Effect on insurance and aviation industry
The Pakistani aviation and insurance industries are
feeling the pinch of the terrorist attacks in the US.
By Syed M. Aslam
Oct 01 - 07, 2001
Truth, as often said, is the first casualty of war.
And so are the Aviation and Insurance industries since that horrific
morning of September 11 which started with the total destruction of
the twin towers of the World Trade Centre in New York and a portion of
the US intelligence headquarter, the Pentagon in Virginia. The
low-tech terrorist attacks using hijacked commercial airliners and
carried out with deadly precision aimed at delivering the maximum
human and financial loss sent the US aviation and insurance industry
in a spin the ripples of which have left no national economy untouched
across the world.
The kamikaze terrorist attacks shattered whatever
little calm existed in the world before September, 11. The US request
to use Pakistan as the most vital strategic partner to hunt down the
culprits and to eradicate the menace of terrorism once and for all
overnight made Pakistan a frontline state.
Slain US Black Rights leader Martin Luther King
once said, "What affects one affects all." The statement,
perhaps, provides the best, though unintended, commentary on the post
September-eleven-developments, particularly with regard to the
aviation and insurance industries. The fast changing global scenario
after the deadly attacks in the US has sent tremors across the
national economies in ways many of which still remain oblique.
Attempts to make even a calculated guess is just not possible due
primarily to many loose ends and complications of global economies
where all sectors are inter-related.
However, the Pakistani aviation and insurance
industries, which by their very nature are heavily interlinked
globally, as well as the country's heavy dependence on foreign
shipping lines to facilitate its foreign trade are feeling the pinch
of the terrorist attacks in the US on the one hand and the
new-acquired frontline status.
A number of foreign airlines have stopped
operations from Pakistan since September 11. British Airways, Air
France, Germany's Lufthansa, Singapore Airlines, Malaysian Airlines,
Gulf Air, China Air and Saudi Airlines have closed passenger and cargo
operations in Pakistan. Cargolux has also closed its dedicated cargo
operations in Pakistan while Cathay Pacific Airline of Hong Kong has
announced to close its Pakistan operations on Wednesday September 26
for a month.
Three of the airlines listed — British Airways,
Saudi Airlines and Luthansa — were the major cargo operators
facilitating exports from the country. While British Airways cargo
service was the part of its passenger operations, Saudi Airlines
operated both passenger and dedicated cargo service and Lufthansa
which ceased passenger operations about two years ago was operating a
cargo dedicated service. In addition, Cargolux, Air France and
Singapore Airlines all operated dedicated cargo services — the last
started the service just last month from Lahore.
While Emirates, the national flag carrier of the
United Arab Emirates, is still operating passenger services, the
national flag carrier Pakistan International Airlines (PIA) just
does't have the capacity to lift the increasing volume of export
cargoes left unattended due to the closure of the services of the
airlines mentioned above.
However, the closing of operations by the foreign
airlines is attributed to the overall recession in the aviation
industry worldwide forcing global airlines to cut their expenses,
according to Air Vice Marshal Arshad Rasheed Sethi, the Deputy
Director General Operations of Civil Aviation Authority.
He said that CAA is bracing itself to lose
substantial revenue due to the resultant decrease in its aeronautical
charges which make up 85 per cent of its earnings. Not only the CAA is
losing revenue in landing, parking and other airport-services related
charges but it is also losing substantial sums as overflights over the
national air space have declined by 35 per cent from an average 280
per day to about 180 per day. This means a major loss of revenue for
the CAA, he added.
According to Moin Fudda, the chief of foreign
Commercial Union Insurance, the war risk insurance on all imports and
exports to and from the country, whether by air or sea, has registered
an increase of 82 per cent. The primary cause of this increase is the
increase in cover by reinsurance companies who are facing enormous
property and aviation-related claims resulting from terrorist attacks
in the US.
Global Reinsurance giants like MunichRe and SwissRe
have to meet claims which according to one estimate stands at $ 40
billion in the devastation in New York alone. This would force these
companies to resort to increase their reinsurance rates worldwide to
absorb the substantial loss the effects of which would be felt in
Pakistan, he said.
This means that the cost of reinsurance would be
enormous, particularly in whole of the region of which Pakistan is a
part. This would result in expensive insurance premiums particularly
for such vital covers as Marine, Property and Airline the first to
result in increased cost of all cargoes be it import or export and the
last in increased airline fares.
As is, the freight forwarders have already
increased rates for exports from Pakistan by 33 per cent which is over
and above the rates fixed by the International Air Transporters
Association. While the local importers and exporters may be able to
absorb the increased insurance and freight rates the real cause of
concern is that the situation may lead to low frequency of air freight
and seaborne trade.
Moin expressed apprehensions that the increased
cost of reinsurance poses a challenge for the Pakistani insurance
industry in general and small and medium size companies in particular.
The outgoing chairman of Insurance Association of
Pakistan, the representative body of some 56 general insurance
companies in the private sector both local and foreign, M.I. Ansari
said that war risk insurance which makes a portion of all cargo
insurance covers has already been increased from 2.75 per cent to 5
per cent. Similarly, the premium on hull (body of the ship) insurance
has already registered an increase of 20-50. So what does this mean?
It means that since the shippers have to buy hull
insurance they would be force to increase the freight rates to
ultimately increase the costs of all imports and exports entering in
or shipped out of the country. This would affect both the air and ship
freights. Asked what exactly would be monetary effect of the increased
freight and hull insurance, Ansari said that it is hard to calculate
the costs as it depends on the increase in the premium rate by the
insurance companies and also on what kind of increase in freight rates
shippers resort to.
A declaration of war would mean the promulgation of
War Risk Ordinance under which the insurance companies would play the
role of an agent while the government would be liable for the claims
as well as the collector of premiums. However, as this applies to only
'declared war' and even in case if there is such a war between the US
and Afghanistan from which we can be affected there would be no War
The Pakistani insurance companies which rely
heavily on the foreign reinsurance companies usually conclude the
yearly contracts in October and November are looking at increased
reinsurance costs which would be a problem for small size insurance
The increased premiums by the insurance companies,
freight rates by the shippers and the suspension of operations by
foreign airlines, both dedicated and non-dedicated freight operators,
have started to take a toll on exports. On the one hand it has
resulted in increasing the prices of exports and on the other it is
resulting in pile-up of cargoes at the commercial airports.
One of the worst hit exports are the leather and
leather garments the major destination of which is such European
countries as Germany, France, Spain and UK. With winter just around
the corner this is the peak season of finished leather and leather
garments exports to Europe. The termination of flights by major
European airlines, particularly such entirely cargo dedicated ones as
Lufthansa, Cargolux and Air France plus British Airways which also
lifted cargo as part of its passenger operations is feared to
seriously jeopardize leather and leather garments exports to the EU.
The emerging scenario is all the more painful as during the first two
months of the current fiscal — July and August — the exports of
leather and garments touched $ 104 million figure showing an increase
of almost 4.5 per cent over the corresponding period figure of $ 99.74
million last year.
Talking to PAGE the member of Federation of
Pakistan Chambers of Commerce and Industry (FPCCI), S.M. Naseer said
that leather and leather garment exports stands heavily affected
despite the best efforts by the Pakistan International Airlines.
Naseer who is also one of the top major finished leather exporter said
that both the air and seaborne shipments are affected. While leather
and garment goods are exported both through air and sea the bulk of it
is shipped through sea which costs much less.
He said that while the Pakistani leather and
leather garment exporters would be able to absorb the cost of increase
insurance and freights and while they could still manage to remain
competitive in the international markets the delayed deliveries have
the potential to result in the cancellations. More importantly, he
said, the delayed deliveries plus the looming uncertainty may drive
the importers in the international markets to replace us with our neighbour.
He said that the leather and leather garments
exporters have already started receiving faxes from their
international buyers expressing concerns about timely delivery due to
termination of flights by a number of foreign airlines. They have also
expressed concerns about the developing situation in the region saying
that it may result in irregular supply and thus hinting at diverting
their business to our main competitor, India. It is imperative that
measures should be taken to lift the export cargoes on top priority
basis so as to help avoid a situation where orders are cancelled or
buyers find new suppliers in other countries or otherwise it would be
hard to rebuild markets already established all over again.
The US is one of the major destination of the
Pakistani seafood. Since the terror attacks the seafood exports have
come to a standstill due to a absence of response from the buyers in
the US. Repeated attempts by the local seafood exporters remain futile
due to lack of response on the part of the US buyers. This has
resulted in a decline in prices of seafood in the local market for the
welcomed surprise of buyers. If and when the exports to the US resumes
its usual activity the increased insurance and freight rates are
feared to increase the cost, fact which poses many challenges for the
While the aviation and the insurance industries are
hit the worst by the terror attacks in the US — President George W.
Bush has already announced a $ 15 billion and $ 16 billion bail out
packages for the two industries respectively — the two sectors by
their very nature would leave no other economic activity untouched,
Pakistan, due to its very geographical location and
its unstinted support against the US-led war against terrorism is
feeling the pinch more than most other countries in the region. As
Moin Fudda said that 'Pakistan is not the only country which is
affected, however, and we have to collectively decide the course of
action for the local insurance industry which is capable of
successfully meeting the crisis no matter how difficult it seems.' The
same is also true for aviation industry and foreign trade. We shall,
and must, overcome.