April 19, 2010 / 3:54 PM / 8 years ago

SCENARIOS-How could Europe volcano cloud crisis play out?

LONDON, April 19 (Reuters) - The economic impact of the volcanic ash cloud currently rendering much of Europe a no-fly zone depends almost entirely on how long it lasts -- something even the experts say they cannot predict.

Below are several scenarios for how the air transport crisis could pan out, together with the likely economic effects.

EUROPEAN SKIES REOPEN QUICKLY

European authorities could give in to the demands of airlines to reopen European airspace if they were confident the risk to aircraft had diminished. The volcano could stop erupting, simply stop emitting ash, winds could shift away from Europe, or the cloud could dissipate faster than expected.

Airlines and freight firms would scramble to make up for lost time, relocating passengers and resuming cargo traffic.

-- Reopening the skies would provide some relief for airline and travel industry stocks, which have been hit hard by the crisis and were among the worst performers in Europe on Monday. However, quantifying the exact losses will take time and even if the cloud clears quickly, some companies could still surprise markets with the scale of their losses.

-- Jet fuel and oil prices would likely move higher. Food companies would also benefit as supplies resumed.

-- Some airlines might still need government aid to deal with the costs of the crisis, which the industry estimates at some $200 million a day in the aviation sector alone.

-- The wider economic impact would be limited. While some economic activity such as aviation traffic has been disrupted during the shutdown, other activity, including long-distance taxi bookings, hotel stays for stranded travellers and alternate shipping arrangements, has been stimulated. Most manufacturers and food firms are only just beginning to feel the pinch and a quick restart could minimise damage.

-- Resumption of flights would relieve pressure on the Kenyan shilling KES= and Turkish lira TRY=, undermined by worries over horticulture and tourism respectively. Kenya's flower industry alone says it is losing some $2 million a day as stocks perish in warehouses.

-- Airlines have shown great interest in cancellation insurance. German insurer Munich Re <MU VGN. DE> told Reuters on Friday it could offer such insurance if the demand was there.

AUTHORITIES, AIRLINES FACE OFF ON SHUTDOWN

The airline industry could continue to face off against governments and authorities. Airlines have demanded that flight bans be reduced or ended, saying that test flights have shown no risk to commercial aircraft.

But a senior U.S. official said glass was found in the engine of NATO F-16s flying over Europe and that dangers remain.

-- Governments face a difficult decision. Between 20,000 and 22,000 flights a day fly in European airspace, so even if 99.9 percent suffered no serious ill effects, that would still see 20 planes a day suffering damage or engine failure. Any crash following the reopening of Europe’s skies would be politically devastating. British Prime Minister Gordon Brown will be particularly keen to avoid a disaster weeks before an election.

-- Airlines and related stocks may fluctuate as the row progresses, rising and falling on statements from both sides. Markets would react negatively to any official statement suggesting the closure might continue for days or weeks rather than being extended one day at a time.

CLOUD CLEARS, RISK REMAINS

Experts warn that even if the cloud clears, as long as the eruption continues, a renewed outflow of ash or certain wind patterns could produce the same effect again in coming months.

This time, airlines would be less taken aback but there is still very little they can do to prepare. The threat of a renewed shutdown might deter both business and leisure travellers from booking flights, holidays and hotels, hitting the industry even if the cloud itself never returned.

-- Airline industry stocks could underperform as markets factor in a risk premium. Rail, road, sea cargo and teleconference firms could see an increase in protective demand.

-- Firms might take on additional stocks to reduce their reliance on “just-in-time” resupply by air cargo.

-- Any return of the cloud would again hit airline and travel stocks as well as potentially hitting regional growth. Even if the cloud did not return, lower demand for flights and regional tourism could still subtly undermine growth in several countries, although how much is impossible to quantify. Holiday destinations such as Greece, Turkey, Spain and Portugal as well as Dubai might be particularly vulnerable.

-- Markets would continue to watch the eruption with trepidation and its behaviour could prompt sharp moves. Much would depend on whether the current eruption triggers the nearby and much larger Katla volcano, increasing the potential impact.

CLOUD REMAINS, EUROPE STILL SHUTDOWN

If the cloud remains over Europe for a sustained period of time, weeks or longer, the trade and travel sector would take a serious hit. Other industries, from high-tech manufacturing to supermarkets, forests and event organisers would also suffer.

-- This would be particularly devastating for airlines, possibly driving some of the weakest operators to bankruptcy.

-- Overall European growth might be affected, slowing recovery from the recession. Governments, already heavily indebted due to the financial crisis, would struggle to find the funds for support programmes. Europe might lag further behind the rest of the world in the global recovery. One economist estimated it might take 1-2 percent off European growth.

-- A prolonged shutdown would slow European and International Monetary Fund reaction to the Greek debt crisis, with the postponement of a meeting on Monday pushing Greek bond yields sharply higher. Further delays could pressure the euro EUR= and push Greek debt yields and spreads higher still.

-- Teleconference, shipping, rail and road transport operators would benefit. So would airports just outside the cloud, suddenly in great demand from airlines and shipping firms as new hubs. Britain’s Royal Mail is already shipping and trucking U.S.-bound airmail to Spain for onward flights.

-- Southern European economies heavily dependent on tourism, including Turkey, Greece, Spain and Portugal, would suffer, although their position on the edge of the cloud might also allow them to benefit by acting as logistics and flight centres. Dakar in Senegal could also benefit as a refuelling centre for flights to the States.

-- Western military resupply flights to Afghanistan would be heavily affected. Western European troop contributors would become entirely dependent on the United States for supplies and medical evacuation flights. U.S. forces would also be heavily affected if they could no longer use their logistics and medical centre in Ramstein, Germany.

-- Major international meetings may have to be cancelled, rescheduled or simply go ahead without senior European policymakers. That might further weaken Europe’s geopolitical relevance at a time when it is threatened by the rise of emerging economies and internal differences over Greece’s debts.

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