Willis released (Dec-2012) its 4Q2012 airline insurance market review, stating the market has “performed exactly as expected” during the quarter, with the predicted acceleration of the level of premium reduction materialising. The company stated the airline insurance market is a “catastrophe market with an absence of catastrophes and a new normal is developing”. Premium reductions “moved into double digits" for Nov-2012 renewals and are slightly higher for Dec-2012 renewals. USD100 million of premium has been eroded from the market and the downward path looks set to continue. 4Q2012 also saw the highest level of hull rate reduction of any this year, at 16%, greater than the annual average reduction of 14%. Passenger rates have reduced by 14% and are also higher than the annual average of 13%. High capacity levels have ensured significant levels of competition have continued in the market. The low loss levels mean that, despite the falling premiums, expiring policies have delivered good experience and on the whole insurers have made a profit on their 2011 underwriting year. [more - original PR]
Willis: Airline insurance market is a 'catastrophe market with an absence of catastrophes'
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US airlines Part 2: LCCs and ULCCs face the same cost overhang as their larger rivals
US low cost carriers and ULCCs observed many of the same trends in the country’s marketplace at the end of 2016 as their large global network rivals – namely, that weak pricing trends in the domestic market were improving. Each airline has its own nuanced view of that general operating environment, but they feel encouraged by what they hope is an inflection point in pricing that will lay the groundwork for a return to positive unit revenue.
Those lower cost and ultra-low cost airlines also face similar challenges to their larger counterparts – cost pressure from new labour contracts and rising oil prices. And like their larger rivals, most of the lower cost US airlines are plotting lower capacity growth in 2017 as a means to improve their respective revenue performances.
For now, pricing improvement that began in late 3Q2016 and a bump in demand after the US presidential election are sustaining the cautious optimism expressed by US airlines as 2017 gets under way. But no US airline is ready to declare that pricing traction in the country’s domestic market is on a sustained upswing.
This is Part 2 of two reports examining the outlook for US airlines in 2017.
US airlines Part 1: labour and oil costs create challenges for the Big 3 airlines as 2017 begins
US airlines, across all business models during 2017, are attempting to arrest negative unit revenue trends that have remained stubbornly in place for two years. Rising labour and fuel costs are heightening the importance of a return to positive unit revenue as investors attempt to determine whether an inflection point in the weaker US pricing environment has been reached.
In order to achieve their stated targets to return to positive unit revenue during 2017, most US airlines are planning lower capacity growth than the year prior as a means to stabilise pricing trends in the market. Many of the country’s airlines struck a positive tone at the end of 2016 after close-in yields began to stabilise in the domestic market. However, challenges remain in some international markets, particularly the trans-Atlantic. American, Delta and United are working to adjust their capacity in order to fuel investor confidence that their unit revenue fortunes will turn positive in 2017.
Investors are likely viewing declarations by US airlines of a return to positive unit revenue in 2017 with some level of scepticism, since many of those entities have inaccurately predicted when their unit revenue performance would improve. But with higher labour and fuel expenses, the urgency to chart a positive unit revenue performance is becoming more pronounced.
This is is the first of two reports examining the outlook for US airlines in 2017.