After a year of tragic airline disasters, coupled with a nosedive in profits, airlines are seriously tightening the purse strings. So, in the midst of the busiest renewal season for years, one broker is attempting to break open the closed world of the aviation industry
Air France flight 447 departed Rio de Janeiro, Brazil, on 1 June 2009. Within hours, the passenger jet had crashed, causing the tragic loss of 228 lives.
The cost of those losses can never be counted. But in purely financial terms, the disaster contributed to the aviation market’s second-worst year on record, with losses topping £2bn.
The market faces many challenges. With passengers numbers dropping and the airlines scrutinising every penny, brokers and insurers are coming under increasing pressure to keep costs down, with clients moving for marginal savings.
The long-established aviation industry is slow to move and shrouded in secrecy. But as rates stagnate and losses mount, broker Jardine Lloyd Thompson (JLT) is shaking things up with a determined and audacious bid to get into this closed world.
But first, what of the clients? It’s been a turbulent time for airline carriers, with the UK’s biggest, British Airways, hit by a pre-tax loss of £292m in the six months to 30 September 2009, compared to £52m profit in the same period last year. It has been forced it to slash thousands of jobs and now faces the prospect of a staff walk-out over the busy festive period.
Inevitably, this makes life tough for brokers and insurers, with recession-hit airlines looking to save their pennies wherever possible. In consequence, a glut of major accounts has recently changed hands, with more expected in the fourth-quarter renewal season.
“The aviation market has always been competitive,” one leading broker says. “It’s a small market and very high profile, and therefore the activity it includes compared with the interest it generates are probably disproportionate in terms of the overall insurance market. Therefore, it attracts competitive people.”
Traditionally, aviation brokers have considered themselves a cut above the hoi polloi trading smaller risks. It’s a small world, and one reluctant to look outside itself. When contacted by Insurance Times for this article, two of the three biggest brokers refused to comment. Sources say brokers are reluctant to talk because it’s such an incestuous, tightly knit market – to speak out is to risk being blackballed forever.
But with today’s sustained economic pressure, something has got to change.
The fourth quarter of the year is generally regarded as the most important by aviation brokers and carriers as airlines negotiate their renewals; in October there were 24 programmes scheduled to renew. Senior aviation figures have suggested that this year’s renewal season could see more major accounts switch hands than in the last five or six years.
The Willis aviation team’s executive director, Steve Doyle, said the “market-changing” events so far this year, such as flight 447, have transformed the renewal landscape. “You are likely to see some change, either of leader or broker or both,” he says.
Amlin’s head of aviation Rod Dampier agrees, adding: “While this is something that occurs in the market from time to time, it is more likely to happen when, as now, leaders are looking to increase prices and other underwriters – and their brokers – sense an opportunity to prize the business away from the incumbents by offering a lower price, albeit still a slight increase on expiring terms.
“The holding broker’s faith in his leading underwriter evaporates rapidly if he senses that the required pricing levels may persuade the client to look elsewhere.”
A year of heavy losses has fuelled rate increases. The Colgan Air crash in Buffalo, New York in February is believed to have cost around $350m (£211m) and the Air France crash was thought to have exceeded $700m. This has reminded underwriters that the competitive pricing levels in the last four to five years have led to airline claims exceeding current premium levels by some margin, according to Amlin’s Dampier.
“The 2009 accidents have finally persuaded the market that current rates are woefully inadequate and that a serious attempt needs to be made to balance the books,” he says.
“But, whilst many underwriters – and brokers – are making the right noises about the required course of action, it needs to be remembered that there is a considerable amount of excess capacity in the market and, as already seen with Air India, there always seems to be someone available to the broker who is willing to soften the clients’ pain. Overall, airline rates will increase in 2009 but inevitably by an inadequate amount.”
So you might be forgiven for thinking it’s an odd time to try to expand the market. Not so, according to JLT’s aviation boss, Nigel Weyman. He defended the broker’s aggressive approach and says that by hiring the “cream of the crop”, it can create a platform for new opportunities to challenge the top three of Aon, Marsh and Willis.
“If we have the right calibre of people, airlines that perhaps would not concentrate so much time on the value of the product they are buying are now looking at it very, very carefully and thinking again about who represents them,” he explains.
“That creates a fantastic opportunity for us because we can say we have the people, we have the energy and we have the ideas that will actually make a difference to you. There are a lot of clients that have been represented by people who have done a good job, but not an amazing job, and suddenly they are very, very vulnerable. You are only going to be able to take advantage of that if you have got the right calibre of people on board who can deliver.
“When these airlines are looking at every single penny they spend, old traditional relationships suddenly get re-examined because they need to be sure they are getting value. So actually, it is a great time for opening up new ideas with these people and starting new relationships.”
The Lloyd’s broker has won few friends in the London market, however, and has had a series of fallings out with Aon. These resulted in a chain of legal challenges after JLT poached around 16 staff, including some of the most senior figures in the aviation market, such as former Aon deputy chairman Jonathan Palmer-Brown, leaving its rival’s teams decimated.
Then there was that smash ’n’ grab raid on Willis, when in the space of just two weeks JLT scooped up both chairman Giles Wilkinson and deputy chairman Chris Clark from Willis’s aviation division, to become partners in JLT Aerospace.
Can JLT’s approach be sustained in a market where new business doesn’t come around often and losses are staggering? One rival broker chief says: “I don’t know how much [JLT] spent on those aviators from Aon and Willis, but most of those people will be out of the market for between six and 12 months. So you’ve got to pay them their 2009 bonus. That’s one hell of an investment, so they had better bring in business. The thing to ask is if they can.”
The trouble is, there’s not that much business out there. One thing’s for sure, though: the days of playing by the rules and refusing to speak out are numbered. The aviation market is waking up to the 21st century. IT
JLT kicked off its expansion by picking up the China Airlines package and Indonesian Lion Airlines – previously held by Aon. NACIL (Air India and Indian Airlines) changed broker from Aon to Marsh as well as changing lead insurers from Ace to Mitsui.
One of the biggest moves of the year is the Cathay Pacific programme, which also includes Air Hong Kong and Dragonair, and which changed broker from Marsh to Willis after what is believed to have been its first broker review in 20 years.
More recently, Marsh landed a major coup by winning the Thai Airways and Ryanair accounts from Aon.
2009: the major losses
15 January – US Airways Airbus A320: Pitched into the Hudson River less than six minutes after takeoff from La Guardia Airport, New York. The aircraft was a total loss but all 155 passengers survived.
12 February – Colgan Air Bombardier Dash 8-Q400: Crashed on approach to Buffalo International Airport, New York. All 48 onboard died and one person was killed on the ground.
1 June – Air France Airbus A330-200: Crashed into the Atlantic Ocean off the coast of Brazil while flying from Rio de Janeiro to Paris, France. All 228 onboard were killed.
30 June – Yemenia Air Airbus A310-300: Destroyed when it crashed while on approach to Moroni Airport, Comoros. There was one survivor and 152 died.