Insights & Advice


Volcano Smokes the Airlines

Aviation, probably more than any other mode of transportation, is at the mercy of weather and natural calamities. The Icelandic volcano-related troubles occurring over the skies of Europe right now illustrate that point, but this rather dramatic illustration is actually a minor blip in the airline’s ongoing battle with weather.

From snow and thunderstorms to wind and fog as well as temperature and pressure extremes, every phase of flight can and is impacted by weather. Considering all of the above, and what could go wrong at 20,000 feet with a plane loaded with hundreds of litigious humans, safety followed by efficiency are key to survival when it comes to flying in all kinds of weather and conditions.

The airline sector, as you might imagine, is highly dependent upon accurate weather information and pays millions each year in acquiring weather data and forecasts. Given the ash-laden skies over much of Europe, it is safe to say that those costs are sky-rocketing at the moment. That sum does not include the additional costs of independent meteorologists who have been hired by the cattle car to help the airlines through this emergency.

If you can believe the reports, the top five U.S. passenger airlines with European operations are losing $35.8 million in revenue per day since Friday. The estimated operating loss so far for those airlines is $21.9 million and climbing. Delta appears worse hit since they have the biggest operation in Europe. But those numbers are deceiving because they do not account for all the delayed and cancelled flights caused by the volcano across the rest of the world. Direct costs to airlines can be divided into several categories: diversion, cancellation, delay and insurance.

The “rub-off factor” where one diverted flight can cause anywhere from 2 to 50 flight delays, while one canceled flight can result in 15 to 20 flight delays adds to a long string of costs that include fuel, crew time, operating costs, lost passenger and cargo revenue, hotels and meals, overtime pay. The cost of one diverted flight can be as high as $250,000 and a cancellation $68,000. Delays cost less and vary substantially depending upon the type of aircraft and airport affected.
Annual insurance payouts for weather-related injuries both among the passengers and emloyees are also in the millions of dollars.

Although the losses on the passenger side of flying due to the volcano have been well-documented over the past few days, there is another downside to this crisis called air cargo. The international air cargo business accounts for something like 35% of total global trade annually or almost $3 trillion. That’s about 5% of last year’s $10 trillion global GDP. About half of those goods end up in Western Europe or did until last Friday. Israeli avocados, flowers from Africa, in fact, most perishable food stuffs are shipped by air. So are the more important bits of electronics, microchips, pharmaceuticals, medical devices, gems, and tons of cash and checks. A prolonged stoppage of these goods could begin to impact worldwide GDP by as much $100 billion per month, if it continues.

The U.S. air freight companies refuse to say how much this aviation shut down is costing them. Instead, they are dwelling on the surge in their over land transportation as a result of this natural disaster. Jet fuel prices have plummeted due to the lack of demand while airline stocks are clearly grounded until after the crisis has passed.

Hopefully, as the air begins to clear over Europe, the Iceland eruption will fade into history. Yes, it will be costly, but as long as the aviation industry can get back to normal in a comparatively short time losses will be made up. Unfortunately, the resolution of this incident does nothing to change the on-going threat to the airline industry’s bottom-line. It will be forever held hostage to what kind of weather tomorrow brings.

Posted in Macroeconomics, The Retired Advisor