In this article we review the financial and operational impacts of COVID-19 on the aviation industry, emerging risk management methods to resume aviation operations and how aviation task forces are aiding those efforts. Further, we consider some of the implications for the aviation insurance industry and how wider strategic risk management practices are evolving in response.
Analysis 1 of the global air transport industry shows that airlines are facing a loss of $84.3 billion in 2020.
The financial impact of COVID-19 has been huge to the aviation industry. The International Air Transport Association (IATA) reported passenger demand in April at its lowest plunging by 94.3% 2 compared to April 2019. IATA initially stated 4 that airline passenger revenues could drop by $314 billion in 2020 due to COVID-19, a fall of 55% compared to 2019, however further analysis 5 is now showing this could fall by as much as $419 billion.
Regionally speaking, Asia Pacific has seen the largest net profit impact. However, Africa is seeing the highest decrease in passenger demand with expectations for this region to experience worsening effects in the coming months. The below table summarises IATA's forecasts 6 for regional demand, capacity and effect on net profit for 2020.
| Passenger demand | Passenger capacity | Net profit | |
|---|---|---|---|
| Global | -54.7% | -40.4% | -$84.3b |
| Asia Pacific | -53.8% | -39.2% | -$29.0b |
| Europe | -56.4% | -42.9% | -$21.5b |
| Middle East | -56.1% | -46.1% | -$4.8b |
| North America | -52.6% | -35.2% | -$23.1b |
| Latin America | -57.4% | -43.3% | -$4.0b |
| Africa | -58.5% | -50.4% | -$2.0b |
Airline operators will require a well-orchestrated recovery plan supported by external agencies to safely regain operational tempo and replenish cash reserves
Despite the downturn, figures show that daily flight totals rose 30% 7 between the low point on 21 April and 27 May 2020. This is primarily in domestic operations and as a result of an already very low base (5.7% of 2019 demand). Airline operators will require a well-orchestrated recovery plan supported by external agencies to safely regain operational tempo and replenish cash reserves.
The implementation of policies and practices required across many governments will take time to coordinate; however, there is considerable expertise and leadership that operators can use in support of ‘opening the skies’. The resumption of international flights will require many consultations on solutions and risk management measures in responses to COVID-19. Despite varying national policies, global cooperation within aviation has remained strong.
As government and industry restrictions on the aviation industry begin to ease, it is vital that the procedures set out by the appropriate industry bodies and authorities are adhered to consistently to control and manage risks such as the COVID-19 pandemic. In terms of the passenger journey, every element from the airports of departures and arrival, the flights themselves, and other supply chain operators need to ensure consistent effective risk management.
The industry now needs to carefully support the return to work process with consideration to how and what aviation roles will look like in the future
A large challenge for the industry will include the skilled employees needed to support operations. The pandemic resulted in global travel shutdown which left many forced to take leave and others without jobs. In the initial phases of the pandemic crisis, articles such as Financial Times ‘Let’s redeploy airline workers to help national health services’ 9 considered the skills of some aviation employees and how they could otherwise be utilised. The industry now needs to carefully support the return to work process with consideration to how and what aviation roles will look like in the future.
In terms of practical guidance there has been considerable thought leadership. ICAO, IATA and ACI representatives contributed with the World Health Organisation initial guidelines “Operational considerations for managing COVID-19 cases or outbreak in aviation” 10. The article set out thoughts on how to manage suspected cases onboard an aircraft. Subsequently, many further practical guides have been published including the ICAO Council Aviation Recovery Task Force (CART) publishing ‘Take-off: Guidance for Air Travel through the COVID-19 Public Health Crisis’ 11.
Airports need to adapt new safety and risk management measures in conjunction with operators
Airports need to adapt new safety and risk management measures in conjunction with operators. A joint publication with Airports Council International (ACI) and IATA was released ‘Safely Restarting Aviation – ACI and IATA joint Approach’ 12 . This developing from the previous publication from IATA “Restarting aviation following COVID-19” 13 . This considered medical evidence and multi-layered approaches to support the restart of operations. Suggestions included:
Similarly, the European Union Aviation Safety Agency (EASA) published a safety directive 14 looking at methods of disinfection, quarantine as well as social distancing. EASA have since launched a charter to monitor COVID-19 operations in practice, announcing first joiners 15 in early June 2020.
Many authorities including CAAC have published guidance for operators, the CAAC releasing ‘Preventing Spread of Coronavirus Disease 2019 Guideline for Airlines’ 16 , in which interestingly, they differentiated responses needed for international versus domestic flights through risk scoring mechanism. Depending on the risk score, different prevention and control measures are recommended.
In the US, the Safety Alert for Operators 17 (SAFO) published guidelines set out by the Centres for Disease Control and Prevention (CDC) and the Federal Aviation Administration (FAA) for air carriers and crewmembers in relation to COVID-19, with similar aims to reduce the exposure of crew members as well as the risk of transmission on board aircraft.
With numerous guidelines and roadmaps to recovery, there is a clear need for a collaborative approach to ensure a level of consistency and cooperation. The creation of task forces such as the COVID-19 Aviation Recovery Task Force (CART), but existing task forces such as The Collaborative Arrangement for the Prevention and Management of Public Health Events in Civil Aviation (CAPSCA) have been integral in coordinating the collaboration to COVID-19 within the aviation industry.
CAPSCA held an online webinar outlining the Public Health Corridor Concept, a recording of which can be found on their website 19. The main emphasis of this strategy involves the use of ‘clean’ crew, ‘clean’ aircraft and ‘clean’ airport facilities to minimise the risk of COVID-19 transmission whilst maintaining flight safety.
These task forces play an important role in driving a collaborative approach to COVID-19 within aviation, including facilitating the restart of aviation operations in a sustainable, safe, secure and orderly manner. A more extensive list of aviation task forces and COVID-19 mitigation measure can be found here 21.
In the immediate term, operators are looking to see where they can alleviate costs. We recently released our “COVID-19, the airline industry and the aviation insurance market” 22 report. This report explores some frequently asked questions from our clients including comparison to SARS, the complexities to aviation insurance and reinsurance markets, as well as predictions in the event the aviation insurance industry suffers another loss-making year.
One possible solution being use of risk analytic tools to quantify exposures and support client decision making
Given the predictions of socially distant travel, the overall flight loads will be lower. These factors will have a direct impact on the rating of exposures. The quantum and long-term effects in an already hardening and recovering market needs close review. Other factors include changing risk profiles. We explore in another article the aggregation of aircraft of the ground 23 and some of the potential issues from a risk perspective. One possible solution being use of risk analytic tools to quantify exposures and support client decision making.
We’re closely monitoring and working with our clients and their risk exposures. With exposures fundamentally changing there is potential impact to insurance ratings as variables have changed.
Underwriters are reluctant to adjust premium payment terms without analysing the risk factors to understand its impact on them. Aviation underwriters have an obligation to their shareholders to undergo strict analysis in order to minimise a situation where they might face a bad debt. Further, as with the aggregation of assets there may also be other new emerging risks such as geopolitical risks.
As such, they need the operators to provide them with detailed operational and risk information in order to assist them with their decision-making process. This is where trusted advisors to monitor and assess the changing landscape and provide valuable insights can be essential.
As worldwide measures continue to be put in place to mitigate the spread of COVID-19, business models are being stressed at a scale that seemed inconceivable to many. The threat of epidemics features in many risk filings for aviation businesses, but how many airports and airlines had run through a pandemic scenario where global flight traffic would drop to the number we’re currently experiencing.
As COVID-19 has demonstrated, society has developed in such a way that the impacts of past events are no longer a certain guide for the future
It also raises the importance of strategic risk-based conversations in the boardroom that explicitly consider resilience. As COVID-19 has demonstrated, society has developed in such a way that the impacts of past events are no longer a certain guide for the future, and this event presents an opportunity to make change.
We should also remember that COVID-19 has shown that we can respond to challenges at a scale we’ve never seen before and consider how to make changes to move to a more resilient state while we have the opportunity. Taking extreme events and stress testing them, whether this is through quantitative modelling or qualitative scenarios is one way to build resilience to global risks and decide what to do next. More importantly, what other risks are on the list – or were excluded because they seemed unlikely – and who can speak to them or be invited in to build awareness and understanding? This is where board composition, NED selection, and trusted advisors are increasingly important to encourage a holistic view that recognises and explores interconnectivity of risks.
This kind of process can bring a new layer of validation and challenge to risk lists – you can’t manage what you don’t measure. Being able to quantify these risks in financial terms and then qualify them as retainable or transferable is key to business resilience. We believe there are key risks facing the aviation industry which are not catered through traditional aviation insurance policies.
5 trends currently on our radar that we believe should be on your list, include:
What can be learnt from the experiences so far and where is the opportunity? The aviation industry will enter into a period of rebalancing and navigating the recovery cycle will require more strategic, data-driven risk management than ever before.
Effective enterprise risk management creates opportunity; you can build business resilience by strategic risk transfer underpinned by robust data analytics. The COVID-19 pandemic has shone a light on the need for all stakeholders in the risk transfer value chain to adapt to the evolving needs of their customers – there needs to be a more correlated relationship between industry and risk transfer. Insurance brokers should be prepared to help their clients achieve this by leveraging data to maximise risk transfer efficiency and value, in turn, enabling more integrated insurance programmes that deliver both cost efficiencies and responsive protection.
1 https://www.iata.org/en/pressroom/pr/2020-06-09-01/
2 https://www.iata.org/en/pressroom/pr/2020-06-03-01/
4 https://www.iata.org/en/pressroom/pr/2020-04-14-01/
5 https://www.iata.org/en/pressroom/pr/2020-06-09-01/
6 https://www.iata.org/en/pressroom/pr/2020-06-09-01/
7 https://www.iata.org/en/pressroom/pr/2020-06-03-01/
8 https://theconversation.com/what-future-do-airlines-have-three-experts-discuss-135365
9 https://www.ft.com/content/b3f1f9fc-684b-11ea-800d-da70cff6e4d3
10 https://apps.who.int/iris/bitstream/handle/10665/331488/WHO-2019-nCoV-Aviation-2020.1-eng.pdf
11 https://media-exp1.licdn.com/dms/document/C4E1FAQGGi180NoGuxA/feedshare-document-pdf-analyzed/0?e=1591264800&v=beta&t=iYuYYxhfYhfySFj8pa3chLIsztXjeATiMS79tMSCrnE
12 https://store.aci.aero/product/safely-restarting-aviation-aci-and-iata-joint-approach/
14 https://www.iata.org/contentassets/7e8b4f8a2ff24bd5a6edcf380c641201/easa-sib-2020-02-r2.pdf
16 https://www.iata.org/contentassets/7e8b4f8a2ff24bd5a6edcf380c641201/airlines-preventing-spread-of-coronavirus-disease-2019.pdf
17 https://www.faa.gov/other_visit/aviation_industry/airline_operators/airline_safety/safo/
all_safos/media/2020/SAFO20009.pdf
18 https://www.capsca.org/CoronaVirusRefs.html#OtherEntitiesRefs
19 https://www.icao.int/Meetings/webinar-series/Pages/Public-Health-Corridor.aspx
21 https://www.icao.int/EURNAT/Documents/ICAO-COVID-19-MitigationActions.pdf
22 https://www.willistowerswatson.com/en-gb/Insights/2020/05/covid-19-the-airline-industry-and-the-aviation-insurance-market?utm_source=linkedin&utm_medium=social&utm_term=&utm_content=aviation%20and%20marine
%20risk_d2bfc833-ad3c-4e0e-9004-df327558fdf3_&utm_campaign=No-Campaign_
23 utm_content=aviation%20and%20marine%20risk_43b40bc8-2705-4b56-b8aa-ab658f1da24d_&utm_campaign=No-Campaign_
https://www.willistowerswatson.com/en-GB/Insights/2020/06/changing-times-bring-changing-risk-profiles?utm_source=linkedin&utm_medium=social&utm_term=&
