Lessons from a Volcano’s Ash Cloud

Iceland’s volcanic eruption has devastated the global airline industry during the past several days.  The trauma inflicted should make all businesses reexamine their operating and contingency plans.

In just the four days following the volcano’s spewing of ashes into European airspace last Thursday, the world’s airline industry lost a total of approximately $1 billion.  European carriers were losing about $200 million per day, while the five major U.S. airline companies were down about $22 million a day.  In addition to passenger carriers, airfreight carriers, such as FedEx and UPS, suffered substantial disruptions to their service.

Assuming that air traffic is permitted to resume relatively soon this week, the impact on the global economy will be limited.  However, the losses incurred by some of the weaker carriers in Europe could spell bankruptcy for them.

The volcano’s impact has some important lessons for all businesses. First, although companies cannot anticipate all shocks that might affect them, their planning processes should include scenarios where revenues or profits are much lower than projected in their baseline budgets.  Second, firms should have contingency and recovery plans in place to react to natural or man-made disasters.  Third, companies need to have sufficient capital reserves, cash buffers, and access to credit to allow them to survive major dislocations.

Disasters are never a good time to learn these lessons.  But, this past week’s air turmoil should give all business leaders important thoughts to ponder.


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