What's the biggest risk facing the aviation industry?

What's the biggest risk facing the aviation industry? | Insurance Business Australia

What's the biggest risk facing the aviation industry?

The World Economic Forum’s (WEF) Global Risk Report 2022 identified climate action failure as the most severe risk facing the world. In the short term, the WEF said extreme weather is the greatest threat.

For the aviation sector, the perception from outside the industry could be that adapting air travel to pandemics is the number one priority.

“It’s climate, climate and climate to be honest. It’s such a big issue,” said John Rooley (pictured), the London based CEO of the Willis Towers Watson (WTW) Global Aerospace division.

Three years ago, WTW formed the Airport Risk Community (ARC) to help manage the airport risk landscape by connecting industry professionals and facilitate knowledge and data sharing.

Despite the ongoing threat of COVID-19 to the industry, Rooley said climate risk has dominated ARC’s discussions.

“We’re at the forefront of how climate impacts the insurance industry,” he said. “We’ve got some great colleagues in our climate group who help analyse the future of risk and we’re seeing a lot of airports and a lot of airlines looking to assess the impact of climate change on their business.”

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The Global Aerospace CEO said a lot of airline industry operators are now obliged to provide their owners and regulators, including governments, boards and private entities with climate related risk assessments.

“They don’t have the expertise to do that and so we feel that we can offer, through membership of communities like ARC, access to other individuals who have similar issues or, in fact, expertise at Willis Towers Watson that can help them assess those risks and how it’s going to impact their business in the future,” he said.

In recent years, the natural resources industry has faced increasing problems finding insurance coverage for dirtier pursuits connected to climate change, especially coal mining.

“We’re already seeing certain insurers, for example, in the natural resources industry, even if the underwriters wanted to, [who] aren’t able to insure risks that don’t have the appropriate carbon attitude for the future,” said Rooley.

Rooley is concerned that the aviation industry, with its large carbon footprint, could soon face similar insurance coverage issues.

“So we’re thinking it’s only a matter of time before that comes into the aviation market. If an airline doesn’t have a carbon neutral policy by a certain date, certain insurers are likely to be precluded from insuring them and this is a very real risk,” he said.

According to the US-based International Council on Clean Transportation (ICCT), the world’s air travel produced 918 million tonnes of CO2 emissions in 2019. Eighty-five per cent (85%) of that number came from passenger travel. The ICCT estimates that those emissions will triple by 2050 amid surging travel and freight demand.

The result, as we know too well, is rising temperatures. According to NASA Science, 2020 was the hottest year on record with average global temperatures 1.02 degrees Celsius higher than the long-term historic average. Many scientists have warned that another half degree rise will bring catastrophic climate disasters.

“The world is getting warmer and we’re seeing the impact in that certain countries will be under water if we don’t halt or reduce the carbon footprint and that’s having a tremendous impact on risk,” said Rooley.

He said these weather extremes are changing the way insurers assess risk and are pushing the aviation industry towards more environmentally sustainable practices.

The ICCT said air travel carbon emissions could be slashed by more than three-quarters through demand management, advances in efficiency technologies, and expanded use of biofuels.

Rooley said when the pandemic closed down air travel two years ago, many airlines took the opportunity “to clean up their business models,” including phasing out old aircraft types.

“The first aircraft they parked in the desert – and there are still deserts full of aircraft – were the older, less fuel-efficient ones,” he said.

Rooley said some airlines have taken considerable strides in terms of reducing their carbon footprint.

“Obviously everybody recognizes the world’s moving more towards a greener world and ESG (Environmental, Social, and Governance) is a major factor, so a lot of airlines are looking to be at the forefront,” he said.

In November, S&P Global released its first ever report detailing the ESG factors impacting insurers. The report is another indication that issues like climate change are influencing where investors put their money.

Read more: S&P releases first ever ESG report on insurers

“We’re seeing airlines move towards more aircraft that are fuel efficient, for example the 787 or the A350,” said Rooley.

He added that some of the big airlines, the hub carriers, like Singapore Airlines, Emirates and Qatar Airways, have used the downtime during the pandemic to alter their fleets “completely.”

“So, for example, the A380 aircraft type, is not a particularly fuel-efficient aircraft. It’s obviously perfect for long haul routes where you want to put 450 passengers on board, but it isn’t as efficient when it’s only half full. So those aircraft types are largely being parked,” he explained.

The new, more fuel-efficient aircraft are better for the environment but they present brokers and insurers with a different set of insurance challenges.

“Those new aircraft are composite in their build so they’re much more expensive to repair because you can’t just replace a panel on the aircraft - you have to replace the whole section,” said Rooley.

“That’s a different risk because the insurers then assess that if there is a small incident that leads to what appears to be minor damage to the aircraft type. It can be very expensive to repair.” 

Meanwhile, even as the surging global wave of Omicron infections plays out, Rooley said some airline territories are bouncing back.

“For example, in the US, they’re now largely operating at pre-COVID levels and it’s because Americans are travelling within America,” he said.

In some parts of Asia, for example in China, he said, the airline demand is currently almost exclusively internal. As part of its zero-COVID approach, the Chinese government still limits airlines to one international flight per week.

Trans-Atlantic travel hasn’t yet come back to the same degree as in the US, said Rooley. As a result, the aircraft flying on those routes tend to be smaller, reflecting the lower demand.

“So we’ve been able to react to that change by altering the mix of insurers who have an appetite for those risks because the actual exposures have changed,” he said.

“So all of these factors are not immediately obvious to the lay person on the street but we’ve seen quite a change in the exposure and the risk during COVID as a result of COVID,” added Rooley.