Would weather hedging be more effective than business interruption for Frontier Airlines hail damage?

by Artemis on July 19, 2011

On a regular basis we see news articles discussing weather events which have caused losses to corporations which may have been better protected through weather risk management techniques rather than their standard business interruption insurance policies. The latest case to hit the news in recent days is the damaging hail storm which hit Denver airport (news article here) and caused major delays and ongoing disruption to flights.

One airline who appear to have been particularly badly affected by the hail storm is Frontier Airlines, who it’s said lost almost a third of their fleet of Airbus aircraft from last Saturday through Monday, resulting in 96 flight cancellations. The cancellations have continued today as many of the airlines affected aircraft remain in hangars for repairs.

The hail storm damaged 18 of Frontiers fleet of 59 Airbus planes and so far just 5 have managed to return to service. It’s said that hail damage can be severe enough to dent the wing edges meaning that the amount of lift provided cannot be guaranteed and so they are taken out of service for inspection and repairs.

Frontier say that the event will have minimal impact on their earnings but they will now be going through a process of claiming on their business interruption policy to recover the losses.

The question is whether a weather hedging instrument of some description could have provided a similar (or greater) level of cover but with a speedier payout enabling the airline to reduce losses to zero or even gain financially as the risk was fully covered?

Could a weather hedging tool which was triggered based on actual weather conditions or on the number of planes taken out of action have been a better solution for them? The obvious problem is the question of moral hazard around the entity responsible for defining a plane as sufficiently damaged to be out of service, but that aside it does seem that there may be better ways for these types of weather risks to be covered.

We’re interested to know our readers opinions on whether they can foresee a time when weather hedging tools may be available for this kind of cover. It would seem like a natural area for the weather risk management sector to attempt to address but in cases like this would a weather hedging instrument offer any unique benefits that a business interruption policy cannot provide?

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