Europe's airlines fight insurance battle to avoid grounding threat

Europe's aircraft could be grounded by Monday unless agreement can be reached with insurers who have threatened to withdraw war-risk cover, which is a legal requirement for airlines.

Airlines around the world said insurance underwriters had given them notice they would cancel cover for war liabilities from midnight on Monday.

The cancellation means airlines and insurance companies will have to renegotiate the terms of cover in the light of the possibility of US military action in response to the terrorist attacks.

Aer Lingus confirmed last night that it was facing the Monday deadline but was working to secure a deal that would allow planes to fly.

Ryanair said it was confident a solution would be found. Chief executive, Mr Michael O'Leary said: "The fact is the airlines need to keep flying to provide the money the insurers need to meet their claims."

US President George W Bush also moved to respond to the threat facing US carriers.

President Bush asked Congress to amend legislation on the war-risk insurance programme provided by the Department of Transport so as to cover domestic US flights.

This would eliminate the risk of carriers being unable to find insurance and offsetting rate increases, his spokesman Mr Ari Fleischer said.

"This will eliminate the risk that carriers cannot obtain insurance and offset insurance rate hikes associated with the September 11th attacks," he said.

EU Transport Commissioner, Ms Loyola de Palacio, also said yesterday that EU finance ministers should also consider taking action over the sharply increased insurance premiums when they meet this weekend.

The cancellation of cover for war liabilities means airlines and insurance companies will have to renegotiate the terms of cover in the light of the possibility of US military action in response to the terrorist attacks.

Mr Ray Neidl, an airline analyst with ING Barings, said the new premiums being discussed were "ridiculously high" and potentially sufficient to tip several already weakened carriers over the brink.

According to a letter from British airlines to the UK transport secretary, Mr Stephen Byers, reductions in insurance cover for injuries to third parties, such as people on the ground, could cause airlines to breach contracts with the companies from which they lease aircraft.

The letter says insurers are offering third-party insurance of only $50 million, way below the $750 million (€54.04 million) typically demanded by aircraft lessors.

Aer Lingus said that amongst the possibilities being discussed was the deferral of the Monday deadline and the raising of the $50 million third-party cover figure to a realistic level.

The company was also talking to Government about solutions in the event of the failure of negotiations with insurers.

News of the latest aviation setback came as US President George W Bush's administration proposes an $8 billion emergency lifeline to save US airlines from collapse after the attacks in the US last week.

Ms de Palacio also called on national governments to help airlines pay the cost of extra security. She was speaking after a meeting with European airline representatives.

Meanwhile, Aer Lingus has begun a daily review of flight schedules to see if further routes cutbacks are necessary.

The airline, which is reducing its operations by 25 per cent, is also expected to consider seeking deferral of the next 5.5 per cent pay increase due under of the Programme for Prosperity and Fairness (PPF).

The possibility of a pay freeze, similar to that agreed under the Cahill Plan in the mid-1990s, is understood to have already been mooted informally at the airline, according to craft union sources.

However Aer Lingus, SIPTU and IMPACT representatives said yesterday it had not been raised so far at meetings, although it is accepted to be one of a range of cost-cutting options open for discussion.

SIPTU shop stewards from Dublin, Cork and Shannon met with officials at Dublin airport yesterday to be briefed on developments.

The unions will meet the Minister for Public Enterprise, Ms O'Rourke, on Monday.