Economic Effects of Iceland Volcano Hit Airlines, Exporters Hard

The past weekend was definitely not a good time to be a Kenyan flower grower, an Israeli avocado farmer, a package tour operator or anyone else trying to run a business that depends on air transport to or from Europe.

The past weekend was definitely not a good time to be a Kenyan flower grower, an Israeli avocado farmer, a package tour operator or anyone else trying to run a business that depends on air transport to or from Europe.

The past weekend was definitely not a good time to be a Kenyan flower grower, an Israeli avocado farmer, a package tour operator or anyone else trying to run a business that depends on air transport to or from Europe.

The past weekend was definitely not a good time to be a Kenyan flower grower, an Israeli avocado farmer, a package tour operator or anyone else trying to run a business that depends on air transport to or from Europe.

Consider TUI, the largest travel operator in Germany. With all the country’s airports closed because of the danger posed by a cloud of volcanic ash from Iceland,

the company, based in Hanover, had to take extraordinary — and costly — steps to bring customers back from Mediterranean vacations:

Late Saturday, TUI flew 540 of its customers from the Spanish island of Mallorca to Barcelona.

After staying overnight in hotels paid for by TUI, the vacationers boarded a dozen buses for a 20-hour trip to Frankfurt.

From there they continued home by train.[br]

Economists have begun considering when, and to what extent, the extra costs sustained by companies like TUI — not to mention the airlines — will start to damage Europe’s already shaky economy.

Most say the effects will not be catastrophic if the skies clear soon, according to this article in the New York Times.

But a longer spell of airport closures — or intermittent disruptions in the coming weeks and months as the volcano continues to erupt and winds carry the ash to Europe — could start to take a toll.

“Given that the recovery of the euro-area economy is anyway so weak, it might have an impact,” Daniel Gros, director of the Center for European Policy Studies in Brussels, wrote in an e-mail message.

While most economists are not predicting that the volcano will push Europe back into recession, there is a risk of unexpected consequences that could amplify the economic damage.

If, for example, ash falls to the ground in greater quantities than expected, creating a real or perceived health risk, consumer sentiment could have a serious decline …

Even if the macroeconomic effects are limited, businesses and industries that depend on air transport are already feeling the pain.

Kenyan growers, who account for 35 percent of the European Union’s imports of flowers, are losing up to $2 million a day in earnings because they cannot fly their blooms to market, Reuters reported.

Produce growers in North Africa and Israel will suffer the same effect. Most fresh produce travels by air because it is perishable.

“Europe is the market where they get the most profit,” said Aliza Fleischer, a specialist in the economic effects of climate change at the Hebrew University of Jerusalem.

Makers of high-tech goods like semiconductors and cellphones could have their finely tuned logistics operations thrown out of whack.

“Where you might have an impact is where the goods are mission critical — phones, parts that are important to the production process,” said Mr. Cailloux of Royal Bank of Scotland. [br]

As if Greece did not already have enough problems managing its debt, the country could be among the hardest hit if the disruptions continue long enough to interfere with the peak holiday season.

“It could make matters worse for Greece, which obviously needs every penny from tourism,” 

The volcano has already led to cancellation of some events because performers could not get there.

The World Wrestling Entertainment “Smackdown” competition, scheduled for Sunday at Abdi Ipekci Arena in Istanbul, was canceled when the headliners were stranded in Europe. The bouts were rescheduled for November.

Not everyone is unhappy about the empty skies. Bus, rental car and rail companies are profiting from the extra traffic.

In some cases, the money lost by some industries could be more than made up in others, helping to offset the effect on gross domestic product.

“There could be some displacement, less expenditure in airports, but more in other forms of transport,” said Stuart Green, an economist at HSBC in London.

Hotels filled with stranded passengers are also profiting. “I spoke to a few of my students who are doing internships in hotels,” said Ms. Fleischer of Hebrew University. “They are happy. The guests don’t leave.”

And some of the lost activity could be made up later.

That might mean that the volcano hurts growth in the current quarter, followed by a strong rebound in the third quarter.

Economists say weather disruptions often create such temporary dips.

Jörg Krämer, chief economist at Commerzbank in Frankfurt, noted that he had canceled a planned flight to London on Thursday but would make up the trip as soon as the skies are clear again.

“My airline travel expenses for 2010 will not change due to the volcano,” Mr. Krämer said.

“Of course,” he added, “I assume that the volcano will soon be quiet again.”

And this article from Der Spiegel provides some — German-centric 😉 — specific numbers:

The initial estimates to the German economy as a whole are of losses amounting to 1 billion euro a day.

And five days of quiet, plane-free skies have left Europe’s airlines furious and warning that some companies may not survive.

Now Brussels says it could come to the rescue of some of the airlines that are losing millions of euros a day due to closed airspace.

On Monday, Competition Commissioner Joaquin Almunia said that the European Union was prepared to react as it had after the Sept. 11, 2001 terror attacks.

“If member states would decide to help with state aid and provided conditions for receiving state aid were not discriminatory, we are ready to think in a similar framework to after Sept. 11,” he said at a conference in Brussels.

The International Air Transport Association (IATA) estimates that the losses caused by the volcanic ash cloud from Iceland could be higher than those incurred after Sept. 11, which saw airlines lose more than $10 billion (€7.4 billion).

Officials at German airline Lufthansa alone say the company is losing €25 million a day.

IATA has warned that if the flight ban goes on for longer than a week that some of the 150 European airlines could go bust. The smaller airlines would be the first to go, IATA President Giovanni Bisignani said on Monday.

According to a study by the Swiss bank UBS, Europe’s six biggest airlines — Easyjet, Ryanair, British Airways, Iberia, Air France-KLM and Lufthansa — together have seen losses of up to €140 million a day.

The ongoing paralysis is hitting Europe’s airlines on the stock markets, as well.

Shares in airlines fell by between 3.5 and 4.5 percent on Monday, with Germany’s biggest airlines Lufthansa and Air Berlin each losing 5 percent of their value.