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BA demands government compensation as airlines watch reserves go up in smoke

Airlines facing a tougher crisis than after 9/11 are queuing up for a bail-out, as the cost to the economy of Iceland's volcano continues to rise. Sarah Arnott reports

Tuesday 20 April 2010 00:00 BST

British Airways (BA) is adding its voice to European airlines' calls for government compensation for the financial impact of the volcanic ash cloud. The eruption of Eyjafjallajokull in Iceland could not have come at a worse time for Europe's battered aviation sector. After a year that saw the global industry's losses top $9bn (£6bn) – clobbered first by unprecedented fuel costs and then by a collapse in demand – air travel was showing some signs of recovery in early 2010. But that was before last Thursday, when a plume of volcanic ash settled invisibly over Northern European airspace, and shut down all air travel – costing the industry an estimated $200m every day.

The crisis comes at a particularly bad time for BA, just weeks after a two-phase strike which cost the embattled flag carrier between £40m to £45m and put a dent in its public image. In the wake of last week's eruption, BA is estimating costs of between £15m and £20m per day for the combination of lost passenger and freight revenues, plus the need to support passengers trapped abroad.

Although keen to stress that they have more than £1.7bn in cash, set aside for just such a crisis, BA is supporting calls for financial assistance under European Commission rules that allow member states to compensate companies for damage caused by natural catastrophes.

"There is a precedent for this to happen 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," Willie Walsh, BA's chief executive, said. "We welcome the EU's initiative to address the economic consequences of the airspace closure on the air travel industry and the wider European economy. We are also in touch with the UK Government, which has set up a group to work on this issue as it recognises the impact on airlines and the contribution that aviation makes to the British economy."

BA is not the only airline to be feeling the strain. No-frills Ryanair will not put a figure on its costs, but has cancelled all flights in affected areas until Wednesday, which adds up to more than 950 flights per day. Rival Easyjet said yesterday it has cancelled 85 per cent of its schedule over the last five days, at a cost of around £5m per day.

Amidst such losses, airlines are upping the pressure on regulators including the National Air Traffic Services (Nats) in Britain and Europe's Eurocontrol air-safety organisation to reassess the blanket ban on air travel.

Giovanni Bisignani, the director general of the International Air Transport Association (IATA), yesterday described the crisis affecting millions of passengers as "a European embarrassment and a European mess". He rounded on political leaders for failing to cooperate on a suitably flexible response. "This crisis is costing airlines at least $200m a day in lost revenues and the European economy is suffering billions of dollars in lost business," he said. "In the face of such dire economic consequences, it is incredible that Europe's transport ministers have taken five days to organise a tele-conference."

Flights are cancelled over concerns that the mix of glass, sand and rock in the ash can damage aircraft engines and cause them to fail. But test flights from a string of carriers – including BA, Air France-KLM and Lufthansa – showing no discernible effect from the ash, is raising pressure for a rethink.

The Association of European Airlines and airports group ACI Europe echoed criticism that Europe is over-reacting. "The eruption of the Icelandic volcano is not an unprecedented event and the procedures applied in other parts of the world for volcanic eruptions do not appear to require the kind of restrictions that are presently being imposed in Europe," the organisations said in a joint statement.

The main criticism is that European watchdogs are using computer models of theoretical volcanic output and local wind speeds to estimate affected areas, and then banning all flights. In comparison, the system in the US tracks eruptions using a satellite to establish the spread and concentration of the debris, and allows airlines to shift flight plans to keep flying as far as possible but avoiding affected areas.

BA's Mr Walsh said: "The analysis we have done so far, alongside that from other airlines' trial flights, provides fresh evidence that the current blanket restrictions on airspace are unnecessary. We believe airlines are best positioned to assess all available information and determine what, if any, risk exists to aircraft, crew and passengers."

The British Airline Pilots' Association (Balpa) also put pressure on the government yesterday, warning that the potential financial impact "could not be more serious for an industry already reeling from the economic downturn", and calling for a bank-style bail-out. "The Government needs to step in and show the same approach it took to keeping banks afloat; if it fails to act it will find that an equally important foundation of our economy is lost," Balpa said.

Alongside the criticisms over the blanket ban on flights, Balpa also raised concerns over the financial impact of EU 261, the regulations setting out airlines' responsibilities in the event of flights being delayed or cancelled. The rules should be loosened because volcanic ash constitutes sufficiently "extraordinary circumstances" to obviate the payment of compensation, for example, says Balpa. "The EU needs to act as their delayed passenger compensation scheme was never designed with this situation in mind and is now crippling our industry," the organisation said.

The volcano crisis could tip vulnerable companies over the edge, insolvency specialist Begbies Traynor is warning. The group estimates that the number of airlines in distress was already running some 40 per cent higher than a year ago, thanks to resolutely weak demand, fluctuating fuel prices and ever-increasing competition.

And the current crisis could precipitate a rash of failures. "This disaster has come at a deeply vulnerable time," Nick Hood, a partner at the company said. "With the airline industry already in such heightened distress, companies without substantial cash reserves will be at grave risk of failure."

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