Analyst Says Possible Industry Bailout Clouds The Horizon

Max Sukkhasantikul, Commercial Aviation Consulting Analyst at Frost & Sullivan  contends that airline "test flights" for operation in volcanic ash are more of a publicity stunt - as the flights do not have any testing equipment and they needed to be flown on those segments regardless.

The European aviation industry has become crippled by the volcanic ash blown across from Iceland on 15 April, resulting in the cancellation of thousands of incoming, outgoing, and flights within Europe.  The safety precaution carried out immediately affected the European airline industry and the traveling public, and because it is something the industry has never been prepared for, airlines involved collectively are losing over $200 million per day, as estimated by IATA.  Sukkhasantikul believes the estimate by IATA is less than reality, as British Airways alone is losing approximately $40 million per day, and even airlines outside Europe such as Emirates, losing $10 million per day.  The 5 U.S. carriers operating to Europe are also losing a daily rate of approximately $20 million collectively.

It was a safety precaution to ground flights as the volcanic ash can jeopardize the safety of a flight, with the possibility of engine malfunction as well as flight instruments reading inaccurate data, causing pilots to make decisions based on incorrect data.  Sukkhasantikul assesses that the immediate effect when air travel restrictions came in, Europe saw 27 per cent of its flights grounded, mostly in Scandinavia and the United Kingdom.  Since then, the numbers of cancelled flights increased to 84 per cent on its fourth day, across 24 European countries. Conditions are slowly improving, with up to 50 per cent of flights operating, but the effect will still be similar to the effect on its second day, 16 April, when up to 60 per cent of the flights were cancelled.

The lift in travel restrictions Monday came as airlines were increasingly pressuring governments to allow flights to operate as normal.  Sukkhasantikul contends that the public are being deceived, as airlines such as KLM, Lufthansa, and British Airways have conducted so-called "test flights" of which they claim the volcanic ash has not jeopardized flight safety.  These flights, in reality, are far from test flights - more of a publicity stunt - as the flights do not have any testing equipment and they needed to be flown on those segments anyways - for example the British Airways flight to Cardiff needed to be flown regardless as the aircraft needed to conduct maintenance there.  The Lufthansa and KLM "test flights" were merely repositioning of aircraft to best resolve the crisis once the flight ban is lifted. 

Flying laboratories have been conducted by scientists with results that are still worrying, justifying the continued flight ban.  Sukkhasantikul points out that the legacy, bureaucratic system in place to handle such a situation is still up to the relative governments whether a flight ban should be imposed or not, questioning the possibility of governments lifting flight bans for political purposes, given public outcry based on so called "test flights," is of great concern as it could jeopardize public safety.  A new risk assessment system based on factual, scientific data, rather than publicity stunts by the airlines, should be considered to mitigate the problem.

NLR Test Flight Photo

It goes without mention that the effect on the airline industry is real, and it is severe. While major airlines are able to take the impact on their financials, it is the smaller ones and less established carriers that will suffer the most as they do not have the luxury of extended borrowing facilities and cash as the others.  Sukkhasantikul claims that airlines such as Lufthansa and Air France-KLM have the upper hand as they have shares - 23.1 per cent and 11.6 per cent, respectively - in the multi-billion dollar, global airline distribution company, Amadeus. They have had intentions to sell those shares this year, enabling them to have a financial buffer from the volcano impact of several hundred million dollars.

While airlines have arranged special flights where possible, European governments are cooperating to have a short term solution.  The United Kingdom, for example, has agreed with the Spanish Government to have its incoming/outgoing passengers and freight channeled through Spain, followed by road/rail transport.  Amidst the chaos, the aviation industry is pursuing the possibility of governmental bailouts similar to the financial sector in recent times.  Sukkhasantikul clarifies that the reality of such a bailout is feasible; however, it may be difficult to justify as it is not only the aviation industry being affected - almost the entire economy of Europe, with other industries which may also need bailout.  On the bright side, this occasion has proved to activists trying to curb the growth of the airline industry that the aviation industry will continue to have a significant impact on the global economy.

FMI: www.frost.com