Limited near-term economic impact

WITH no aircraft allowed to enter or leave the UK since 15 April due to the volcanic ash, disruption and problems for the economy have been widespread. But the overall impact for the UK should be limited, especially as British airspace is poised to reopen. There is, however, a not insignificant risk the problem could flare up again to varying degrees for several weeks or even months. If so, the overall economic disruption and impact would be much more significant, but even then should not be catastrophic.

There is a growing feeling within the airline industry the authorities have over-reacted by closing airspace. Of course, everyone is aware that one plane coming down due to the problems could lead not only to loss of life but to potentially massive legal repercussions. Many passengers would likely refuse to fly if there is any perceived risk at all.

The airline industry has been hit substantially, particularly as it is already struggling. The International Air Transport Association reports the industry has been losing £130m a day. UK airlines are reported to be losing £28m a day. Clearly, if the disruption starts again, there is a greater danger that some airlines could be pushed into bankruptcy. The air freight cargo industry has suffered hugely, with losses put at £2.9m a day.

Travel operators have seen costs mounting by the day. Some of these losses will be limited by insurance – insurance companies are another sector that will suffer from the situation. The airlines’ travails, however, have been benefiting other travel companies. With no planes flying, people are booking alternative travel arrangements, notably Eurostar and ferries, so these travel companies are benefiting. Also, people due to travel within the UK by plane have travelled by train, coach or car instead.

The overall economic impact on the UK should be limited in the near term at least, although this will be of little comfort to those industries affected and the people left stranded or missing their holidays. If the ash cloud starts to affect flights again, the greater the potential hit to the economy will be. This is particularly true given the current fragility of the UK’s recovery and the fact Europe is the worst hit region and a key UK export market. Costs will mount if the flight ban is imposed again – more perishable goods will have to be dumped, more companies may have to shut down production if a key spare part is delayed or they cannot get vital inputs.

On a worst-case scenario, if the problem strikes again and then runs into summer, it would hit the key tourism period. But then many more people would take holidays at home in the UK rather than overseas and so offset lower foreign visitor numbers.

Dr Howard Archer is chief European and UK economist at IHS Global Insight.