Deadly virus may force Cathay to ground entire fleet

The crisis enveloping the airline industry deepened yesterday after the Hong Kong-based carrier Cathay Pacific warned it may have to ground its entire fleet next month and Germany's Lufthansa said it was facing its gravest threat since before the 1991 Gulf War.

Cathay's warning, prompted by the outbreak of the deadly severe acute respiratory syndrome (Sars) virus, caused airline share prices to nosedive in the Far East while Lufthansa's blunt assessment of its prospects further added to gloom surrounding the European aviation industry.

The US airline sector has been in turmoil since the 11 September terrorist attacks but now Sars has spread the contagion to the Asia-Pacific region while economic slowdown is taking an increasing toll on Europe's airlines.

Cathay has already cut 42 per cent of its daily flights because of the collapse in business and tourist traffic following the World Health Organisation's advice not to travel to Hong Kong or the southern Chinese province of Guangdong.

The possibility that Cathay might have to ground its fleet of 70 aircraft entirely emerged in an internal memo which warned that the airline was "haemorrhaging" $3m (£1.9m) a day and that passenger numbers could fall to as little as a fifth of normal levels next month.

Cathay, which was forced to issue its first-ever profits warning last week because of Sars and the war on Iraq, ordinarily carries about 30,000 passengers a day. But traffic levels have fallen to 10,000 a day and Nick Rhodes, Cathay's director of flight operations, said in the memo: "We forecast that the number of passengers could fall to less than 6,000 a day in May in which case we will have to consider grounding the entire passenger fleet."

Cathay is partly insulated from Sars by the fact that cargo business makes up a third of total revenues and continues to grow strongly while the airline has more than $1bn in cash and short-term liquid assets. But that has not been enough to prevent its market capitalisation plunging by 20 per cent in the last month, wiping $1.3bn from its value.

Other carriers such as Singapore Airlines, Qantas of Australia and EVA Airways and China Airlines of Taiwan have also been hit. Shares in the two Taiwanese carriers shed up to 6 per cent of their value yesterday while Qantas is cutting 1,000 jobs to help combat the downturn in passenger demand.

Lufthansa's gloomy assessment of the market was spelt out by its chief financial officer in an interview with the company magazine. Karl-Ludwig Kley said that weekly sales were lower than the seasonal average and in the first quarter of the year the airline had suffered an "unexpectedly high" loss. "Without exaggeration, the situation with passenger traffic is worse than most realise," he added.

The airline added that it was in a deeper crisis than after either the 1991 Gulf War or the 11 September attacks. The warning suggests it will need to make further cutbacks on top of those already announced. So far Lufthansa has grounded 53 planes, or 15 per cent of the fleet, imposed a recruitment freeze and cut investment by ¤200m. Last week it announced a shorter working week for ground crew of 36 hours, down from the standard 37.5 hours.

Chris Tarry of the aviation research and advisory consultancy CTAIRA said Lufthansa had recovered quickly from the 1991 Gulf War because of the stimulus provided by the re-unification of Germany. Now it had the twin dangers or relatively high exposure to the Asia-Pacific market and a weakening German domestic economy.

"In addition to that Lufthansa and the other European airlines are faced with serious structural problems while the only direction in which fares are heading in mainland Europe is downwards," he added.

"Sars will pass. The real issue is how aggressively airlines have cut their costs since 11 September in anticipation of what may happen to the industry. The strategy in Europe has to be to survive and compete."