NDBI: keeping the airline industry in flight when planes can't fly

As experts keep a watchful eye on Iceland's Bardarbunga volcano, we're reminded of the havoc caused by the Ejyjafjallajökull ash cloud of 2010, which led to thousands of flight cancellations and millions of dollars lost. Non-damage business interruption (NDBI) cover can help the industry stay aloft.

Although no commercial flights have been affected as of yet, Iceland's latest volcanic eruption has the airline industry on alert, and for good reason. The Ejyjafjallajökull ash eruption led to over 100,000 flight cancellations that affected around 10 million passengers. European airspace was closed for 16 days.

Could we be in for a repeat performance? The Bardarbunga volcano prompted authorities to raise the ash risk warning level to red, the highest level, on 31 August, before lowering it later.

Business, interrupted

While we don't know what the current Icelandic eruption has in store, we do know the impact such an event could have on the airline industry: the 2010 eruption led to a revenue loss of USD 1.7 billion.  

Operators are already under pressure due to recent tragic accidents, stiff competition, demanding passengers and low GDP growth rates which correlate with passenger numbers. Standard business interruption (BI) policies would usually cover revenue lost as a result of damage caused during a natural disaster. But what happens when there's no damage, as in the case of airspace or airport closures? This is where non-damage business interruption (NDBI) policies can come in.

Smarter together: keeping the industry in flight

"Airline business is to a large extent fixed cost business with leasing/financing costs of the aircraft, labor cost and wages, other operational cost, overheads, and landing/parking fees. The only thing you save by not flying is the fuel part but the lost revenue effect is far worse and lingered for months after Ejyjafjallajökull," says Oliver Dlugosch, Head Aerospace Swiss Re Corporate Solutions.

"An airplane can only make money when it's in the air," Dlugosch continues. "An airspace closed due to ash, or any other event, could have serious, long-lasting implications. An NDBI product can protect airlines against situations in which planes haven't been damaged, but are grounded due to weather or other events e.g. access to airspace or the airport taken out of service. As it involves an element of risk and assumes volatility it also comes with a cost attached in form of premium, so it is not available for free."

There are principally two types of NDBI cover we offer today: one is triggered after a certain number of days of an airspace or airport closure; the other one is triggered when the number of cancelled flights reaches a pre-defined threshold. The exact details of coverage is structured depending on customer need and risk profile.

"NDBI cover is a way to mitigate catastrophic risks and have the cash available for customer reimbursement and other uses," says Dlugosch.

Find out more

Swiss Re Corporate Solutions' Aviation Unit works with aviation and space clients to develop risk transfer solutions. Download our brochure Non-damage business interruption cover to learn more.

Published 4 September 2014

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