Aviation Matters

FIRST QUARTER 2010

If 2008 was the year that witnessed the end of the soft airline market, 2009 was the year that finally saw a sustained increase in premium levels. The number of major losses in 2009 was around the 10-year average and the number of fatalities was below it. Despite this, apart from the September 11 2001 losses, 2009 produced the worst incurred losses ever a clear demonstration of how the type of aircraft, nationality of passengers and location of loss can have a large effect on the cost of accidents.
The year began badly with three major losses, which put more pressure on insurers to raise rating levels. Despite this pressure, and the fact that by late May losses were signicantly higher than they were at the same point in 2008, insurers were still struggling to raise premiums due to market overcapacity and consequent competition for share on the larger risks. The loss of the Air France A330-200 over the Atlantic in late May and the crash of the Yemenia Airways A310-300 into the Indian Ocean in late June proved to be the catalyst that nally saw the markets resolve translated into signicant premium increases. Every month from this point through to November saw average renewal premiums increase by more than 20%. December is the most signicant month for renewals, with around 65 major airlines renewing their insurance programmes. Despite the premiums for the month being bolstered by the renewal of a major European ag carrier that had suered a major loss during the year and therefore received a signicant premium increase, the overall average increase for the month was approximately 12%. The lesser overall increase in December does not necessarily indicate a weakening of insurers resolve. The continuation of signicant premium increases and a more focused, technical approach to renewal rating by insurers is set to continue at least into the early part of 2010. Renewal activity for the rst part of the year is very light, and barring a spate of bad losses or a catastrophe, we expect the current status quo to continue. Other Markets The non-airline markets have continued to remain immune to the peaks and troughs of the airline sector. The aerospace sector, including airports, manufacturers and other service providers, saw overall lead premiums fall by around 2% in 2009. This is very similar to 2008, but for a dierent reason. In 2008, plentiful competitive capacity ensured continued pressure to maintain or reduce premiums. A dierent situation arose in 2009, in which the eects of the global downturn ltered through by way of lower exposures and, consequently, less opportunity to increase premiums. There were some signicant losses in this sector in 2009, and pressure to increase premiums will inevitably return. Economic Situation Having delivered strong growth in 2009, China released impressive trade data in January showing that the countrys exports had risen 17.7% in December, and imports had risen by a massive 56%. However, this led the countrys central bank to tighten liquidity by increasing the bank reserve requirement ration and raising the yield on one-year central bank bills. Japan appears to be struggling. Its economy has moved from weak growth back into recession, and January Japanese machinery orders a key driver of Asias second-largest economy collapsed to levels not seen since the late 1980s. Orders in November were 11.3% lower than the previous month and hit a 23-year low. The central bank also issued data showing that wholesale prices fell by a record margin last year, with some analysts taking the view that deationary pressures are now prevalent throughout the economy. The UK nally left recession in Q4 (albeit with tenuous 0.1% growth). The three months to December showed that unemployment down for the rst time in 18 months. The US unemployment rate fell to a vemonth low of 9.7% in January. However, this welcome news was tempered by the revelation that revisions to earlier data showed the economy losing almost 1m more
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jobs than previously thought since the recession began. The latest data shows that some 8.4m Americans have lost their jobs during the downturn. In late January, President Obama stunned US equity markets by announcing sweeping reforms of the US banking system. If approved by Congress, the reform will mean that commercial banks will be banned from running their own trading desks and owning, investing in or sponsoring hedge funds and private equity groups. Announcing the changes, the President said, never again will the American taxpayer be held hostage by a bank that is too big to fail. Industry news Ace has revealed that prots for Q4 rose to US$953m from US$20m in Q4 2008, while prots for the year rose 113% to US$2.55bn from $1.197bn in 2008. Amlin has announced a record prot before tax of 509.1m for 2009 (2008: 121.6m). This represents a return on equity of 37.0% (2008: 7.8%) and the dividend (paid and declared) has been increased by 17.6% to 20.0 pence per share (2008: 17.0 pence). Chaucer has reported prot before tax of 42.0m for 2009 (2008: loss 26.2m). Post-tax return on equity of 9.7% (2008: loss 7.0%) and a nal dividend of 2.7 pence per share recommended, making a total dividend of 4.0 pence per share (2008: 5.5 pence). 2009 results from Willis reveal that the company cut 450 positions during the year. The broker said that the job cuts had cost them US$24m in severance payments, compared to US$2m in 2008. During the year the company also oered sta cash incentives to cut their working hours in an eort to avoid a higher number of job losses. Willis revealed that Q4 net income rose to US$79m from US$61m in Q4 2008, while for the year, net income rose to US$436m from US$302m. In an exceptionally dicult operating environment, the airline industry is estimated to have suered an overall loss of US$11bn in 2009. Despite more stable fuel prices and the prospect of modest increases in passenger numbers and freight volumes, the current estimate for 2010 is an overall loss of US$5.5bn. Japan Airlines, Asias biggest air carrier, led for bankruptcy protection in January, becoming one of the countrys biggest corporate failures. Some 15,600 jobs are expected to be cut and the airline intends to dispose of some of its older, less fuelecient aircraft and cut some routes. In America, regional carrier Mesa Air Group has also led for bankruptcy protection and intends to dispose of 25 aircraft and lay-up a further 52. Airbus and Boeing delivered a record 978 aircraft between them in 2009, an increase of 14% over the 2008 gure. New orders for 2009 stood at 310 for Airbus and 263 for Boeing. Losses Despite getting o to a better start than in 2009, the market suered its rst major loss of the year when an Ethiopian Airlines Boeing 737-800 crashed into the sea o Lebanon shortly after takeo on 25 January, killing the crew and all 82 passengers. Other signicant incidents recorded during the rst quarter of 2010 are: A SkyBahamas Airlines Saab SF-340A sustained signicant damage when its undercarriage retracted whilst it was on the

ground at Nassau on 7 January. On 10 January a United Airlines Airbus A319 was badly damaged when its right main gear collapsed on landing at Newark. A Kabo Air Boeing 747-200 was damaged at Kano on 12 January when a taxying Middle East Airlines Airbus A330 struck its tail with its wing tip. Another ground incident, this time at Moscow Vnukovo, saw a UTair Boeing 737-500 damaged when its nose landing gear collapsed on the ramp on 16 January. On 19 January a Mexicana Airlines A318 was damaged when both casings on the left engine separated on takeo from Cancun. A Click Mexicana Boeing 717 was also damaged when it was cleared to land before the runway was cleared and hit the debris. An Aeromexico Embraer ERJ-145 was substantially damaged when it left the runway on landing at Tijuana on 21 January. Both crew were killed when an Alaska Central Express Air Cargo Beech 1900C crashed into the sea shortly after takeo from Sand Point, Alaska, on 21 January. All 157 passengers and 13 crew aboard a Taban Air Tupolev Tu-154M had a lucky escape when the aircraft caught re after landing at Mashhad Airport, Iran, on 24 January. More than 40 passengers were injured and the aircraft was destroyed. A Shaheen Airlines Boeing 737-200 was badly damaged on 8 February when it overran landing at Peshawar, Pakistan. On 11 February a Trigana Air Services ATR-42-300 suered an en-route engine failure and made a forced landing short of its diversion aireld at Balikpapan. Some passengers were injured and the aircraft is probably damaged beyond economical repair. Also on 11 February, some passengers were injured when a Click Mexicana Fokker 100 suered a landing gear collapse on landing at Monterrey. An Air Tanzania Boeing 737-200 suered a nose landing gear collapse on landing at Mwanza, Tanzania, on 1 March. Also on 1 March, an ACT Airlines A300B4F operating on behalf of DHL Bahrain was damaged (possibly beyond economic repair) when its left main landing gear collapsed on landing at Bagram Air Force Base, Afghanistan. On 9th April 2010 a Polish Air Force TU-154 carrying the Polish President, his wife and entourage including prominent Polish government, business and military leaders crashed whilst trying to land at Smolensk air base in Russia. Tragically all on board perished. Market Personnel News 2009 saw an exceptionally high movement of personnel both on the underwriting and broking side. Individuals and teams made signicant moves and some well-known personalities returned to the market as the various broking and underwriting operations positioned themselves to implement their future strategies. So far in 2010 the following personnel moves have been announced: Edward Dawson and Matthew Bowers have left Marsh to set up a new aviation practice at Alec Finch Ltd. Jeremy Chase has moved from Marsh to join the expanded General Aviation team at Aon.

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Editors Note

Aviation Matters is published by Colemont Insurance Brokers Limited for the benet of its clients and prospective clients. It is intended to be a general discussion of signicant issues aecting the aviation industry but is not meant to be comprehensive or provide specic advice on any particular issue. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Colemont does not accept or assume any liability, responsibility, or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on such information or for any decision based on it. If you intend to take any action or make any decision based upon the content of this publication, you should rst seek specic professional advice and verify its content. Colemont is regulated by the Financial Services Authority for insurance mediation services only.

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