As volcanic ash spreads in Europe, threats to economic recovery seen

Eric Reguly

The air travel suspension in much of Europe threatens to spread more economic damage through economies still struggling to emerge from the brutal recession.

In Britain, the biggest supermarket chains said some fresh foods will go missing from shelves as imports from Africa and Asia can’t make it in. European flower shops everywhere may soon have scant offerings because hundreds of tonnes of Kenyan flowers destined for the export market lie rotting. And logistics companies warned that the freight logjam could hurt manufacturers that rely on steady air cargo deliveries.

No economist predicts disaster – yet. But there is no doubt that the longer the Eyjafjallajokull volcano belches ash, the greater the economic danger. While airlines hope to fly up to about half their regular schedules Monday, the potential for long-term air travel disruption still exists. Records show that the last time the Icelandic volcano stirred, in 1821, it erupted on an off for two years.

Not only are Europe’s economies struggling to rebound from the financial crisis, the continent is also battling a debt crisis that for now has hit Greece, Spain, Portugal and Ireland the most, but has scared off international investors, in turn hurting the euro common currency.

Economists believe manufacturers would eventually adapt to missing air freight deliveries, as trucks and trains take up the slack. But they fear that tourism, one of the most important European industries, could be gutted.

“If the disruption is longer and recurrent over a period of months, the damage to the tourism industry might be substantial, as it would remain mostly dependent on customers from Europe, where the growth outlook is weak,” Marco Annunziata, economist in London for Italy’s UniCredit bank, said in an interview Sunday.

The volcanic ash has eliminated much of the air travel to Europe as well as within Europe. That has cut off the supply of overseas tourists who had been lured by the relatively cheap euro, pound and other European currencies. While hotels around airports are now packed with stranded airline passengers, longer-term disruption would certainly reduce occupancy rates throughout Europe.

The European hotel industry has yet to recover from the recession. STR Global, a hotel market research firm, said European hotel occupancy rates were 61.1 per cent in 2009, down from 65.1 per cent in the previous year. Average per-night rates fell 11 per cent over the period.

“The major uncertainty here is how long air travel will be disrupted, how long it will take for things to go back to normal and how often disruptions may reoccur in coming months if the volcano remains active, as scientists seem to expect,” Mr. Annunziata said.

Since Thursday, about 63,000 European flights have been cancelled, some 20,000 of them on Sunday. On Saturday, the European aviation agency Eurocontrol reported that just 6,000 flights, or 27 per cent of the normal level, were made.

As hub airports such in London, Paris and Frankfurt remained closed over the weekend, airline consultants estimated that the shutdown could affect one million passenger and cost the airlines $1-billion (U.S.) in lost revenues. The longer-term damage will depend on how many business and tourist travellers will rebook flights after the skies are declared safe for travel.

By Sunday night, however, there were encouraging signs that some of the travel restrictions would be lifted today. Several airlines, among them KLM, the Dutch arm of Air France-KLM, conducted weekend test flights at regular cruising altitudes. Initial inspections reported no damage from the fine-grain silicate in volcanic ash, which can kill jet engines and sandblast cockpit windows. Air France, Lufthansa and Austrian Airlines also conducted test flights, although most travelled below the altitudes where the ash has been heavily concentrated

Peter Hartman, the CEO of KLM, was on the test flight. “We have found nothing unusual, neither during the flight or during the first inspection on the ground,” he said in a statement, adding that he hopes “to get permission as soon as possible to partially restart our operations.”

On Sunday night, the European Union announced that European air traffic could return to about half of normal levels on Monday. In Brussels, EU Transport Commissioner Siim Kallas told reporters that “it is clear that this is not sustainable. We cannot just wait until this ash cloud dissipates.”

On Friday, two days after the volcano erupted, shares of Europe’s largest airlines – Air France-KLM, BA and Lufthansa – fell by 3 per cent or more. Emirates, the airline of Dubai, revealed on Sunday that the European air travel restrictions were costing it $10-million a day.

The Financial Times reported yesterday that the European Commission is considering a waiver of state aid rules, which would allow EU countries to support airlines, most of which have lost horrendous amounts of money during the recession, with emergency funding. The last time airlines received emergency assistance was in the wake of the Sept. 11, 2001, terrorist attacks.

The havoc created by the travel ban has also proved costly to the airports themselves, which depend on landing fees for about half their income.

While airlines and courier companies such as DHL and FedEx were hit, hotels, car rental agencies, ferries and train and bus services were reporting a booming business as stranded air passengers sought lodging or alternative routes home. Some passengers were making overnight train trips between northern and southern Europe, while others were paying outrageous fees for long-distance cab rides. One was the actor and comedian John Cleese, who reportedly paid £3,300 ($5,100) for a 1,500-kilometres cab ride between Oslo and Brussels.

Ferry operator P&O said it carried 6,000 foot passengers across the English Channel on Friday, compared with a normal 100 to 200 people.