Big rise in premiums may ground UK airlines

Terror in America: Aviation

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Airlines have warned that services could be grounded from Tuesday unless the Government agrees to underwrite the cost of insurance.

The news came yesterday as the crisis in the world airline industry deepened: British Airways axed 7,000 jobs, a UK carrier collapsed and budget airlines began offering seats for as little as two pence in a desperate attempt to lure back passengers.

BA, Virgin Atlantic, and other leading airlines have warned they might have to stop flying within days because insurance companies have threatened to cancel cover for war liabilities from midnight on Monday. In a letter to Stephen Byers, the transport secretary, the 12 airlines said the reduced insurance cover would put them in breach of their contracts with the aircraft-leasing companies and force them to ground their planes.

Rod Eddington, chief executive of BA, said: "Clearly there is a war risk issue and we are talking to the insurers."

BA announced yesterday that it is cutting its 56,000-strong workforce by 12.5 per cent, grounding 20 planes and reducing capacity by 10 per cent. It warned that further cutbacks would be made if the market outlook continued to deteriorate.

The Government's determination to press ahead with proposals for a tax on aviation fuel was described yesterday as "lunacy" by airlines hit by the impact of last week's atrocities.

Mr Eddington said: "We face exceptional conditions which have forced us to take very tough decisions." He said the terrorist attacks in the United States would have a "significant" impact on air travel and he refused to rule out compulsory redundancies.

Details of the cutbacks in services will be announced next week and will affect transatlantic and short-haul European flights, with BA expected to pull out of some routes altogether.

He also confirmed that BA was reviewing its aircraft orders with Airbus ­ the first sign that the European plane maker could be forced into the same kind of production cuts as its US rival Boeing. BA has 43 short-haul Airbus A318 A319 and A320 jets on order.

Meanwhile, there was growing anger over the collapse of Gill Airways, based at Newcastle upon Tyne, after Bank of Scotland withdrew its funding. The airline, which employed 240 people, ran into trouble when its insurance premium was increased by £340,000 after last week's attacks.

The airline's chief executive, Malcolm Naylor, said the board was "shocked" at the bank's decision, claiming the airline had enjoyed a period of profitable trading since it was refinanced earlier this year.

In an effort to tempt passengers back into the skies, the no-frills airline easyJet last night launched a £500,000 advertising campaign to promote what it claimed was its biggest ever ticket sale. The airline is offering 150,000 seats at low prices. Examples include return flights from Luton to Edinburgh and Glasgow for £25, including airport taxes, and returns to Barcelona, Madrid and Majorca for £35.

But some of the cheapest deals are being offered by Ryanair which is selling one-way tickets from Gatwick to Dublin this weekend for just two pence and flights from Cork to Stansted for as little as IR£4 (£3.30). The low-cost airline Go is also offering reductions of up to 33 per cent on flights from Stansted. Return prices to Bologna and Venice have been cut from £75 to £50 while returns to Majorca, Prague, and Rome, have been cut from £85 to £60.

The low-cost carriers have been hit by the downturn in air travel, but not as badly as the full-service flag-carriers such as BA. BA's shares sank to a 10-year low of 143p yesterday, valuing the airline at just £1.6bn ­ some £300m less than the stock market value of Ryanair, which is a sixth of the size. Since Tuesday last week BA's shares have fallen by 46 per cent.