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COVID-19 and the aviation industry

Will pandemics change our view of risk?

Luftfart og romfart
COVID 19 Coronavirus

By John Rooley | March 13, 2020

As the global disruption caused by pandemics such as COVID-19 increases, airlines may need to consider a broader strategy to analyse risks across the organization.

The International Air Transport Association (IATA) has warned that collective airline losses attributable to the global COVID-19 outbreak could reach $113 billion, if the virus continues unchecked.1

If realized, the COVID-19 outbreak will see airlines lose more than 16 times as much revenue than they did during 2003’s SARS (Server Acute Respirator Syndrome) epidemic.

IATA, whose members carry 82% of the world’s air traffic, said Asia-Pacific airlines could see a 23% year-on-year fall in passenger numbers, with similar estimates for parts of Europe and the Middle East. Those new projections imply that Asia-Pacific airlines could see revenues fall by $49.7 billion this year, according to IATA’s update.1

In context, when the dust had settled after the SARS contagion, IATA put global airline losses at about $7 billion.2 It took nine months for normalcy to return to the industry. At the time of writing, more than 4,292 have died from the spread of COVID-19 (SARs killed just under 1,000) and more than 118,322 people have been infected globally.3

Airline analysts believe the dark financial forecast for COVID-19 is largely attributable to two key factors: travel and flight restrictions imposed by the private and public sectors are expected to last longer than for SARs; and China’s contribution to global airline revenues today is far larger than it was 17 years ago.

Airline hull and liability coverage

While the ultimate cost this time – in lives and dollars – remains unclear, airline management may wish to consider the breadth of cover that may be provided by their current insurance program. There will also be questions about what more could be done to transfer risk and the inevitable revenue losses in preparation for future outbreaks.

Current airline hull and liability policies are not designed to protect airlines against non-damage business-interruption financial losses.

Current airline hull and liability policies are not designed to protect airlines against non-damage business-interruption financial losses. Broadly, the hull section is designed to respond to physical damage to the aircraft, spares and equipment. Standard liability cover for airlines traditionally protects them against claims for bodily injury or property damage caused by an “occurrence,” defined as an accident or exposure to continued and repeated conditions that result in bodily injury or property damage that are unexpected or unintended by the insured. Bodily injury includes sickness, disease and death.

International airline liability is predominantly regulated by the Montreal Convention 1999. IATA and bodies such as the World Health Organisation set standards for the required response to epidemics, which cover best practices for screening of passengers, tracking customers who may have been exposed to a virus, and minimum requirements for crew resources and training, etc.

When those guidelines are followed, an airline would only be liable for bodily injury to passengers and third parties if the sickness is proven to be the result of an incident that happened onboard the aircraft or during embarking or disembarking. There must be an external event that causes the person to contract the sickness, such as evidence there was a failure to screen passengers in accordance with existing regulations when boarding.

It would also be very difficult for a passenger to prove that they contracted the virus on the aircraft or while embarking or disembarking, as opposed to at any other point in their journey. Even if a person could prove that they contracted the virus onboard the aircraft, establishing liability against the airline would be difficult if it had acted in accordance with procedures. If an airline was found liable for people contracting the virus, insurers would be obliged to defend the insured against these alleged claims, as they would potentially fall within the scope of the policy coverage.

Under the personal injury section, AVN60A in standard aviation liability contracts, a policy holder could also be protected against claims for non-physical injury stemming from the quarantine or detention of passengers, or from passengers having been denied boarding.

This could come into play if an overzealous employee at the gate refused boarding or detained someone purely based on their ethnicity, rather than in line with the mandated protocols for passenger screening. Possible allegations of discriminatory actions could be made and preventively leadership could reinforce employee learning when these types of events occur.

In summary, standard airline hull and liability cover is not designed to offer airlines protection for non-damage business interruption losses arising from global health threats such as COVID-19.

Parametric solutions for airlines

When a pandemic or epidemic occurs, it’s natural that we all start to look at risk through a slightly different lens and investigate possible solutions that may alleviate shareholder insecurity.

There are several dedicated epidemic / pandemic solutions available from the insurance market that offer cover for non-damage related revenue losses once pre-set triggers have been met. While these solutions have been available for some time, they have only been taken up by a limited number of airlines, cost being a decisive factor.

Pre COVID-19, the interest in these solutions from the airline sector was limited and, understandably, since the outbreak and its continued spread, COVID-19 is currently excluded from the cover offered. However, cover is available to companies looking for a long-term solution against future outbreaks.

Other parametric solutions feature a pre-agreed list of primary triggers such as natural perils, adverse weather, terrorism and pandemics. If one of the trigger events occur, the policy then responds based on either the intensity of the event or movements in a pre-agreed secondary index, which, for airlines, could be a reduction in passenger numbers or an increase in flight cancellations, for example.

Does a changing risk landscape call for a new approach?

As the impact of the current COVID-19 outbreak on the airline sector becomes apparent, so too could the interest in exploring parametric solutions to manage the potential impact of future pandemics and other costly events such as volcanic eruptions and extreme weather.

The insurance sector has the capacity to create solutions for these risks, but as each solution is customised to the specific risks and needs of the buyer, the structuring process takes time and requires a high level of commitment and collaboration between the airline, its risk advisor and its insurers.

As the world becomes increasingly interconnected and risk in turn, becomes even more global and complex, airlines may require their risk advisors to shift the focus from the traditional safety and reputational risks to a broader strategy of enterprise-risk management to analyze risks across the organization.

Footnote

  1. IATA Updates COVID-19 Financial Impacts; Scenario 2: Extensive spread https://www.iata.org/en/pressroom/pr/2020-03-05-01/
  2. IATA Economic Briefing. https://www.iata.org/en/iata-repository/publications/economic-reports/impact-of-avian-flu/
  3. Coronavirus disease (COVID-19) Situation report - 51. https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports/

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programmes it is critical to consider all local operations and how policies may or may not include COVID-19 coverage.

The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates.

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