Andy Pickford, McLarens

Aviation: “Whilst the underlying safety of the aviation industry has improved markedly over the last 20 or so years, it is the annual cost of the attritional claims that is now the predominant focus.”

Andy Pickford, McLarens

June 14 2023

As the Asia Pacific region sees growth in passenger traffic, attention has turned to attritional losses and rising claims costs. The global aviation industry is returning to pre-pandemic levels of activity and Asia is leading the way.

According to the International Air Transport Association (IATA) international traffic climbed 68.9% in March 2023 compared with March 2022. Whilst all markets saw notable growth, these stats were largely led by “a near-tripling of demand for Asia Pacific carriers as China’s re-opening took hold.” The IATA stats pointed to a 283.1% increase in traffic for Asia Pacific airlines, with capacity rising 161.5% and the load factor increasing 26.8 percentage points to 84.5%, the second highest among the regions.

As such it’s business as usual for aviation hull insurers in the region, who are turning their attentions towards claims’ costs. Whilst the underlying safety of the aviation industry has improved markedly over the last 20 or so years, with major losses having become rarer, it is the annual cost of the attritional claims that is now the predominant focus.

New generation aircraft
During the Covid pandemic, airlines accelerated the retirement of older aircraft, inevitably favouring the newer more fuel-efficient types. This has been further reinforced with the return of higher oil prices and the global economic downturn. This trend shows no sign of abating.

Airbus, for example is forecasting that the region will need over 17,600 new aircraft by 2040. The manufacturer expects the “retirement of older aircraft to accelerate, demand progressively more driven by replacement, supporting the industry’s decarbonisation objectives.”

Various issues are at play here. The technology is such that conventional structural repair methods, which are more straightforward and readily available, are no longer applicable to aircraft such as the B787 and A350. In almost all but the most minor damage events, the manufacturer’s support will be required.

These aircraft types have been in service long enough now for us to see that the level of cost increase is in the order of four to six times that which had been experienced on the previous generation of aircraft.

Moreover, with the latest generation of aircraft, the manufacturers have been less inclined to invest in repairs and it is now often the case that components are repaired through the replacement of sub-assemblies, as opposed to the more cost-effective option of repairing those sub-assemblies.

New engine options
The same is true for engine damage caused by Foreign Object Debris (FOD), which accounts for almost half the attritional claims experienced on the global airliner fleet. In some events, the damage will be able to be repaired “on-wing”, in the remaining cases the engine will need to be submitted to a shop which can result in costs running to millions of dollars.

The design of the latest engines offers many of the advantages, one of which is an improvement in FOD resilience. The downside is that the repair of these engines will be concentrated with the manufacturers’ shops and the design is such that high-cost parts will inevitably be scrapped as opposed to being repaired. Experience is low at this stage however we are already seeing examples of the cost of repairing these engines being high.

Risk management
The overall safety record has shown steady improvement although more can clearly be done to reduce the avoidable claim events. The human interface and operational environment will always create scenarios that combine to cause losses, particularly as the industry recovers and resources become stretched.

For aviation insurers, risk mitigation is a primary consideration and, where appropriate, they may take a more active approach to assessing an insured’s risk profile by using specialist organisations to review their operation and make recommendations to reduce risk.

These assessments are almost always beneficial, particularly if they are followed up on.

This article was written by Andy Pickford, Asia Regional Director at McLarens Aviation. Pickford is based in Singapore. 

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