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Flight cancelations largely uninsured as airlines dismiss costly coverage

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Each year, airlines across the globe lose tens of millions of dollars from cancellations and delays caused by weather and other forced groundings. Despite this, few airlines buy insurance to cover these losses.

Although insurers do offer coverage for weather losses, the cost is prohibitive, risk managers and observers say.

Some brokers say they are working on programs that would be more attractive to airlines. And alternative markets, such as weather derivatives, also are options for airline risk managers, but coverage for weather-related interruptions to operations remains largely an uncovered exposure for airlines.

The lack of coverage purchased does not reflect a lack of financial losses resulting from interruptions to airlines normal operations.

For example, cancellations and delays caused by air traffic control cost an estimated $5.9 billion in direct operating costs for U.S. airlines in 2005, according to the U.S. Air Transport Assn. in a report issued late last year.

Airline balance sheets in the recent months also reflect these kinds of losses.

For example, severe service disruptions as a result of the Feb. 14 ice storm in New York cost JetBlue Airways Corp. $20 million to $30 million, according to stock analysts. JetBlue had to revise its first-quarter and full-year 2007 projections downward as a result of the disruption (see related story).

United Airlines also saw its fourth-quarter 2006 passenger revenues hit by three severe winter snowstorms in Chicago and Denver, the company's two largest hubs.

During December, United and United Express canceled some 3,900 flights systemwide due to the storms, reducing passenger revenues by $40 million, according to parent UAL Corp.'s 2006 results.

Weather, though, played only a small part in losses at British Airways P.L.C. A bigger factor was disruption from a security scare last August that cost the company much more. According to the airline's second-quarter results ending Sept. 30, 2006, the airline lost £100 million ($195 million) from the security crackdown at U.K. airports in August after British police thwarted an alleged massive terrorist attack on several trans-Atlantic flights.

In addition, the airline faced increased costs related to the ongoing crackdown on passenger security at U.K. airports in its third quarter, as well as weather-related losses when it canceled 800 flights in the pre-Christmas peak period because of fog. This cost the airline £40 million ($78 million) for the third quarter ending Dec. 31, 2006.

Insurance to cover these types of costs is available, but few airlines buy it.

"I have not heard of anyone taking the cover," said Ralf Oelssner, director of insurance for Lufthansa A.G. in Frankfurt, Germany.

However, airlines are protected in their existing insurance programs for claims associated with the "loss of use" of an aircraft that is damaged or destroyed, Mr. Oelssner said.

Insurance for weather-related losses "is available, but it's very expensive because the losses are high," said Carol Gates, director of industry risk management and insurance at the International Air Transport Assn. in Montreal. "Some airlines purchase some coverage, but it's very expensive."

One of IATA's future aims is to "benchmark" the cost of the operational interruptions and examine total losses, she said. Total losses could include time when aircraft are damaged on the ground and when additional costs come into play such as aircraft downtime, leasing new aircraft, rerouting, employee costs and so on.

Brokers at Chicago-based Aon Corp. have put together weather risk management insurance products that will cover airlines for interruptions caused by weather, said Steve Doyle, manager of aviation and global practice at Aon Ltd. "We are trying to help the airlines...and are working with our clients to offer custom-made products," said Mr. Doyle. He would not disclose any details about the products.

One type of financial mitigation tool that is used by other industries, weather derivatives, is not widely used by airlines.

Ms. Gates of IATA and Mr. Oelssner both said they have not heard of any airline using weather derivatives to mitigate cancellation and delay costs.

"Airlines have their hands full as the rising cost of fuel has superseded everything," said Ms. Gates. Airlines do hedge to offset their rising fuel costs.

"I've yet to hear that an airline has bought a weather derivative," said Robert Holmes, director and meteorologist for Overland Park, Kan.-based Guaranteed Weather L.L.C., a weather risk management company. Guaranteed Weather's partners are Ramsey Quantitative Systems Inc., Mitsui Sumitomo Insurance Co. and Hannover Re. "A five day snowstorm in Denver doesn't seem to be enough to make airlines or airports scream or shout."

But weather derivatives could be a useful tool for airlines, he said.

For example, an airline could try to protect itself from weather-related losses by hedging against the amount of snowfall at, say, Chicago's O'Hare International Airport, said Mr. Holmes.

Depending on the derivative, the airline might earn $1 million for every inch that falls above the average of, say, 36 inches per year, and possibly lose $1 million for every inch below 36 inches that falls during the year, he said. But if the airline had to pay out, then the likelihood is that there would be fewer cancellations and less cost because there was less snow, he said.