Analyst Sees Volcanic Ash Reducing Airline Cash Flows

Airlines may have to reduce fares to win back passengers after the volcanic ash crisis, a leading aviation financial analyst has told BTN. Chris Tarry also warned that carriers with limited cash reserves will be tested severely by the events of the past week, which cost the world's airlines more than $1.7 billion in lost revenue up to Tuesday, according to the International Air Transport Association.

Airlines may be tempted to raise fares to make up for lost business, but Tarry, an independent U.K.-based analyst, said this is impossible in the present economic climate, and the opposite is much more likely. "Globally, the airline industry only has to raise fares by an average of $15 to put itself on a healthy footing, but underlying demand is still weak even though we are through the trough," he said. "Unless there is more capacity discipline, they are not going to get fares up, and that is not going to happen.

"When crises like this are raised in the travel psyche, they tend to stay there for a while, so airlines may have to reduce fares as they have done for similar situations in the past," Tarry said.

Scientists have warned that the ash may return, the threat of which could deter discretionary travel over the next few months. That will concern airlines, which Tarry said have taken a big hit owing to lost revenue and additional costs associated with repatriating stranded travelers. "People talk about the impact on profits, but cash is the real problem," said Tarry. "BA made a big point this week of saying it has £1.7 billion of cash reserves and access to lines of credit, but for other airlines the situation is more serious."

With airlines already forecast to lose $2.8 billion in 2010 before this latest crisis, speculation is likely to intensify that carriers will resort to extraordinary restructuring measures, such as mergers. They are requesting government compensation, partly because many believe the shutting of large swathes of European airspace for six days was an overreaction.

"The scale of the crisis eclipsed 9/11, when U.S. airspace was closed for three days," said Giovanni Bisignani, IATA director general and CEO. "Airspace was being closed based on theoretical models, not on facts. Test flights by our members showed that the models were wrong."