Airline Industry Increasing Prices

The aviation sector has been seemingly grounded after the terror attacks on the US. With increased check-in times, strict security searches and fear of war, air travel has been reserved for times of necessity. The decrease in both business and leisure travel has in turn affected other industries, the likes of the tourism and hospitality industries. A slump in consumer confidence is said to be long-term effect as demand for tickets decline.

The World Tourist Organisation said that it could be several years before global tourism recovers from the attacks.

However, the short term threat to the airline industry needs urgent attention. Share prices in related stocks have plummeted. Reduced air travel, damage to aircraft, refunds and insurance claims all aggrevate the situation which might result in some airlines filing for bankruptcy.

In an effort to boost airline stocks and to make a statement about the stability of the country after the attacks, President Bush prompted the biggest single industry deal in the US. The President signed a bill to the value of $5 billion in cash and loan guarantees, as well as state-backed insurance against war and terrorism risk for the next six months.

"The terrorists who attacked our country on September 11 will not shut down our vital businesses or thwart our way of life," Bush said in a statement after closing the deal.

Ticket prices are expected to soar which will certainly not aid the slump in consumer confidence. "Tighter security requirements and procedures as well as the drastic rise in insurance premiums which has already been announced, a significant increase in ticket prices and cargo rates now seems inevitable," said Lufthansa in a statement.

The attacks are expected to add to the cost of air travel across the industry because of extra security measures. KLM Royal Dutch has begun charging $10 extra for each return flight. "It's a safety surcharge," a spokesman said. "We have taken a lot of measures to boost safety, and that incurs costs."

The attacks have also hurt the value of aviation asset sales. The Australian government has delayed the sale of Sydney airport until early 2002. The market's volatility threatened to cut the $2.2 billion price tag. The sale of Kingsford Smith airport had been due to be completed by the end of the year.

Asian governments have stepped forward to bridge an insurance gap for their airlines too, joining counterparts around the globe keeping their carriers afloat ahead of sharply reduced war risk protection.

However, analysts are saying that these short term cash injections will do little to help the airlines in the long-term. "We can provide the airlines with all the money they need, but people aren't going to climb on board again until they know they're secure, and our job is to see that security is provided," Senate Majority Leader Tom Daschle, a South Dakota Democrat, told NBC's Meet the Press.

What remains to be seen is what the airlines will do to incentivise air travel. Increasing the number of seats per flight through an incentive programme is seemingly the only solution in the long-term.