Airlines scramble to find someone – anyone – to pay for volcanic grounding

Compensation was paid after 9/11, and this is worse, says BA's chief. But who will foot the bill?
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The Independent Online

Frustrated air passengers turned to their insurance companies. Insurers pointed them to the airlines. The carriers want compensation from the state. Governments are looking to the European Commission. The cost of the week-long grounding of flights because of the volcanic ash cloud has been expensive, and everyone is looking for someone else to pay.

Oliver Hogan, the managing economist with the Centre for Economics & Business Research, estimates the cost to Britain has been £100m a day – three-quarters of that in revenues lost by airlines and other companies, and £25m for the disruption suffered by would-be travellers.

"Some of that will be made up as people get back to work," he says. "But with some people, like teachers, it is just lost." Hospitals have had to cancel operations because doctors are stranded abroad; conferences have been cancelled.

Britain imports around £2bn a day of goods by airfreight, and flies out £1.4bn of exports. Any trade by plane is expensive and those goods are fresh items such as food or flowers, or urgently required components for industry. If they do not reach their markets, the goods perish or the customers have to delay manufacturing. BMW had to close its German production lines last week because parts could not be delivered, as did Nissan in Japan.

The ban on flying could thus widen Britain's trade deficit, but Mr Hogan warns: "We're likely to see a bit of a jump in prices because of shortages. We could see a temporary spike in the inflation rate of, say, 0.5 per cent."

But the biggest sufferers have been the airlines. Giovanni Bisignani, the Italian head of the airlines' trade body, Iata, and a former chief executive of Alitalia, initially calculated the flying ban was costing carriers $200m a day in lost revenue but that doubled by the time the ban was eventually lifted, putting the total cost at $1.7bn, or over £1bn.

Airlines lost $9.4bn globally last year and Bisignani was estimating a further $2.8bn loss for this year before the latest crisis, with European carriers accounting for $2.2bn. "This crisis is hitting while the industry is at its weakest point," he says.

British Airways, already suffering from cabin-crew strikes, says the enforced grounding cost it £15m to £20m a day; holiday group TUI, which includes Thomson and First Choice, puts the cost at £6m a day and rival Thomas Cook at £7m. EasyJet reckons its total cost was £50m.

Heathrow and some other airports waived fees for parking grounded aircraft and are not charging for repositioning flights, and there were other savings such as the $110m a day normally spent on fuel, but airlines still had to pay fixed costs such as salaries, and are incurring extra expenditure on payments to stranded passengers.

Ryanair initially said it would limit payments to the price paid for tickets but quickly did a U-turn rather than defy EU regulations introduced in 2004 to compensate passengers bumped off flights because of overbooking. Chief executive Michael O'Leary called the rules absurd and discriminatory, and declared: "We will continue to persuade the European Commission and European parliament to alter this regulation and put a reasonable limit on these reimbursement claims."

European Transport Commissioner Siim Kallas has no intention of exempting airlines, however. The Estonian proudly says: "European citizens have some of the toughest passenger rights in the world and despite these exceptional circumstances, air passengers are entitled to all their usual rights."

But Bisignani is lobbying for change, saying: "It is urgent that the EC finds a way to ease this unfair burden. This is an Act of God, completely outside the control of airlines. Insurers are looking at it this way but airlines are bearing the complete burden for hotel, food and telephones."

However, the insurance industry insists it is not refusing to financial help. Nick Starling, a director at the Association of British Insurers, says: "It is an urban myth that insurers are relying on an 'Act of God' clause to get out of providing cover. While a volcanic eruption is not a specific insured event covered in insurance policies, some cover for delay and travel abandonment may be available, depending on the level of cover purchased by the policyholder."

But, as airlines pick up bills they thought would be covered by insurers, they are increasingly seeking to recover their own costs. They blame governments for imposing the ban, governments for the EU regulations, and they want governments to pay.

Bisignani says: "We must look at government compensation for lost revenues. This industry does not want or need bailouts, but this crisis is not because we have been bad at running our business. It is beyond our control. Governments must take some responsibility, starting with the fact that their methodology for closing airspace with no risk assessment is extremely flawed."

BA, currently merging with Iberia of Spain, is one of the airlines seeking aid. Its chief executive, Willie Walsh, says: "European airlines have asked the EU and national governments for financial compensation. There is a precedent for this as compensation was paid after the closure of US airspace following the terrorist events of 9/11, and clearly the impact of the current situation is more considerable."

The admission by Lord Adonis, the Secretary of State for Transport, that mistakes were made, may weaken the Government's resistance to agreeing payments. In Brussels, Mr Kallas is heading a group looking at the flying ban's economic impact on all sectors, and accepts that state aid may be possible, though no national governments have yet made requests. The EC approved aid after 9/11, and the commissioner says: "Similar compatibility criteria as the ones fixed in 2001 could apply."

This could mean payments to all airlines, so as not to discriminate between companies, but limiting it to the cost of the disruption and with no hidden aid for restructuring carriers. "The Commission could rapidly assess such requests," Mr Kallas says.

This weekend, airlines are flying home the 100,000 Britons stranded abroad, and bookings, which went on hold during the grounding, are starting to pick up again. Manny Fontenla-Novoa, the head of Thomas Cook, says a large number of his frustrated travellers are rebooking, and Paul Bowtell, the finance director of the rival TUI, says: "Most customers who were booked to go on holiday and whose flights were cancelled are choosing to rebook for a later date."

That will mean fewer unsold summer packages and less discounting, say travel agents. Whether through expensive car-hire, higher holiday prices or taxes to fund compensation claims, it will be consumers who pay for Iceland's volcano.