Insurance and Aviation are the two worst hit sectors
By Syed M. Aslam
Oct 08 - 14, 2001
As clouds of war looms dark and heavy over Central Asia amidst US threats of attack on Afghanistan, Pakistan has turned into a frontline state as if overnight. This is the second time in just as many decades that Pakistan has aligned behind its 'traditional ally', the US, to offer 'an unstinted support against terrorism' as President Gen. Pervez Musharraf has said.
However, the situation this time around differs completely from the previous one when Pakistan played the role of a buffer state to triumphantly check the expansionist designs of the Red Army of the then undivided Union of Soviet Socialist Republics (USSR). Analysts attributed the demoralized and fatally wounded pullout of the Soviet troops ten years later primarily on Pakistan's all-out logistic and operative support. They also credited it and the Afghan Mujahideen with the ultimate disintegration of the USSR as one of the two 'Super Power' of the world beside the US.
This time around the US is counting on Pakistan to help 'eradicate the menace of terrorism in the world', the first self-selective target of which is its yesteryears friend, and today's top nemesis, the Afghanistan now ruled by Taliban. While a tense world awaits with a deep sense of anxiety and uncertainty, the clouds of war are becoming thicker and darker over the region with each passing hour. Within a short span of just over two decades, Pakistan once again has been pushed to play the role of a frontline state with a difference: There is no foreign invader in Afghanistan and the target of the US is Afghanistan itself.
The use of hijacked commercial airliners to deliver the maximum human and economic damage in the low tech but highly deadly attacks in the US has sent shivers to the global economy. Someone has humorously said that 'when US sneezes, the world catches a cold.' The terror attacks on the symbols of US economic and intelligence might in the most horrifying way imaginable and the effects thereafter sent the global economies in a spin which has yet to stabilise.
The loss of four commercial airliners one after the other within two hours in the most bone-chilling ways and the collapse of the twin towers of the World Trade Centre and damage to a number of many relatively lower highrise buildings in the vicinity delivered a deadly blow to the world's most affluent trading center, the Manhattan which also houses Wall Street.
With over 6,700 identified dead or categorized missing, the razing of the WTC totally wiped out a number of companies along with their entire management, staff and workers. Numerous other companies found out that they were suddenly out of business. The unparallel catastrophe also rendered thousands of people unemployed. Thousands more found out that they had no office to go to the day after.
The human and financial cost of the devastation is yet to be calculated exactly primarily as requires months, and may be years, of details. Initial reports, however, say that giant global reinsurers have received over $ 40 billion of claims in property insurance alone. An estimate about life insurance has yet to be reported and so is the socio-economic cost of unemployment and job placement for thousands who have lost a livelihood.
Worst hit sectors
The very nature of the horror which fell on the WTC in the early morning hours of September 11 hit the airline and insurance industry the worst. Commercial flights were banned in the US. For the first time in its history the New York Stock Exchange remained closed for continuous working days. When it opened the shares of airlines and insurance industries were the worst hit though trading as a whole remained excessively depressed. Airlines reported drastic reduction in the number of flyers for the much obvious reasons. The global airline industry also felt the pinch and many airlines across the globe have recently announced to cut their operations as well as jobs to reduce the expected losses due to a sharp fall in passenger traffic.
The signs are strewn all over: US airlines, particularly hit by the crisis, have announced heavy job cuts to lessen the expected huge losses. United Airlines, which lost two of the planes in the terror attacks, has announced to cut 20,000 jobs. Delta, Continental and US airways have announced to lay-off 13,000, 12,000 and 11,000 workers respectively. United and Continental is offering 50 per cent discount to help encourage a badly hit air travel.
Dutch carrier KLM announced this week that it will cut its scheduled flights by 15 per cent when it introduces the winter timetable on the 28th of this month. In addition, the airline will also cut some 2,500 jobs and another 12,000 employees in The Netherlands would go on reduced work-hours.
Italian national flag carrier Alitalia was expected to announce a 'crisis surcharge' to deal with reduced passenger traffic after the terror attacks. It already announced to slash 2,500 jobs as well as sell a number of aircraft and scarp a number of destinations to minimize the expected losses.
Similar announcements are made by the two major airlines of Japan; Japan Airline and All Nippon Airways. JAL has announced to weekly number of flights to the US by 24 per cent to a total of 108. It cited a dramatic reduction in passenger traffic as average seat occupancy level fell to almost 50 per cent down from a satisfactory level of 75 per cent prior to September 11. ANA on the other hand cited a 60 per cent drop in passenger occupancy rate to Guam while it refused to provide details of the frequency of flights to the US.
Spanish carrier, Iberia, said that the crisis may force it to lay-off over 6,000 employees.
Pakistan Aviation Scenario
The state-owned Pakistan International Airline (PIA), the only domestic and international airline operating in the country at present, has been able to remain 'unaffected' by the crisis which has affected the airlines worldwide. It has been able to achieve the 'fete' at a cost which poses serious challenges to exports and $ 1.4 billion in exports to the US alone during the current fiscal ending June 30 next year.
PIA has benefited from the termination of operations by 8 foreign airlines, including passenger operations, passenger-cum-cargo operations as well as purely freight operations. PIA has announced that while its passenger load has fallen by 10 per cent to 65 per cent its cargo operations have surged by 35 per cent after September 11 to feel the pinch like other airlines across the globe.
However, it may be added that the worst victim of the termination of operations of foreign airlines to Pakistan, including both dedicated and non-dedicated cargoes services they offered, resulted in the piling of time-sensitive exports such as leather at the national airports. This is primarily so as PIA has limited capability to lift export cargoes, the bulk of which was lifted by the foreign operators prior to September 11.
With a fleet of aging airliners, many of whom were grounded in the recent months for want of funds for the much needed repairs and spares, the heavily indebted and loss suffering airline faces two great challenges. Number one, how to lessen the expected losses under the prevalent uncertain circumstances which has resulted in a passenger load factor drop of 65 per cent, the global benchmark to barely keep an airline out of the red. Secondly, and as importantly, to effectually fill in the vacuum created by the en-masse termination of operations by foreign airlines to lift the export cargoes, time-sensitive in particular and all others in general.
This is all the more necessary to honour commitments by local exporters to retain markets already developed as the crisis has resulted in lack of interests by foreign buyers on the one hand and their apprehensions that the regular supply would be disrupted on the other. Exporters told PAGE that they have received faxes and e-mails from foreign buyers about their apprehensions about regular supply from Pakistan and hints of them finding willing exporters in rival countries to ensure regular supply.
While PIA has maintained to keep its head over the water primarily due to termination of operations by foreign airlines, the crisis has affected the Civil Aviation Authority in an extremely adverse way. It has dried up a substantial revenue earnings for the CAA the major portion of which comes from the aeronautical charges. Aeronautical charges make up about 85 per cent of CAA revenue including Landing and Parking charges, rental of offices and cargo sheds at the airports and the use of the national airspace. Prior to September 11, the number of daily commercial flights over the national airspace was an average 270-280 and presently it is just about 170 daily. Apart from the termination of operations by foreign carriers, those still operating out of Pakistan as well numerous others which used to use the Pakistani airspace don't use it anymore due to situation in Afghanistan. The foreign carriers are also no more flying over the Iranian airspace thus complicating a situation even worse for the CAA as this means that they are also no more using the corridor of Pakistani airspace.
In addition, travelling on both foreign and domestic sectors have been badly affected — the first due primarily to restricted issuance of visas by the embassies of many countries and the later by a 25-30 per cent drop in domestic travel. In addition, PIA and the remaining four foreign airlines, still operating though less frequently, have started the recovery of War Risk insurance due to imposition of similar surcharge by international insurance companies. All the above factors combined is resulting in a loss of Rs 33 million to the CAA every week.
The drop in both domestic and international passenger traffic, like the rest of the world, poses many challenges both for the PIA and CAA. However, its affect are more so profoundly felt as the insurance companies have increased the War Risk insurance on all imports in and exports out of the country by 82 per cent. In addition, the crisis has also resulted in increase in the premium of hull (the body of ship) by as high 50 per cent. As insurance is an inbuilt cost of all foreign trade, imports as well exports both sea and air borne, this means that the cost of all imports and exports entering/leaving the country would be increased.
The international insurance companies, many of which are facing heavy claims arising from the devastation in New York, have imposed a 'War Risk insurance' of $ 150 for a 20-foot container and $ 300 for a 40-foot container on all import and export cargoes from and to Pakistan. This is resulting in high CIF costs of goods and merchandise coming in or going out of the country.
The imposition of heavy war risk surcharge by the London-based Joint War Committee of Underwriters (JWCU) will cost the national economy heavily in the next twelve months. The JWCU's decision taken late last month increased the war risk insurance on ships servicing six countries; Pakistan, Sri Lanka, UAE, Syria, Yemen and Egypt. While Pakistan and Sri Lanka have been subjected to the highest rate of increase, neighbouring India has been conveniently excluded from the list.
The increase in the rate of insurance rates is mainly due to the fact that the top global reinsurance companies are facing heavy claims in the aftermath of the destruction of the World Trade Centre. The move to increase the insurance rates is aimed at absorbing some of the losses on the one hand and Pakistan turning a frontline state at the other. It has the potential to discourage an already low interest in both inbound and outbound airline passenger traffic as PIA and other airlines operating in and out of Pakistan have forced to increase airfares to adjust war risk insurance.
The increased insurance rates has the potential to render the price of exports incomptitive in the international markets where buyers in many established markets have concerns about the timely supply from Pakistan. For the local insurance industry itself, which is dominated by local private companies with a substantial share also enjoyed by a number of foreign companies, this poses a challenge due primarily to two reasons — the volume of business and the difficulty to negotiate workable deals meals starching the margins for big companies and difficulty to rearrange reinsurance covers for the small and medium-size companies.
The liftings of inbound and outbound cargoes, affected as they are, are making the insurance companies to brace for an expected lower volume. With official announcement of heavy trade loss of $ 1.4 billion this fiscal to the US alone has only increased the apprehensions. Lower export volumes mean low insurance revenues for an insurance industry which is already underpressure to absorb the heavy increase in war insurance as well as freight rates. For many small insurance companies this simply means a hard times ahead as financial constraints would not enable them to buy the reinsurance from the global companies at a workable rate.
Sources in insurance industry talking to PAGE said that though the industry is facing heavy inconvenience it would not result in any bankruptcies. They added that Pakistan is not the only country effected by the crisis which is rather global in its nature. However, they stressed the need for coming up with a collective decision to better tackle the crisis which have made things tough but not unmanageable. Moin Fudda, the chief of foreign Commercial Union, said that the 'situation has been blown out of proportion.'
The crisis is feared to take a heavy toll on the exports. Thus far reports of cancelling of orders already placed with the Pakistani exporters as well as a substantial drop in new orders due primarily to the concerns of the foreign buyers that they would not be able to receive orders in time. According to an estimate that export orders worth $ 1.5 billion have either been cancelled or would be cancelled.
In addition, the strengthening of Rupee against Dollar after, which gained 2 per cent after September 11 compared to 20 per cent value loss during a year previous to it, is feared to render Pakistani exports incompetitive in the international market. Inter-Bank Closing rates for dollar which stood at Rs 63.95 and Rs 64, buying and seeling respectively, on Monday September 10 touched a low of Rs 62.70 and Rs 62.75 respectively on Friday October, 5. This shows a 2 per cent gain in rupee-dollar parity in less than a month. This in addition to the substantial increase in insurance rates is bound to increase the CIF prices of all export cargoes from Pakistan.
There are concerns, and rightly so, that Pakistan would not be able to meet its export target of $ 10.1 billion during the current fiscal ending June 30 next year.
The challenges posed to the aviation and insurance industry have the potential to become much bigger due to the very nature of the two industries. They indicate to extract a much bigger and heavy toll not only on foreign trade, both inbound and outbound, but also all local industry and trade irrespective of nature, capacity or variety.
A heavily import dominated industry and trade which needs not only raw and semi-raw, spares and accessories but also finished products and commodities on the one hand and is trying hard to expand the base and volume of its exports is feeling the crisis, the most prominent indicator of which are the aviation and the insurance industry.
With the strengthening of vocal rhetorics on both the sides and signs of a massive buildup of US and allies forces in the region the aviation and insurance sectors as well as the local industries and trade need to do more than just bracing themselves for a worsening situation in very near future. The government policies can play a vital role to help them best absorb the impact of the unavoidable when it comes. And for many it is only days away, maybe when you are reading these lines it may have already taken place.