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Thursday, 20 September, 2001, 08:42 GMT 09:42 UK
Q&A: The outlook for Europe's airlines

European airlines fear for the worst as panic after the attacks on the US compounds the effects of an economic slowdown. BBC News Online explains why they are desperate for financial aid, just like their US rivals.

How bad is the financial outlook for European airlines?

Although US airlines have been hit harder by the attacks of last week, the European airlines also face falling passenger numbers, added security costs, falls in their share prices and increased insurance premiums.

Any airline that suffered financial losses before the attacks, such as British Airways and Swissair, is particularly vulnerable.

Both Virgin Atlantic and British Airways have announced thousands of staff cuts in the last few days.

IATA, the International Air Transport Association, estimates that airlines worldwide will suffer total losses of 10bn in 2001.

Why was the airline industry suffering before the attacks?

The economic slowdown has left airlines suffering from excess capacity as passenger numbers, especially lucrative business travellers, drop.

In particular, the US downturn has affected major airlines, such as British Airways, which generate a lot of their business from the transatlantic route.

IATA's spokesman William Gaillard also points out that airlines were forced to negotiate expensive contracts with pilots just as the economic slowdown took a grip.

Meanwhile, recent highs in the oil price have dented sentiment in the sector as airlines spend more than 10% of their operating costs on fuel.

In addition, airlines are facing increased tariffs charged by airports and air traffic control.

How has this been exacerbated by the attacks on the US?

US and major European airlines that fly the transatlantic route have all suffered loss of revenue from the four-day ban last week on flights to and from America.

Going forward, many leisure travellers will be more inclined to stay home, or avoid taking long-haul flights, which will add to problems with over-capacity.

The crisis has also led to a battering of airline shares, halving the value of some companies in the US.

This has pushed up the interest cost of outstanding loans. In addition, the attacks will lead to an increase in insurance premiums paid by carriers.

All airlines will also have to bear the added costs of extra security measures.

Following the recent problems, Dutch airline KLM and Virgin Atlantic have announced that they will be cutting flights from October.

Will European airlines be at a disadvantage if their US rivals receive financial aid?

IATA says the European companies would be at a "tremendous disadvantage" if they receive no assistance to deal with the crisis.

Should the US airlines win substantial financial backing from Congress, the European Commission would be under enormous pressure from the industry and national governments to help its own airlines.

"Not to react would be irrational on their part," says IATA's Mr Gaillard.

"They would have on their conscience the demise of the European airline industry and thousands of lay-offs."

What kind of financial aid would the European airlines receive?

The US airlines are asking for a $24bn bail-out, but this has not yet been agreed to by Congress.

The aid is expected to take the form of direct cash, guaranteed loans and possibly tax cuts.

In Europe, the structure of any package would probably be adapted because the airlines are not as cash-strapped.

For example, they may receive cash and loans, but not tax relief necessarily.

The industry is also expecting regulators on both sides of the Atlantic to relax restrictive rules on future mergers as a result of the crisis.

Most analysts believe that the industry is too fragmented and needs to consolidate so that players can share costs and build greater economies of scale.

At the moment regulations provide a disincentive because merger partners are often forced to give up existing traffic rights.

What long-term impact will the attacks on the US have?

It is difficult to forecast when passenger numbers might pick up again until it becomes clear what retaliatory action the US plans to take.

During the Gulf War 10 years ago annual numbers shrunk for the first time in history, but then recovered after the military action was over.

As the enemy is more elusive in this latest conflict and has hit commercial aeroplanes directly, it is likely that travellers will remain apprehensive for some time to come.

What is the outlook for consumers?

The only good news for travellers is that the cost of air tickets will probably come down.

When airlines have too much capacity and are desperate to fill seats, they inevitably sell tickets at a discount.

 WATCH/LISTEN
 ON THIS STORY
The BBC's Patrick Bartlett reports from Frankfurt
"European airlines are suffering from the impact of the US hijackings."
See also:

19 Sep 01 | Business
US aviation crisis deepens
18 Sep 01 | Business
UK airlines call for state aid
18 Sep 01 | Business
More pain for US airlines
13 Sep 01 | Business
Air industry faces bleak outlook
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