Volcano Costs To Airlines Reach $1.7 Billion, Some Carriers In Jeapordy

The cost of the Iceland volcanic eruption to airlines has reached $1.7 billion and it has risen at a rate of $400 million from April 17 to 19 period. Some of Europe’s largest airlines may be in line for government bailouts soon. The International Air Transport Association which has over 230 member carriers says that the event has had some very minor benefits including a $110 million less per day fuel cost savings.

But, the fuel savings will do little to help airlines which have experienced huge losses over the last two years and suffer from ballooning pension obligations. British Airways is first among these. If  the carrier’s financial situation deteriorates further, it could jeopardize its merger with Iberia.

Giovanni Bisignani, IATA’s Director General and CEO said “For an industry that lost $9.4 billion last year and was forecast to lose a further $2.8 billion in 2010, this crisis is devastating. It is hitting hardest where the carriers are in the most difficult financial situation. Europe’s carriers were already expected to lose $2.2 billion this year—the largest in the industry.”

The liquidity issues could eventually force bankruptcies and M&A to increase in an industry where these events are already commonplace. UAL (NASDAQ: UAUA) has recently had merger discussions with Continental (NYSE: LLC). Each of the airlines has extensive operations to Europe. While the cost of the disruption is not known, most airlines run on razor-thin margins. Continental made only $1 million in operating income on $3.2 billion in revenue in its most recently reported quarter.

The airlines most at risk for deep financial problems are Irish operator Ryanair, which carried 57 million passengers last year, Air France, which carried 32.5 million, and Lufthansa, which carried 42.1 million. Each has its major hub at the center of the cloud of volcanic ash. The Iceland volcano is still erupting and it is unclear when airlines will be able to resume their normal schedules. It is not hard to imagine a major European flag carrier going into Chapter 11. Swissair effectively did that in 2002.

There is no accurate estimate of how long the financially troubled carriers like BA will keep their heads above water, but it cannot be much more than a month or two, at least not without government help. Now that banks are back on their feet, national governments have money to spare.

Douglas A. McIntyre