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Air carriers face insurance woes and slow season

"We can't exactly say if the current traffic is totally because of the attacks as it's also the lean season."

Philippine Airlines President Avelino Zapanta

orean Air Co, Philippine Airlines and other Asian carriers said time is running out for them to win insurance backing from their governments for damage caused by jets brought down by acts of war.

Insurers worldwide decided to limit their coverage to US$50 million per aircraft, down from as much as US$2 billion. While the new rules take effect today, only Hong Kong, Australia and New Zealand governments in Asia have offered to cover the shortfall.

Some Asian airlines warn flights may be canceled unless they can fill the gap and say governments are dragging their feet.

Insurers decided to slash coverage after commercial aircraft were used as weapons to destroy the World Trade Center in New York and damage the Pentagon in Washington on Sept. 11.

"If the alternatives don't work, then flights would have to be canceled"' said Philippine Airlines President Avelino Zapanta.

"Our situation is no different from the other airlines in other countries."

The company's top executives met yesterday to discuss their alternatives, such as imposing a insurance surcharge on passengers or asking for government assistance.

Governments in the US and the EU have agreed to help insure airlines, tiding them over at a time when demand for flights, particularly on transpacific routes, was already shrinking and reducing revenue.

The Hong Kong government this afternoon said it proposed covering claims for its airlines, the airport and service operators at the airport. The guarantee will commit the government to provide a maximum indemnity of US$1.95 billion to Hong Kong-based airlines such as Cathay Pacific Airways and Hong Kong Dragon Airlines Ltd in the next six months, the government said in a statement.

The government would also extend US$1 billion in coverage to 17 service providers operating at the Hong Kong International Airport, including Hong Kong Air Cargo Terminals Ltd and Hong Kong Aircraft Engineering Co. The government, which will charge a premium for the coverage offered, also said it will cover the airport authority for as much as US$1.25 billion per accident.

Cathay needs to achieve a US$750 million third-party war risk cover to satisfy requirements from leasing companies, said Tony Tyler, director of corporate communications, before the decision.

Hong Kong said the maximum claim that can be made at one time would be HK$62 billion (US$7.95 billion).

The Philippine government said it won't rush in and bail out its national carrier, which is under debt rehabilitation.

"We haven't been asked to provide financial assistance, so I haven't taken a position on it yet," Finance Secretary Jose Camacho said. "If requests are made, I want them studied first."

Philippine Airlines' Zapanta said passenger traffic for Philippine Airlines has fallen after the terrorist attacks and that only 50 percent to 60 percent of available seats are booked.

"We can't exactly say if the current traffic is totally because of the attacks as it's also the lean season," Zapanta said. "At any rate we expect traffic to slow down, and one thing we can do is hold back on bits of expansion that will happen in the next two years."

Eight of Asia's largest air carriers have lost nearly a third of their market value since the Sept. 11 attacks, with investors concerned the threat of US military action could lead to a prolonged slump in travel demand.

Delta Air Lines Inc last week said its planes are on average 29 percent full. Continental Airlines Inc and US Airways Group's US Airways said their jets are flying 40 percent full.

Korean Air yesterday said it will suspend or reduce flights on nine routes because of falling demand. Korean Air, the No. 4 cargo carrier, expects to lose 124 billion won (US$95 million) between September and December because of fewer flights to and from the US, while insurance costs are expected to swell by 98 billion won.

Korean Air and smaller rival Asiana Airlines Co have asked the government to offer insurance guarantees, approve raising fares to cover higher insurance premiums and to close unprofitable domestic routes, Korean Air said in statement. They also asked for tax breaks.

The South Korean government will discuss measures to help the carriers at a meeting today, said Korean Air spokesman William Han.

"We are anticipating a positive response from the government," said Han. "At the moment, we don't have any plans to cancel flights [because of the insurance shortfall], although the government is moving somewhat slowly."

Singapore Airlines Ltd declined to comment.

The Australian government said on Saturday it will provide US$5 billion to insure Qantas Airways Ltd and other national airlines threatened by canceled flights, while New Zealand Sunday earmarked US$807 million to insure national carrier Air New Zealand Ltd.

In the US, Congress approved the cover as part of a US$15 billion aid package to the industry.

While EU finance ministers ruled out direct financial aid they agreed to allow governments to act as airlines' guarantors for at least a month.
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