Posted on 14 Mar 12
Air travel in Asia Pacific is set to significantly surpass that of North America and Europe in the next five years, increasing the exposure of airlines operating in the region to potentially game-changing risks such as reputational risk, said Joe Plumeri, Chairman and CEO of global insurance broker Willis Group Holdings at a major aviation conference in China today.
Plumeri also cited loss of customers, talent and skills shortages, currency and price fluctuations and changing legislation among the emerging risks facing the global aviation industry. The Willis Asia Pacific Aviation Insurance Conference is being hosted in Hong Kong this week in conjunction with the International Air Transport Association (IATA) and the Association of Asia Pacific Airlines (AAPA).
“In aviation, traditional forms of risk, once identified, can be engineered out with redundant systems. Most accidents in this industry are now due to human error,” said Plumeri, who went on to give examples of the new risks facing airlines, including:
- Loss of customers – The Icelandic ash cloud of 2010 cost airlines millions of dollars in extended business interruption, despite the fact that there was no physical damage to assets.
- Talent and skills shortages – “In next 20 years, airlines will need to hire and train 460,000 pilots and 650,000 maintenance technicians,” said Plumeri who pointed out that Asia is already experiencing delays due to pilot shortages.
- Currency and price fluctuation – “Fuel represents nearly 40 percent of an airline’s cost base and is purchased in dollars,” explained Plumeri who said that airlines could be at the mercy of unsustainable oil prices, should the political confrontation with Iran over UN and other sanctions escalate.
- Changing legislation – Plumeri mentioned the EU offsetting charges for CO2 emissions being imposed unilaterally on airlines not based in Europe.
Focusing on reputational risk as the hardest risk for airlines to manage in a hyperconnected world where social media is ubiquitous, Plumeri cited Willis research which found that major firms suffer a significant reputational reversal every seven years, on average. “While a reputational crisis can destroy a company’s value, massively and almost instantly, they are virtually impossible to predict,” said Plumeri.
In order to prepare for these unpredictable risks, Plumeri urged airlines to focus on building resilience in their company rather than simply taking the traditional approach of trying to anticipate the risks to which an organization might be exposed.
“By having a risk management policy based solely on anticipation, a company will find that they are not fast or flexible enough to respond to a complex, interconnected and rapidly changing world. As much as any other industry, Aviation needs to anticipate the worst, but to build resilience,” Plumeri told the audience of industry leaders. “The resilience approach acknowledges that the future is unpredictable and responds dynamically by having the right expertise and processes in place to make decentralized decisions and adjustments in real time. This builds organizations more capable of bouncing back from adversity.”
Plumeri called insurance “the bridge between anticipation and resilience” and said that the insurance industry has been anticipating known risks for decades, while at the same time helping business build resilience against the unknown.
“We as an industry own resilience,” Plumeri said. “We’ve proven our own resilience over the years and our focus on extreme one in 200 year events has made us more resilient to catastrophe and shocks from Mother Nature and markets.” Calling for a closer partnership between aviation and insurance, Plumeri said, “Our industry is continuously transforming the scale, depth and quality of insight about the risks facing our clients and how to manage and transfer them. We will use this insight to help airlines to build resilience and to prepare for and respond to new and emerging risks.”