Ouch. Airlines aren't insured against business interruptions such as those caused by the cloud of volcanic ash from Iceland, which has grounded aircraft in Europe and resulted in huge financial losses.
The Eyjafjallajokull volcano has grounded thousands of flights
As if airlines didn't have enough problems: First the volcanic ash cloud being blown south from Iceland grounds thousands of European flights over a period of days. Now insurers say carriers can't file claims for lost revenue because their policies don't cover business interruptions. The expensive nature of such insurance means most airlines won't be able to afford such protection in the future either.
No one can say how long the volcano under Iceland's Eyjafjallajokull glacier will continue to erupt. In the early 1800s, a volcano in the country poured ash into the air for more than two years. Concerns are also growing that a larger, neighboring volcano could soon become active, too.
"Airlines could theoretically insure themselves"
Aviation insurance typically covers physical damage to planes and the consequences of a plane crash caused, for example, by volcanic ash, according to Christoph Groffy, a spokesman for the Hanover-based HDI-Gerling insurance group. “Airlines could theoretically insure themselves (against business disruptions such as volcanic ash clouds) but it's simply not affordable,” he told Deutsche Welle.
And even if airlines had the funds to insure themselves against a business interruption such as volcanic ash, they would struggle to find an insurance company willing to take their money, according to Groffy. Ash clouds can drift across a huge area, affecting not only local airlines but also connecting flights to other parts of the world, he noted. “No insurer is willing to take that risk,” he said.
Airplanes at European airports have been grounded for days
Not even Lloyds of London, which is known to insure just about anything if the price is right, will provide coverage against volcanic ash – at least for now. Spokeswoman Sarah Robson said that while Lloyds does provide insurance coverage against interrupted business operations, the company would need to study the current situation to determine the feasibility of providing coverage for volcano-related disruptions in the future.
Mountain of debt
Reinsurer Munich Re is already sniffing at an opportunity. Spokesman Klaus Schmidtke said the company is considering offering a “cancellation insurance” if the crisis creates sufficient demand. “This is something we're studying right now,” he said. “Of course, one of the big questions is what customers are willing to pay for such coverage.”
That is a huge question. Airlines have little financial breathing space. Many of them are sitting on a mountain of debt caused by sharp drops in air travel after the September 11 terrorist attacks, the Internet and real estate bubbles, and, more recently, the global economic crises.
The International Air Transport Association (IATA) estimates that airlines are losing about 150 million euros ($202 million) a day in the shutdown, which has caused chaos far beyond the immediate European airspace.
Major airlines like Lufthansa are not insured against volcanic business interruptions
Lufthansa isn't insured
German airline Lufthansa confirmed that it wasn't insured against any loss of revenue caused by the volcanic disruption. And a spokeswoman declined to say whether the airline would consider seeking such coverage in the future. “At the moment, our entire focus is on normalizing air traffic,” she said.
Analysts point out that European airlines will likely have to cover the lost revenue themselves. Most governments in the region have exhausted funds bailing out banks and large manufacturers and financing employment programs aimed at limiting the impact of the global economic downturn.
Reinsurance companies such as Hannover Re, Munich Re and Swiss Re, which act as a backstop to insurance companies, say they do not expect disruptions in the airline sector will have any impact on their operations.
The volcano under Iceland's Eyjafjallajokull glacier erupted on Wednesday April 14, spewing clouds of ash up to 10,000 meters (32,810 feet) into the air. The ash plume has resulted in tens of thousands of cancelled flights in and out of European airspace.
Author: John Blau
Editor: Sam Edmonds