Grounded aircraft – fewer risks for insurers and operators?

In 1918, amidst the Spanish Flu pandemic, aviation was in its infancy. The first South Atlantic crossing, from Lisbon to Rio, occurred only in 1922. Fast-forward a century and in 2018, TAP Air Portugal alone carried 1.7m passengers from Portugal to Brazil. The impact of the Covid-19 pandemic on aviation globally has been devastating. For example, Brazil closed its air borders to non-residents on 30 March, leaving a restriction in place for four months. Closer to home, in Q2 2019, passenger movements at Heathrow airport (LHR) exceeded 20.8m. For Q2 2020, this fell 96.2% to below 800,000. Even with  “travel corridors” opening, July 2020 saw LHR passenger traffic down 89% on 2019.

But what impact is reduced air travel having on the underlying insurance industry? Theoretically, risk is reduced. Fewer passengers mean fewer claims, and less movement of aircraft equates to a lower risk of ground collisions or accidents. However, the risks are not eliminated, and there is a fundamental change in risk profile. There continues to be an aggregation of aircraft assets in storage, often in locations not intended for that purpose, and potentially with contractual or physical exposures which may not have been foreseen. Insurance provision may change from “flight risks” to “ground risks only”, but are those ground risks increased, whether through adverse weather events or a risk of terrorism or political instability?

Yet the “mothballing” of fleets may not have been anticipated for so long, with the consequent impact upon maintenance schedules, crew currency and training, exacerbated through furlough and redundancy. Risk increases over time, and the effect will only become apparent as aircraft return to the skies. Compliance with manufacturers’ maintenance manuals and regulatory requirements is safety critical for the operator and will be “cover critical” for insurers. In short, aircraft must be protected securely on the ground, but also maintained appropriately to ensure safe operation when they (and their constituent parts) re-enter service.

That return is necessarily conditional upon adequately trained employees – pilots and engineers - being current and compliant with the regulatory requirements of all applicable territories. This will be an inevitable focus for insurers and claimant lawyers in the event of future losses occurring.  All this is against the backdrop of an industry with little, if any, income for many months, and an evolving landscape for not only aircraft use, but also ownership. The fallout for the lease market will continue for many months, if not years, and this will undoubtedly reverberate in the insurance market too.

For operators and insurers alike, the instant compulsion of change necessitated by a global pandemic will, with recovery, see further incremental change as financial losses, redundancies, differing public demand, restructuring and asset seizure all define the aviation landscape. When losses occur in the future, they will inevitably be in the aftermath of the coronavirus downturn; scrutiny of what led to a loss with the benefit of hindsight will be critical.  The “Swiss cheese” theory of accident investigation will likely see novel holes aligned and argued to have caused a loss.

As ever, the insurance market underwrites protection of assets and individuals (be they aircraft, airports, components, cargo or even passengers) but in an environment that requires safe operation and, to the greatest extent possible, contractual certainty. The onus is on operators and insurers alike to satisfy themselves of compliance now, to ensure that the impact of legal analysis at a later date provides as few surprises as possible.

Alex Stovold is a Partner and Head of Aviation at international law firm DAC Beachcroft LLP.

This article was first published in Insurance Day.