The ability to view risk through bifocal lenses is a definite plus for aerospace industry risk managers when we consider some of the primary risks circling the industry. Organizations that can develop strategies for managing and mitigating today’s social, geopolitical, technology and environmental risks in tandem with a well-informed view of how those risks are likely to develop in the future should reap the benefits.
Social risks: COVID-19’s lingering effects
The aerospace industry is still in a state of recovering from, or adapting to, the impacts of COVID-19. From the dark days of when airline travel was effectively suspended, companies across the industry continue to experience the pandemic’s after-effects. Whether felt in staffing shortages or supply chain disruption, airlines, airports, manufacturers and service providers are still affected to varying degrees.
Barring another global pandemic, some of these issues are becoming business as usual for risk managers. But they also raise other potential longer-term risks associated with trends such as the changing nature of the workplace and a shift toward more onshoring of production facilities in reaction to supply chain sensitivity.
Geopolitical risks – a more turbulent world
We’re living through some turbulent political and economic times, including the Russia/Ukraine conflict, heightened tension surrounding some aspects of Chinese policy and, most recently, the civil war in Sudan. As a global industry, these cannot fail to have impacts across the industry from a risk perspective.
Indeed, if we look at the aircraft finance and leasing industry, the confiscation of aircraft in Russia could result in the single largest ever insurance loss in aviation history.
Given the prevailing levels of geopolitical volatility, the tricky questions for risk managers to explore are where the future potential hotspots may be and how these could impact risk exposures.
Technology risks – cyber and more
For an industry with advanced technology at its core, cybersecurity and hacking incidents are clear and present threats, with potentially profound impacts for the aviation industry over and above the risk of equipment failures. Next-generation technologies, such as artificial intelligence and Web3, are likely to offer risk managers significant benefits, in terms of simulations and modeling, but will also generate new risks of their own.
The quest for Net Zero
The need and pressure to reduce greenhouse gas emissions put aviation businesses, particularly airlines, very much front and center in environmental and climate change discussions. But as organizations developing their overall environmental strategy are discovering, emissions only scratch the surface of climate risks, contrary to mainstream attention that has tended to focus on steps to limit the extreme weather events that can be so damaging to aviation businesses.
Employee retention and attraction, external reputation, investment attractiveness – these are just a few examples of risks increasingly linked to climate strategy. And, medium to longer term, there are the risks associated with the net-zero transition, such as reduced use of fossil fuels and changing environmental responsibilities and liabilities to consider.
Risk transfer is just one part of the risk management toolkit
The first thing most people think about in response to these risks is risk transfer. But the simple fact is, traditional insurance markets alone can’t protect you against or offset your exposure to them all.
Protecting your organization’s balance sheet against such a diversity of risks will need a broad set of risk management and financing strategies. But a common thread, we would argue, is those that do it most effectively are likely to draw extensively on historical and predictive data and industry expertise to strengthen models and assumptions.
Data and analytics are critical to organizations’ ability to interrogate their risk assumptions and develop profitability impact scenarios based on historical information and predictive analysis.
For an industry that is all about keeping people and goods on the move, aviation organizations that can move their risk management analysis and strategy in tune with a highly fluid set of primary industry risks should be better able to stay on course with their business objectives.
