Western economies will come under huge budgetary pressures

greenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Western economies will come under huge budgetary pressures

Bill Jamieson Executive Editor (bjamieson@scotsman.com)

AIRLINES are not the only industry stricken by the financial domino effect spreading out from the terrorist attacks on 11 September. The insurance sector is having to cope with claims arising from the biggest man-made disaster ever.

Estimates of the total bill extend from $10 billion to as high as $70 billion. This compares with the $20 billion cost to the industry of Hurricane Andrew in 1992. Insurance companies in turn insure themselves with reinsurance companies to avoid losses beyond a certain limit, and the more the liability is spread, the better. There has also been speculation that only one of the two New York towers was covered, as a double collapse was considered so unlikely.

Tourism around the world has been dealt a severe blow as air traveller numbers have plunged. There are calls in Scotland for an emergency aid fund for the tourist industry which stands to lose £240 million in US visitor spend. The European Commission is already preparing an assessment on the impact on tourism Europe-wide. It is due to report early next month on possible measures to help the industry without breaking EU state aid rules.

Air traveller numbers have plunged since the attacks, with BA reporting a 20-25 per cent fall in passengers. The slump will send ripple effects across the tourism, entertainment and leisure industries.

Hopes that the tumbling oil price - it has fallen 20 per cent since 11 September - will help the airline and tourist industries look forlorn. With the collapse in demand and rising insurance and security costs, the airlines say it will not come near to offsetting the huge rise in expenditure elsewhere.

Ironically, it will be the oil industry that will feel the slowdown in the aviation industry, rather than vice-versa.

One industry expert commented: "Jet kerosene accounts for 8 per cent of the barrels of oil consumed in the developed world. If the number of flights declines by 20 per cent, which is looking likely at the moment, that might cause a fall in demand for oil on a global level of between 1 to 2 per cent."

For airlines, fuel costs only make up between 10-15 per cent of overall operating costs. A fall of 25 per cent in the price of oil from $28 to $22 will therefore only reduce overall operating costs by a maximum of 2-3 per cent. But the benefit would be reduced by the extent of advance fuel purchases by airlines.

Costliest of all for governments could be extra spending and/or tax cutting measures to help restore household and business morale and get the economies of the US and Europe moving again.

Congress has already approved emergency packages totalling $55 billion. Pressures for higher defence spending and a further tax hand-back to help boost consumer confidence could see President Bush under heavy budget pressure in the months ahead.

http://www.thescotsman.co.uk/scotland.cfm?id=113048&keyword=the

-- Martin Thompson (mthom1927@aol.com), October 04, 2001


Moderation questions? read the FAQ