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Airlines exposed to catastrophes as planes stay parked amid pandemic

Posted On: Sep. 8, 2020 7:00 AM CST

parked planes

The prolonged downturn in air travel brought on by COVID-19 has left many aircraft idle in the United States, prompting concerns about aggregation risk especially in areas exposed to natural catastrophes.

While larger commercial airlines generally have the resources to mitigate the risks in normal conditions, the pandemic is making it more challenging for some as they downsize their networks and lay off workers, several experts say.

Concentrations of risk were already a heightened concern in the aviation sector before COVID-19, for both U.S. and international airlines, said Brad Meinhardt, Las Vegas-based managing director of Arthur J. Gallagher Inc.’s aerospace practice.

The grounding of Boeing 737 Max aircraft in March 2019 due to safety concerns meant that many airlines were looking for storage holds, he said.

“Underwriters were actively asking about concentrations of this particular model aircraft, and some underwriters had a significant concern over them,” Mr. Meinhardt said.

During COVID-19, the problem has expanded to include other aircraft. “We’ve moved beyond the MAX to the regular fleet of aircraft that aren’t flying and need a place to go, and those exposures are significant,” Mr. Meinhardt said.

Airlines have given “great thought” to how they can mitigate natural catastrophe-related risks on aggregated exposures, said Jeff Bruno, Parsippany, New Jersey-based president and chief underwriting officer at Global Aerospace Inc.

“Aircraft that are in windstorm- or hurricane-prone areas are maintained in ready condition with their regulatory paperwork up to date and they have crews assigned to fly them away to safety well in advance of a storm,” he said.

If aircraft cannot be evacuated in some circumstances, they are fully fueled so they are weighted properly and parked strategically away from flying debris and behind buildings, Mr. Bruno said.

Larger airlines tend to have multiple hubs and more flexibility in terms of where they can park their aircraft, and “careful consideration was given to their fleets of aircraft, the values of those aircraft and the potential for adverse weather in various parts of the country,” said Jason Saunders, Atlanta-based president of Willis Towers Watson Aerospace, a unit of Willis Towers Watson PLC.

COVID-19, however, adds another layer of logistical complications when it comes to managing extreme weather risks, Mr. Saunders said.

Airlines need to consider where they are going to fly the aircraft, the current state of the aircraft in storage, how quickly aircraft can be moved, the readiness of their crew and whether they have sufficient crew, he said.

“That’s a challenge right now with airlines laying people off and furloughing employees,” Mr. Saunders said.

General aviation aircraft, which include private planes and business jets, that are stored are also at heightened risk, and there are increasing exposures for maintenance, repair and overhaul operations, Mr. Meinhardt said.

This year, $250 million of aircraft have been destroyed on the ground predominantly in the Southeast due to severe weather events, “so you can see what can happen when you have concentrations of even general aviation aircraft in certain areas of the country,” Mr. Meinhardt said.

“It doesn’t necessarily take a COVID-19 environment to give an example of what can happen when a significant storm comes through an area and aircraft get tossed on each other,” he said.

While general aviation insurance policies are tailored based on an airline’s exposure and history, a common problem for owners is that “a significant portion of their fleet is grounded somewhere, scattered about various airports wherever they can find space,” said Matt Drummelsmith, president, Aviation Specialty Insurance, a Columbus, Ohio-based brokerage.

Airline risk managers should take into consideration weather risk when they are looking for space to rent for storage of their aircraft, he said.

“There’s clearly not enough hangar space built because something like this was never contemplated where 80% of the fleet would not be flying,” Mr. Drummelsmith said.

“The hangar capacity was built to sustain about 10% of the fleet at any given time. Well, now it’s the inverse, but there’s no hangar space. Aircraft are sitting on ramps subject to weather. It would make sense that they would pick locations not exposed to weather,” he said.

Amid the pandemic and with increased numbers of idled aircraft, Swiss Re Ltd. has introduced a new coverage for insurers known as “Sleeping Beauties.”

“We realized early on when planes were being grounded there was an accumulation of assets for airlines. A lot of their fleets were being stored in the same location and this created concentration risks for our clients, the insurance entities,” said Greg Schiffer, Armonk, New York-based head of special lines reinsurance at Swiss Re.

The coverage uses data from Swiss Re’s aviation tool ‘Goldeneye’ to quantify the exposure per airline and location and then overlays the reinsurance protection that insurers have to see where they may have gaps, he said.

In the United States, many airlines have a concentration of assets in New Mexico, and idled aircraft are also parked at locations in Florida, Georgia and Texas, areas exposed to natural catastrophes like hurricanes, Mr. Schiffer said.

This can leave insurers with potential gaps in reinsurance as they face exposure beyond anticipated levels.

“A lot of insurers will buy protection up to a 1-in-100 or 1-in-250-year event. Certainly, having millions of dollars of exposure in a certain location could skew that number,” he said.

The Sleeping Beauties coverage offers top-up or drop-down coverage to protect insurers against natural catastrophe risks but doesn’t cover aviation war risks such as terrorism, hijacking and sabotage. Swiss Re did not disclose capacity and limits information.