Airline industry comes to terms with ash cloud impact

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A cloud of uncertainty over the extent to which airlines and airports will be able to recover losses sustained during April's closure of European airspace has replaced the cloud of volcanic ash responsible for the shutdown. As the threat of further flight disruptions linked to Iceland's still-active Eyjafjallajökull volcano still remains, industry figures are voicing scepticism about proposed state aid measures and criticism of Europe's controversial passenger rights legislation.

European airlines in particular have been left reeling from the unprecedented week-long closure of the continent's airspace, which IATA estimates cost the industry as a whole $1.7 billion in lost revenues. The Association of European Airlines estimates its members lost €850 million ($1.08 billion) during the nine-day period surrounding the ash cloud crisis. ACI Europe puts the losses for European airports at €250 million for between 15 and 20 April.

These losses are unlikely to be recovered through state aid measures approved by European transport ministers in early May, says ACI Europe director general Olivier Jankovec. "[State aid] was discussed at the transport ministers' meeting but there was not a lot of support for it," he says. "Some countries said they wouldn't do anything, others said they could look at it positively, but nobody took any leadership. My fear is that not many will get compensation for this. The airline industry is applying pressure at national levels, so we will have to see what governments ultimately decide. But, based on the way governments have reacted so far, I don't think a lot will be done."

voclanic ash departures board (445) rex features 
 ©Rex Features
As part of measures put forward by European transport commissioner Siim Kallas, member states will be able to compensate their airlines and airports for direct losses associated with the ash cloud in the same way they were able to provide compensation to companies affected by the closure of US airspace following the 11 September 2001 terrorist attacks. However, Jankovec points out that while member state governments were "calling the European Commission to ask how they could compensate their airlines" after 9/11, things are different now.

$1.7bn 

 IATA estimate of airline sector lost revenues from ash cloud disruption
"This time no government has called the Commission because they all have tight budgets," Jankovec says. Andrew Clarke, air transport policy adviser at the European Regions Airline Association, echoes this view. "The fact that states are permitted to pay out under European law doesn't mean they will," he says. ERA has asked the European Commission to provide the airline industry with centralised access to existing European Union emergency funds, instead of relying on individual member states for compensation. It has so far received no response.

Aside from the issue of whether compensation will be forthcoming, some airlines are opposing the idea of using any state aid to help recoup ash cloud-related losses due to fears that it could distort the market. One such carrier is Finnair. "Our logic comes from the fact that the problem in the airline business has been chronic overcapacity, and one of the reasons for this is that the state has been supporting airlines that have no viability," says Finnair chief executive Mika Vehvilainen. "My fear is that this will again be used as leverage to support airlines that wouldn't otherwise have the means to exist anymore."

Finnair lost €20 million in revenues as a result of the ash cloud crisis, but the impact does not end there. "Passenger loads will be down, which will have another financial impact. [Passenger] compensation is an open issue that might add more losses, so the financial consequences are still open," says Vehvilainen.

Despite his opposition to state aid, however, Vehvilainen does not rule out the possibility that Finnair will eventually make an application: "It's better not to go down this path at all. But if the EC agrees to hand out compensation, we are not foolish enough not to have our hand out. We will seek to get our fair share."

 $1.1bn

Estimated revenues lost by AEA members from disruption
Lufthansa is also morally opposed to compensation in the form of state aid, but would apply for it if other airlines did so. "We are not seeking compensation from the government," it says. "We don't want to see subsidies in the aviation industry, but if compensation is handed out on a large scale in Europe then, of course, Lufthansa would ask for its fair share. But you won't see Lufthansa being a frontrunner on asking for compensation."

Vehvilainen does not believe criteria set out by the EC to ensure that compensation can only be claimed for losses directly related to the ash cloud will prevent false claims. "I'll believe it when I see it. It will be very difficult to come up with exact measures," he says. David Henderson, manager information at the Association of European Airlines, is also keen to see that strict criteria are met to ensure that compensation is "strictly limited to identifiable losses directly related to the volcano". Otherwise, he adds, "some struggling airlines might see this as an opportunity for a financial injection beyond the losses related to the volcano, using it as a smokescreen".

Henderson is more optimistic than Vehvilainen about the ability to easily quantify volcano-related losses. "It should not be too difficult for airlines to present these accounts," he says.

One theme that appears to unite airline industry executives, as they pick up the pieces from April's disruption and brace themselves for the possibility of further ash cloud chaos, is the thorny issue of EU passenger rights legislation. Under EU law, airlines are obligated to cover the costs of feeding and accommodating passengers affected by delayed or cancelled flights. Despite fierce opposition from airlines, the EC is not treating the ash cloud crisis as an exception to these rules.

 $317m

 Amount ACI Europe says ash cloud crisis cost airports
"This is the only piece of EU legislation that we're aware of that imposes unlimited liability on commercial companies for events outside their control," says ERA's Clarke. "This law is grossly unreasonable and the EU should refund these costs to airlines." AEA's Henderson is equally scathing. "The very complicated wording of the regulations is not up to the task of dealing with a situation like this," he says. "It lasted a week, it could have lasted a month or more and the airlines could have run out of money. This was a nonsensical application of the rules. Airlines cannot just write a blank cheque for stranded passengers."

Finnair's Vehvilainen is so incensed by the regulations that his airline is refusing to cover expenses incurred by passengers during the days when European airspace was closed. Finnair is prepared to go to court to fight against the application of passenger rights rules during this period. Vehvilainen says the carrier "declined to pay compensation to passengers for the period in which the airspace was closed", on the grounds that "when we can't provide an alternative product, the only right is a refund of the ticket price". Finnair's refusal to abide by the legislation will likely be "settled in court", he says, adding: "We are not the only airline that's taken this view. Some airlines have agreed to pay compensation and some haven't. We took liability when the airspace reopened, but in the middle period we refused."

The EU is currently carrying out a review of the passenger rights legislation and a report is due to be released by this summer. However, Clarke points out that "any change to the regulation is unlikely to be in place before the end of 2012", meaning that airlines will have no choice but to continue paying out in the event of further ash cloud-related flight disruptions.

Despite the harsh body blow dealt to the airline industry by the ash cloud crisis, recovery from the incident is expected to be relatively quick. IATA chief economist Brian Pearce points out that "when we've had these sorts of disasters in the past, we've seen passengers returning". AEA's Henderson adds: "Nobody is too worried about demand returning. This is not seen as having an ongoing effect like terrorist activity." Finnair's Vehvilainen expects business demand to recover "almost immediately" and, while leisure demand will take longer, "it will be weeks rather than months".

Germanwings chief executive Thomas Winkelmann estimates the closure cost it about €2 million a day, and led to "an enormous drop in bookings - not only people who were cancelling, but in bookings coming in". He points to the impact on load factors that followed. "The first week after the airspace reopened our seat load factors were in the 60s. You shouldn't be in the 60s in April, you should be in the 80s with our business model. We had enormous no-show rates and that was business travellers who had cancelled their plans," he says.

80% 

Amount of European airports paralysed by ash cloud on 18 April
On the airport side, ACI Europe's Jankovec says the losses sustained during the airspace shutdown amount to "lost business", which "won't be recovered". He adds that "there is a question mark about the medium-term impact", with the possibility that leisure passengers "may postpone their trips until it all settles down".

Highlighting the extent to which Europe's airports were affected by the shutdown, Jankovec says: "At the height of the crisis, on 18 April, 313 airports across Europe were totally paralysed, representing 80% of the network. The impact has been dramatic - there was a loss of aeronautical revenues and a loss of commercial revenues, so it was a double whammy."

Airline and airport executives feel the ash cloud crisis has kicked an industry which was already down on its knees, and they have effectively been left to fend for themselves and suffer the consequences of something that was beyond their control. As Jankovec puts it: "We did not press the volcano button."

PHOENIX FROM THE ASHES 

One positive thing to have come out of the volcanic ash cloud, which closed down Europe's airspace for almost a week in April, is that it has put plans to implement the Single European Sky project firmly back on the European Commission's agenda.

European Union transport ministers met in early May and agreed that they would give "the highest priority to the acceleration and anticipation of the full implementation of the Single European Sky". Among the measures agreed on by ministers to speed up the introduction of SES are the nomination "without delay" of a functional airspace blocks co-ordinator, and the appointment of a European network manager before the end of this year.

ACI Europe director general Olivier Jankovec hopes the chaos caused by the ash cloud will put fire under the EC to end the fragmentation of Europe's airspace. "Over the last year and a half we've seen momentum growing for the Single European Sky. The ash cloud will reinforce that momentum, but a lot needs to be done at national level," he says. "Hurdles are still there but this puts more pressure on states."

Jankovec adds that if SES had been in place, "we could have reopened part of the airspace much more quickly". Germanwings chief executive Thomas Winkelmann agrees. "I think the most important lesson we have learned is that this is a master example that we urgently need a Single European Sky," he says. "We had absurd situations, like in Cologne - the Belgian airspace was open and the Dutch airspace was open. Cologne is two miles from Belgium and Holland and we were closed. This shows that you need one international organisation."

However, Graham Lake, director general of the Civil Air Navigation Services Organisation (CANSO), counters that "the reasons for the specific closure of airspace due to volcanic ash were nothing to do with a Single Sky, or lack thereof". He cautions: "We must be careful not to draw the wrong lessons from the ash cloud incidents," adding that "there are important points to do with airspace co-ordination and management which SES would hope to address that are relevant to how the ash cloud situation was dealt with, but...it should proceed carefully and not in response to short-term political pressures."

Despite this cautious approach, Lake admits that the level of communication and co-ordination about the expected length of time of airspace closures, and the speed with which airspace could have been reopened, may have been quicker under a Single European Sky. "But I must repeat that SES does not alter the effects of ash on an aircraft engine," he says. "Until we know more about that, we risk a similar event in the future."