Allianz: 9 trends to watch as aviation readies for post Covid-19 takeoff

• Pilot problems, “air rage” incidents,
  reactivation risks and even insect infestations are among challenges facing
  aviation sector.
• Post Covid-19 aviation landscape – new routes
  to soar; new generation aircraft bring benefits but higher repair costs; air
  cargo to continue strong performance.
• Direct Covid-19 claims impact limited. Slips
  and fall incidents at airports declined but large loss activity has continued.
  Claims activity expected to return to normal levels as passengers return. Five-year
  claims analysis shows collision/crash incidents are the main cause of loss.
• Asia Pacific airlines have fared the worst in
  the world compared to competitors in other regions, as a result of the Covid-19
  crisis.

JOHANNESBURG/LONDON/MUNICH/NEW YORK/PARIS/SAO PAOLO/SINGAPORE  – Media OutReach – 6 July 2021 – The sudden halt
imposed on the aviation industry by the Covid-19 crisis hit the sector hard. In
April 2020, two-thirds of the global commercial aviation fleet sat idle on the
tarmac, while passenger traffic was down 90% year-on-year. Today, the aviation industry is slowly
rebounding, led by domestic travel. As more aircraft return to the skies, a new report from aviation insurer Allianz Global
Corporate & Specialty (AGCS) highlights some of the unique challenges
airlines and airports face as they restart operations – ranging from “rusty”
pilots to insect infestations. It also identifies a number of ways in which
Covid-19 is reshaping the sector, driving long-term changes in fleet
composition, flight routes and passenger demand.

“The grounding of
worldwide fleets during the pandemic has represented an unprecedented event for
the aviation industry,” says Dave Warfel, a Regional Head of Aviation at AGCS.
“Airlines have worked tirelessly to maintain their fleets and train their crews
during this long period of inactivity and, as insurers, we take a keen interest
in working with them to understand their plans to return to service. Challenges
will no doubt emerge as the industry readies for takeoff again. Although it is
hard to predict in exactly what shape the aviation industry will return, one
thing is for certain – it will have changed.”

 

In Asia Pacific, airlines
have fared the worst in the world according to latest International Air
Transport Association (IATA) data released in June. The region experienced the
steepest traffic decline for the ninth consecutive month, with capacity down
86.3%. Singapore Airlines is facing its second consecutive annual loss
amounting to a net loss of 4.3 billion as of March 2021, largely because
unlikely other countries it does not have domestic travel. Meanwhile, AirAsia
X, the long-haul affiliate of Malaysian Air Asia Group and Thai Airways are in
bankruptcy courts to negotiate time to restructure their debts.

 

1.   
“Rusty”
pilots and the return of sightseeing flights

 

Earlier this year,
dozens of pilots reported making mistakes, such as taking multiple attempts to
land, to NASA’s
Aviation Safety Reporting System, with
many citing rustiness as a factor on returning to the skies. In September
2020, an Indonesian flight veered off the runway during landing as the pilots had
did not have the opportunity to fly an aircraft in months.  Airlines (and other operators) are well
aware of the potential for pilot “rustiness” and continue to take steps to
manage and mitigate these risks.

 

Major airlines have
developed different training programs for pilots re-entering service, depending
on the length of absence. “At a time of
such unprecedented activity, it is comforting to know that the risk management
processes that made airline travel safer than any form of travel prior to the
pandemic will continue to drive an unparalleled travel safety environment in
the post Covid-19 world,” says Warfel.

 

However, the return of sightseeing flights in
tourism destinations could lead to an uptick in risk for smaller leisure
aircraft, including helicopters, particularly if there is an influx of new
pilots unfamiliar with the routes and terrain. There have already been a number
of fatal accidents involving sightseeing flights in recent years.

 

2. “Air rage” incidents on the rise

 

Unruly behavior of airplane passengers is increasingly a concern,
particularly in the United States. In a typical year there are around 150 reports of
passenger disruption on aircraft. By June 2021 there had been 3,000 according
to the Federal Aviation Administration – the majority
involving passengers refusing to wear a mask. The report notes that unruly passengers may later claim they were
discriminated against by the airline in these cases even when in the wrong – a trend
insurers need to stay on top of.

 

This trend, however was not a
concern in Asia as countries such as Hong Kong, Singapore and South Korea have
imposed a blanket requirement for everyone to wear masks as long as they are in
public and not only for air travel.

 

3. Perils from
parked fleets

 

Although
a large proportion of the world’s airline fleet have been – and are still – parked
during Covid-19, loss exposures do not disappear. They change. Parked fleets
are exposed to weather events. In Asia the challenge lies in aircrafts being
exposed to extreme weather events particularly in countries such as Hong Kong,
Japan, Taiwan and the Philippines that are prone to strong storms. The risk
lies in moving groups of aircrafts without causing damage.

 

The risk of shunting or ground incidents also increases,
which can bring costly claims. There
were a number of collisions at the start of the pandemic as operators transferred
aircraft to storage facilities. More are likely when aircraft are moved again
ahead of reuse.

 

Aircraft in storage typically undergo regular maintenance to ensure they
are ready to return. However, never has the industry seen so many aircraft
temporarily put out of service and the report notes that smaller airlines may face significant challenges
when reactivating fleets, given it will be an unprecedented process.

 

4. Pilot shortage brings risks

 

Odd as it
may seem given the impact of Covid-19, the global aviation industry faces a
pilot shortage in the mid to long-term. The tremendous increase in air
travel pre-pandemic – annual
air passenger growth in China alone was 10%+ a year from 2011 – meant pilot
demand was already outstripping supply. More than a quarter of a million are
required over the coming decade. Moreover, the pandemic has forced many airline
companies to lay off pilots as seen in Cathay Pacific cutting 600 pilots to ease
its financial burden.

 

“In less regulated countries, shortages
can lead to pilots operating commercial aircraft with limited qualifications
and low overall flying time,” says Warfel. “Pilot fatigue is also a known risk
among existing pilots that must be properly managed. Fortunately, there is a
lot of industry expertise and resources available to assist airlines in
building proper fatigue management systems.”

 

Some airlines are building their own
pilot pipelines by establishing flight schools. Given the nature of training,
flying schools are prone to accidents and claims are becoming more expensive
with rising values of aircraft and increased activity. Landing accidents are
most common, but insurers have also seen total losses.

 

5. New
generation aircraft bring safety improvements but higher costs

 

A number of airlines have shrunk their fleets or retired aircraft over
the past year, as the
pandemic hastens a generational shift to smaller aircraft, given the
anticipated reduced number of passengers on aircraft in the short-term future.

 

“Newer generation
aircraft bring safety and efficiency benefits,” say Axel von Frowein, a
Regional Head of Aviation at AGCS. “However, new materials such as composites,
titanium and alloys are more expensive to repair, resulting in higher claims costs.”

 

6. Robust
performance by air cargo and trend will continue

 

Although passenger travel has been devastated by the pandemic, other
aviation sectors have performed more robustly, such as cargo operators. In April 2021, Asia Pacific
reported its best month for international air cargo since the pandemic began, thanks to rising business confidence, e-commerce and congestion at sea
ports, while Latin America to North America freighter capacity grew by almost a third
in May 2021 compared to the same two week period in 2019. The report expects air cargo to continue to perform strongly.

 

A Singaporean
low-cost airline, Scoot has re-configured their regular passenger cabins to
allow aircrafts to carry extra cargo, while Singapore Airlines continues
to capture more vaccination shipments as production ramps up and the demand for
exports increase.

 

7. Business
travel – boom or bust?

 

Pre-Covid-19 business travel traffic amounted to $1.5trn a year or around
1.7% of global GDP. With many airlines dialing back expectations
in the short-term, the report asks whether those days are over. New ways of collaboration, such as video
calls, proved to be effective and more companies are aiming to reduce business
travel to improve their carbon footprint. Therefore, while there will be initial
surge once lockdowns end, many airlines are preparing for a long-term paradigm
shift in traveling, with business travel expected to be slow to pick up.

 

However, what
speaks for a possible uptick is that some areas of business aviation have
proven resilient during the pandemic. Companies that had aircraft continued to
use them while many that had never purchased or chartered an aircraft before
did so for the first time. Many charter companies thrived.

8. New routes
multiply in Europe and Asia Pacific

 

Over 1,400 new air routes are scheduled for 2021 – more than double those added in 2016 –
driven by Europe (over 600) and Asia Pacific (over 500), with regional airports
set to be the main beneficiaries. Growth in China’s domestic market alone
has seen over 200 new routes added – almost the same as the US.

 

China has one
of the largest domestic tourism markets in the world. The Ministry of Culture
and Tourism estimated there will be more than four billion trips made across
China in 2021, a market worth just over USD$500 billion. The demand for
domestic alternatives, possibly exceeding pre-pandemic levels is not surprising
— especially as China is home to 55 UNESCO World Heritage Sites

 

“This development
reflects the desire of some airlines to experiment in uncertain times,
particularly smaller ones,” says von Frowein. “New routes means less congested
airspace and congestion at airports which can have a positive impact on risks
such as ground handling incidents. However, flying new routes can bring a
heightened risk environment.”

 

9. Insect infestations
affecting instrument accuracy

 

There
have been a number of reports of unreliable airspeed
and altitude readings during the first flight(s) after some aircraft have left
storage. In many cases, the problem was traced back to undetected insect nests
inside the aircraft’s pitot tubes, pressure-sensitive sensors that feed data to
an avionics computer. Such incidents have led to rejected takeoffs and turn
back events. Contamination risk increases if storage procedures are not
followed.

 

Covid-19 claims impact

The
report also notes the aviation industry has seen relatively few claims directly
related to the pandemic to date. In a small number of liability notifications,
passengers have sued airlines for cancellations/disruptions.

 

“Covid-19
has not been a direct driver of aviation claims over the past year,” says
Cristina Schoen, Global Head of Aviation Claims at AGCS. “As a result of the
significant reduction in commercial airline travel during the pandemic we saw
fewer attritional claims than we would during a typical year. However, the
insurance sector was not immune to larger losses during the course of the
pandemic, with different regions seeing tragic accidents, emergency landings
and hull losses to name a few. As air travel begins to return to pre-pandemic
levels we expect claims volume to rise accordingly.”

 

AGCS
analysis of more than 46,000 aviation insurance claims from 2016 to year-end
2020 worth more than EUR 14.5bn (US$17.3bn) shows collision/crash incidents
account for over half the value of all claims. Other expensive causes of loss
include faulty workmanship/maintenance and machinery breakdown.