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Current Aviation Industry Overview

Challenges that faced airlines and the aviation industry as a whole over the last

few years, has forced the industry to rethink how they do business on both afinancial and operational level. Most airlines have faced up to these challenges,and as a result have been remarkably successful at turning around ailingcompanies, in many cases completely reinventing themselves. Although highfuel prices are affecting profitability, airlines are now in a much stronger positionthen 2000, due to unprecedented demand for air travel.

The notion of restructuring and cost cutting has been embraced wholeheartedlyby European and Asian airlines as the only viable way to secure their long-termsecurity. North American airlines have been slower to face up these challenges,and face major cost cutting exercises in order to reach necessary levels of

efficiency. There is no doubt that the aviation industry has come through one ofthe toughest periods in over 30 years. The industry is now in an excellentposition to face the challenges ahead

Major changes in the airline industry

The air transport has gone through a period of unprecedented change, during theglobal slowdown. Many commentators claim the industry is almostunrecognizable to that of ten years ago. Major factors that have resulted in this

ever changing landscape is:

Many major airlines have been operating under major losses over the lastfew years, resulting in bankruptcy and the need for massive restructuring.

Approximately 1800 old and mid generation aircraft have been withdrawnfrom service.

Revenue raised from business traffic has been greatly reduced. The emergence of low cost carriers in the US and Europe, and the

adoption of this model in Asia and Middle East. The growth of business via the internet. Consolidation of airlines in Europe and Asia through mergers

The opening up of the Chinese economy to outward investment, and therecovery of the US economy.

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Aviation Market Forecast

Economic recovery coupled with the steadying of world markets, has resulted in

the return of business confidence and corporate investment in the aviationindustry. The political environment has also begun to slowly stabilize; this hasresulted in high level growth in the demand for worldwide leisure travel. Thisresulted in much stronger levels of air traffic in 2004 than had been forecast.Over the 2004 2023 period world passenger levels is forecast to increase by5.3% year on year. Companies such as boeing and airbus will reap the benefitsof this growth. Traffic growth coupled with fleet renewal, will require the deliveryof approximately 16,600 new passenger aircraft. Freight traffic is also expectedto grow at 5.9% per year, throughout the 2004 2023 period. Traffic growth andfleet demand will result in the demand 3,100 freighter deliveries of which 23% willbe purpose built freighters.

Aviation Insurance Forecast

The global aviation industry saw the lowest level of losses in its history in 2004although concerns in the insurance industry over the severity of claims aregrowing, according to Aons 2004 Airline Insurance Market Review*. An averageof 22 total losses per year during the 1990s decreased to just 15 in 2004. Thoughthere were fewer losses, the total loss amount of US$1billion showed a moderateincrease from the figure recorded in 2003. While the introductions of safety

initiatives are clearly reducing the number of incidents, the cumulative cost ofthose incidents to the insurance industry is on the increase.

Despite fears over the growing cost of claims, the airline insurance marketremained buoyant with an average premium reduction of 7% achieved in 2004 bythe worlds airlines as insurers competed for business. Market capacity continuedto be adequate despite the departure of one underwriting syndicate in 2004 andthe outlook for the 2005 renewals is stable provided there is no significantchange in the level of losses. While 2004 was the safest year on record in theaviation industry, the actual severity of claims made has shown an increase onthe previous year. This factor is clearly of concern to the insurance industry.