Posted on 12 Mar 2010
Joe Plumeri, Chairman and CEO of Willis Group Holdings plc, the global insurance broker, said last week at a major aviation conference in China that Asia's aviation industry will play an important role in its economic recovery, but cautioned that it, like other industries, must take proactive steps in risk management to mitigate a series of new and emerging threats.
Last year marked the first time in aviation history that intra Asia-Pacific travel eclipsed the number of travelers in North America, Plumeri told 220 delegates at the Willis Asia Pacific Aviation Insurance Conference in Sanya, Hainan, China. The conference was hosted in conjunction with the International Air Transport Association (IATA) and the Association of Asia Pacific Airlines (AAPA). The event was also sponsored by the People's Insurance Company of China and Air Union Insurance Brokers Co. Ltd. amongst others.
“By 2013 an additional 217 million travelers are expected to take to the skies within the Asia-Pacific region,” said Plumeri. “It is estimated that the global transport industry will triple in size when Asians start to travel as much as Americans. The dynamics of the aviation industry in Asia are compelling, but while the growth potential for air travel is enormous, so too are the new risks facing airlines.”
Following speeches to audiences in Los Angeles in December and London in February, in which Plumeri laid out his “Top 10” risks for the new decade, his remarks in China calibrated those risks to specific threats facing the airline industry. A summary of some of those risks follows below:
Reputation: Managing reputational risk is one of the top priorities for companies and high profile individuals today. Plumeri noted that Pan Am and TWA had difficulty recovering in the public eye following the downing of Flight 103 and Flight 800.
Supply chain volatility: Like any other industry, airlines and airline manufacturers work with a myriad of suppliers and one weak link in the chain can mean delays and billions of dollars in losses.
Cost and availability of credit: Just as small businesses are squeezed in their ability to find funding for their enterprises, so too are airlines challenged in their ability to renew their fleets, while leasing companies are struggling to finance the purchase of new aircraft.
Cyber Security: Insurance for airlines used to be largely focused on hull, passengers and cargo, and in many cases still is. But with the Internet playing an enormous role in reservations and ticketing, the risk of airlines losing their passengers’ data or experiencing a system-wide failure is growing significantly.
Regulation and compliance: Most airlines operating in the airspace of the European Union will come under the EU’s emissions trading scheme from 2012. Such new regulations around the globe will bring new compliance risks as well.
Pandemics: Passengers wearing facemasks have become an increasingly common occurrence as fear rises of airborne disease transmission. At the same time, new screening programs for tuberculosis raise controversy. The H1N1 virus was another reminder to airlines of the operational challenge of carrying infected passengers and its associated risks.
Terrorism: On Christmas Day, 2009, a passenger on Northwest Airlines Flight 253 with 80 grams of explosives sewn into his underwear imperiled 289 others on board. It was the latest reminder of many of the threats to the industry. No sector has more experience of what both an incident and the cost of constant vigilance can have on business.
Climate change: Adverse weather and increasing frequency or severity of natural catastrophes can affect the operating environment of an airline. While climate change remains controversial, there has been less public discussion about the long-term economic impact of weather-related schedule changes and cancellations.
“These new risks are not unique to the aviation industry — all businesses face them in some shape or form. All of us as business leaders must have a clear and structured focus on risk management to protect our companies,” said Plumeri. “We must look at all the risks we face and address them head-on. We have to be honest and open about what we see and what we’re doing about it. This is not about just buying insurance. What I’m talking about is true enterprise risk management.
“Today, a lot of companies simply buy insurance without effectively analyzing their company's risk. When that happens, insurance becomes a commodity, like fuel, soybeans or lumber. When you buy a commodity, you look for the cheapest price. If you're dealing with risk as an expense — like any controllable cost — you're doing your company a disservice. We need to be focused more on the underlying nature of insurance: protecting what you’ve built and what you care about.”
In conclusion, Plumeri called for the elevation of the risk management function in companies through the hiring of Chief Risk Officers and the establishment of risk committees on boards.