ASH CLOUD: Crisis leaves lessons to be learned

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As the dust begins to settle on the volcanic ash cloud crisis, industry experts are highlighting two major lessons that can be learned to help protect airlines from similar events in the future: regulations governing cross-border mergers should be relaxed and cash is king.

The six-day shutdown of European airspace resulting from the ash cloud cost airlines $1.7 billion, according to figures from the International Air Transport Association. Carriers based in Europe were "disproportionately impacted" by the event because they have been prevented from spreading their geographical risk through global mergers, says Brian Pearce, chief economist at IATA.

UK flight disruptions board, Stephen Simpson/Fex Features
 Click here for more coverage of the impact on European airspace of the ash cloud
"US, Asian and Middle Eastern carriers with flights into Europe have seen their revenues impacted but they have networks elsewhere," says Pearce. "If it was any other global industry there would be production facilities in other countries, but because of the regulatory restrictions that prevent cross-border mergers airlines are not allowed to spread the risk." Pearce adds that for risk mitigation purposes "there is a strong reason to review the regulatory structure that prevents European airlines from becoming global".

Chris Tarry, chief executive of consultancy CTaira, believes the ash cloud crisis will hammer home to airlines the importance of maintaining strong cash reserves to enable them to cope with unforeseen events. "There's lots of talk about the effect on profits but it's the effect on cash that's key," says Tarry. "This all shows why cash is so important in this business. There is no magic figure for what the right amount is, but more is better than less."

Airlines with weak cash reserves will find it "increasingly challenging" to continue operating in the aftermath of the crisis, adds Tarry, and bulking up those reserves will be tough because "very few airlines can access new money on attractive terms". Raphael Bejar, chief executive of consultancy Airsavings, says that to help improve their cash position airlines need to "push direct sales and push all extra revenues to the maximum". He adds: "The question is not to sell more, but to sell better."

The potential impact on future bookings of passengers reluctant to fly due to the fear of being stranded by a similar event is difficult to predict, but Pearce points out that "when we've had these sorts of disasters in the past we've seen passengers returning". Tarry believes there could be a behavioural change among passengers and that "to encourage people to fly airlines will cut prices, so some good deals could come out of this".

IATA expects the airline industry to make a speedy recovery from the losses inflicted by the ash cloud crisis, noting that "people want to fly and goods are waiting to be transported". However, the organisation believes it will take three years for the industry to recover from the effects of the global economic downturn.