Government acts to bail out local airline industry

Government assured local airlines yesterday it would take immediate steps to support the industry in the wake of mounting financial pressures as a result of the unilateral decision of aviation insurers worldwide to increase insurance premiums and cap third party liability coverage.

Finance Secretary Jose Isidro Camacho and Transportation and Communications Secretary Pantaleon Alvarez signed yesterday a manifesto of support for Philippine Airlines (PAL), Air Philippines and Cebu Pacific, indicating government’s willingness to work with the industry to come up with a plan to address their concern over the insurance issue.

It was not clear, however, how much will be needed to bail out PAL and the rest of the industry.

Flag carrier PAL was all set to ground its aircraft beginning at 3 a.m. yesterday had government not acceded to its demand.

Global insurers have lowered their compensation ceiling from $2 billion to $50 million on third party damages related to war and terrorism following the attacks on the US. This has left airlines without much of their former war risk insurance cover and prompted many governments to extend assistance.

The predicament stems from provisions in airline loan and lease agreements that require airline carriers to maintain certain levels of war third party liability insurance coverage. The inability to secure necessary insurance coverage is enough justification for creditors to ground the aircraft.

Moreover, an increasing number of airports around the world are now requiring airline carriers to have a substantial war third party liability insurance cover, otherwise their aircraft will not be allowed to land.

For instance, London’s Heathrow Airport Authority would not allow foreign carriers to land in London unless guaranteed by the home government on third party liability cover. There are also reports that the Hong Kong Civil Aviation Department is contemplating a similar move.

The Philippines joins governments in China, Sri Lanka, South Korea, Thailand and Malaysia in throwing a lifeline to airlines in the wake of the attacks on the World Trade Center and the Pentagon two weeks ago.

In Europe, British Airways said it was considering a range of options to raise cash, including the sale of property, if losses from the attacks in the US grew.

In the biggest single industry deal, US President George W. Bush signed a bill last week giving US airlines $15 billion in cash and loan guarantees, as well as state-backed insurance against war and terrorism risk for the next six months.

The potential grounding of planes worldwide caps nearly two weeks of turmoil resulting from the Sept. 11 airborne attacks on US landmarks, costing billions of dollars in losses and as many as 100,000 layoffs.