UPDATE 1-Zoom Airlines files for bankruptcy, grounds planes

Thu Aug 28, 2008 3:53pm EDT

(Recasts with operations suspended)

CALGARY, Alberta Aug 28 (Reuters) - Zoom Airlines, a Canadian discount transatlantic carrier stung by sky-high fuel costs, canceled all flights and began bankruptcy proceedings on Thursday, stranding passengers at several airports.

Ottawa-based Zoom said it had tried until midday Thursday to secure a financial lifeline that would keep it aloft after rising jet fuel prices added $50 million in annual costs.

But creditors refused to give Zoom any more time, forcing it to file for creditor protection in Canada and Britain.

"We deeply regret the fact that we have been forced to cease all Zoom operations," Hugh and John Boyle, co-founders of the privately held company, said in a statement.

"It is a tragic day for our passengers and more than 600 staff," the statement said.

"We are desperately sorry for the inconvenience that this will cause passengers and those who have booked flights."

The carrier, which has operated since 2002, has 450 employees in Canada and 260 in the United Kingdom.

It flew to six U.K. destinations as well as to Paris and Rome. It also operated service to eight Canadian cities as well as New York, San Diego, Fort Lauderdale and Bermuda.

In Britain, Times Online reported the carrier's planes were grounded by the Civil Aviation Authority for failing to pay air traffic control fees, stranding hundreds of passengers.

In Calgary, 69 Zoom passengers bound for Glasgow, Scotland, and London's Gatwick Airport were stranded when the firm that had leased an aircraft to Zoom terminated the lease, local media reported.

In addition, Zoom is reported to have owed the Western Canadian city's airport authority C$400,000 ($380,000) in landing fees.

Zoom advised those who have paid for future reservations to contact their credit card companies to apply for refunds.

It also said it would advertise details of other carriers that fly the same or similar routes.

Surging fuel prices have led several airlines to seek legal shelter from creditors as their costs have soared. Established players, meanwhile, have been forced to chop staff, reduce capacity and impose new fees to deal with the burden.

In addition, numerous Canadian start-up carriers have failed while trying to undercut big carriers like Air Canada (ACa.TO) and WestJet Airlines (WJA.TO) on fares.

In the last eight years, such airlines as Canada 3000, Jetsgo, CanJet and Harmony Airways have all been forced to scrap scheduled service.

Canadian Industry Minister Jim Prentice said in Inuvik, Northwest Territories that he had yet to be briefed on Zoom's collapse, but acknowledged the tough times in the sector.

"I have had discussions with representatives of both Air Canada and WestJet about fuel costs and what that is doing to the industry," Prentice said.

"If we find passengers in difficult circumstances, everybody is going to have to work together to deal with that." (Reporting by Jeffrey Jones. Additional reporting by Allan Dowd in Inuvik and Wojtek Dabrowski in Toronto; Editing by Ted Kerr)

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