When Airlines Fail (Financially)

If an airline suddenly goes bust and leaves you stranded, that travel insurance policy you bought may not offer you the protection you think it does.

Low-cost airlines in Scandinavia are having their problems these days.

When Primera Air abruptly belly-flopped financially last October, the unexpected collapsed stranded flight crews and passengers alike throughout the airline’s network, leaving both to find their own way home.

Today, it’s happening again, this time to Iceland’s WOW, leaving passengers stranded on both sides of the Atlantic and costing 1,100 employees their jobs.

Oh, well, that’s what travel insurance is for, I said. Trip cancellation and trip interruption ar two of the eventualities typically covered in travel insurance policies.

So imagine my surprise — and consternation — when I start hearing from readers that travel insurers often refuse to pay claims when an airline suddenly stops operating. I mean, isn’t that the very definition of “trip cancellation” or “trip interruption?”

It may be a matter of timing. If the bankruptcy occurs while you’re in the midst of your trip, trip cancellation and/or trip interruption would certainly seem to kick in. If the airline collapses before your trip begins, that may be the loophole your travel insurance uses to slip out of paying your claim.

So I look into it a little further, and sure enough, just like the digital world has an app for everything, the insurance industry has a product for that.

It’s known as SAFI, short for Scheduled Airline Failure Insurance. It specifically reimburses you for money lost when the airline you booked on goes down the financial drain before or during your trip. You can purchase it separately or as part of a standard travel insurance policy if the insurer offers it.

Is buying a SAFI policy on top of traditional travel insurance a good idea? It partly depends on who you’re flying with, and where.

You’re more likely to see abrupt financial collapse among smaller regional and low-cost carriers — and the smaller they are, the greater the possibility. Further, this situation is more likely to crop up among airlines in developing countries, especially in Africa, where airlines come and go like fashion trends and one-hit wonders.

Witness Nigeria, the site of multiple airline failures, where exciting plans for a new national flag carrier, Nigeria Air, were “suspended” two months after they were announced, without a single passenger getting the chance to board a single flight.

Government officials insist that Nigeria Air isn’t dead, just on hold. We’ll see.

But for all the millions of us flying everywhere (4 billion worldwide every year, more than 630 million in the US alone), the airline business is remarkably fragile. If all your flights are on large, traditional carriers, so-called “legacy” airlines, then you’re somewhat less vulnerable to your airline abruptly going out of business. But only somewhat.

For every “Third World” airline whose finances collapse, a large number of well-known and seemingly financially solid “First World” airlines have teetered on the edge of insolvency over the years.

Indeed, since 1979, more than 60 airlines in North America have entered Chapter 11 bankruptcy protection, and only a handful of them ever came ou. Some of those survivors are names you will recognize, and may have even recently flown with:

  • Air Canada
  • American
  • Delta
  • Frontier
  • United

It’s one of the reasons why we’ve seen so many airline mergers in the United States since deregulation took effect in 1978. It’s also why 80 percent of today’s domestic air travel market is controlled by exactly four airlines — Delta, United, American and Southwest.

But that’s for another conversation.

Short form: If you’ve already bought travel insurance, find out if it covers your costs if the airline collapses before you take off. If it doesn’t consult with the insurance company about your options — and hope that you have some.

In any case, the best form of travel insurance just might be a credit card with a healthy limit and no balance on it — just in case you’re left to your own devices to get home.

Greg Gross is a travel advisor for Trips by Greg travel agency in San Diego, CA. He doubles as senior editor for I’m Black and I Travel. He believes you can never be too rich, too thin or have too many visa stamps in your passport.