The financial impact of the volcanic ash crisis on the European airline industry

Immediately after the eruption of the Icelandic volcano Eyjafjallajökull in April 2010, there were claims of huge economic impact on the air travel industry. However, it is difficult to obtain accurate estimates of the overall economic impact that can be ascribed to a natural disaster like this, because of the unpredictable behaviour of nature, the adaptive behaviour of travelers, the possible profits for alternative transport businesses, and a number of offsetting factors like the fuel saved. A (partial) solution to the impossible task of estimating and aggregating all those impacts lies in the exploration of financial markets. In this chapter, an event study analysis – a consolidated econometric method – is employed in order to provide some estimates of financial losses for selected airline companies and potential gains for alternative transport companies that may be ascribed to the volcanic ash cloud. A few key results can be summarized: (1) the initial occurrence of the crisis generated major negative impacts on airlines, then return to normal financial operations was quite rapid; (2) as the ash cloud returned to affect flight operations in May, despite the relatively low impact in terms of disrupted flights and grounded passengers, the financial reaction was quite strong; (3) potential gains for economic agents that can benefit from the disruption of air travel seem to be short-lived, consistently with the adaptive behaviour of agents and the time needed for structural adjustments (e.g. increasing capacity for car rentals). Our overall estimate for nine selected European flag carriers is a financial loss of about €3.3 billion over one month, a figure that is well above the overall economic impact estimated by various air traffic organizations in the aftermath of the event for all European airlines.