8 Critical Risks Facing the Aviation Industry

Commercial airlines will have to stay ahead of these risks in order to keep up with demand and stay profitable.

By: Katie Dwyer | January 29, 2019

According to Statista, U.S. commercial airlines carried more than four billion passengers and generated $534 billion in global revenue in 2017. Demand for air travel is projected to grow, but commercial airlines will have to contend with these risks, many of which continue to emerge and evolve, in order to keep up and stay profitable.

1) System Failure and Aging Technology Infrastructure

An unfortunate number of examples demonstrate the far-reaching effects of a major airline’s system outage. In late January of 2017, Delta experienced a network interruption that lead to at least 270 flight cancellations and many more delays. It also missed out on additional bookings since the issue affected its website and mobile apps.

This was after Delta experienced an even more significant outage in August 2016, which was the result of an equipment fire. In that case, an estimated 2,300 flights were cancelled, costing the airline $150 million in lost revenue.

A month before that, Southwest Airlines experienced a router failure that caused cascading malfunctions across its systems, resulting in 2,000 cancelled flights, which cost the company between $54 million and $82 million in lost revenue and increased costs. It’s estimated Southwest lost out on $5 million to $10 million in ticket sales because the glitch disabled online booking applications.

United Airlines was also forced to ground all domestic flights for more than two hours due to a computer outage in January 2017. FAA officials said that the Aircraft Communications Addressing and Reporting System (ACARS) had issues with low bandwidth.

These events highlight the risk of trying to build new programming on top of outdated infrastructure. Like in many industries, the underlying technology supporting many airlines’ operations is decades old and in dire need of an overhaul, but the costs associated with doing so have prevented much-needed updates.

2) Pilot Shortage

Increased demand coupled with a shrinking pool of qualified pilots is driving an ongoing pilot shortage. According to Boeing’s 2018 Pilot & Technician Outlook, the aviation sector will need 790,000 pilots over the next two decades and 754,000 new maintenance technicians, thanks to an anticipated influx of new aircraft. At the same time, more than 42 percent of airline pilots will retire over the next 10 years, according to market research firm Cowen & Company. Baby boomers currently comprise about half of the pilot workforce.

Private sector aviation companies tend to recruit highly-qualified former Air Force pilots, but even the Air Force is short by about 2,000 pilots as of the end of 2018.

Private and business aviation are suffering the most, as commercial airlines can typically offer more competitive salaries and more regular schedules.

3) Climate Change

The ability to keep flights running on time is highly dependent on the weather. Historically, airlines could anticipate some cancellations based on seasonality. It’s reasonable to expect some flights to Florida to be cancelled in the height of hurricane season, or trips to the Northeast to be hindered by snowstorms in the middle winter. Airlines could plan for such events and prepare to absorb the cost. But the effects of climate change have made planning an almost futile exercise.

Source: NASA GISS & NOAA NCEI global temperature anomalies averaged and adjusted to early industrial baseline.

Global warming has given rise to more frequent and more severe storms, which means more and longer interruptions for travelers. Extreme heat is also an issue. When the air is too hot, pilots cannot achieve enough lift to take off safely. Over the summer of 2017, a string of 120-plus degree days in Phoenix led one airline to cancel more than 40 flights. According to Climate Central, the five warmest years on record have all occurred since 2010. Heat will continue to be a factor keeping planes on the ground.

More volatile temperature changes and weather patterns are also giving rise to more turbulence. A study by researchers at the University of Reading in the UK, the volume of severe turbulence will double in airspace over North America, the North Pacific, and Europe between 2050 to 2080. Over the North Atlantic in particular, severe turbulent will become as common as moderate turbulence today.

That could mean an increased need to reroute flights, and a higher frequency of passenger and crew injury.

Given that the aviation sector accounts for 2 to 5 percent of global emissions, airlines are also under pressure to find ways to become more fuel-efficient and environmentally friendly.

4) Oil Price Volatility

Price Per Barrel of Oil. Source: macrotrends.

Fuel accounts for about 30 percent of costs in aviation. Profit margins can quickly erode when oil prices soar. In the past 10 years, the price per barrel fell from a high of $126 in 2011 to a low of just $36 in 2016. As of the end of January 2019, the price sits at $52 per barrel. While the cyclical nature of oil prices is not a new risk, rapid fluctuations have become more pronounced in the past several decades, and will continue to be a difficult exposure to manage.

It is estimated that just a $1 increase per barrel of oil can cost the global airline industry an additional $1 billion a year. According to The Motley Fool, “That is a significant amount of risk that is outside the control of an individual airline company. Even hedging strategies cannot fully compensate their vulnerability to sustained periods of high oil prices.”

5) Reputation Damage

It all began with the case of David Dao, a Kentucky doctor aboard a United Airlines flight who was violently removed when the airline realized it had overbooked and needed to “bump” some passengers, but no one volunteered. Images of a bloodied Dr. Dao being dragged down the plane’s narrow aisle spread across social media like wildfire, and the unapologetic reaction from the company’s CEO Oscar Munoz didn’t help.

United’s market value reportedly deteriorated by about $250 million because of the incident.

Since then, there have been countless similar episodes where confrontations between passengers and crew or forcible removals are filmed and posted online for the world to see. In some cases, crew members are accused of acting brashly or rudely, but in others, they’re motivations in confronting passengers have been dubbed racist.

These incidents underline the importance of having a clear communications response plan in place. Incidents can’t always be avoided, but the way a company responds can determine whether the story disappears in a day or causes longer term impact to the bottom line.

6) Economic Recession

In 2008 and 2009, five of the nine largest U.S. airlines reported losses totaling nearly $4 billion. When a shrinking economy forces individuals and businesses to tighten up their budgets, travel is typically at the top of the list of expenses to cut.

In September 2008, the top seven airlines in the U.S. averaged a 9.47 drop in domestic passenger miles traveled compared with September 2007. Internationally, airfreight volumes fell by about 13 percent.

The inability to predict when a recession will occur or how long it will last presents a constant uninsurable risk to the commercial aviation sector.

7) Government Shutdown

The impact of a government shutdown likely was never a top concern for airline risk managers before, but the recent 35-day shutdown — the longest in history — made clear that a non-functioning federal government has big implications for airline safety, efficiency and profitability.

Southwest Airlines reported it lost up to $15 million during the shutdown in the month of January 2019. Delta said it cost them 25 million in lost revenue.

This is due to fewer government employees and contractors taking business trips, and fewer TSA agents and air traffic controllers available to handle the existing traffic. Facing weeks without pay, these workers called out sick in record numbers. Citing financial limitations, as many as 10 percent of TSA agents used sick days during the shutdown. Absence of air traffic controllers lead to delays and cancellations.

Among La Guardia, Kennedy International and Newark Liberty International airports, there were 87 cancellations and more than 1100 delays.

8) Decreasing Insurance Capacity

A 2018 aerospace market update issued by Willis Towers Watson predicted that a hardening market was likely to continue. After years of soft market conditions, waning profitability has lead some carriers to exit the market completely.

According to WTW, “2017 was one of the costliest years on record for the broader property and casualty (P&C) market, which will have an effect on many insurers’ reinsurance programs as they renew their treaties in 2018.” Claims are also becoming more expensive due to increasing cost of repair of newer aircraft and rising jury verdict and settlement amounts.

Attritional claims now comprise almost 70 percent of all airline claims. “This means underwriters that write the entire portfolio will not make a profit,” the update said. “Several underwriters have already ceased writing airline business until premiums reach a more sustainable level. We will also likely see some mergers and acquisitions of some P&C underwriters. We should expect to see a slight upward trend in pricing for 2018, especially for airlines with losses. The market will harden much quicker should there be a significant loss.” &

Katie Dwyer is a freelance editor and writer based out of Philadelphia. She can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.

8 Critical Risks Facing the Aviation Industry