Airlines face more chaos as insurance risks rocket

By Our International Staff Published: September 20 2001 21:33 | Last Updated: September 21 2001 03:57

The airline industry warned on Thursday of severe disruption to services from early next week as a result of changes to insurance cover in the wake of last week's terrorist attacks in the US.

Airlines around the world said underwriters had given notice they would cancel cover for war liabilities from midnight on Monday. It means airlines and insurance companies will have to renegotiate the terms of cover in the light of the possibility of US military action in response to the terrorist attacks.

Ray Neidl, an analyst with ING Barings, said new premiums being discussed were "ridiculously high" and potentially sufficient to tip several weakened carriers over the brink. Airlines were lobbying Congress to exempt them from liability for damage on the ground, he added.

"There is zero posturing in this," said Peter Walsh, an airline consultant with Mercer Management Consulting. "Every airline around the world has been notified that coverage will be reinstated [only] for a [higher] fee."

The insurance problems are the latest blow to an industry already pushed to the wall by cancelled business, lack of demand and a complete loss of revenues from the US ban on flights last week.

"This is having a very wide-ranging impact," said Graham Nichols, chairman of the Aviation Insurance Office's Association, which represents aviation insurers trading in the London insurance market.

"At least in the Gulf war only certain airlines were affected, whereas now the potential risk of terrorism affects every airline."

Leading British airlines warned they could be forced to ground their aircraft unless the government offered help with covering insurance risks. To keep flights going, ministers are examining emergency measures, including a scheme that would see the government underwriting commercial airlines' insurance.

In a letter to Stephen Byers, the transport secretary, the airlines warn that reductions in insurance cover for injuries to third parties, such as people on the ground, could cause airlines to breach contracts with the companies from which they lease aircraft.

The letter, seen by the Financial Times, says insurers are offering third-party insurance of only $50m (E54m) - way below the $750m typically demanded by aircraft lessors.

"We are not confident aircraft owners and lessors will allow airlines to fly them with such reduction of cover," the letter says. "If our pessimism were to be borne out in practice, airlines would cease to be able to mount any form of coherent service beyond Monday 24th September."

Andrew Smith, chief secretary to the Treasury, and Sir Andrew Turnbull, permanent secretary, spent Thursday afternoon working with industry executives to devise a plan that would see cover restored.

One model being studied is Pool Re, the mutual insurer owned by the insurance industry but backed by the government, which has guaranteed commercial buildings against terrorist attacks since the IRA attacks on the City in the early 1990s.

Representatives from Europe's leading airlines met Loyola de Palacio, EU transport commissioner, in Brussels on Thursday to plead for special help. Ms de Palacio said she would raise the issue with EU finance ministers, who meet in the Belgian city of Liege on Friday and on Saturday.

Airlines in south-east Asia and Australasia announced they would be introducing surcharges of $1.25 per passenger to cover the shortfall in third-party insurance cover.

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-- Martin Thompson (mthom1927@aol.com), September 20, 2001

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It's a good thing we have a hefty budget surplus. All of this is going to cost and cost and cost.

-- Billiver (billiver@aol.com), September 21, 2001.