Airfares and insurance - after latest Malaysia Airlines tragedy.

The shooting down of Malaysia Airlines flight MH17 between Amsterdam and Kuala Lumpur on Thursday could affect the aviation industry adversely.

The Ukraine-Russia border region where the Boeing 777 went down falls under a busy flight path used by global airlines flying between Europe and Asia.

Route change

In the wake of the incident, Air India and several other global airlines have decided to avoid the region and changed their flight routes. Another Indian carrier, Jet Airways, also flies to Europe from India.

The change in route will not only make flights between Europe and Asia longer, it will also see costs going up as every additional minute spent in the air means more aviation fuel burnt.

With the price of aviation fuel being at an all-time high due to the crisis in Iraq, one of the largest producers of oil, the deviation from a well-laid-down flight path is likely to bruise the profitability of the global airline industry.

It could also lead to airfares moving northwards if airlines decide to pass on the higher cost to passengers.

Insurance hit

Then there is the issue of aircraft insurance — the premiums that global airlines will have to pay to insure their fleets are also likely to go up. This could be a major worry for Air India, which is in the market to re-insure its fleet.

At the moment insurance companies are hedging their bets on the impact of the crash although some feel that the premium payout is likely to go up not only for Air India but other airlines as well. This increase may also be passed on to flyers, leading to higher fares.

9/11 impact

Something similar had happened after the 9/11 terror attacks. The fall of the twin towers in faraway New York had an immediate financial impact on Airlines House, the headquarters of Indian Airlines.

The IA top brass had barely returned from London after successfully renegotiating a lower rate for the insurance premium when they were summoned back to London to renegotiate at a higher rate after the terror attack on the twin towers.

G Srinivasan, Chairman and Managing Director of The New India Assurance Co Ltd, felt that the Malaysian Airlines flight’s shooting down could lead to hardening of premium rates in the aviation insurance market.

“No hardening was noticed after the tragedy of Malaysian Airlines flight MH370. The insurance industry has had a good experience in the aviation market in recent years, but for the two recent incidents,” he said.