Tuesday, 5 April 2016

Why Airlines Cannot Recover Disruption Losses Caused By Handlers Who Damaged Their Aircraft, And What Needs To Be Done To Make Their Claims Successful


Interview with Ivar Busk

Airlines pay a high price for their ignorance about origins and true value of disruption costs. This increases their business vulnerability including unexpected events caused by external service providers. Among the most costly ones are ground handling incidents resulting in aircraft damage which cost major airlines over $10 billion annually. The majority of these costs are disruption related and impossible to recover using the existing, oversimplified methodologies. 

Instead of introducing the effective disruption cost/cause tracking methodologies as an integral part of airline decision making and applying them when needed, like in the case of recovering costs of aircraft damage, airlines either do nothing (and pay a high price when incidents happen), or opt for insurance protection with high premiums, high deductibles, and high legal charges when involved in long, hard to win disputes. This doesn't mean that carriers should not be insured against this kind of losses, but relaying exclusively on insurance protection they miss to understand their true exposure to risk of aircraft damage and work on its prevention and better protection. In this way airlines let this kind of ground handling incidents grow unnoticed and, apart from the financial impact, contribute to slow but inevitable deterioration of system performance and safety, especially at congested airports.

How do airlines cope with these problems in real life? What are the challenges faced by people directly involved in recovering consequential costs of aircraft damage?

I asked Ivar Busk, a veteran of 34 years in this field to share with us his insightful views about this 'niche' industry problem with the not so 'niche' consequences on airline cost, revenue, reputation and ramp safety. Ivar's impressive career as an ex SAS Manager Insurance, Head of Airside Safety, Aircraft Accident Investigator, Aircraft Engineer, and member of IATA Airside Safety Group, combined with his commercial business degree from Copenhagen Business School, and education at USC and FAA makes him a respectable contributor to the discussions related to the improvement in this sidelined area of airline business.

JR: According to handlers, 'carriers have been asked to provide quantifiable evidence of their damages ('loss of aircraft use') and they found it difficult if not impossible'. What are the main reasons behind airlines' inability to provide the evidence of consequential losses resulting from aircraft damage caused by ground handlers?
IB: Aircraft damage incidents are sporadic and unpredictable events so their assessment and claim recovery has not always had a high priority, and therefore no specific development and practice for aircraft damage assessment and claim recovery really exists. The aim for an airline is to minimize both direct and indirect losses following the aircraft damage and at the same time try to establish preventive measures to prevent reoccurrences in conjunction with the line operation.
And also, because of relatively small number of cases on a yearly basis, it is difficult to gain experience in dealing with claim recoveries which then require external expertise to help resolve the case. The problem is that there are not many companies with sufficient expertise. In order to minimize losses some airlines have established an extensive network of insurance companies and surveyors that can help them with reducing bureaucracy, ensuring quicker and more expedient resolution, and increasing the chances to win the maximum possible compensation.
Nobody expects losses related to aircraft damage on ground to be completely eliminated, but they can certainly be kept at minimum possible levels. This can be achieved first by raising awareness about the full scale of costs involved in aircraft damage incidents and by organising the process in an efficient way. This assumes continuous monitoring of operational risks, particularly at critically congested airports. It also requires preventive system measures and guidelines for dynamic approach to identifying event specific indirect costs of aircraft damage without which claims cannot be recovered. Many external influences including the latest economic crises have forced airlines (operating at low profit margins) to take actions to increase the claim recovery. As a result, they have started to make claims even for minor damages.

JR: Are there any estimates on how big the costs associated with 'loss of aircraft use' are?
IB: Consequential loss ("loss of use") is the big item and is on average approximately four to ten times higher than the direct costs. A special development of a model for calculation of “Loss of use” is therefore essential, for achieving the optimal results. Airlines are well equipped with figures representing structured information concerning, crew, maintenance, passenger interruption cost, ground operation, sales cost etc., however the knowledge of how to put them together and present them, has been hard to come by.

JR: The content of ground handling contract can increase or decrease chances for loss recovery. How difficult it is to reach the agreement on consequential losses? 
IB: Agreeing on contract is always a big challenge and it is hard and often impossible to agree about consequential losses related to disrupted operations...