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What The Future Holds For Operators & Their CustomersEDITOR'S NOTE: The following article is an editorial by the author, and may not reflect the opinion of other WATA members, corporate sponsors, MIDWEST FLYER MAGAZINE or its advertisers. Nothing can be reprinted without the written consent of the author, WATA and MIDWEST FLYER MAGAZINE. Any use of the information presented is done so without permission and at the user's risk. |
 Bruce Botterman President |
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The last few weeks have been very interesting for me. Beginning in October, I attended the National Business Aviation Association (NBAA) Convention in New Orleans, the first planning meeting for the Wisconsin Aviation Conference, and most recently a meeting with the A&P Advisory Committee at Fox Valley Technical College. All of these activities raised a number of questions about the future of our industry, many of which will be addressed at the upcoming Wisconsin Aviation Conference, April 9-10, at the Raddison Hotel in Appleton. The planning committee is trying a new format this year. The conference will only be two days long and held on a Monday and Tuesday, with a welcome reception on Sunday evening before the conference. The WATA Board encourages its members, as well as non-member operators to attend and take an active role in shaping their future. More details on breakout and general sessions will be published in the next few months. Mailers will be coming from the Wisconsin Bureau of Aeronautics in January. Register early... Plan to attend! After attending the NBAA Convention and the A&P advisory committee meeting, some interesting thoughts have come up regarding the future of aircraft maintenance. There are numerous issues on the table as we enter this new century. Aging aircraft, manpower shortages, labor cost increases, brick and mortar expansion of facilities, and new technology are some issues on the front burner. All these items affect fixed base operators and their customers. The advisory committee at Fox Valley Technical College is comprised of a variety of people from industry. In this case, air carrier maintenance, corporate/business maintenance, FBOs, repair stations, former graduates in aviation maintenance, and aviation management staff. These representatives provide input on what is happening in their area of expertise so the college can better plan and serve the industry. The intermarriage of these issues will have an effect on fixed base operators and their customers in the very near future, if not already. I had a visit with a single-engine owner the other day and he said he was so happy that he had "a friend" that could do his maintenance "for cash" because he was tired of getting gouged by the local FBO. We all have a level of what "gouged" is, no matter what we spend our money on. But is having cash deals for aircraft maintenance in a tee hangar the answer? With the shortage of aircraft technicians comes rising labor costs. When I graduated with my A&P license from vocational school, I was able to go to school for 11 months, have no income during that time, and go to work at the FBO for $2.25 per hour. There was a shortage of A&Ps at that time, too. So I was able to go to work for United Air Lines for more than twice that amount, which I did do a few months later. As history does sometimes repeat itself, we are there once again. The General Aviation (FBO) A&P technician - your local aircraft mechanic - has the opportunity today, more than ever before, to jump to a much higher paying job, and these hard working people are doing just that. To hire and keep A&P technicians, your FBO must raise salaries to remain competitive with private corporate flight departments and the airlines, or service for the independent aircraft owner just won't be available. Aircraft manufacturers are using new technology in airframes, engines and avionics, and are building smaller jet aircraft that will compete in the piston twin market. How are FBOs going to compete for this business? How are they going to be able to provide services to this market? Who is going to operate and repair these aircraft? Will our industry be ready when these new aircraft are certified? As an industry, we need to encourage young people to pursue careers in aircraft maintenance, and the incentive in pay and benefits has to be there for them. Perhaps it is time for the
Wisconsin Aviation Trades Association (WATA) to have a round-table
discussion with customers to hear their concerns, and so they can hear
ours, and we can together address these concerns. Whether an operator or
an aircraft owner, if you have some ideas, we would like to hear from
you. Email me at sales@newviewtech. com, or fax: 920-233-0336. Several events have occurred over the last several years that have caused a general increase in insurance rates for commercial operators (i.e. fixed base operators, charter companies, flight schools). One factor was the decision by several aviation insurers (most recently AVEMCO) to discontinue writing commercial aviation insurance. These actions collectively reduced the supply of insurance to commercial operators. Insurance is no different than other products in that a reduction in supply usually leads to an increase in price. The second factor driving rates upward is a multi-year trend in which most commercial aviation insurers have simply paid out more in claims and associated expense than they have received in premiums. The response to this situation has been to either get out of an unprofitable class of business, as AVEMCO did, or to increase rates and become more selective as to which operators will be insured. If there is any silver lining behind this cloud, it is the fact that the insurance industry is historically cyclical; eventually the commercial aviation market will again become profitable, causing more insurers to enter this segment of general aviation. When this occurs, the increased supply of insurance should again drive rates down. For the time being, commercial operators will have to weather the effects of the current aviation insurance market. To do this, it is critical to
understand the process by which insurance is purchased in today's
marketplace and the role that each party plays in this process. Commercial aviation insurance is purchased through "specialty brokers." These brokers usually work directly with a commercial operator or occasionally through a local agent who does not specialize in aviation. A good broker can have a significant bearing on the cost of your insurance program. A broker acts as an intermediary between you and the insurance company. In that capacity, the broker serves (or should serve) four roles. The first two are obvious and straightforward, but it is the last two that truly determine a broker's value to you. First, your broker is a facilitator, serving as a conduit of the information needed to obtain insurance. Aviation insurers prefer to work through an aviation broker and expect the broker to obtain the information necessary to offer and provide insurance coverage. In this facilitator role, your broker should have adequate knowledge about the marketplace to be able to provide alternative insurance proposals (or explain why alternatives may not be available), rather than simply placing you in a "take it or leave it" position each year. It is also the broker's role to propose creative solutions to insurance-related issues involving your business. Second, your broker services your account, responding to your insurance needs throughout the policy year, providing documents (such as certificates of insurance) when requested. Third, your broker acts as your advocate in the insurance marketplace. This is one of the most important roles of a broker. Just as an effective attorney can make the difference in the outcome of a trial, a broker who can persuasively communicate your business needs to an underwriter can make a substantial difference in the quality of your insurance program. It is the broker's job to get you to the top of the underwriter's priority list. Your broker's success in accomplishing this is based upon a number of factors, including their knowledge of your business, the broker's own experience and reputation with the underwriters, and the experience and reputation of the brokerage company for which they work. In the end, the broker who gets calls returned from an underwriter is the one who has built a reputation of trust with that underwriter. The last role of a broker is to act as your business advisor. No doubt that some people may be shaking their heads after reading this last sentence. The truth is that an aviation broker works with commercial operators all day and is in a position to amass a great deal of knowledge about the general aviation industry. (It is not uncommon for an aviation broker to become aware of pilots or mechanics looking for jobs or companies who are seeking to buy or sell aircraft.) A broker's knowledge of the local community can benefit you. With this information, a broker should be in a position to advise you as to where you fit in your own aviation community. As an example, if you are like
most operators, you are getting more and more contracts from customers
or vendors that you deal with on a regular basis. Who reviews those
contracts for you to determine whether they are reasonable within your
general aviation community? In his role as your advisor, your broker
should be able to review these contracts, and recommend legal services
from a firm that specializes in general aviation law. Like any insurance company, it is the aviation insurer's responsibility to provide insurance and to pay claims based on the terms of their policy. Aviation insurers can also provide information and recommendations on various safety issues. Several companies actually have separate departments that can provide safety audits of your operation. Insurers can also offer guidance on related safety issues such as emergency response plans, reputable training facilities, or whether a certain service and repair center has a good reputation in the industry. Since the insurers ultimately
pay claims, they have up-to-date statistical information regarding
accident rates for particular aircraft or types of aircraft operations.
Most of this information can be readily obtained from the aviation
insurer. Ideally, you should consider your insurer a "partner" in the
risk management side of your business. As a commercial operator, what can you do to improve your insurance situation? The answer is, quite a lot. One of the best (and easiest) things to do is to simply provide accurate and plentiful information about your business. The operator who can educate their broker about their business will permit the broker to do the same with the underwriter. An insurer looks at their relationship with their insured almost like a marriage - they are looking for someone with whom they can be comfortable. By being open with information, you give the broker, and eventually the underwriter, the means to achieve this comfort level. In providing this information, don't be afraid to sell yourself and your business. You are in a tough business and you should be proud of your accomplishments. Don't forget to tell your broker how long you have been in business, the experience of your key employees, or your clean loss record. The enthusiasm and pride you show for your business will rub off on others in the process. Although aviation underwriters can appear to be somewhat aloof, they do in fact take great pride in being chosen to be your insurer. The same advice applies to underwriter visits. If you get a call from your broker telling you that an underwriter is coming to visit, consider it an opportunity to showcase your business. Make sure that the hangar floor is cleaned, unused shop tools are put away, and that key employees are available to meet with the underwriter. Rather than treating the underwriter like a nosy stranger, treat them like your best charter or rental customer. If you do, you will most likely be pleasantly surprised by their response. Underwriters are no different
than any of us; they like to do business with people who they know and
like. Your own attitude towards an underwriter can go a long way towards
creating a successful business relationship. While there is no magic
solutions in today's insurance climate, hopefully these suggestions will
help you in dealing with one of the most expensive cost items facing
your operation. FREDERICK, MD. - The Aircraft Owners & Pilots Association (AOPA) is continuing its efforts to look into the growing commercial aviation insurance problem. The association recently hired a special consultant to look at possible solutions for flight schools, independent flight instructors, and small fixed base operators that are finding it increasingly difficult to obtain insurance coverage. That consultant, Ray Olsen, has already produced his first report, including a list of insurance companies that will consider providing instruction and rental insurance under some conditions. Olsen is the former vice president of Employers Reinsurance Corporation, and is also the Airport Support Network volunteer for Johnson County Executive Airport outside Kansas City. "It's important to have a professional aviation insurance agent scour the market and contact all the companies writing commercial aviation insurance," Olsen advised AOPA. "Some instruction and rental insurance is available, but maybe not at a rate you like, and maybe not for the limits you need." AOPA has found that some insurance brokers don't exhaust all possible sources for commercial aviation insurance. And AOPA has other suggestions on how operators can maximize their chances of getting the best insurance deal (see below). Olsen's preliminary report identified nine insurance companies that will provide instruction and rental (I&R) insurance under some circumstances. AIG Aviation will now accept commercial accounts, although with more restrictions than in the past. William Brown and Associates generally will write commercial operations if the loss ratio is under 30 percent for the last five years. Associated Aviation Underwriters, ACE, PartnerRe Ltd., USAIG, Phoenix Aviation Managers, Houston Casualty Company Aviation (HCCA) and Aerospace Insurance Managers will also write some I&R insurance. Unfortunately, it is also apparent that some operations still won't be able to obtain insurance, and others will have to pay higher rates than in the past. Olsen's report helps explain how the problem develop: "Ten years ago, the aviation insurance industry was flourishing with competition and awash with losses," Olsen reported to AOPA. "New agencies started up and companies who never had been in aviation before thought it would be a good idea to have a little aviation insurance to complement other lines." That competition forced companies to keep rates artificially low to maintain market share. Insurance companies' costs continued to increase as aircraft became more expensive to repair and replace. But insurance rates didn't keep pace with these increasing costs. "People in the insurance industry were saying that most single-engine, fixed-wing operators were paying less for their aircraft insurance than they did for their automobiles," Olsen reported. Meanwhile, insurance companies' investment profits were declining, yielding less non-premium income to help pay claims. As the market got tighter, detailed underwriting reviews revealed that most of the losses were coming from business insurance for small FBOs and losses arising from instruction and rental insurance. Some companies had I&R loss ratios of 160 percent or more, meaning the company paid out $1.60 in claims for every $1.00 in premiums they took in. "The first thing done was to reduce total limits and impose sub-limits," noted Olsen. "But for some companies, the losses were still too much. They withdrew from that class of business." It was the sudden withdrawal this spring of two companies - AVEMCO and Great American Insurance Company, that blew up the long-festering problem into a major crisis. "The remaining companies established new underwriting guidelines to stem their losses," said Olsen, "and everyone raised their rates." Small FBOs, flight schools and independent flight instructors were hit with sharply higher insurance rates. New businesses found it almost impossible to find insurance at any price. "For years, the aviation insurance industry has not been collecting enough money. It is now going through a painful correction - painful for the companies and painful for their customers," Olsen reported. "But as the industry goes through this cycle, history tells us that some company will raise its head and try to make a niche or undercut the current market." AOPA has tasked Olsen to look for other "outside-the-box" possibilities to make commercial aviation insurance more available and affordable. Among possible steps are 1) an insurance pool, and 2) a "summit meeting" of insurers. AOPA staff also recently
traveled to Europe for discussions with agents for Lloyds of London.
However, European reinsurers are less willing to take on new, higher
risks due to large recent claims. AOPA advises how to maximize one's
insurance chances: |
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