11 September 2001>News Stories>Airlines bankruptcy warning

Airlines bankruptcy warning

London, Sept. 14

US airlines face tough new safety measures

Losses are mounting for airlines around the world, and the bankruptcy of some carriers is looking increasingly likely, following the terrorist attacks on the US.

And the European Union said on Friday that it feared the attacks could have serious consequences for the air transport sector, adding that it will monitor events to avoid a crisis in the sector.

Share prices of airlines have fallen sharply since the attacks as brokerages and credit agencies have cut their the financial outlook for the firms.

And carriers themselves have begun to issue initial statements of their expected losses.

The International Air Transport Association (IATA) has estimated that this week's flight cancellations will cost the air industry $10bn (6.81m).

On top of the cost of at least a week of severe disruptions, airlines are likely to face a sharp decline in passenger numbers over the next months.

The air industry was already under financial pressure before the attacks, because of a slump in demand due to the economic downturn and high jet fuel prices.

'High instability'
"The airline industry is cyclical," Professor Rigas Doganis, former head of Olympic Airways, told the BBC Radio 4's Today programme.

"It seemed as though we were on the edge of a downturn. What has happened will almost certainly push us over the edge.

"Airlines have been losing money in the last few months and it now seems these losses will increase dramatically."

The short-term losses springing from the severe disruption and cancellations over the past week could eventually seem small in comparison with the losses from dwindling demand for tickets.

"We will see a period of high instability, a number of airlines will probably collapse, there will be a period of consolidation and the air industry in four to five years time will look very different to how it does today," Professor Doganis said.

Series of downgrades
The outlook for the US industry looked sufficiently bleak for credit agency Standard and Poor's to downgrade its ratings of the corporate credit and loans of all US airlines.

The agency has also placed Air Canada and British Airways on credit watch because of these companies' substantial dependence on traffic to the US.

The price of British Airways shares has fallen by more than one third this week, sliding 15.8% on Friday alone.

Higher security will add to airlines costs

EasyJet stock has lost 30% of its value over the week, while shares in Air France and Lufthansa both lost over 10% on Friday alone.

Schroder Salomon Smith Barney has downgraded the entire European airline sector, saying the terror attacks were likely to have a "catastrophic effect" on airline profitability.

US airlines are planning for falls in demand of 30-50% during the next six months, Chris Avery, aviation analyst at JP Morgan told the Financial Times.

And grounding aeroplanes, rather than flying empty seats around the world, may be one of the ways which airlines can try and save costs.

Asia hard hit
Asian airlines - which were already in financial difficulty and who fly a heavy proportion of transatlantic flights - are also expected to be hard hit.

US routes account for as much as 25% of all business of many Asian carriers, and All Nippon Airways has said that it is losing 60m yen ($502,200) a day on the cancellations.

Korean Airlines said its immediate revenue loss stemming from attacks was 15bn won (7.88m, $11.5m) while the country's second-ranked Asiana Airlines put its losses at about 5bn won (2.63m, $3.86m).

Korean Air shares fell 6% at the close on Friday and Asiana dropped 11%.

Taiwan's largest carrier China Airlines, which derives 20% of its revenues from Taiwan-US routes, fell 7%.

And Asia's biggest listed airline, Singapore Airlines, shed nearly 6% of its value.

Security costs
Tighter security measure will hike costs for the airlines and deter passengers.

The US has already introduced new measures including strict screening, a ban of checking in baggage outside the airport, and a total ban on knives and scissors.

And even tighter measures are likely to follow, with America's IATA saying it would like to see as many airlines as possible to introduce scanning systems which identify passengers by palm-prints or the iris of the eye.

Delays in processing passengers will slash terminal capacity, probably forcing the busiest airports to scale down their peak-hour operations, according to analysts.

Studies have shown that even a one-minute delay for the average passenger could significantly cut terminal capacity.

"I think in the near term you are going to see US airports will be near paralysed, because they will go overboard on security," said Peter Harbison, an analyst at the Centre for Asia Pacific Aviation.

'Blackest day'
One industry expert dubbed the attack "the blackest day aviation has had," with other catastrophes, such as the 1988 Lockerbie bomb, paling in comparison.

The attacks will affect both bookings to and from the US.

While there is expected to be a dramatic decline in passengers to the US, American tourists are expected to cut back on their international holidays.

As seen during the Gulf War, US tourists are likely to be concerned about becoming targets of terrorists when travelling outside their home country.