Aviation in Crisis

Ruwantissa Abeyratne

• Publisher: Taylor & Francis
• Year: 2017
• eBook ISBN: 9781351772174
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This title was first published in 2003. The events of 11 September 2001 defy modern economic theory when addressed in aviation terms. Economic theory would suggest that, once the impact of such events are a thing of the past, and economies are restored to their status quo ante, a rise in the gross domestic product of States to earlier levels would almost inevitably result in increased consumption. This in turn would mean that the demand for air travel would rise to earlier proportions and consumption in terms of air transport services would be restored to normalcy. However, the September attacks on United States' property introduced a unique characteristic through the fear factor that directly impacts the future development of air transport. As a result, the grim task of restoration of passenger confidence stands in the way of economic revival of the air transport industry. Aviation was always in crisis. The air transport industry, even prior to 11 September 2001, although seemingly a glamorous, exciting and prosperous business, never enjoyed sustained periods of profitability. Even among the large carriers, a short bout of profitability would inevitably be followed by a period of downturn in real income. It is simply that this fluctuation in fortune is an ineluctable characteristic of air transport, whose fortunes are dictated by rigid regulation, competition and technological change. If a sustained analysis were to be made of air transport, plain economic theory would no longer be the exclusive discipline for consideration. Rather, all relevant factors have to be taken in context and emerging issues should be analyzed as possible threats to the economic well being of the air transport industry. This book addresses issues in a post-September 2001 context but also analyses issues past and present, with the intent of looking at the future. Four major areas are taken into consideration which were in crisis but are truly impacted by the events of September 2001. These areas relate to crises in the commercial, security, insurance and environmental protection fields. Of these the first and fourth areas are inextricably intertwined, as aircraft noise regulations in various States have a direct impact on aircraft financing, which in turn is linked to demand for air services. A drop in demand for air services would essentially mean that the demand for lease or purchase of new aircraft would drop. When this occurs, air transport enterprises would be more inclined to cut costs and therefore concentrate on using the aircraft already at hand, upgrading them to conform to the The purpose of this book is to view the overall picture of an aviation industry - comprising air transport and other aviation related industries - in crisis, through issues that continue to impact the economic viability of air transport, particularly as a result of the events of 11 September 2001.

Chapter 1
Introduction

At best, the air transport industry’s fortunes have been irregular. The airline industry, despite its glamour and perceived commercial power, has experienced marginal profitability and cyclical fiscal growth in the long term, with periods of growth and profit being watered down by less successful periods that follow. One of the reasons for this fluctuating pattern is that the airline industry is driven by variable factors such as operational and technological changes as well as regulatory control. To add another dimension of unlawful interference with civil aviation to this list would almost certainly break the industry’s back.

It is an incontrovertible fact that the sad and tragic consequences of the events of 11 September 2001 affected first and foremost the victims of those terrible attacks, and their families. It is equally unchallengeable that the second casualty in this horrendous series of events was aviation. Aeronautically speaking, aviation paid the irrecoverable cost of having aircraft used as weapons of vast destruction. Commercially speaking, the closure of airspace, as an immediate measure throughout the United States and some parts of Europe, and its subsequent opening amidst restricted commercial activity of airlines, not only affected the air transport industry during the first few days of the catastrophe, but also continues to portend grave commercial implications for the airline industry in the years to come. This chapter will outline these implications, with particular focus on insurance and security considerations which were considered in some depth by the 33rd Assembly of the International Civil Aviation Organization, which concluded its deliberations on 5 October 2001.

Aeronautical Implications

The International Civil Aviation Conference, convened at the initiative of President Roosevelt of the United States, was held in Chicago, Illinois from 1 November to December 1944. The delegates at this conference, in the words of President Roosevelt, ‘met in a high resolve that ways and means be found, and rules may be evolved, which shall permit the healing processes of peace to begin their work as rapidly as the interruptions resulting from aggressive war can be cleared away’.¹ The resultant consensus, the Convention on International Civil Aviation,² begins by stating that the development of international civil aviation can greatly help to create and preserve friendship and understanding among the nations and peoples of the world, yet its abuse can become a threat to the general security.³

The Chicago Convention identifies its scope as being applicable to international civil aviation, thus presumably leaving us with the assumption that at least technically, the Convention may not apply to local or domestic aviation. If this were to be accepted without further debate, one could argue that the attacks on the United States, carried out with aircraft flying domestic routes within the country, would not come within the purview of the Chicago Convention. The situation, however, is not that simple or straightforward. The Chicago Convention does not state anywhere that the Convention will apply only to international civil aviation. On the contrary, the Convention, in Article 4 provides: ‘Each Contracting State agrees not to use civil aviation for any purpose inconsistent with the aims of this Convention.’

Although the provision itself is contextually irrelevant to the events of 11 September 2001, the use of the words ‘civil aviation’ links domestic or local aviation to the Chicago Convention and therefore to the work of the international aviation community, in pursuing safe and orderly development of international civil aviation. The ICAO Council, at its 141st Session in 1994, in addressing the subject of aircraft accident investigation, noted that, although Article 26 of the Chicago Convention, which requires a state to institute investigations upon an aircraft of another state which meets with an accident in the territory of the first state, and that what was seemingly described by Article 26 was an accident occurring during international air transport, the Foreword to Annex 13 specifies that the annex may also deal with accidents of a kind which do not fall within the purview of Article 26. Accordingly, the Council, in 1944 considered an amendment to the annex which ensured some uniformity in investigation procedures regardless of whether an accident involved an international or domestic flight.⁴

Annex 13⁵ has incorporated the above-mentioned amendment by stating in its Foreword:

Article 26 does not preclude the taking of further action in the field of aircraft accident investigation and the procedures set forth in this Annex are not limited solely to an inquiry instituted under the requirements of Article 26, but under prescribed circumstances apply in the event of an inquiry into any ‘aircraft accident’ within the terms of the definition herein.

The annex defines an ‘accident’ as an occurrence associated with the operation of an aircraft which takes place between the time any person boards the aircraft with the intention of flying until such time as all such persons have disembarked.⁶ The definition does not mention that the accident has to occur during an international flight.

Annex 17 to the Chicago Convention,⁷ on the subject of aviation security, defines ‘security’ as a combination of measures and human and material resources intended to safeguard international civil aviation against acts of unlawful interference. This would mean that any measure taken, including one following the occurrence of an accident caused as a result of domestic aviation, would, if such an event affects or threatens to affect international civil aviation, fall within the provisions of Annex 17.

Insurance Implications

Following the events of 11 September 2001, the international insurance market gave notice on 17 September that, effective from 24 September, third party war risk liability insurance, covering airline operators and other service providers against losses and damages resulting from war, hijacking and other perils, would be cancelled.⁸ As an immediate response to this measure, the President of the ICAO Council, Dr Assad Kotaite, issued a State Letter⁹ to all ICAO contracting states, requesting that they take effective measures to preclude aviation and air transport services from coming to a standstill. This letter also appealed to contracting states to support airline operators and other relevant parties, at least until the insurance market stabilized, by committing themselves to cover any risks to which airline operators and others might become exposed by the cancellation of insurance cover.

The 33rd Session of the ICAO Assembly, held in Montreal from 25 September to 5 October 2001, considered as an urgent priority the insurance issue by adopting Resolution A33-20.¹⁰ This resolution, while recognizing that the tragic events of 11 September had adversely affected the operations of airline operators globally as a result of war risk insurance cover no longer being available at levels which are practical and accessible to airline operators, prima facie urges contracting states to work together to develop a more enduring and coordinated approach to the important problem of providing assistance to airline operators and other service providers. The resolution, basing itself on the fundamental premise enunciated in Article 44 of the Chicago Convention, which refers to the objective of ICAO to ensure safe, regular, efficient and economical air transport, directs the Council of ICAO to establish urgently a Special Group to consider issues emerging from action taken in the insurance market regarding third party war risk insurance coverage.

One must of course appreciate that war and associated risks, including hijacking and acts of terrorism, pose an extremely high risk exposure to insurers. Aviation hull and liability policies therefore usually contain an express exclusion in respect of such risks. The war risk exclusion used in the London market, known as AVN 48B,¹¹ excludes the risks of war, invasion, hostilities, civil war, rebellion, revolution, insurrection, martial law, hostile detonation of atomic weapons, strikes, riots, civil commotions or labour disturbances, acts of a political or terrorist nature, sabotage, confiscation, nationalization, seizure and hijacking.

In practical terms, war risk insurance is required to cover three eventualities: to protect an airline operator from potential financial liability that could jeopardize its existence; to justify operations into territories of states by assuring those states that they and their citizens would be financially compensated in the event of damage; and to protect the financial interests of airlines, their owners, financiers or lessors. It is usual for an aircraft, depending on its type, to be covered for any amount up to US$750 million to US$1 billion on aggregate (as against per single occurrence). As against this figure, it is significant that the underwriters permitted coverage for only up to US$50 million aggregate consequent upon their issuing notice of withdrawal of third party war risk insurance on 17 September 2001.

Many contracting states, following the State Letter of the President of the ICAO Council, stepped in to address issues regarding cancellation of insurance. It is therefore relevant to discuss steps taken by these various ICAO contracting states in responding almost immediately to the difficulties posed to their airline operators and other service providers. In the United States, the administration proposed a plan to have taxpayers cover most of the losses that insurance companies would suffer in future terrorist attacks. The administration viewed its proposal as an alternative to legislation drafted by lawmakers from both parties in Congress at the behest of the insurance industry. The industry plan recommends a new government-backed insurance company that would manage a pool of premiums and payouts for terrorism policies. Once losses exceeded the amount of money in the pool, the government would cover the difference – which could total much more than taxpayers stand to pay under the administration’s proposal. The administration was wary of the industry approach, fearing the creation of a new federal bureaucracy that is insensitive to costs.¹²

The White House was reported as planning to propose that the federal government relieve insurance companies of 80 per cent or more of the cost of damages from any terrorist attacks over the next year. The proposal would leave the government vulnerable to huge losses if there were large-scale attacks, but administration officials said they thought it was the most workable plan at a time when the industry and others that depend on insurance need a quick fix. Experts estimate that about 70 per cent of the insurance contracts covering terrorist attacks will expire by the end of the year, and reinsurers, who essentially offer insurance to the insurers, have said they plan to drop such coverage.¹³

In Europe, the member states of the European Union recognized that the terrorist attacks exposed the vulnerability of the air transport sector, with damage exceeding all rational estimates. The EU member states have asked the Commission to draw up guidelines to ensure an efficient and coherent response in such cases. Possible responses could include the establishment of a ‘mutual fund’ for risks in order to avoid the cost of national measures. In addition, the Commission proposes harmonizing the amounts and conditions of insurance required for the issue of operating licences.¹⁴

The European Commission announced, on 10 October 2001, that it would allow member states to help European airlines recover from the turmoil after the attacks on 11 September. The Commission, which in the past has been critical of government assistance to airlines, was urging governments to extend compensation to cover the rise in premiums until the end of 2001, and has proposed setting up a fund to cover the higher premiums.¹⁵

In the context of European States, it must be borne in mind that the European Civil Aviation Conference (ECAC) had, during a special Plenary Meeting held in Paris on 13 December 2000, adopted a resolution¹⁶ setting certain third party liability limits for airline accidents involving carriers of EC AC member states. The action of the European Union of 10 October 2001 would be presumed to apply, at least temporarily, notwithstanding the earlier EC AC resolution.

Japan’s government stepped in to help the struggling airline industry as companies tried to cope with rising insurance costs and falling demand in the aftermath of the suicide attacks on the United States. The Ministry of Land, Infrastructure and Transport said the government would guarantee third party insurance up to $2 billion for Japan’s airline carriers to cover any shortfall in claims after insurers reduced coverage to $50 million following the September 11 attack.¹⁷

Colombia’s airlines pleaded for government aid on 3 October 2001, after their insurance costs rose by 6300 per cent, to $32 million, following the 11 September attack in the United States. Colombia’s Association of Colombian Air Transporters (ATAC) said the Andean nation was hit especial...

Table of contents

• Cover
• Half Title
• Dedication
• Title
• Copyright
• Contents
• Foreword
• Preface
• Table of Cases
• 1 Introduction
• 2 The Commercial Crisis
• 3 The Security Crisis
• 4 The Insurance Crisis
• 5 The Environmental Crisis
• 6 Conclusion
• Index