Jumbo jet's arrival off insurers' radar

The fanfare surrounding the maiden U.S. flights last week of the world's largest passenger jet contrasted markedly with the minimal disquiet that the jet's long-anticipated arrival has stirred in the global commercial airline insurance market.

Contrary to concerns expressed by market executives two years ago, when the Airbus A380 was expected to be delivered much sooner than it ultimately will be, airlines that have ordered the double-decker jumbo jet have not clamored for liability limits that have strained the market's capacity, market executives say.

But some executives say they have seen some subdued limit building.

Among the 15 airlines worldwide that have ordered the jumbo jet, manufactured by Toulouse, France-based Airbus S.A.S., Singapore Airlines is scheduled to be the first to take delivery. The current delivery date is October, nearly two years behind schedule.

No U.S. commercial airlines have ordered the jet, and U.S. freight carriers FedEx Corp. and United Parcel Service of America Inc. have canceled their orders for the cargo version of the jet because of the long production delays.

But last week, in conjunction with Airbus, German airline Deutsche Lufthansa A.G. and Australian airline Qantas Airways flew two A380s to airports in New York, Los Angeles and Chicago. Throngs of onlookers--including aircraft fanciers, journalists and the curious

gathered to see the A380.

The aircraft's first official U.S. appearance was at John F. Kennedy International Airport in New York, where a flight from Frankfurt, Germany, landed March 19 with about 500 passengers and crew onboard.

All of the A380 flights to U.S. airports last week were route-proving demonstration runs by Qantas and Lufthansa, which are scheduled to take delivery of their first A380 jets in 2008 and 2009, respectively.

Although the flights were operated by the airlines, Airbus' parent company--European Aeronautic Defence & Space Co. N.V. of Schiphol-Rijk, Netherlands--retained responsibility for the flights' liability and hull risks, according to market sources.

The lead commercial insurance underwriter for EADS is Paris-based aviation insurance pool La Reunion Aerienne, according to sources. Willis Group Ltd. placed the coverage, sources said.

While EADS has liability insurance limits of approximately $2 billion, which is comparable to the limits that many of the world's largest passenger airlines purchase, it also likely has arranged additional protection through capital markets, sources said.

The A380 surpasses Boeing Co.'s 747 as the world's largest passenger jet (see box). The three-class configuration of the A380's passenger cabin is designed to carry 555 passengers, but the jet can be configured to carry as many as 853 passengers by eliminating various accommodations in the passenger cabin. The 747 can carry 366 to 568 passengers.

The A380's potential passenger load triggered concerns among market executives two years ago that airlines ordering the aircraft would seek much higher insurance limits to protect themselves if an A380 crashed while carrying mostly U.S. citizens.

An airline's potential liability in that scenario could exceed the $1.75 billion to $2 billion of limits that most large airlines had at that time, market executives said. The executives conjectured that airlines might need between $2.5 billion to $3 billion of coverage but that those limits could strain market capacity and force airlines to restructure their single-layer insurance programs into primary and excess layers (BI, Jan. 24, 2005).

Demand hasn't materialized

That level of demand has not materialized, market executives say, though there is some disagreement over whether airlines have made a much less ambitious effort to begin building their limits. Some executives say airlines would begin boosting their limits only during the renewal period immediately preceding the date they expect to take delivery of the jets. Others say some airlines have started earlier, because of favorable market conditions.

Rod Dampier, divisional aviation underwriter at Lloyd's of London managing agent Amlin P.L.C., said any anticipation of the A380 beginning service has had "no impact on the market."

Wayne Wignes, the Chicago-based president of the Aon Aviation unit of Aon Corp., agreed. "Airlines are not at risk yet, so there have been no modifications to their programs yet," he said.

Similarly, Joe Trotti, chief executive officer of New York-based Willis Global Aviation/North America, a unit of Willis Group Holdings Ltd., said: "I don't know of anyone who has purchased higher limits ahead of time" of taking delivery of A380s.

But Mr. Trotti acknowledged that some airlines have boosted their limits somewhat over the past two years.

Some market executives say a couple of airlines with orders for the A380 now carry $2.25 billion of limits--the highest limits ever purchased.

But while those moves could have been in anticipation of taking delivery of A380s, the airlines also might have taken advantage of favorable airline insurance market conditions, Mr. Trotti said.

As underwriters' profits have soared in recent years because of relatively few losses, market capacity has ballooned. That has fueled market competition and resulted in lower rates.

Given how rates fell last year, some airlines could have boosted their limits to $2.25 billion "without much cost implications," said Nigel Weyman, a partner and the head of the aerospace division at broker Jardine Lloyd Thompson Group P.L.C. in London.

As airlines begin taking delivery of A380s, current market conditions would allow them to further increase their limits, market executives said.

The market currently could provide up to $2.5 billion of limits, but demands for coverage beyond that level would tax the market, executives concurred.

Foreign-flag carriers that eventually fly U.S. citizens aboard their A380s "would be imprudent not to boost their limits," Mr. Wignes said. Those airlines would be exposed to U.S. liability awards, which typically are higher than in other countries, he said.

But some airline risk managers have come to view the difference in risk profiles between the A380 and the 747 as "not that big of an issue now," said Steve Doyle, a manager of aviation and global practice leader at Aon Ltd., the London-based unit of Aon Corp.

Airlines with $2.25 billion of limits might be satisfied that they have sufficient coverage he said.

Jardine's Mr. Weyman agreed.

Another broker, who asked not to be identified, noted, for example, that the November 2001 crash of an American Airlines jet in New York resulted in 265 fatalities, but that liability payments to the victims' families totaled far less than the airline's $1.5 billion of limits.