Icelandic Volcano Airline Costs Keep Climbing

April 16, 2010 — -- The cost of the Iceland volcanic eruption is growing more enormous by the hour, with airlines facing losses in excess of $200 million per day.

"At current levels of disruption, IATA's initial and conservative estimate of the financial impact on airlines is in excess of US$200 million per day in lost revenues," the International Air Transport Association said in a statement Friday. "In addition to lost revenues, airlines will incur added costs for re-routing of aircraft, care for stranded passengers and stranded aircraft at various ports."

The IATA also said it has set up its crisis center in Montreal, Canada, and is closely coordinating with Eurocontrol and European air navigation service providers.

"The costs are going to be enormous, at least into the hundreds of millions of dollars, especially if the eruption drags out over months," said Gregg Gallina, a satellite meteorologist at the Volcanic Ash Advisory Center in Washington, D.C. "This type of volcanic ash disruption in the heart of the transatlantic flight lanes is unprecedented."

The D.C.-based VACC is one of nine such centers around the world tasked with issuing volcanic ash cloud warnings that are specifically aimed at preventing airplanes from experiencing potentially catastrophic failures as a result of ash particles clogging up engines.

A 1989 volcanic ash plume that followed the eruption of Mount Redoubt in Alaska nearly took down a KLM flight and eventually grounded thousands of Alaskan Airlines flights. That event, which occurred on and off until April 1990, carried an estimated economic cost of about $160 million, the brunt of which was felt by the airline industry, according to a 2009 report from a team of researchers affiliated with the National Oceanic and Atmospheric Administration.

The costs of another ash cloud event following the eruption of Mount Redoubt last year still are being tabulated.

"This is not merely a one-time event -- volcanic ash is a hazard to aviation every day," said Marianne Guffanti, a volcanologist with the U.S. Geological Survey. "Every day, around the world, there are eruptions throwing ash clouds into the stratosphere and there are teams of meteorologists, volcanologists, air-traffic controllers, and airline dispatchers sending crucial information about these hazards to the cockpit."

To date there have been 126 documented encounters involving planes and volcanic ash, Guffanti said. Even a small amount of ash can cripple a jet plane and cause millions of dollars worth of damage. The cost of repairing one engine is around $10 million.

While Gallina was hesitant to extrapolate too much from the 1989-90 estimates, he said what is happening in Europe represents a vastly larger disruption than the one caused by Mount Redoubt two decades ago.

Delayed and cancelled flights, as well as overall lost business and productivity, all start to add up exponentially.

Just how severely the airline industry suffers from the ash cloud conditions depends on how long these conditions persist, said industry analyst Robert Mann, the president of R.W. Mann & Company, Inc.

If the skies clear within 36 hours, the ash cloud's impact may be no greater than that of, say, a rare spring snowstorm, Mann said.

Revenue lost by passengers who cash in refundable tickets, he said, would be balanced out by savings on unspent fuel and salary costs negated by canceled flights.

Passengers with nonrefundable tickets -- mostly leisure travelers -- likely will reschedule their flights.

Some Businesses Could Benefit From Ash

But if the ash cloud conditions force airlines -- especially those with hubs in the affected European cities -- to cancel flights for a longer period of time, revenue losses from those cancellations will begin to add up and airlines may find it hard to afford their fixed overhead costs, he said.

Assessing the costs of the Iceland ash clouds can be tricky because of the nature of ripple effects. Some of the ripples create economic opportunities.

Airport enterprises such as newsstands and eateries could see a surge in business because stranded passengers likely will be setting up "tent cities" in terminals, Mann said

"It's largely a captive market," he said.

While the airlines lose, ground transportation providers in Europe win. Mann expects European railways, particularly Eurostar, the operator of high-speed trains connecting Great Britain and Europe through the underground tunnel beneath the English Channel known as the "Chunnel," to see an influx of new passengers.

But even Europe's extensive train system has its limits. On its Web site Thursday, Eurostar had a message to travelers: "Due to the disruption to air travel in Europe, Eurostar trains are extremely busy. We would ask that you only come to our stations if you hold a confirmed reservation for travel."

With the air travel shutdowns have come shipping complications. There were concerns Thursday about what would happen to shipments of perishable cargo such as flowers and food, the Associated Press reported.

The world's three major shipping companies all scrambled to adjust operations Thursday.

FedEx released a statement Thursday saying that it was rerouting flights away from Europe's closed airports to open ones and would substitute truck transportation for air shipping. FedEx said its refund guarantee on deliveries "does not apply to delays of this type or nature that are beyond the control of FedEx. "

UPS said that, as of Thursday evening, it was still operating its Cologne, France hub but expected that that hub would be closed today and that the closure of European airspace would affect U.S. shipments.

"As long as European airspace is closed, UPS will be unable to move package volume to and from Europe from the U.S. and Asia," the company said.

For shipments within Europe, the company said, it would "turn to contingency operations and move packages as best we can by ground."

DHL alo said it was expecting "significant disruptions" on several European traffic routes and said it would process shipments in regions affected by the cloud as soon as possible.

While an airline stands to turn a profit off those who have nonrefundable tickets and are unsuccessful in their attempts to rebook, "it's a public relations nightmare," Mann said. "Every single one of [the passengers] is going to understandably whine about it. It's human nature."

--ABC News' Matt Hosford contributed to this report