Zoom and bust: Airline collapses but 'worse is to come'

The collapse of Zoom, the budget airline, left 4,500 passengers stranded, another 60,000 with unusable tickets, and more than 600 people without jobs. But expect more of the same, and worse, to come, warn experts.

The spectacular demise of the Canadian carrier this week brings the list of airlines bankrupted by the vicious combination of sky-high fuel costs and wary consumers to more than two dozen. None are safe and the roll call of commercial ruin spans both the globe and the spectrum of services – from business class-only ventures like Silverjet and Eos, to Oasis in Hong Kong, EuroManx from the Isle of Man, and a slew of US carriers including Aloha, ATA and SkyBus.

And last night, Alitalia said it had filed for bankruptcy protection, taking the first step in a plan to restructure and downsize Italy's failing national carrier. The company said in a statement that its board had asked the government to appoint an administrator and had declared insolvency to a Rome court.

Alitalia has been losing some €2m (£1.6m) a day – hurt by labour unrest, competition from budget airlines and high fuel prices. Its shares have been suspended from trading since June.

Even the survivors are having a hard time. Industry stalwarts like British Airways are seeing profits crashing; smaller companies, like Ryanair and Aer Lingus, are reporting losses.

"We've had all sorts going bust – full service, low cost, high end, long haul and short haul – because all buy petrol and all have customers getting poorer," Andrew Lobbenberg, an aviation analyst at ABN Amro, said. "There have been lots of failures already, and there will be more."

Worse still, the bankruptcy rate is set to accelerate as price wars over dwindling customers eat even further into cash reserves, just when the sector enters its usual annual dip.

The summer months are the best time for airlines, with cash balances high on the strength of forward bookings. But by January, cash is running low, strained by sustaining the normal off-season losses. For those airlines already running on empty, the lean winter months could spell disaster.

Add to that the looming expiry of fuel-cost hedging arrangements, which are currently warding off the worst excesses of the oil price, and the difficulty of raising additional funding, and the picture is bleak. Gert Zonneveld, an analyst at Panmure Gordon, said: "Zoom is by no means the end. It is inevitable there will be more bankruptcies as airlines currently flying on vapour realise it's not going to work. The reason it doesn't look so bad yet is because a lot still have good hedging in place."

Picking the survivors is not easy. A report from Blue Oar Securities this month listed some 50 European carriers under threat, including Flybe, bmi and Monarch in the UK. But most experts agree that cash is the key. Mr Zonneveld said: "It will all depend on the airline's cash position, fuel hedging and the ability to access extra funds. But the situation is pretty dire."

The mood within the industry is equally grim. This month, Willie Walsh, the chief executive of British Airways, described the situation as "the worst trading environment the industry has ever faced". Fuel is currently costing BA £8m per day. The result is a 90 per cent fall in profits in the last three months. In response BA is closing down little-used routes and cutting its capacity by 3.1 per cent from October.

Ryanair, which announced a quarterly loss of €91m last month, is also cutting back. So far it has grounded 19 planes. It is also freezing staff pay.

How to protect yourself if carrier goes bust

The best way to protect yourself if an airline goes bust is to make sure you book by credit card. If the cost of your flights is £100 or more, your credit card company will fully reimburse you. If you pay by debit card, or with cash, you have no such protection.

Booking through an agent, online or otherwise, should also afford you an additional level of protection – unless you are booking tickets for a budget airline (such as Zoom). Agents such as Ebookers, Expedia and Trailfinders are covered by Atol, an organisation which collects a bond from airlines and tour operators, which can be used to compensate customers in the event they go bust. If you book your flight direct from the airline, however, you won't have this protection. If you are booking from an agent, and are paying by debit card, check that they are Atol-protected. Beware that aggregators, such as Kayak.co.uk, will not be Atol-protected.

Another level of protection against your airline going bust is travel insurance. However, most insurers won't cover you against insolvency, so you'll need to seek out a specialist policy using an insurance broker. To find a broker, visit www.biba.org.uk.

If you have no choice but to find a new flight immediately, then you'll probably have to pay more than you did for your original flights. Unfortunately, travel insurers won't cover you for the difference. However, some travel agents, such as Trailfinders, guarantee to ensure customers suffer no financial loss in these circumstances, and will get you on to an altern-ative flight at no extra cost.

James Daley, Personal Finance Editor