May 2010 | Commentary | In Perspective

Act of God or Act of Government?

Tags: Air Cargo, Risk Management, Global Logistics

International airlines expect to lose more than $2 billion due to disruptions resulting from the recent volcanic eruption. And, they are setting the stage to ask for government support.

Airlines have been dealing with shifting fortunes since the Sept. 11, 2001, terror attacks. It seems like the minute they have a plan in place to deal with one adverse event, something else hits them. This time around, it's a volcanic eruption. Or is it the government's reaction to the volcanic eruption?

While most attention was focused on the thousands of passengers trying to find alternative transportation, there was plenty of cargo in distress as well. The UK government's uncommon response of sending naval vessels to retrieve stranded civilians drew cheers and criticism as the country faces a hotly contested national election. Sorry, cargo, you don't vote.

But that isn't the only political angle to emerge. The International Air Transport Association (IATA) was using airline results from test flights to argue that the flying ban should be lifted earlier than government safety officials deemed advisable. As the ban was finally lifted, IATA was setting expected lost revenues at $2 billion.

The question IATA and others wanted to address was: "Act of God or act of government?" And much hinges on the answer.

Integrators such as DHL and TNT were able to ramp up capacity on their road networks and reroute some international flights to European airports unaffected by the volcanic ash cloud.

Meanwhile, flowers and produce that would normally fly to markets across Europe were expiring on the tarmac in Africa. Purchasing in those markets slowed or stopped.

During natural disasters, act-of-God clauses in service contracts typically come into play to free the carrier from service guarantees it can't possibly meet. So, that overnight parcel or document envelope doesn't fly free when it is delivered on the third day or fourth day, and performance metrics don't register a service failure.

Act-of-God exclusions also affect claims on losses, which is also good news for the carriers who may already be looking at revenue declines as a result of the disruption.

Perhaps the bigger question centers on the "act of government." Hostile actions of governments, such as war, are typically treated like acts of God. But a stand-down for safety isn't a hostile act. The legal eagles will have to work this one out, but if part of the disruption is attributed to an act of God and part to an act of government, does that change the carrier's liability for losses?

The airlines may be thinking that in light of financial bailouts, they have a compelling argument for their governments to offset at least some of their revenue losses for this act of government. But will shippers and consignees seize on this opportunity to overcome an act-of-God exclusion and prosecute their loss claim with their carriers?

Ensuring the safety of citizens is a government's primary role. So is protecting commerce. Let's hear from you on how well these two goals have been served.