War tipped to knock major airline out of skies

By CLAYTON HIRST

Read this list carefully: British Airways, Virgin Atlantic, KLM, SAS, Lufthansa, Alitalia, Air France, American Airlines and United Airlines. Analysts say it's safe to assume that at least one of these names will disappear as a result of the war with Iraq.

Already cash-starved from the aftermath of the September 11 attacks and the downturn in the global economy, the airlines couldn't have seen the war come at a worse time. The long-haul carriers have already suffered a 15 per cent fall in forward ticket sales as passengers fret about the risks of flying.

Now that hostilities have begun, sales are predicted to plummet 30 per cent over the next month.

Last week the airlines began to prepare for what could be one of the most troubled periods in civil aviation history, by cutting routes and making thousands of redundancies. But, as credit agency Standard & Poor's put 11 airlines on watch for a possible downgrade, this will just be the start.

"The last Gulf war resulted in a four-year trough for the airline industry. Because the industry is already in a trough, this time it could take much longer to climb out," says Daniel Solon, an analyst at aerospace research company Avmark International.

The news couldn't be much worse for Rod Eddington, chief executive of British Airways. He has already slashed costs and made 10,000 people redundant. But these drastic steps won't be enough. Some 80 per cent of the company's revenues come from long-haul flights, leaving it acutely exposed to the war.

"It's going to be pretty hardcore for BA," says Rebecca Langley, an analyst at investment bank Dresdner Kleinwort Wasserstein (DKW).

Based on the fall in customers during the 1991 Gulf war, DKW estimates this conflict could cost BA £300 million ($856 million), pushing it £100 million ($285 million) into the red next year. BA is expected to announce 3000 new redundancies soon to stem the decline.

Another threat is a sharp rise in the price of aviation fuel as a result of the troubles in the Middle East. BA, like most airlines, buys fuel on long-term contracts. But at the end of this month many of those contracts will expire and the company will be forced to buy about half of its fuel on the open market. Over the past year the price of aviation fuel rose by more than 50 per cent, and the airlines will be praying that the latest fall in oil prices is sustained.

But BA has a £1.8 billion balance-sheet buffer against the downturn and £400 million available in loans. As a result, most analysts believe it will survive and may even be the catalyst for mergers. It is understood that KLM is in BA's sights and Eddington is due to meet his Dutch counterpart this week for talks.

It is more difficult to assess how the war will affect BA's big rival, Virgin Atlantic, as it is a private company. Virgin Atlantic concedes that forward ticket bookings have fallen, but a spokesman says that it won't cut capacity until it is clear how the war will affect sales.

However, accounts filed at Companies House reveal that Virgin Atlantic is still suffering from the aftermath of September 11. In the year to last April 30, it made a £92 million loss after tax on a turnover of £1.4 billion. This compares with a £45 million profit and £1.5 billion turnover in the previous year.

Other European airlines, such as KLM, SAS and Alitalia, also are struggling. And the recent revival in the fortunes of Air France and Lufthansa could be quickly snubbed out by the war.

The conflict could also deliver a double blow to airports operator BAA. The former monopoly, which owns airports such as Heathrow, Gatwick and Stansted, makes its money by charging airlines for its facilities and by taking a slice of the revenues generated by retailers.

On average, each passenger generates £5 in airport fees and £4 in retailing for BAA.

The 1991 Gulf war led to a 7 per cent fall in passenger volumes at BAA's airports over a year, with a 14 per cent drop in the first quarter. If this war leads to a similar fall then BAA will lose about £75 million in revenue this year, with £35 million going in the next three months.

Having committed to invest £8 billion over 11 years on new facilities such as the fifth terminal at Heathrow, it would find any fall in revenue hard to stomach.

A spokeswoman says that BAA has no plans to scale back or postpone its investment programme, but admits "it could be a contingency".

The biggest impact of war, though, could be felt by US airlines. Already the effects of September 11 have forced United Airlines and US Airways into Chapter 11 bankruptcy protection.

American Airlines, the world's biggest carrier, which last year lost US$3.5 billion, is teetering on the edge. The war is expected to force it to seek protection from creditors.

Much to the annoyance of the European airlines, the American carriers can turn to Washington for help.

After September 11, US airlines received US$15 billion in aid. Airline lobbyists have described the outbreak of war as a "silver lining".

Sensing further gloom in the industry, US politicians last week proposed a law, the Aviation Stabilisation Act. If passed, it would allow airlines to borrow money from the Government to pay for fuel, insurance and new security systems.

While there is no guarantee that it will become law, US Government sources insist that it is "ready to move quickly" to help the airlines.

This is in stark contrast to the attitude of the British Government. The Department for Transport hasn't even set up a working group to discuss the impact of war on the airlines.

A spokesman says that there are no plans to offer UK carriers any financial assistance.

But amid the gloom, there is one sector that could emerge from war unscathed; it may even profit. In the countdown to the war, many budget and short-haul airlines increased ticket sales.

The most dramatic uplift has been at Ryanair, which this month has seen bookings rise 35 per cent on the same period last year. Meanwhile, easyJet is predicting growth of 25 per cent this year and BMI British Midland, principally a short-haul airline, says war "hasn't had any effect on our business at all".

In an echo of the period immediately after September 11, travellers are turning away from long flights and planning shorter trips in Europe.

But every week that this trend continues is a week of pain for established airlines. When war with Iraq is over, aviation will be changed for good.

- INDEPENDENT