Thousands stranded as Icelandic fallout grounds Sterling

The budget Icelandic airline Sterling grounded its fleet and filed for bankruptcy yesterday, leaving thousands of travellers stranded across Europe, including up to 700 at Gatwick.

Attempts to save a carrier already struggling against the toxic combination of rising fuel costs and falling passenger demand were dealt a final blow by the Icelandic financial crisis which saw three of its largest banks taken into government ownership.

Sterling's Icelandic backer Palmi Haraldsson had already put up a cash injection of 444.5m Danish crowns (£47.4m) between July and September this year. But then the money dried up. "Over a three to four week period, the whole financial system melted down, and that resulted in our shareholder being unable to continue his support for the company," the company said yesterday. Despite talks with several other potential investors, the Copenhagen-based carrier has found it "impossible to make ends meet".

The business flew a fleet of 27 Boeing 737s to 40 European destinations from hubs in Copenhagen, Oslo and Stockholm. The company was already conducting a major restructuring to cope with the rising oil price and an aggressive expansion plan that left it exposed to stagnating demand.

In the aftermath of yesterday's collapse, Sterling said that it could offer customers no refunds, nor would any return tickets be redeemed. Scandinavian rival SAS stepped up to offer stranded passengers free carriage back to Denmark, and Ryanair launched a €100 (£79) rescue fare for flights returning to Aarhus, Billund, Gothenburg, Oslo and Stockholm.

Sterling adds its name to a growing list of airlines pushed out of business by trading conditions that Willie Walsh, the chief executive of British Airways, earlier this year branded as the "worst ever" for the aviation industry. More than two dozen smaller carriers have gone to the wall, including Zoom, Silverjet and Oasis, and the major flag carriers are also feeling the pinch – as last week's profits warning from Air France-KLM illustrated. The International Air Transport Association also confirmed last week that the number of passengers flying dropped by 2.9 per cent in September, the first monthly fall for five years.

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