09 January 2025
The Challenges of Escalating Claims Costs
The Gallagher Specialty Let's Fly – Happier Skies conferences, recently held in Hong Kong and Singapore, brought together industry experts to discuss rising Hull and Liability claim costs in aviation insurance, driven by inflationary pressures. I had the privilege of moderating a panel where each expert shared insights from their respective fields, highlighting the rapid escalation in claim costs.
Andy Pickford, Partner, Gallagher Specialty
In the current economic climate, airlines and aviation companies are grappling with higher operational costs, including increased fuel prices and general overheads. From the perspective of aviation adjusters and claims brokers, the cost of aircraft parts and materials has surged due to supply chain disruptions and higher raw material prices, making repairs and replacements more expensive. The global pandemic and geopolitical events have significantly disrupted supply chains, leading to shortages of essential components and parts. Additionally, there is a growing shortage of skilled labour in the aviation industry, primarily due to retirements and staff layoffs during the pandemic, resulting in increased wages and higher costs for maintenance and repair services.
Aviation lawyers on the panel pointed out that medical and legal expenses, which are significant components of liability claims, have also risen due to inflation. This has resulted in higher costs for treating injuries and handling legal matters. A particularly compelling segment of the discussion centred on the concept of social inflation in aviation liability claims. This phenomenon refers to the rising costs of insurance claims driven by evolving societal trends and attitudes that influence the legal environment and litigation outcomes. The legal experts elaborated on several contributing factors, including an increasing tendency for litigation, larger jury awards influenced by shifting societal attitudes towards corporate responsibility, and evolving legal precedents that expand the scope of liability. Additionally, heightened public awareness, often fuelled by extensive media coverage, and broader economic factors such as inflation, were identified as significant drivers of higher costs.
Drawing from my own experience as a former Aviation Surveyor and Adjuster for the past 20 years, before joining Gallagher last year, it is evident that the aviation industry is facing escalating aircraft and engine repair costs. These costs have seen significant year-on-year increases driven by several inflationary factors. Major repairs, labour, and replacement parts have all seen substantial price hikes. This surge is attributed to several factors, including the adoption of advanced materials and technologies in new aircraft design and manufacturing. While these modern innovations are driven by the requirements to enhance performance and efficiency by manufacturing stronger and lighter aircraft and their components, they also lead to higher repair costs due to their complexity and the need for specialised repairs typically performed by the Original Equipment Manufacturers (OEMs).
Advanced composite materials
Since the introduction of the all-composite Boeing 787 aircraft into commercial service in 2011 and the Airbus A350 in 2015, there have been numerous examples of these aircraft sustaining damage in service. These aircraft are constructed using a significant amount of advanced composite materials, such as carbon fibre-reinforced polymers. These materials, while offering benefits of reduced weight and improved fuel efficiency, are far more costly than traditional aluminium and require specialised handling and repair techniques. Repairing composite materials is more complex than repairing traditional metal structures. Composite repairs often involve intricate processes such as layering, curing, and bonding, which require specialised equipment and facilities. These processes are time-consuming and labour-intensive, contributing to higher repair costs. Often, repairs on advanced composite structures like those on the Boeing 787 or Airbus A350 are normally exclusively repaired by the OEMs as they alone hold the authority and are ultimately responsible for the design and certification of these repairs. This involvement can, of course, add to the cost due to the premium charged by OEMs for their repair design, expertise, and oversight.
A recent example highlighted the challenges faced by composite-constructed aircraft. A composite aircraft suffered an in-flight lightning strike, resulting in significant burning of the fuselage structure and wingtip, requiring an extensive manufacturer's repair. On a traditional aluminium fuselage aircraft, this type of event typically results in superficial damage, such as burn marks, pitting, or small holes on the aircraft's fasteners or skin. These are usually found at the entry and exit points of the lightning strike, where the electrical current enters and leaves the aircraft. Fuselage repairs are normally relatively minor, with burnt fasteners being replaced or minor fuselage skin repairs being completed. Therefore, lightning strike repairs and associated repair costs on a traditional fuselage aircraft would not be significant.
In contrast, the lightning strike event on the composite aircraft caused a significant amount of localised heating at the points where the electrical current touched the fuselage and wingtip skin surface. Composite materials can suffer from thermal damage, which includes resin decomposition, delamination, and fibre breakage. The high temperatures can cause the resin layers to burn or vaporise, leading to a loss of structural integrity. In this case, the breakdown of the resin between the plies resulted in large areas of delamination that required extensive manufacturer's repairs. The aircraft was out of service for almost five months resulting in repair and claim costs of more than USD7m.
Although this is an extreme example, as of the latest data available, only a relatively small percentage of the world fleet of commercial passenger aircraft are manufactured using composite materials. The most notable examples, as indicated above, include the Boeing 787 and the Airbus A350, both of which feature significant use of composite materials in their fuselage and wing construction. While exact percentages can vary depending on the source and the specific criteria used, it is estimated that aircraft with composite fuselage such as the Boeing 787 or Airbus A350 make up less than 7% of the total global commercial passenger aircraft fleet. The majority of the current fleet in operation still consists of aircraft with traditional aluminium fuselages, such as the Boeing 737, Airbus A320, and older models like the Boeing 777 and Airbus A330, which use composites primarily in specific components such as panels and fairings rather than the entire fuselage.
However, the adoption of composite materials is expected to grow as newer models like the Boeing 787 and Airbus A350 continue to be delivered and as future aircraft designs increasingly incorporate advanced materials to improve efficiency and performance. Looking ahead, as fleet modernisation to all composite constructed aircraft continues and older conventional aluminium-designed aircraft are retired, it is highly likely that maintenance repair costs and ultimately claims will continue to rise in value.
Engine claims are on the rise
In addition to aircraft repair and maintenance cost increases, in my own recent claims handling experiences, engine repairs, specifically repairs on modern gas turbine aircraft engines are certainly more expensive. This is due to the combination of factors including technological advancements, material innovations, supply chain complexities, and labour market dynamics. Each of these factors contributes to the overall cost in distinct but interconnected ways.
The use of advanced materials in modern engines such as the Pratt & Whitney GTF Geared Turbofan PW1000G, Rolls-Royce Trent 7000 & Trent XWB, and the CFM International LEAP engines, are all significant cost drivers. Materials such as single-crystal superalloys, ceramic matrix composites, and thermal barrier coatings utilised in the hot combustion chamber and turbine sections of the engine are essential for withstanding the extreme temperatures and stresses encountered in these high-performance engines and are utilised to some degree on all modern engine designs. Single-crystal superalloys, for example, are used in turbine blades, thereby enhancing durability and efficiency. However, the production of these materials involves complex processes such as directional solidification (a controlled cooling process to produce a specific grain structure) and precise control of alloy compositions, which are both time-consuming and expensive. When these materials are damaged and require repair or replacement, the costs are inherently higher due to the specialised techniques and equipment needed.
The necessity of original equipment manufacturers OEMs only in the engine repair process further escalates costs. OEMs possess the proprietary knowledge, tools, and parts necessary for repairing advanced engines. Much like with modern airframes, OEM manufacturers often have exclusive rights to certain technologies and materials, making them the primary, and essentially the only source for engine repairs, in contrast to older engine types, where the use of third-party alternative repair facilities was far more common. Ultimately, today, airlines and maintenance providers must pay a premium for OEM services, and this will continue to escalate overall claims costs. For example, to disassemble and reassemble any of these modern engines the costs alone for this process, before any repairs take place, are generally in the region of USD500,000 - USD700,000 depending on the level of disassembly required.
Supply chain disruptions have also played a significant role in increasing engine repair costs. As discussed on the panel, geopolitical tensions and trade restrictions have all contributed to shortages of essential components and materials used in the engine manufacturing and repair process. It is estimated that Russia and Ukraine account for around 30-40% of the global titanium supply used in various industries, including aerospace and the aeroengine sectors. These material supply disruptions have led to increased prices and longer lead times for parts, further driving up repair costs.
The labour market dynamics in the engine repair industry are another critical factor. There is a growing shortage of skilled labour, particularly in the field of engine maintenance and repair. The specialised skills required to work on modern gas turbine engines are in high demand, and the pool of qualified technicians is limited. As previously mentioned, this shortage has been exacerbated by retirements and layoffs during the pandemic, as well as the lengthy training and certification processes required for new technicians. As a result, wages for skilled labour have increased, contributing to higher overall repair costs.
There is a growing shortage of skilled labour, particularly in the field of engine maintenance and repair.
The rising costs of repairing modern aircraft and gas turbine engines can be attributed to several significant factors. The adoption of advanced materials and technologies has increased the complexity and expense of repairs. The reliance on Original Equipment Manufacturers (OEMs) as the sole repair source adds to the costs due to their specialised expertise and premium charges. Supply chain disruptions have led to shortages and higher prices for essential components and materials. Additionally, a shortage of skilled labour, exacerbated by retirements and layoffs during the pandemic, has driven up wages and repair costs. Together, these factors contribute to the overall complexity and expense of aircraft and engine repairs, resulting in a substantial increase in claim costs.
How can Gallagher help?
As one of the leading and most highly resourced aviation insurance brokers in the world, our team is comprised of highly experienced aviation specialists from a variety of career backgrounds. Indeed, our team includes several in-house aviation law and technical engineering experts to assist with contentious claims matters, particularly useful regarding generation technologies/equipment. With many years of experience in the aviation industry, we offer our clients an unparalleled depth of knowledge and practical expertise, backed by a wide range of risk management, loss control and consultancy services.
Our teams’ unique skills and qualifications in this area also complement our in-house Safety & Operational Aviation Risk Solutions (SOAR) team’s offering around safety and operational risk management consulting from an engineering and claims standpoint. Our SOAR team works alongside our claims experts and provides our aviation clients with the services and solutions they need to help identify sources of risk within their business, mitigate risk sources and ultimately reduce costs.
We know that rising claims costs and repair complexities are particular areas where our clients rely heavily upon our advocacy, as such our strengthened value proposition in this area is a key differentiator of our service. Please do get in touch to discuss your business needs and find out how the Gallagher Specialty team can help.
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