8 Major Threats to the Aviation Sector
Published by: SOMA Team - - September 14, 2022

U.S. commercial airlines carried more than four billion passengers in 2017 and produced $534 billion in revenue globally. The demand for air travel is expected to increase. Still, to keep up and remain profitable, commercial airlines must manage these hazards, many of which are still developing and emerging.

  • 1) System failure and outdated technological infrastructure

Unfortunate examples show how a big airline’s system failure can have wide-ranging implications. Delta’s network outage in late January 2017 resulted in at least 270 aircraft cancellations and numerous delays. Due to the problem affecting its website and mobile apps, it lost out on extra reservations.

This followed a far worse disruption for Delta in August 2016 due to an equipment fire. In that instance, the airline lost $150 million in income due to the projected 2,300 flights that had to be canceled.

Southwest Airlines had 2,000 flights canceled a month earlier due to a router failure that led to cascading systemic issues and cost the airline between $54 million and $82 million in lost income and escalating expenses. Southwest is expected to have lost $5 million to $10 million in ticket sales due to the bug that rendered online booking services unavailable.

In January 2017, a computer malfunction led United Airlines to cancel all domestic flights for more than two hours. According to FAA officials, the Aircraft Communications Addressing and Reporting System (ACARS) had bandwidth problems.

These incidents demonstrate the danger in attempting to implement new software on top of aging infrastructure. The underlying technology that underpins the operations of many airlines is decades old and in desperate need of an upgrade, but the prices involved have precluded much-needed changes.

  • 2) Pilot Shortage

A persistent pilot shortage is caused by rising demand and a dwindling pool of qualified candidates. Boeing projects that over the next 20 years, the aviation industry will require 754,000 new maintenance technicians and 790,000 new pilots, according to its 2018 Pilot & Technician Outlook. Over the next ten years, more than 42% of airline pilots will retire, predicts market research firm Cowen & Company. At the moment, the majority of pilots are baby boomers.

Private aviation firms frequently hire highly skilled former Air Force pilots, yet as of 2018, the Air Force was short by roughly 2,000 pilots.

The most affected aviation sectors are private and business, as commercial airlines may frequently provide more competitive pay and more consistent schedules.

  • 3) Climate Change

The weather significantly impacts the ability to maintain planes on schedule. In the past, seasonality allowed airlines to predict some cancellations. It is realistic to anticipate that some flights to Florida during hurricane season will be canceled and that travel to the Northeast during the heart of winter will be hampered by snowstorms. Airlines could plan for such occurrences and prepare to cover the expense. However, because of the effects of climate change, planning is now all but useless.

Storms are becoming more severe and frequent due to global warming, which causes more and longer travel delays. Extreme heat is another problem. Pilots cannot safely take off when the air is too hot because they cannot generate enough lift. In Phoenix, a stretch of days with temperatures above 120 degrees during the summer of 2017 forced one airline to cancel more than 40 flights. According to Climate Central, the five warmest years have happened since 2010. Heat will still play a part in keeping aircraft on the ground.

Turbulence is increasing as a result of weather patterns and temperature variations that are more unpredictable. According to a study by the University of Reading in the UK, between 2050 and 2080, the amount of severe turbulence in the airspace over North America, the North Pacific, and Europe will tremble. Severe turbulence will occur more frequently than in today’s mild turbulence over the North Atlantic.

This could result in more flights needing rerouted and more accidents involving passengers and crew.

Airlines are also under pressure to develop ways to become more fuel-efficient and ecologically benign because the aviation industry is responsible for 2 to 5% of global emissions.

  • 4) Oil Price Volatility

About 30% of aviation expenses go toward fuel. When oil prices rise, profit margins may swiftly deteriorate. The price of a barrel dropped over the previous ten years, from a high of $126 in 2011 to a low of roughly $36 in 2016. End-of-January 2019 prices have the price at $52 per barrel. Although the cyclical nature of oil prices is not a new risk, there have been significant increases in quick variations over the past few decades. This exposure will remain challenging to manage.

According to estimates, the global aircraft industry might lose $1 billion more annually for every $1 increase in the price of a barrel of oil. The Motley Fool notes that this substantial risk level is beyond any airline firm’s control. Their vulnerability to extended periods of high oil prices cannot be entirely offset by hedging techniques.

  • 5) Reputation Damage

A Kentucky doctor named David Dao was forcibly removed from a United Airlines flight after the company discovered it had overbooked and needed to “bump” some customers, but nobody offered to do so. Images of a bleeding Dr. Dao being dragged down the aircraft’s tight aisle quickly went viral on social media, and the company’s CEO Oscar Munoz’s lackadaisical response didn’t help.

The event reportedly reduced United’s market worth by around $250 million.

Since then, there have been innumerable instances in which disputes between passengers and personnel or violent evacuation are documented and broadcast online. While crew members have occasionally been criticized for being impulsive or impolite, in other instances, their intentions for approaching passengers have been labeled racist.

These occurrences emphasize how crucial it is to have a well-defined communications response plan. Accidents can’t always be prevented, but how a business handles them can determine whether the incident has a short-term impact on the bottom line or a longer-term one.

  • 6) Economic Recession

Five of the top nine American airlines reported losses totaling around $4 billion in 2008 and 2009. Travel is generally at the top of the list of expenses to cut when a decreasing economy causes individuals and organizations to tighten up their budgets.

The domestic passenger miles flown by the top seven U.S. airlines decreased by 9.47 in September 2008 compared to September 2007. Air freight volumes decreased by around 13% globally.

The inability to forecast when or how long a recession would endure for the commercial aviation industry creates a continual, uninsurable risk.

  • 7) Government Shutdown

The recent 35-day shutdown, the longest in history, demonstrated that a non-functioning federal government has significant implications for airline safety, productivity, and profitability. It is likely that the impact of a government shutdown was never a top concern for airline risk managers in the past.

Southwest Airlines estimated it lost up to $15 million in January 2019 due to the closure. Delta said that the lost revenue cost them $25 million.

This is because fewer federal employees and contractors are traveling for work, and there aren’t as many TSA agents and air traffic controllers to manage the current traffic volume. These employees reported being sick in historic numbers because they faced weeks without pay. During the shutdown, up to 10% of TSA employees took sick days due to financial constraints. There are delays and cancellations when air traffic controllers are not present.

87 cancellations and more than 1100 delays at La Guardia, Kennedy International, and Newark Liberty International airports.

  • 8) Decreasing Insurance Capacity

Willis Towers Watson forecasted a hardening market to persist in its 2018 aerospace market update. Weakening profitability has forced some carriers to abandon the market after years of challenging circumstances.

One of the most expensive years ever for the overall property and casualty (P&C) market, according to WTW, “will have an impact on several insurers’ reinsurance programs as they renewed their treaties in 2018.” Due to increased judgment verdict and settlement amounts as well as rising maintenance costs for modern aircraft, claims are getting more expensive.

Nearly 70% of all airline claims are now attrition-related. This implies that underwriters who write the entire portfolio won’t turn a profit, according to the update. “Until premiums reach a level that is more sustainable, a number of underwriters have already stopped writing airline business. There will probably be some P&C underwriter mergers and acquisitions as well. 2018 pricing should show a little increase trend, particularly for airlines that are losing money. In the event of a significant loss, the market will become considerably more difficult much sooner.

Source: https://riskandinsurance.com/7-critical-risks-facing-the-aviation-industry/

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