The aviation industry faces a major shake-out

Global cooling; Telecoms surge Â

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As the smoke clears from the rubble of Manhattan's defiled skyline, one thing is clear. Tuesday's shockingly murderous attack on America is turning into a disaster of epic proportions for the world's airlines. When the body count is climbing and the civilised world is still reeling in disbelief at such barbarity, to be concerned about the fate of an industry, even one as big as aviation, may seem banal.

But America was the birthplace of modern aviation and, more than any other nation in the world, it personifies the way in which air travel has revolutionised how we live, work and think. All that may be about to change in the most fundamental fashion, perhaps in ways we have not yet begun to think about.

The prognosis being spelt out by some analysts yesterday as dire. A 50 per cent fall in US domestic air travel next year. A collapse in transatlantic travel of 25 per cent and perhaps considerably more, with the contagion spreading to other aviation markets.

Airlines face the prospect of being caught in a pincer movement of plummeting passenger numbers on the one hand and spiralling costs on the other. Take passenger numbers first. The Gulf war a decade ago frightened people off air travel for quite a while but eventually they came back. The manner in which Tuesday's obscene attacks were perpetrated promises to have a much more profound impact on passenger psyche. Tourists will no longer fly to New York for a weekend's shopping when they can take the train to London or Paris. And why should companies take the risk of putting their executives in the air when a teleconference could do the job just as well?

Then there are the strengthened security precautions, of which longer check-in times and more stringent body checks, are the most obvious. This will have two effects. First, it will make air travel less convenient and more time-consuming, eating into its natural advantage over other forms of transport. Second, it will wreck airline schedules, reducing the volume of traffic that can be handled and changing the whole economics of air travel.

That means a new era of higher fares, fewer companies and less choice. Some carriers will adapt but the bigger they are, the harder they may find it to adjust their cost bases accordingly, even if they abolish their sales forces and make every passenger book on the internet. Survival of the fittest will become the name of the game, which means we can expect failures.

Global cooling

A small group of young City traders are gathered in a bar. They are all foreign – German, French, Spanish – but speak in a common language, English. Filled with the vitality of youth and still fired by the adrenaline of the morning's trading, they are killing themselves with laughter. "You know what her trading strategy is," one of them guffaws. "When there are more than 10 little arrows pointing up on her screen she buys, when there are more than 10 going down, she sells. It's as simple as that". The cheek of it. The recklessness and stupidity of it. And yet there she was, getting away with it, day after day.

That little window on a trader's world took place only last Monday, but it seems like an age away now. Indeed, it might almost belong to another era, a carefree, playful and innocent time, the time before two hijacked 767s ripped into the World Trade Centre and changed the capital markets for ever. For although eventually a semblance of normality will undoubtedly be restored, it is impossible to believe that things are going to return to the way they were for the great financial centres of New York and London.

In the immediate aftermath of any catastrophe, exaggeration and hyperbole reign supreme. Events that seem hugely significant and dramatic at the time, often turn out to have been of little long-term historical importance. Perhaps unfortunately, this is unlikely to be one of them. The geo-political and social consequences of Tuesday's outrage are still anyone's guess, but we can already begin to assess the likely damage to financial markets.

Set against the tragedy of these atrocities, what happens to financial markets may not seem of great interest but just dwell on it a little. Globalisation, perhaps the single most significant socio-economic trend of the late 20th century, has been fed and inspired by the growth in capital markets. They've just received a huge jolt, physically and psychologically, and it's knocked the stuffing out of them. Sure, the systems still work, the markets still operate, and the personnel are still largely intact. Things look grim right now but eventually volumes will recover and so will some of the old money making enthusiasm. The system seems robust.

But the self confidence, momentum and sense of purpose have gone. There have been periods of doubt before, not least during the Far Eastern crisis in 1997-8, when the sometimes devastating power of markets was seriously questioned. There was lots of talk and soul searching by western policy makers, but in the end the crisis went away and nothing was done. This time it's different, and potentially much more grave.

America, the inventor and for the past twenty years driving force behind global capital markets, has been attacked, and like any big beast when wounded, it feels besieged, angry and aggrieved. The natural response is to rein in, draw back, close up, and to replace openness and inquiry with rejection and hostility. People will travel less, do fewer deals, and generally conduct less business. People will stay at home, rather than venture out. There will be less dialogue, less contact, and the once unstoppable force of globalisation might, at least for a time, go into reverse.

The analogy shouldn't be stretched too far, but throughout the 1990s the capital markets have behaved like an imperialist force, spreading the benefits of free market capitalist practice and belief throughout the world. Not everyone has thought the process benevolent, and unsurprisingly, there's been a backlash. A new era of caution and suspicion is upon us, and it is unlikely to be an enlightened one.

Telecoms surge

One unlikely beneficiary of the attacks on New York and Washington is the beleaguered telecommunications industry. The volume of calls, both fixed line and mobile, is said to have risen hugely over the past week, while the internet, that great spent force of the New Economy, has experienced a new lease of life.

Unfortunately, the reprieve may be short-lived. Within a few weeks, the appetite for news and information, the need to call friends and loved ones, will begin to wane, and when it does, the telecommunications industry will be left facing exactly the same problems as it had before.

Indeed, the situation may be even worse. If the economy slips into recession, call volumes, both voice and data, will suffer accordingly. Some telecom executives take the view that less travel might mean more business transacted over the phone and the internet but it's a slender hope to cling to.

j.warner@independent.co.uk