Active Stocks
Tue Mar 19 2024 15:58:41
  1. Tata Consultancy Services share price
  2. 3,977.55 -4.03%
  1. Tata Steel share price
  2. 148.65 -0.64%
  1. Bharti Airtel share price
  2. 1,227.85 0.23%
  1. Power Grid Corporation Of India share price
  2. 258.95 -2.28%
  1. ITC share price
  2. 409.50 -1.89%
Business News/ Companies / Indian airlines likely to pay up to 25% more to renew fleet cover
BackBack

Indian airlines likely to pay up to 25% more to renew fleet cover

The potential increase comes at a time when Air India is seeking to renew insurance cover worth more than $10 bn

Flight MH370 with 239 people on board disappeared without a trace in March and MH17 was shot down over Ukraine in July, killing all 298 people on board. Photo: BloombergPremium
Flight MH370 with 239 people on board disappeared without a trace in March and MH17 was shot down over Ukraine in July, killing all 298 people on board. Photo: Bloomberg

Mumbai: India’s airlines will likely have to pay 20-25% more in premiums for renewing the combined $30 billion of insurance cover on their fleet—the consequence partly of two disasters that struck Malaysian Airline System Bhd this year, airline and insurance executive say.

A Libyan militant group’s attack on Tripoli International Airport this month and extremist attacks on Karachi Airport in June have also put pressure on premiums that had already hardened after Flight MH370 with 239 people on board disappeared without a trace in March and MH17 was shot down over Ukraine in July, killing all 298 people on board.

“The reinsurance market is global in nature and any impact on premium rates will spill over to the Indian aviation sector as well," said Kapil Mehta, managing director at SecureNow Insurance Broker Pvt Ltd.

“After the crash of Malaysian Airlines, reinsurers are offering cover of terrorism and geopolitical risks at escalated premium rates. Not taking insurance for certain things can be one way to save costs for airlines," added Mehta.

Mehta said insurance premiums are a relatively small portion of overall expenses incurred by India’s airlines, which have a combined fleet of over 300 planes.

Even so, it adds to cost pressures at India’s airlines which, according to a June report by the Centre for Asia-Pacific Aviation (Capa), are expected to post combined losses of $1.4 billion in year to next 31 March.

The combined losses for Indian airlines—Air India Ltd, Jet Airways (India) Ltd, Kingfisher Airlines Ltd, SpiceJet Ltd—were at $1.77 billion in the last fiscal year and in the last seven years accumulated losses have reached $10.6 billion, Capa said.

“The potential increase in premium rates will put pressure on the margins of airlines, which are incurring huge losses already. However, the falling crude oil prices will give some respite to them," said Rashesh Shah, an analyst at Mumbai-based brokerage firm ICICI Direct, a unit of ICICI Securities Ltd.

The potential increase in rates comes at a time when Air India is seeking to renew insurance cover worth more than $10 billion for its fleet, which has a few more than 100 planes. The airline is in talks with state-run and private sector insurers for the renewal due in October. In 2012, Air India paid a premium of $24 million for its cover.

A senior Air India executive, requesting anonymity, confirmed that insurance rates had hardened. “We are in discussions with few insurance companies for better rates and bargaining hard," he said. A spokesperson for Air India declined to comment.

Jet Airways, IndiGo (run by InterGlobe Aviation Pvt. Ltd) and GoAir (run by the Wadia Group) are also expected to approach the market for the insurance cover.

SpiceJet said it had renewed the cover ahead of the Malaysian Airlines disasters but did not disclose the details, saying the terms and conditions were “confidential". IndiGo and Jet Airways did not offer any comments to the story.

Jet Airways has 113 planes, IndiGo has 81 and GoAir 19.

Insurance companies including New India Assurance Co. Ltd, Reliance General Insurance Co. Ltd, HDFC Ergo General Insurance Co. Ltd and ICICI Lombard General Insurance Co. Ltd are pitching for business from domestic airlines.

In a note dated 23 July, Aon Risk Solutions, a unit of Aon Plc, said recent incidents in aviation had resulted in claims that are estimated to be in excess of $600 million.

“These losses, which include the two recent Malaysian Airlines accidents, incidents in Tripoli and Karachi, are paid against this backdrop of insufficient global premium income and provide insurers with problems balancing their losses with premium income," it said.

Willis Group Holdings Plc, a risk advisory firm, said in a July presentation that there will undoubtedly be corrective pricing, which would be spread across the global air transport community. The presentation said the premium would depend on the risk profile of the airline.

A senior Indian insurance company executive, requesting anonymity, said Air India is likely to pay a relatively higher premium rate, given that it flies on some routes that straddle war zones. He did not disclose details.

The insurance cover for aircraft is typically determined by the lessor depending on the type of aircraft and the type of fittings that have been added to it, said Rakesh Jain, chief executive officer at Reliance General Insurance.

“The value of an Airbus A320 would range between $44 million and $55 million whereas the Dreamliner (Boeing B787) would be in the range of $200 million. The lessors generally insist on insurance at replacement value +10% irrespective of age of the aircraft," Jain said.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 21 Sep 2014, 11:41 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App

Chat with MintGenie