ALEXANDER CAMPBELL, BUSINESS EDITOR

A slow but steady recovery is expected, but war with Iraq could tip more carriers over the precipice

After a year of sluggish economic performance around the world, 2003 should see the world economy start a slow but steady recovery - generally good news for the airline industry, although local issues may still mask the global improvements. A year ago, in the first months following 11 September, anything seemed possible. But by now the future shape of the airline industry seems clearer.

It is still too early to say what will happen to the two US carriers - United Airlines and US Airways - in Chapter 11 bankruptcy protection. But for the rest of the industry, the gradual abatement of passenger fear and the recovery of the economy in general means that no others are likely to follow them towards collapse. Here a couple of worries have proved to be less serious: state aid and protectionist legislation.

The loudly-announced $15 billion aid package for US carriers has been less of a help than many hoped, or, depending on your point of view, less of a distorting factor than many feared. The three-man Air Transportation Stabilisation Board has refused many of the most egregious appeals for help. They will continue to do so: US Airways and United will have to struggle on alone. And with the crisis receding into history, new appeals for help will be much less likely to succeed, as the link with 11 September becomes increasingly tenuous.

The industry seems to be set for recovery without either massive bankruptcies or - the other buzzword - "consolidation". Understandably, major carriers are loath to compound their own massive difficulties by buying another airline with its own set of problems. The exceptions have been in the low-cost sector, with EasyJet acquiring Go and taking aim at Deutsche BA - and despite initial union and organisational difficulties, this seems to be going smoothly.

Ownership laws

Mergers in Europe have also been limited by ownership laws and restrictions inherent in current bilateral aviation treaties. But here, at least some progress has been made - the European Court of Justice has belatedly decided that most current bilaterals are illegal. Or, possibly, not. European Court decisions tend to be rather Delphic, and immediate reactions to this one show that it has plenty of wiggle room, with the European Commission - which brought the case in the first place - the US administration and the various European defendant governments all drawing wildly different interpretations. After a good deal of sound and fury, the result - maybe not in 2003, but soon - should be a more liberal Atlantic aviation environment. This will benefit non-flag carriers such as BMI British Midland, and - perhaps -European carriers that could benefit from with a more equitable US-EU deal than the current open skies treaties, which tend to favour US carriers.

With little hope of peace in the Gulf, carriers around the world are nervously remembering the last Iraqi war, when traffic across the Atlantic fell 25%. Will another Gulf conflict have the same effect, which would almost certainly finish off many more airlines? Probably not. A rapid allied victory in early 2003 is the most likely outcome, and this might actually help the airlines by removing the uncertainty over the war's result which is currently slowing economic recovery, while it would be brief enough to have no significant effect on passenger confidence. The absence of hysteria following December's missile attack on an Arkia Boeing 757 may indicate that fear of terrorism has now reached a plateau among airline passengers - and even actual attacks by Iraqi-backed terrorists, as a response to a US invasion, would have little impact on air travel.

But a sustained war, with weeks of street fighting in Baghdad and Tikrit, and Arab terrorist organisations joining in on Iraq's side in the Middle East and elsewhere, would hit the world economy badly. The aviation industry would not escape this second and more serious downturn.

Source: Flight International

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