LONDON – The volcanic ash cloud making much of northern Europe a no-fly zone has hurt the prices of airline stocks, paralysed air cargo delivery and disrupted business and leisure travel.
But analysts expect the overall economic impact to be minor, since the disruption appears unlikely to last continuously over a long period.
HOW LONG WILL THE DISRUPTION LAST?
This depends on how long the volcano under Iceland’s Eyjafjallajokull glacier keeps erupting, whether it continues spewing ash, and whether winds carry the ash towards Europe.
The volcano’s previous eruption lasted over a year, but changes in wind and weather patterns could disperse the ash; many analysts think the cloud will not linger over Europe for more than a few days at a time.
If the volcano does continue to erupt, occasional disruption will be possible over six months or more, experts say. Much will depend on whether Eyjafjallajokull triggers a new eruption from the nearby and larger Katla volcano, which has happened in the past. That could magnify the impact.
Countries are proving able to resume flights quite quickly when local conditions improve. Ireland has reopened its airspace and Britain says some of its northern airspace may reopen later on Friday. But the cloud continues to drift south, affecting more countries.
OVERALL ECONOMIC, MARKET IMPACT
Unless the cloud disrupts flights continuously for weeks, threatening factories’ supply chains, economists do not think it will significantly slow Europe’s shaky recovery from recession or affect second-quarter gross domestic product figures.
"The overall impact should be very limited even if the problem persists for a day or more…Just as people can’t get into the UK, people can’t get out," IHS Global Insight chief UK and European economist Howard Archer said in a research note.
"So the people stranded in the UK will have to find places to stay and eat, so they will be spending money here rather than abroad."
Business meetings have been cancelled across Europe as a result of staff being unable to attend, but analysts say they will largely be replaced with teleconferences or rearranged.
If extended disruption to air travel hits supply chains, factories will be able to reduce the damage by using sea, river or road cargo, or changing procurement plans.
The pan-European FTSEurofirst 300 stock index hit its highest level in nearly 19 months on Friday morning, suggesting little investor concern about the ash cloud. It fell 1.5 percent in the afternoon but traders mostly blamed Greece’s debt crisis.
IMPACT ON AIRLINES
Around 17,000 flights were expected to be cancelled on Friday, with airspace closed across much of Europe.
Shares in Lufthansa, British Airways, Air Berlin, Air France-KLM, Iberia, Ryanair and SAS fell between 2 and 4 percent. Ryanair said it would cancel flights to and from northern European countries until 1200 GMT on Monday.
The disruption is costing airlines more than $200 million a day, air industry body IATA estimated.
Fraport AG, which operates Germany’s main airport in Frankfurt, says its initial estimate was for the ash to cost it between 2.5 million and 3 million euros per day.
Iceland’s location means the eruption could prompt wider disruption to international flights.
"Iceland sits right on one of the key routes between Europe and the USA and…depending on meteorological conditions it could also affect flights from Europe to Asia, so there are two big international flows which could be affected by this," said John Strickland, director of air transport consultancy JLS Consulting.
"You can still get disruptions to other flights or have to take more circuitous routes, which adds costs and maybe even requires planes to land because they can’t go on the direct route."
ALTERNATIVE TRANSPORT
Eurostar, which runs trains between London and the European continent, said trains were operating at full capacity and it might lay on additional trains if necessary.
London taxi firm Addison Lee said it had taken requests for journeys to Paris, Milan, Zurich and Salzburg in Austria.
AIR CARGO
Grounded air cargo flights have halted delivery of items such as microchips, flowers and mail. Europe’s largest mail and express delivery company Deutsche Post said it was switching to road transport where possible.
Switching to sea cargo might be an option for longer deliveries, although not for perishables such as flowers, but shipping analysts said it would likely take at least several more days before firms started rebooking by sea.
Pharmaceutical supplies in particular are often transported by air, but experts said there were sufficient stocks so there should be no serious shortages for now.
ENERGY
JBC Energy’s model for European jet fuel consumption puts daily consumption at 1.17 million barrels a day, so assuming an estimated 80 percent of Europe’s airports are shut for 48 hours, the disruption will cut 1.87 million barrels of demand.
"Some demand will simply disappear — those who need to fly will eventually fly, but there will definitely be some flights that just do not take place," said JBC Energy oil analyst David Wech.
European jet fuel price spot differentials to the ICE-traded gas oil contract fell to $48 a tonne on Friday from $50.50 on Thursday. But analysts said the long-term price impact would be minimal once flights resumed; much airline buying is done through long-term contracts.
European oil, gas and electricity production is not expected to suffer. Some helicopter flights to and from oil rigs in the Norwegian Sea have resumed; the effect on solar power plants is unlikely to be greater than the impact from any other passing cloud, while wind power industry sources said cold volcanic dust on wind turbines should not cause any problems.
INSURANCE IMPACT
Airlines are expected to have little recourse to insurance firms. Most airlines are neither insured against cancellations nor business disruption at airports.
Insurer Munich Re said it could offer cancellation insurance to airlines if necessary. "Up to now there has not been demand in the market, said a spokeswoman. "Maybe that will change now."
HEALTH IMPACT
The World Health Organisation warns the dust could cause problems for those with breathing difficulties, though it has not yet assessed this particular eruption.
A Scottish expert on respiratory disease told Reuters that the low-toxicity ash falling on Britain was unlikely to do much harm as a very high exposure would be needed to have much effect on people.
CLIMATE, AGRICULTURAL IMPACT
Scientists say the eruption does not seem to have produced enough dust or gas to alter the climate or impact agriculture, and should have no effect on global warming trends. A larger eruption from the Katla volcano might be a different matter.
(Editing by Andrew Torchia)
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