Air fares to rise after Katrina creates a jet-fuel shortage

British Airways and Virgin Atlantic are set to increase the fuel surcharges on their flights as a jet fuel shortage in the US is threatening to ground flights.

The situation in the wake of Hurricane Katrina is so bad that some airlines - such as Continental - have taken to carrying extra fuel on board because of fears that they will not be able to refuel. Analysts are also predicting the crisis will force more airlines into bankruptcy, including Delta, America's third-largest carrier.

Both BA and Virgin say they have enough jet fuel to keep their transatlantic operations flying but are monitoring the situation closely. They are also reviewing their fuel surcharges - £24 a flight each on long-haul and £8 on short-haul for BA. It is expected that they will increase them this week.

Katrina closed down at least eight refineries on the Gulf Coast, cutting jet fuel production by 13 per cent and pushing prices from $1.90 a gallon to nearly $2.40. A month ago they were under $1.70.

"The effects of Katrina have exacerbated a situation we have been watching with increasing concern," said a spokesman for Virgin Atlantic.

Estimates of the insurance cost of the hurricane are now exceeding $25bn (£13.5bn), making it the most expensive hurricane in history. The Lloyd's of London market is said to be liable for up to £1bn of this.

Lloyd's refused to confirm those figures, saying it simply had not collated them yet. However, it said that it had modelled a worst-case scenario and the market could absorb claims from a hurricane that caused as much as $60bn of damage.

Rob Jones, an insurance analyst at rating agency Standard & Poor's, said the insurance sector would face large pay-outs because of catastrophe and energy claims. "A similar event of a similar magnitude would clearly be extremely damaging to the market at this stage," he said.

US forecasters say there is a 45 per cent chance of another hurricane hitting the Gulf Coast this month.

One sector benefitting from Katrina is oil producers. While Shell and BP had to close down most of their Gulf of Mexico oil and gas production last week, analysts said they stood to benefit from the crisis.

"The loss of income for the producers is likely to be more than offset by the higher prices for oil and natural gas," said Neil McMahon, an analyst at US brokers Sanford C Bernstein.

The combined market value of Shell and BP rose by more than £8bn last week, with BP's capitalisation up by £5.1bn alone.

"BP will be better off than Shell," Mr McMahon said. It escaped mostly unscathed with seven small oil platforms toppled and another two leaning over. The combined production of those platforms was only 2,000 barrels of oil a day. BP produces around 360,000 barrels of oil a day out of the Gulf of Mexico, with the company hoping to resume production over several days, a spokesman said. None of its refineries was damaged.

Shell was less fortunate. A number of pipelines were shut, while its Cognac platform and the giant Mars Platform were damaged. It is unclear what the cost of the repairs will be at Mars, which cost more than £1bn to create, or when it will resume production.

David Stedman, an analyst at Daiwa Institute of Research, said the loss of Mars could be worth around $100m a week in lost revenue to its owners. Mars produces around 200,000 barrels of oil a day, with Shell the 71.5 per cent owner and operator, and BP owning the remainder. "Proportionally, Shell has been hit reasonably hard," he said.

BP has no insurance for its rigs and while Shell is insured for any damage, it is not covered for loss of production.

The Gulf of Mexico region - responsible for 30 per cent of US crude oil production - produces 1.37m barrels a day and 91 per cent of that production was closed due to the hurricane.

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