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Impact on U.K. Economy from Volcanic Ash Flight Ban Should Be Limited

Published: 4/19/2010
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The overall economic impact will be negative, but should be limited in the near term at least. It is important to bear in mind that there will be some winners as well as losers from the flight ban.

No planes have been able to leave the United Kingdom or land there since Thursday, 15 April, because of volcanic ash over its airspace coming from Iceland. This is clearly causing disruption and problems for the U.K. economy. Over 20 other European countries have also had to either completely or partially close their airspace. The overall economic impact for the United Kingdom should be limited even if the problem persists for several more days. There is, however, a not insignificant risk that the problem could persist to varying degrees for several weeks or even months. If this were the case, then the overall economic disruption and impact would clearly be much more significant, but even then should not be catastrophic.

Obviously, the longer the volcanic ash problem goes on, the more that increasingly pressurised airlines will look to get round the problem. Already several airlines have carried out test flights and there is a growing feeling within the airline industry that there has been an over-reaction by the authorities in closing airspace. Of course, everyone is very aware that one plane coming down because of any problems would be one too many and could lead not only to a tragic loss of life, but to potentially massive legal repercussions. In addition, many passengers would be likely to refuse to fly if there were any perceived risk at all.

The Winners and Losers

The airline industry is obviously being hit substantially; particularly, as it is already struggling. The International Air Transport Association reports that the industry is losing £130 million (US$200 million) per day. U.K. airlines are reported to be losing £28 million a day. Clearly, the longer the disruption goes on, the greater the danger that some airlines could be pushed into bankruptcy. The air freight cargo industry is also suffering hugely, with losses put at £2.9 million a day.

Travel operators are also suffering, and their costs are mounting by the day. Europe's largest travel operator, TUI Travel (which owns Thomson and First Choice), has reported that its daily costs from the flight problems are currently running at £5–6 million. Presumably though, some of these losses will be limited by insurance. Indeed, insurance companies will also suffer from the situation.

The airlines' travails, however, are benefiting other travel companies. With no planes flying, people are booking alternative travel arrangements, notably with the Eurostar train company and ferry operators, so these travel companies are benefiting. In addition, many people due to travel within the United Kingdom by plane can go by train, coach, or car instead.

Tourism is obviously being affected. Just as people cannot get into the United Kingdom, people also cannot get out. Therefore, the people stranded in the United Kingdom will have to find places to stay and eat, so they will be spending money in the country rather than abroad. This will offset at least some of the loss of revenue for hotels and restaurants. Moreover, it also should be borne in mind that this is not a peak tourist time. The Easter break has just finished and it is—fortunately—some time to go to the summer season.

The overall impact on business confidence should be slight and there should be little, if any, impact on consumer confidence. The main rider to this is that the economic recovery is still very fragile, meaning that any event that has any negative repercussions at all may have more of a depressing impact on confidence than would be the case in good economic times. In addition, the uncertainty as to how long the volcanic ash problem could last may also affect confidence.

The impact on business should be limited by the fact that many affected companies can hold international meetings via teleconferences; and of course many meetings can be rearranged. Moreover, people can work from home or even from hotel rooms easily using the Internet, and many workers tend to make up lost time anyway. Nevertheless, the longer that people are stranded from their offices or workplaces, the greater the potential disruption will be.

Admittedly, many schools are suffering from teachers being stranded and pupils not being able to get back.

Some businesses will be increasingly affected by the inability of freight to get in and out of the country, but as long as the disruption is not too lengthy, this should not be a major issue. The main problem concerns goods that are perishable. Imports of items such as exotic fruit and flowers are being affected and this could lead to a marked spike in prices for these goods. Consumers can obviously choose other products while the shortage persists. Significantly, the British Retail Consortium (BRC) points out that, "The vast majority of fresh food sold in the U.K. is sourced in the U.K, and a very small proportion is air-freighted in." There could also be benefits for any British growers who can replace foreign suppliers, or if demand for U.K.-produced fresh produce picks up due to more exotic produce not being available. The pharmaceutical industry may be hit significantly as many of its products are moved around by air, and many need to be delivered quickly.

It is true that individual companies could be affected if they rely heavily in their production processes on inputs brought in quickly from abroad. Companies could also be affected if they suddenly and urgently need spare parts for their plant and machinery brought in quickly from overseas. Any sustained delay in this could significantly disrupt their production processes. If they see this as a very real problem, in many cases they can presumably get these parts or inputs shipped over by boat or train through Eurotunnel.

Overall on the trade front, both imports and exports are being affected, so the net trade position should not be affected markedly overall. About 25–30% in value terms of U.K. exports and imports are moved by air, but only around 1% by volume.

Outlook and Implications

The overall economic impact on the United Kingdom of the flight ban arising from the Icelandic volcanic ash should be limited in the near term at least, although this will be of little comfort to those industries that are affected and the people that are stranded or are losing their holidays.

Obviously, the longer the problem goes on, the greater the potential hit to the economy. This is particularly true given the current fragility of the U.K. economic recovery and the fact that Europe, a key export market for the United Kingdom, is the region most affected. Costs will mount as the flight ban lengthens—more perishable goods will have to be dumped and more companies may have to shut down production if a key spare part is delayed or they cannot obtain vital inputs.

In a worst-case scenario, if the problem were to run into the summer, this would hit the key tourism period substantially. Many more people would then take holidays at home in the United Kingdom rather than overseas, offsetting many of the foreign tourists having trouble getting into the country.

There is also the likelihood that the longer the problem persists, the more adept companies will become at getting around it. For example, they may find nearer suppliers, bring in inputs or spare parts by boat or train, build up stocks, and look to service markets nearer to home. In a number of cases, of course, U.K. domestic suppliers may benefit from foreign competitors being unable to ship their products into the country.

By Howard Archer
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