Wednesday, 9 April 2014

What stops airlines from recovering uninsured disruption losses caused by third parties

An increasingly busy operational environment and a growing number of outsourced services make airlines more susceptible to operational disruptions caused by third parties. This can incur substantial losses to airlines unable to credibly document indirect damages - the ripple effects following the initial disruptions.  

Ground handling incidents resulting in aircraft damage, for example, could put a plane out of service for days or even months and cost an airline hundreds of thousands and in some cases over a million dollars. Apart from the direct cost of aircraft damage associated with aircraft repair, it often incurs several times higher indirect costs caused by unserviceable aircraft. While losses above the deductible insurance values can be recovered for direct damages, as well as a part of ‘straight’ indirect cost, like hired replacement aircraft, those below highly set deductibles (over $1 million for wide body aircraft) must be borne solely by the airline, unless protective contractual clauses are agreed with the third parties. The situation is not much better in case of disruptions caused by ground handling, aircraft maintenance or technology companies, ATC, airports, or aircraft manufacturers.
At the core of the problem lies a deeply rooted industrial approach to cost management and inherited organisational departmentalisation - both contributing to the distortion of communication channels and consequently the objectivity of information. This is manifested through traditional, linear, top-down distribution of costs which are multidimensional by nature, and their dissociation from operational events like flight delays, cancellations, diversions, additional flights, and aircraft replacements. The same applies to passenger related costs including additional handling, loss of revenue and passenger compensation which remain disconnected from the events that have created them, making their recovery impossible.

Another obstacle to identifying the full impact of damages caused by third parties is related to the responsibility for collecting this information. It is dependent on people based in parts of an organisation who neither have much to do with tracking of actual costs and their origins, nor are they equipped with a cross-system tool necessary to successfully complete this complex task (job usually delegated to Engineering, Insurance, Ground Operations, Flight Safety or other operational departments).

However, improvement in this area is possible even for the most complex organisations. To identify the true value of disruption costs they need to be observed as close to real time as possible. All it takes then is to create a system that provides links between real time costs, initial and reactionary schedule changes (operational events) and their root causes. In addition to numbers, it needs to be accompanied with stories of those directly and indirectly involved in the event captured as close to real time as possible. It is amazing to see how this process opens the way to true cost tracking crossing the departmental boundaries in all directions; it sets a healthy ground for creation of the reliable information system that, apart from many other internal purposes can well serve legislative requirements for disruption loss recovery.

Designing and implementing this relatively simple and inexpensive method for loss recovery requires a good system knowledge, support at highest organisational level, and cross-system cooperation. The results spread much wider than for the purpose of loss recovery, with efforts and investments being minuscule compared to the benefits.

Those willing to share their personal experience, or have questions related to this subject including design of tools for disruption loss control can contact me at