Copyright 2001 FDCHeMedia, Inc. All Rights Reserved. Federal Document Clearing House Congressional
Testimony
October 24, 2001, Wednesday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 1798 words
COMMITTEE:HOUSE FINANCIAL SERVICES
HEADLINE:
INSURANCE AND TERRORISM
TESTIMONY-BY: ROY A.
WILLIAMS, DIRECTOR OF AVIATION
AFFILIATION:
LOUIS ARMSTRONG NEW ORLEANS INTERNATIONAL AIRPORT
BODY: October 24, 2001
Statement of Roy A. Williams Director of Aviation, Louis Armstrong New
Orleans International Airport
Before the Subcommittee
on Capital Markets, Insurance, And Government Sponsored Enterprises
Committee on Financial Services
United States House of Representatives
Good
Afternoon. My name is Roy A. Williams and I am Director of Aviation for the
Louis Armstrong New Orleans International Airport located in Kenner, Louisiana.
I am here to testify regarding the financial impact of the events of September
11, 2001 on our airport and our ability to continue functioning as an
economically competitive provider of airport services to our community. In
particular, I have been asked to offer testimony regarding the availability of
insurance for operations at the airport and the increased costs involved where
we have found insurance.
General Information about
Louis Armstrong New Orleans International Airport
Louis
Armstrong New Orleans International Airport serves Southeastern Louisiana and
the Gulf South with extensive domestic and international service. Sixteen
passenger carriers and air cargo carriers operate scheduled service to and from
the airport, along with numerous charter, corporate, and general aviation
flights. In the twelve months ending August 2001, we served move than 10 million
passengers, an all-time record. Louis Armstrong ranks 39th in the United States
for total passenger traffic.
The airport is located
entirely in Jefferson and St. Charles Parishes. The New Orleans Aviation Board,
appointed by the Mayor of the City of New Orleans, manages the airport. The nine
member board includes representatives from New Orleans, Jefferson, and St.
Charles Parishes.
The Jefferson Parish and St. Charles
Parish Sheriff offices provide primary law enforcement, with additional support
from the Kenner and New Orleans Police Departments. Numerous Federal agencies
have a presence at the Airport, including the Federal Aviation Administration,
Federal Bureau Investigation, United States Customs Service, Immigration
Naturalization Service, and the Department of Agriculture. We also benefit from
the presence of the Louisiana National Guard.
Passenger
security screening is provided by ITS and Wackenhut. They are private firms
working directly for the airlines serving New Orleans. The airport does not have
a number of activities, found at many airports, which could pose additional
security issues. For example, we do not have a major aircraft maintenance
facility, a passenger or cargo connecting hub, or an airline reservation
center.
Overview of Airport Insurance Availability
Since September 11, 2001
As a consequence of the
September 11 th events, the worldwide aviation insurance market has been in a
state of crisis. Initially, the underwriting community's emphasis was directed
at the airline portfolio; then their attention quickly shifted to other lines of
aviation risk coverage, including airport liability, with negative
implications.
Immediately after the attacks on the
World Trade Center and the Pentagon, the underwriters issued notices of
cancellation of "War, Hi-Jacking and Other Perils" risk liability, which
includes acts of terrorism, to all airlines. To permit continuing airline
service, Congress passed the Air Transportation Safety and System Stabilization
Act, which included a mechanism for the federal government to indemnify air
carriers for all war and terrorism risk above $100 million.
In late September, airports were put on notice that their war insurance
would be cancelled as of October 1, 2001. Although underwriters are beginning to
offer war risk insurance, again, there has been no commitment
whatsoever from the insurance industry that reasonable reinstatement terms will
be offered to airports. That is why airports are continuing to petition the
market, Congress and Department of Transportation for this essential coverage.
In essence, airports are uninsured or "naked" with respect to this risk coverage
and are exposed to substantial third party liability risk going forward.
Currently, airports are solely dependent on state sovereign immunity laws to
back them up. The problem is that these laws vary in inclusiveness across the
states, they may not fully cover proprietary responsibility, and they do not
cover all airport operating entities such as BAA USA, which operates the
Indianapolis International Airport, the JFK/IAT International Air Terminal Group
which operates Terminal 4 at John F. Kennedy International Airport, or the
company that operates Stewart Airport. Also, where state sovereign immunity law
applies, 3 rd party claims would go unsatisfied, a moral/ethical issue that
concerns most governmental entities operating airports.
Prior to the September 11 th events, airports usually had substantial
levels of war and terrorism risk included as part of their general airport
liability coverage, generally $300 million at airports such as Louis Armstrong
Airport to $1 billion for large hub airports. To date, three insurers have come
back into the market with a product that is expensive and has a very limited and
inadequate liability cap of $50 million. At least one of the available policies
contains massive exclusions such as screening, baggage and security functions.
In addition, all policies still include the 7-day cancellation clause, which
would allow insurers to cancel their policy on short notice.
Impact of September 11 at Louis Armstrong Airport
Prior to September 11 th , the airport was able to acquire adequate
insurance at reasonable premiums. For the 12 months ending September 30, 2001,
our policies covered essentially all risks, including War and Terrorism, up to
$300 million. Our annual premium was $321,000 and our provider was
Westchester.
We began searching for a replacement
policy after the events of September 11th. By September 20 we had an insurance
proposal for the coming year, but it is quite different from the insurance we
previously had. The new policy excludes war and terrorism, completely, it
excludes coverage for officers and directors, and it costs significantly more -
$520,350 for $300 million of coverage.
The airport
continued to seek additional coverage and was later offered an amended proposal
that included $50 million of war and terrorism coverage, at an added cost of
$450,000. A second provider was able to offer $50 million of this coverage for a
premium of $303,000. We were also able to obtain officers and directors coverage
for $8,000.
The board sought additional coverage,
hoping to bring the airport to the pre-September level, but none was available.
We accepted and "bound" the offers we had. As of this time, we have similar
general liability coverage to what we had before September 11, but far less for
war and terrorism coverage. And, the airport's annual premiums have nearly
tripled.
Just this week, we have received one
additional insurance option that we are considering. For a $572,950 annual
premium, we can obtain $100 million in additional war and terrorism coverage,
increasing our total protection for this coverage to $150 million. If we accept
this option we will have half of our prior war and terrorism coverage for a
total annual premium of five times what the airport paid last year: $1.4 million
versus $321,000 in the year 2000.
We will have no
choice but to charge this cost to the air carriers through increases in their
rents and landing fees. The $1.1 million insurance premium increase I have
described represents a 3 percent increase in total air carrier costs. Put
another way, this increase could raise landing fee by 15 cents per 1,000 lbs. of
aircraft weight or approximately 22 cents per passenger.
The board remains committed to maintaining adequate insurance to
protect the airport. The board is equally committed to minimizing air carrier
costs and would therefore welcome your help in providing airports with war and
terrorism coverage at a cost we can all afford.
Recommendations
Congress quickly stepped into
the marketplace to ensure that airlines would not be faced with financial ruin
as a result of the September 11 th tragedy. Our airport and airports across the
country will benefit by the fast action of the Congress in this regard. However,
as many people in this hearing are aware, our nations airports are a primary
driver of the economies of our nations' cities. It is at our airports where jobs
and value added services provide a tax base and economic opportunity. In order
to sustain those jobs, our airport and airports like it must remain competitive
and efficient.
The Louis Armstrong International
Airport cannot sustain the risks of insuring itself against perceived risks of
terrorism across the world by passing on the exorbitant costs of higher premiums
through higher landing fees. There is simply no mechanism for an individual
airport to recover these costs in an efficient and economic manner given the
magnitude of the risk compared with the limited resources available at any
single airport. Therefore, we recommend that the committee consider solutions
that spread the risk to individual companies and airports in as broad of a way
as possible, taking into account that the risks associated with an act of terror
far exceed the economic capacity of an individual airport to sustain. One of
these solutions would be to extend the federal war risk
insurance program explicitly to airports (the program now covers airlines
and their vendors, agents and subcontractors).
We are
cautiously optimistic that the Louis Armstrong International Airport has
recovered from the downturn of air travel nationwide. For the first half of
October, the airport has handled an average of 157 flights, down 14% from a
daily average of 180 flights reported in all of October 2000. The airport is at
about 90% of air passenger volume reported in August and 85% of volume as
compared with October 2000. We hope these numbers for New Orleans will improve,
but we cannot fulfill our obligation to our community unless national volumes
return to normal.
What will get those passengers flying
again? The single best means of getting back to business in air travel is to
restore confidence in the security of our planes and airports and to provide
stability in the marketplace. The uncertainty regarding the availability of
insurance and the calculation of risk associated with acts of terror creates a
background of instability that has wreaked havoc with the traveling public and
the insurance industry. Restoring the certainty of insurance at reasonable rates
should underpin any legislative effort to restore this confidence.