Flight services face insurance nightmare

Posted: Tuesday, January 02, 2001

Flying has always been tough in Alaska, but a spike in insurance rates is making it tougher. Rate increases are causing ripples though the industry and worry among small airlines in Southeast.

The cost of insurance, plus a surge in aviation fuel prices, combines to hit the industry with a one-two punch. It remains to be seen if the salvo will prove to be the knockout punch for any of Alaska's regional airlines.

Insurance rates have gone "through the roof" the last couple of years, said Bob Jacobsen, president of Wings of Alaska. The Juneau-based company operates a fleet of about 18 aircraft including its signature deHavilland Otters during the busy summer season.

"It's very difficult for all small operators," said Ken Simpson, general manager of Haines Airways. Simpson said the company, which operates 10 planes including three $1.5 million Cessna Caravans, has had a "significant" cost increase for insurance the last two years.

"I don't see any relief in sight," he said.

Statewide, 25 to 30 percent seems to be on the low end of the insurance rate increase and in some cases, rates doubled over the past year, said John Eckels, board president of the Alaska Air Carriers Association. The association has about 80 active members, he said.

If insurance cost is 5 percent of business and fuel 10 percent, and they both double, those costs are going to eat away at profits, shaking weaker companies out the industry, Eckels said.

Aviation gas has gone up around 30 percent in the last year, said Haines' Simpson. At least the cost of oil is going down, but it still takes time for price reductions to reach the propeller, he said.

"I hope there's some (fuel cost) relief in sight," Simpson said.

Though the cost of doing business is going up, it isn't being passed on to customers accordingly, he said. There isn't a lot of price flexibility with other competitors including the ferry helping to keep ticket prices down.

At Wings, insurance for the Juneau-based flight service's fleet doubled when it renewed its insurance in April, Jacobsen said.

"We're going to get it again" when they renew in three months, he said, adding that he too didn't see any price relief in sight.

Several factors have led the companies to jack up their rates. Litigation and the high amount of awards from lawsuits are a factor. Another is the limited number of companies selling aviation insurance.

Aviation insurance isn't like buying insurance for the family truck. Only a handful of companies insure commuter airlines, said Allan Shattuck of Shattuck & Grummett Insurance. One carrier, AIG Aviation, pulled out of the Alaska market this year and others are offering a limited amount of per-seat coverage, he said.

AIG was a significant underwriter just two or three years ago, said the air carrier's association's Eckels.

AIG's pullout combined with reduced coverage from other insurers has forced some airlines to seek the same amount of coverage from multiple carriers, Shattuck said.

Two years ago, Skagway Air Service had $1 million-a-seat coverage. Last year, that was cut in half even though the cost of insurance remained the same, said Mike O'Daniel, director of operations.

"Now they won't even sell ($500,000 per seat)," he said.

The insurance company only offers the regulatory minimum of $300,000 coverage per seat. That leaves the 37-year-old, family-owned business with 10 aircraft exposed to more risk, he said.

"It feels like your pants are around your ankles," he said.

Things are slightly easier for Alaska Seaplane Service, said co-owner Craig Loken. AIG was his insurer so when it pulled out, he had to seek another company, he said. His insurance cost only went up 4 percent over last year, he said.

But over the past five years, it has gone up around 30 percent while coverage has been cut by two-thirds, he said.

"It doesn't have nearly the effect on the industry that shutting down year-round jobs has," he said.

The much larger problem with his business has been the loss of mining, closure of logging camps the company served, and the loss of Glacier Bay fishing, which has a trickle effect on communities Alaska Seaplanes serves, Loken said. That and paying Juneau's 12 mills property tax for each plane, he said.

Loken said the insurance increase is a recurrence of a cyclical spike that happened in the mid 1980s. It was high, then insurance was cheap and now it's back to expensive, he said.

Wings' Jacobsen said he didn't have as much faith as Loken that prices would come down. In the 1980s, several companies went out of business and he said he "wouldn't be surprised if history repeats itself."

Mike Hinman can be reached at mhinman@juneauempire.com.

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