T5: insurers to the rescue

T5: insurers to the rescue

It took six years to build at a cost of £4.3 billion, but when it opened its doors to the public on 27 March, Heathrow Airport’s Terminal 5 disappointed in spectacular style. David Craik reports on the repercussions for travel insurers

First published in ITIJ 88, May 2008

It took six years to build at a cost of £4.3 billion, but when it opened its doors to the public on 27 March, Heathrow Airport’s Terminal 5 disappointed in spectacular style. David Craik reports on the repercussions for travel insurers

British Airways (BA), which will use it on an exclusive basis, promised ‘a new era of air travel’, with a state-of-the-art baggage system helping create for passengers a ‘natural, logical journey that’s so calm you’ll flow through’. But when it started operations at the end of March, Heathrow Airport’s Terminal 5 was mired in confusion, anger and incompetence. Software failures in the new baggage system led to the cancellation of 34 flights and saw baggage check-in suspended before 5 pm. Passengers had to change or cancel their travel plans and many, instead of arriving at their holiday or business destinations, spent the night in local hotels.

BA admitted staff were unfamiliar with the new operating systems. BAA, Heathrow’s operating company, said the baggage system was working properly but there had been too few staff to unload the bags from the conveyor belts. It was also said that baggage handlers had been delayed getting into work because there were too few security staff to check their personal credentials. Whatever the causes, in the days ahead the problems continued at T5 with more flights being cancelled as the baggage system spluttered into life. It emerged that staff had not been properly trained in the new procedures; as the number of delayed and lost bags moved into the thousands.

BA chief executive Willie Walsh remarked that the service BA had provided at the terminal had ‘not been good enough’, and stated: “We apologise sincerely to our customers,” adding that the baggage system problems were being addressed by a team of engineers and IT specialists from BA and BAA. As they worked behind the scenes to rectify the problems and the damage to their global reputations, however, the effects of the turmoil began trickling out to the wider travel industry, and in particular challenged the essential nature of insurance provision.

Knee-jerk reaction

Providers in Royal Bank of Scotland’s (RBS) insurance stable – Direct Line Travel Insurance, Churchill and Tesco – responded to the chaos of lost baggage, cancelled flights and travel policy claims by disgruntled T5 passengers, by withdrawing its insurance cover for customers using the terminal. “We cannot provide new travel insurance policies to cover an event that has already occurred. Just as a customer cannot contact us for flood cover once their house is under water, insurance companies cannot offer cover for T5 issues after the problems have occurred and been documented in the media,” a spokesperson said.
RBS Insurance reassured existing customers who had purchased their policy before the T5 problems occurred that they would be covered for issues associated with T5 under the terms of their policy. The new policies, however, no longer included cover for travel delay, trip abandonment, delayed and lost baggage or missed departures.

The recent issues highlighted at T5 demonstrate the importance of having comprehensive travel insurance.

The stance of RBS provoked vitriol within the rest of the travel insurance sector. Steve Hook of Mondial Assistance said the policy ‘added to the misery for travellers’. He told ITIJ: “Insurers are expected to anticipate risk rather than to react to it. I don’t see that withdrawing cover has been based on proper commercial analysis but more likely a knee-jerk reaction to sensational reporting”. He added that Mondial had no intention of changing its terms to exclude T5-related claims. “Things are already settling down at the airport. As insurers it is our responsibility to assess the risks associated with high profile events such as this. Everyone knew T5 was coming and that there was the potential for significant issues to impact the opening. We will continue to provide full cover for travellers going through T5.”

Hook said exposure was limited to the first couple of weeks of opening, and that making short-term changes to policy terms and conditions was unlikely to have a significant impact on a company’s results. He believes RBS’s stance challenged the whole ethos of insurance: “Making a decision like this is akin to closing the door after the horse has bolted. What message does it send to our customers other than one of ‘We’re only interested in your premiums and not your claims’.”

Perry Wilson, managing director of travel insurer Insure and Go, was equally as concerned about the long-term damage done to the travel insurance sector by RBS’s actions: “We have seen a slight increase in the number of claims, but nothing to set the world on fire. There are problems at T5 but what they have done is disgusting. It’s scandalous. To use a silly little clause and back out now leaves a bad taste in the mouth for the public over insurance,” he said, adding: “We will honour all our claims. The number of bags lost at T5 is just s a drop in the ocean. [RBS has] carried out a knee-jerk reaction. They should be investigated by the Financial Services Authority for not treating customers fairly.”

A spokesperson for Halifax Travel Insurance also said: “We have not experienced a significant increase in claims since the difficulties at T5 began. It is too early to speculate on the amount of money this will cost individual travellers and travel insurance providers.” The spokesperson said the company was ‘continuing to treat customers affected by the T5 situation no differently to those who are affected by delays at any other airport’, and that it had ‘no intention of following competitors who have refused cover for passengers travelling though the troubled terminal’. Sainsbury’s Travel Insurance took the same stance; as did Norwich Union. But then RBS changed its mind.

A spokesperson for RBS declared: “Following assurances from British Airways and BAA that service levels at Heathrow's T5 have returned to an acceptable standard, travel insurance policies will be valid should customers suffer lost and delayed baggage or flight disruptions at the airport. It has always been the case that customers who have bought single and annual travel policies before the terminal opened on 27 March were fully covered for any disruption or loss.” As a ‘gesture of goodwill’ it also said it would be taking a ‘sympathetic view’ of any claims made against flight disruptions or lost and delayed baggage at the terminal since its opening irrespective of when the policy was bought. “To date, we have agreed to pay all claims made in respect of lost luggage at T5,” added the spokesperson.

Getting sorted

So what is happening at T5? Have BA and BAA rectified the problems? If so, what does this mean for insurers? BA says no flights are being cancelled at T5 at present, but problems remain with the baggage system and its operation. Although these difficulties are being worked on, since the terminal opened several thousand bags have been mishandled. In fact, it has been reported that the number of lost bags reached 28,000 at the start of April, although this has been disputed by BA.

The airline’s spokesperson added that all the bags from the ‘initial disruption’ have now been processed and left Heathrow to be reunited with their owners. “Tens of thousands of customers already have their bags back in their possession and we are working as hard as we can to get all the delayed bags back to each customer. We are using specially appointed courier companies to deliver bags to customers' individual addresses. We are working to return bags as quickly as possible; however’ given the worldwide destinations of these bags this will take some time,” the spokesperson stated.

The stance of RBS provoked vitriol within the rest of the travel insurance sector.

It is also understood that over 500 flights have been cancelled since the opening of the terminal, and that the problems have cost BA £16 million in lost revenue and compensation. The planned move of the airline’s long haul services from T4 to T5 will be deferred from the end of April until June BA said. Walsh added: “We need to have confidence that good service can be maintained when the terminal is handling larger numbers of customers. It is only sensible to ensure that T5 is operating consistently at a high standard before the move begins.”

Not an entirely reassuring position for passengers or insurers. “We are strongly recommending that passengers check with their airline and airport before travelling,” said a Halifax spokesperson. “The recent issues highlighted at T5 demonstrate the importance of having comprehensive travel insurance. It is advised that those who do suffer lost or delayed baggage whilst flying should contact their airline, rather than their insurer, for compensation in the first instance.” This can be gained under The Montreal Convention.

Wilson of Insure and Go said BA and BAA have worked hard to rectify the problems experienced in the opening days of T5, and insurers should continue to support it. “Their system went wrong but when it begins to work it will be a great service. We haven’t lost millions of pounds a day because of this. This is why people buy insurance.”