Insurance costs could boost price of flying

Your Money

September 03, 2006|By James Bernstein | James Bernstein,Newsday

It may cost more to fly by the first of the year, and for a change, soaring fuel prices will not be entirely to blame.

Passengers can blame higher ticket prices on terrorists.

Airlines are facing the possible loss of a federal program that, since the Sept. 11, 2001, terrorist attacks, has provided carriers with less costly insurance than what they had been getting from insurance companies. The insurers, finding the risks too high, virtually abandoned the commercial aviation industry after hijacked passenger planes were rammed into the World Trade Center and the Pentagon.

Under the Federal Aviation Administration's War Risk Insurance Program, started a few weeks after the Sept.11 attacks, about 70 large and small airlines have been paying a total of about $150 million a year in premiums for coverage against damage, death or injury caused by terrorists, industry sources said last week.

Experts believe airlines would pay at least $500 million a year if the FAA program is not renewed.

Also last week, the Department of Transportation extended the program until Dec. 31. But after that, its future is uncertain, said airline and other experts.

A spokesman for the department said no decision has been made about whether to extend the insurance program further, but the matter is being evaluated. The decision will depend in part on the availability of commercial insurance, the spokesman said.

"It's very definite that if the airlines are forced to pay higher premiums, the cost is going to be reflected in higher fares to passengers," said Shalem Massey, an attorney with the law firm of Bryan Cave in Irvine, Calif., who specializes in the aviation industry.

Massey said the issue is now "a major industry concern," right behind fuel costs.

While intense competition had blocked most major airlines from raising fares in the past, carriers have jacked up ticket prices 21 times since the beginning of 2005, according to a report by Jamie Baker, who follows the industry for the investment bank JPMorgan in Manhattan.

"Demand bullishness only continues to strengthen," Baker said.

How much ticket prices might rise is uncertain, although fare increases have ranged anywhere from $5 to $20 each way.

The uncertainty about insurance coverage comes as airlines are making a comeback. Even with fuel costs this summer 142 percent higher than in 2000, major carriers including Southwest Airlines and Continental Airlines saw profits double in the second quarter, while American Airlines reported a profit for the second time in the past 22 quarters.

But raising ticket prices is always a risk.

"You could get to the point where customers say, `I'm not going to fly. It's too costly. I'll drive or telecommute,'" said David Castelveter, a spokesman for the industry's major trade group, the Air Transport Association.

If they don't raise ticket prices, airlines could eliminate some routes, park some airplanes or try to trim salaries even further to cut costs, industry experts said.

There may be room for compromise.

Robert Hartwig, chief economist for the Insurance Information Institute, an industry trade organization in Manhattan, said insurers would like at least some of the airline business back.

"In the immediate aftermath of 9/11 there were a lot of issues," Hartwig said. "But since, insurers have said they can handle some of the risk and are willing to provide some of this capacity."

But undoubtedly not all of it, Hartwig said.

James Bernstein writes for Newsday.

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