If Ash Cloud Lingers, Economic Impact Could Rise Sharply

By | April 19, 2010

The economic impact of the volcanic cloud halting flights across Europe will increase sharply the longer disruption continues, forcing holiday cancellations, delaying deliveries and reducing jet fuel demand.

African exporters of flowers and vegetables by air to European supermarkets, technology companies relying on “just-in-time” deliveries of components, event organisers and others could all feel the pinch.

Economists say so far they have not changed their models or predictions for European growth, hoping normal service could resume this week. But in a worst-case scenario in which the ash cloud closes European airspace for months, one economist estimates lost travel and tourism revenue alone could knock 1-2 percentage points off regional growth as long as it lasts. European growth had been predicted at 1-1.5 percent for 2010.

“That would mean a lot of European countries wouldn’t get any growth this year,” said Vanessa Rossi, senior economic fellow at Chatham House. “It would literally stifle the recovery. But the problem is it is incredibly hard to predict what will happen. Even the geologists can’t tell us.”

[Airlines are typcially not insured against cancellations.]

The event is a classic example of a “Black Swan”, a totally unexpected event with widespread impact, impossible to predict and hard to model.

The key questions now are whether the volcano keeps erupting and spewing ash into the atmosphere, where the wind takes the ash and how long the ash already in the sky remains over Europe.

Vulcanologists and meteorologists say they cannot immediately answer those questions as volcanoes are particularly unpredictable. They warn the last time the volcano under the Eyjafjallajokull glacier erupted, it lasted more than a year. But it may not continue to spew ash for the entire eruption.

Most had originally expected the cloud and disruption would linger over Europe for several days.

Travel and tourism accounts for around five percent of global gross domestic product — some $3 trillion — with Europe accounting for a third of that, much of it accruing over the summer months. Not all of this will be lost, but Rossi estimated a prolonged shutdown could cost up to $5-10 billion dollars a week in the industry.

But the impact will likely be wider. Most of the world’s goods by volume may move by sea and land, but transport analysts estimate 40 percent by value moves by air.

NO “JUST-IN-TIME”

The world’s biggest air freight operators say they are moving what they can by road and looking at contingency plans of using southern European airports that are outside the cloud. But they say deliveries will be sharply affected.

“If your just-in-time operation is depending on parts that come from Asia or the U.S. or Africa or the Mideast… , you just can’t get it,” said United Parcel Service Inc. spokesman Norman Black.

“DHL and UPS use airhubs in Germany, Fedex Corp. relies on an airhub in France and all that airspace is closed. There’s just not an option right at the moment while we all wait and see how long this is going to take.”

Pharmaceutical firms are heavy users of air freight, but most said on Friday they had enough stocks to avoid a short-term crunch. Last-minute high-tech imports between Asia and the United States are flown over the Pacific and will be unaffected, but European firms may feel the pinch.

Most food and beverage deliveries move by sea, but some premium products such as the finest Scotch whiskeys — retailing at hundreds of dollars a bottle in China or Japan — can no longer be moved.

That could mean the most vulnerable national economies to the shutdown could prove to be African producers of fruit and flowers that will swiftly perish if not shipped to market.

“Kenya, as the largest supplier of cut flowers to Europe, where tourism is also an important sector, is likely to be the most vulnerable; followed by the East African soft commodity producers more generally,” said Standard Chartered chief Africa economist Razia Khan, herself stranded in Botswana by a cancelled flight.

The International Air Transport Association (IATA) estimates airlines are losing $200 million a day from the shutdown, which has caused chaos well beyond the immediate European airspace closed. Most airlines will be uninsured for this loss, although insurer Munich Re said on Friday it would consider offering cancellation insurance in future should the crisis produce demand.

NO MONEY FOR GOVERNMENT SUPPORT

European airline shares dipped on Friday and will likely fall sharply if it appears disruption will be prolonged. Even if the wind shifts, ash clouds over the Atlantic and Arctic would continue to disrupt flights to North America and Asia.

Analysts estimate the shutdown is reducing demand for jet fuel by some 2 million barrels a day, last week undermining jet fuel prices. This could filter into the wider oil price if the shutdown continues.

The wider travel and tourism industry so far has suffered less. The problem will be if the shutdown lasts long enough to deter future travel.

“Right now the hotels have people who are stranded. If after a while, no new people arrive, that hurts the hospitality industry, ” said Rajeev Dhawan, director, Economic Forecasting Center at the Robinson College of Business, Georgia State University.

Even if the initial cloud clears, vulcanologists warn the same thing could happen again for as long as the eruption under the glacier lasts, further threatening struggling firms.

“If this had happened a couple of years ago, governments would have had the money to step in and provide support,” she said. “But right now, after the crisis, that money isn’t there. This could be enough to push some weaker airlines and travel companies to the wall. It couldn’t have happened at a worse time. On the other hand, it could all clear overnight and we could be back to normal by next week.”

It could be worse. Scientists say this eruption looks unlikely to impact agriculture outside Iceland itself, in contrast to the much larger 1783 Laki eruption, also on Iceland.

“They were famines in France due to crop failure and this might well have been a factor in the French Revolution,” said Prof Steve Sparks, director of the Bristol Environmental Risk Research Centre at Bristol University.

(Additional reporting by Tim Hepher, William Schomberg, Helen Chernikoff; editing by Janet McBride)

Was this article valuable?

Here are more articles you may enjoy.