Failsafe mode is very useful if you misconfigured your WLAN router, so that you can not access it anymore. E.g. if you accidentially disabled secure shell or misconfigured the firewall, so that you can not login any more.
When in failsafe mode, the device won't interpret any networking setup files. It stops even before fwcf is set up. It will just set the LAN interface up and give it the IP address 192.168.1.1 and netmask 255.255.255.0. Then it will start a telnet daemon, so you get straight access (without depending on the installed SSH daemon).