Aircraft owners urged to maintain risk management standards in the face of rising costs

Increasing cost pressures driven primarily by skyrocketing fuel prices have had a significant impact on the aviation industry, with a number of airlines and aircraft owners being forced to consider more affordable ways of keeping their planes in the air.

However, according to Graham Smith, Business Unit Head at Aon South Africa, it is essential that these owners and operators continue to make risk management their primary consideration when making decisions around their aircraft.

“While cutting costs in the short-term is obviously important, these cannot come at the expense of increased risks to the aircraft, cargo and passengers. For example, switching to a more fuel efficient plane may result in immediate cost savings. However, owners also need to consider the risks that the new aircraft presents and whether it is the most appropriate choice from a safety perspective.”

Smith says that appropriately maintaining an aircraft is one way of minimising potentially hazardous incidents. That means complying with airworthiness criteria, meticulous reporting of defects, mandatory periodic inspections, and quality control to name a few.

He adds that owners should also avoid opting for cheaper maintenance contractors, at the expense of quality. “Owners need to ensure that their preferred aircraft maintenance organisations are registered with the South African Civil Aviation Authority.”

Besides the physical risks to pilots and passengers, the financial risks confronted by aircraft owners in the event of a serious incident are enormous. “Insurance claims in the airline industry in 2010 amounted to approximately US$2.1 billion, with insurers paying out more claims than they took premiums,” says Smith.

Latest data from Aon shows there were US$409 million of claims in Africa in 2010. Africa’s proportion of total claims was just over 25% of the global average, compared to an average of 8% between 1995 and 2009. Of the 12 incidents that occurred in Africa, two have been valued at more than US$100 million. They are the region’s second and fourth most expensive claims since 1995, two of only five US$100 million plus, losses in its recent history.

Smith adds that from a risk management perspective, it is critical that owners comply with the stipulations in the policy and the information provided to the insurers.

“Limitations for pilots, specifying a minimum number of flying hours, types of use and geographical limitations are all very important to the insurer and are often the reason for rejecting claims both for aircraft damage and passenger and third party liability. It is vital for operators to understand that while regulations may make payment of damages to passengers a strict liability, there is nothing that compels an insurer to indemnify the operator if he is in breach of the policy conditions,” says Smith.

“When it comes to owning and operating aircraft, it is important to get advice from a trusted risk management professional on the appropriate risk management solutions that should be implemented to avoid any potential disasters”, concludes Smith.