Air India plane crash unsettling, but won’t hit aviation sector

Insurance rates are expected to harden for Indian airlines after the crash of an Air India (AI) Boeing Dreamliner flying from Ahmedabad to London that claimed over 240 lives on Thursday. As the investigation begins into the world’s worst aviation disaster in a decade, insurers could be confronting claims stretching past the premiums paid last year by Indian airlines. The tragedy is a setback for Indian aviation, which was recovering from pandemic disruptions with plans to add upwards of 1,000 aircraft to its commercial fleet over the next two decades. The aircraft orders are designed to set right the inventory mismatch that has been favouring foreign airlines in international air traffic from India. Insurance is a critical cost in airline capacity buildup, and the rate of increase in premiums has a bearing on airlines’ fleet acquisition strategy.

The global aviation insurance business is growing fastest in the Asia-Pacific, and India is the fastest-growing market in the region. A higher price of insurance ought to magnify the volume growth for aviation insurance in India. There are concerns that higher operational costs will affect Indian airlines’ margins, which are relatively slim on account of uncompetitive jet fuel prices. And, feeding through to airfares, costlier insurance could affect the growth of the price-sensitive Indian aviation market. But the second-order effects of insurance payouts for a solitary crash are not of a magnitude to fly Indian aviation into rough weather.

For one, the insurance costs will be spread over a growing fleet, which acts as a drag on premiums. Second, the results of the investigation will be fed into the global aviation industry, another mechanism to control insurance costs. Safety standards are reset globally after every airline disaster, helping maintain flying as the safest mode of travel for many decades. As the costs of accidents inflate, the aviation industry has built up increasingly sophisticated product and process controls. All stakeholders are equally invested in learning from mistakes.

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