The Economic Impact of the Icelandic Volcano Eruptions on the International Economy Term Paper

Introduction

It is impossible to imagine a natural catastrophe which does not influence the international economy. Paying attention to the Icelandic volcano eruptions and especially the most recent one which took place on April 14, 2010, it is possible to say that Eyjafjallajokull volcano has affected the international economy greatly.

Therefore, it is impossible to say that the impact was positive. The whole international economy suffered greatly. The ash plume rose over several kilometers into the sky which could not be left invisible for the national and international economies.

It is obvious that the first problem which seems to be crucial is the environmental one. So much ash in the air and other consequences of the eruption harm the nature greatly. Still, the economic impact may not be compared with the environmental one as the environment of one country was affected and the changes the eruption caused are reversible. But, the whole world suffered from the disaster which has happened on one island.

Dwelling upon the international influence of the Icelandic volcano eruptions, it is necessary to state that not only the nearest countries like UK, France, Germany, and other northern European countries suffered from the disaster, but such remote ones like Japan and some other countries in Africa appeared under the influence.

Thus, it may be easily stated the economic impact of the Icelandic volcano eruptions on the international economy was great, especially in the airline sector and other types of transportation, tourism, import and export, and business. At the same time, referencing to the problems which have appeared, it may be predicted that there are some specific facilities for solving those.

The Influence of Icelandic Volcano Eruptions on the Airlines

It is natural that the appearance of much amount of ash in the air prevents airplanes from flying. This problem seems to be not so urgent if to consider it from the side of some tourists who had to stay on the island for several days more, but, being the international problem it is necessary to consider the far-reaching impact which is negative. Now, it is possible to calculate the costs and state that the global gross domestic product reduced on about US$4.7 billion for the first week.

The global aviation has lost about US$2.6 billion along with the net aviation sector which was impacted by US$2.2 billion lost. Due to the flight restrictions, the international trade loses even impossible to calculate. Because of the airspace shutdown, about 5,000 flights were cancelled, which led to US$5.0 billion total cost of the GDP through May 2010 (The Economic Impacts of Air Travel Restrictions Due to Volcanic Ash, 2010). All this information is taken for the first week after the disaster.

Considering the operating daily flights while the disaster, it may be easily stated that 27,000 flights were recorded on 14 April and on 17 April this number reduced up to 5,000 in the European space. The cancellation of flights impacted not only 7 million passengers, but also disrupted supply routes in the whole world. Passengers had to spend additional money on hotel rooms, taxis, food, as well as shopping and entertainment.

According to the Oxford economics report, “Nearly all inter-regional travel involving Europe was affected by the crisis and, as a result, every region of the world felt the impact of lost visitors with a potential loss (over and above aviation sector losses) of US$4.2 billion in visitor spending” (The Economic Impacts of Air Travel Restrictions Due to Volcanic Ash, 2010, p. 5).

Considering the far-reaching effects of the disaster, it is impossible to omit the following information. Those people who were far from their homes and wanted to go there had to use other options for traveling (sea, train, cars) or had to stay in the foreign country till the services start working again.

The would-be travelers had either to cancel the trip or to delay it. The airlines suffered from great costs due to the fact that the customers declined their booking. The European costs were about US$2.8 billion because of the loss of the predicted arrivals (The Economic Impacts of Air Travel Restrictions Due to Volcanic Ash, 2010).

The counties outside the Europe suffered as well. The USA is the country which was impacted greatly. Its aviation has lost about US$336 million in revenue. Middle East and Africa managed to lose US$253 million in the air transportation sector.

In spite of the fact that Asia was considered to be the region where the impact on travelers in numerical form was fewest, the aviation lost US$216 million. Moreover, “global effects of the disruption on GDP were the smallest in Asia at US$517 million, equivalent to around 0.16% of the region’s GDP for the week” (The Economic Impacts of Air Travel Restrictions Due to Volcanic Ash, 2010, p. 8).

The impact on passengers was great. Many people could not get home when they planned, that is why many people were left in stranded position not only for the time when the air space was closed but for much longer period. Even though there were so many problems the airline sector had to suffer from because of the Icelandic volcano eruptions and its negative impact on GDP, there were some ways which might reduce that harmful effect.

Therefore, those employees who used to work at home could continue performing their responsibilities from another country, some workers could be substituted for some period of time, others could catch-up the work later, and there could be people who could use the time stranded as the holiday (The Economic Impacts of Air Travel Restrictions Due to Volcanic Ash, 2010).

So, it may be completed that even though the shutdown of the European airspace negatively affected the economics of the whole world and GDP level of the countries, there were the ways for solving the problem or at least to reduce the harmful effect caused by the Icelandic volcano eruptions.

The Influence of Icelandic Volcano Eruptions on Other Means of Transport

The types of transport different from airplanes benefited from the situation. The main reason for such situation is that people tried to look for alternative types of transportation to reach their homes. Trains, ferry, rented cars, sea are the main types of transport people used to reach the place where they could reach their homes with. It may be said that train and ferry services increased at least twice while the period of time when airspace was closed.

It is obvious that airline services are considered to be the fastest and the most convenient means of transport in the relation to others. Still, when the problem appeared and ash resulted from eruption of the Eyjafjallajokull volcano and European airspace was shutdown, people remembered about alternative means of transportation and used those to reach their homes or other places of destination.

The most beneficial industries in the situation were railways and car rentals. It is obvious that if people could use other means for reaching their homes, they did all possible to do that.

Thus, Eurostar reported that it managed to carry 50,000 extra passengers the next day after the volcano eruption. The increase of the passengers who used the services of the company increased on 33% on 17 April. P&O Ferries of France stated that all places were booked and that they had to employ additional staff temporary to cope with the telephone calls and booking services (Mazzocchi, Hansstein & Ragona, 2010, p. 92).

At the same time, it is possible to conclude that the alternative means of transport were considered as effective only when small distances and products of long expire date were meant. Otherwise, when the freight should be delivered within a short period of time due to some specific terms and conditions of storage, it is obvious that sea and railway were not the appropriate means of transport that should be considered.

Even though many sources state that alternative types of transport benefited from the whole situation and helped people reach the places of their destination as well as the export and import deliveries, it is impossible to state that this substitution was efficient. According to the Swedish Transport Agency report, Swedish State Railways (SJ) and bus companies managed to help some stranded passengers and deliver them to the places they needed.

Still, it was impossible for them to replace the airline freights. All the countries reported that even the slightest help from alternative means of transport was visible, it was “hard to replace international air traffic with buses and even harder to substitute trains, because they are not coordinated internationally” (Skoglund, 2010, p. 47).

In conclusion, the means of transport different from airlines were considered as the rescue ones when Eyjafjallajokull volcano erupted. The types of alternative transportation services got additional revenue and only benefited from the situation. At the same time, surface transportation services also suffered great expenses in case when they depended on the air transportation.

Thus, the situation in the sphere of surface transportation was rather doubtful, on the one hand, people were given an opportunity to use alternative means of transport and reach the places of their final destination having increased the revenues in the sphere, but on the other hand, some surface transportation companies suffered costs if they depended on the airline delivery.

Icelandic Volcano Eruptions Impact on Tourism Industry

Iceland is one of the places which is considered to be the center of the international tourism. It is impossible to imagine the better place which combines cold temperature of the air and hot geysers. The country does not have the facilities for heavy industry, but has some specific conditions which increase the possibilities of tourism development. At the same time, it is impossible to state firmly whether the tourism industry was affected positively or negatively by the volcano eruptions. There are a number of reasons for this.

The factors which positively influenced the tourism industry on the island due to Eyjafjallajokull volcano eruption were as follows. Firstly, the demand for hotel rooms increased. This was connected with the stranded passengers who had to stay on island. Secondly, people spent more days in Iceland that could not prevent them from attending different entertaining facilities and eating in different restaurants.

Thirdly, the use of the surface transport in the country was inevitable that brought more profit to the national economy. The airspace was shut down for several days. This time was not enough to harm the industry greatly. Still, some negative effect was observed as well.

The negative impact on the tourism industry in the country was reflected via the following factors. The tour operators, according to the terms of the ATOL regulations, had to provide the tourists with the alternative means of transport free of charge and to offer the would-be tourists other types of transportation suitable for them.

This brought some additional costs which should be covered by the tour operators (Oakley-Smith, Rifkind, & Cartwright, 2010). Apps (2010) in the report devoted to the economic impact of the volcano eruption in Iceland states that approximately 5% of gross global product accounts for tourism industry. This is about $3 trillion. It is obvious that not all this sum was lost, still, the industry expenses were about $5-10 billion dollars a week.

Moreover, the environment problems which have appeared as the result of the eruptions cannot be eliminated too fast, so people would not like to go to the place where nothing is seen because of ash. Moreover, some vulcanologists warn that “the same thing could happen again for as long as the eruption under the glacier lasts, further threatening struggling firms” (Apps, 2010, par. 9).

So, it may be concluded that tourism sector is the one which suffered less from the volcano eruptions in Iceland. It may be predicted that the next time people would like to visit his place for a number of reasons. Still, one of those reasons is going to be the desire to visit the place which managed to shake the whole international economy and stop the air flies for several days. Moreover, the Eyjafjallajokull volcano is going to become one more place of interest which is going to attract more people on the island.

Influence of Iceland Volcano Eruptions on Export and Import

International trade largely depends on rail, road, and sea freight rather than on air transportation. However, the Iceland volcanic disruption has caused serious adversities for international including flowers and foods transportation that heavily relies on air freights.

In particular, export operations in Africa and the United Kingdom encounter serious problems due to air cancellations. Japanese leading car manufacturer Nissan has to postpone the production because it has failed to ship car parts from the Irish Republic and other countries.

Clouds of ash caused by the Iceland volcano eruptions have forced thousands of farmers near Equator strike and causing Kenya’s vegetable and flower industry a $ 3 million loss daily (Pflanz, 2010, p. 2).

In general, more than $ 12 million has been lost due to incapability to deliver the products to the European market. Such losses provide significant damages to Kenyan economy because horticulture industry is one of the main sources of the country’s revenues. As a result, the bankruptcy of this production line can lead to the increase of unemployment rates and decrease of the country’s gross domestic product.

Pflanz (2010) reports, “5000 farm workers across the industry were told to stat home on Monday as efforts were made to keep flowers and vegetable in the ground rather harvest them” (p. 2). While considering the transportation of fresh vegetables and fruits, the largest category involves leguminous vegetables, such as green pees and beans, and exotic fruits such as mangoes and melons (The Economic Impact of Air Travel Restrictions, 2010).

The disruption of airline freights has a negative impact on just-in-time manufacturing. The problems of economical character have touched upon even developed countries such as Japan and the United Kingdom.

In particular, Nissan, the leading car manufacturer in Japan, plans to cease the production due to the shortage of key engine controllers that are supplied by Hitachi. The production process and supply chain network was considerably disrupted by volcano eruptions in Iceland providing tangible reasons for economic problems in future (Wakabayashi and Takahashi, 2010).

The problems with air freights have always been the main stumble blocks for supply chain management, but volcanism has aggravated the situation to a great extent. In addition, care manufacturing at BMW has also undergone temporary suspensions due to the shortage of pressure sensors that are supplied via air-freights (The Economic Impact of Air Travel Restrictions, 2010).

Despite the fact that the production of the leading car industries has not been considerably disrupted by the ecological factors, the consequences of the volcanic eruptions still demonstrate the vital role airline in the international trade for global supply chain management.

The ecological disaster has greatly affected the economy of the United Kingdom. In particular, the country will suffer from import shortages of exotic fresh food due to air flight cancellations.

Due to the fact that Britain is one of the most developed economies in the world, the ash clouds caused by volcano eruptions in Iceland can considerably worsen the UK economic relationships not only with the Irish Republic, but also with other leading economies (Warner, 2010). Specifically, the disruption and air-flight cancellations threaten Britain’s successful economic activities. Their retail business encounters great losses as well because suppliers of fresh products could be affected and lead to more serious problems.

A significant impact will be experienced by pharmaceutical companies because their transactions and transportations heavily rely on the airline sector (Apps, 2010). The least unaffected zone in this term is Asia and the United States whose relationships has not been worsened.

The financial recessions can also spread over the economies of South America and Africa whose agricultural manufacturing can be suspended due to the transportation problems.

According the report carried out by the Economic Impact of Air Travel Restrictions (2010), “…under $ 300 million of flowers were exported to the EU from Latin America by air in 2009, $ 21 million in April 2009 Alone, with most of this coming from Ecuador and Argentina…” (p. 9).

Like Kenya, these economies also heavily rely on horticulture development, which greatly contributes to the economic growth because it affects all economic fields.

Impact of Volcanic Eruption on Other Business Costs

As it has mentioned previously, the international trade has been greatly affected by the environmental problems in Iceland. The shortages in import and export operations have provided additional expenditures for the elimination of the outcomes of air flight cancellations. In particular, the major attention is focused on the analysis of such areas as airmail, road and rail transportation systems, supply chain management reorganization, telecommunications, and environmental programs.

Due to transport and freight limitations, the greatest businesses and economies are also under the threat of financial crisis. In particular, leading industries can lose money due to stranded staff, cancelled meetings, and air mail delays (The Economic Impact of Air Travel Restrictions, 2010). The closure and cancellation of major European air space leaves passengers stranded around the worlds and provides with not possibility for returning home.

This is especially problematic when air flights are necessary for arranging business meetings and concluding important agreements. According to the Oxford Economics report (2010), “Europeans passenger “stranded days” totaled just less than 2.8 million days and that does not allow for the difficulties passengers are encountering getting home even one the majority of the airspace has reopened” (The Economic Impact of Air Travel Restrictions, 2010). Similar problem occurs of North American, US, Canadian, and Asian passengers.

The aviation section has also encountered great financial losses. The estimation of the European commission has revealed that more than 1 million schedules passengers were daily affected during the period of volcanic eruptions. The total number of stranded passengers counted about 10 million, which considerably influenced the economies and businesses of such leading countries as Great Britain, France, and Germany (Sokglund, 2010).

The disruption caused by volcano ash clouds has led to the delay of airmail. Many airmail operations have been suspended or delayed for an uncertain period. In particular, the United Parcel Service and FedEx have also stopped their activities for an indefinite time.

The problem is that the largest couriers companies such as DHL, and FedEx, and UPS use air hubs in Germany and France, which are closed now due to recent threat of volcanic eruptions (Apps, 2010). In this regard, the restrictions to air flights can influence the rearrangements of the routs. What is more problematic is that it can lead to the increase of gas prices and demand in crude and oil products (Norrington, 2010).

The economic outcomes of the volcanic eruption in Iceland infuse the implementation of various environmental programs that are also followed by significant business costs (Sokglund, 2010). Additionally, substantial financial support is necessary for future actions and operations on the prediction and elimination of environmental problems.

Impact of Volcanic Eruptions Economic Growth

The general economic impact of the volcanic disruption is planned to the relatively minimal. Nevertheless, the suspension period of air transportation might have a detrimental influence on European countries and their economic development.

The overall estimation of the consequences of volcanic eruptions for Icelandic economies and the global economy assumes that air transport and services has undergone the greatest losses. The ecological problem has also defined that this economic area is quite significant because it is closely intertwined with production, international trade, and business relations. What is more important is that air transportation system has become an inherent component of the modern economy.

The volcano eruptions in Iceland have contributed to financial crisis of a 2008-2010 period. In particular, this environmental problem has negatively affected the stability of supply chain operations being the basis for business transactions.

According to Levinson (2010), “[d]elays are much more frequent. Even with reduced demand in the current situation, we’ve got missed schedules, missed deliveries, and that has a cost for shippers” (p. 14). In addition, there is a decrease in economies of scale that are dependent on the efficient of air transportation system.

The emerging restrictions to air freights and transportation have led to the necessity to increase expenses on fuel energy. However, this problem is less serious in comparison with the costs related with environmental programs at ports that have acquired great significance.

Insufficient flexibility of port shipping operations can negatively influence the supply chain systems established in Europe and the United Stated. In addition, the problem of railroad transportation has also become urgent because this sphere lacks flexibility and efficiency in comparison with freights carried out via airlines (Levinson, 2010, p. 14). Such contingencies and inconveniences can lead to considerable changes for geographic location of manufacturing.

The leading international producers are now developing alternative ways for delivering their products in a timely manner and preventing the economic recession of their businesses. In particular, they are searching for more innovative approaches to lessen their supply chains by moving their production back to their countries.

Levinson (2010) emphasizes that “manufacturers whose supply chains were disrupted will have to decide whether Eyjafioell caused one-time losses or is the harbinger of things to come” (p. 14). Interpreting this, the problem of time-sensitive good would be at issue due to the problems with air transportation.

Despite the negative outcomes of Icelandic volcano eruptions, some business areas of the countries have undergone considerable economic growth. This specifically concerns hotel industries and land transportation due to high demand in hotel rooms.

Considering future perspective in economics, environmental issues require the deepest consideration. In this respect, International Volcanic Ahs Task Force and ICAO has put forward steps that should be taken at the international level.

The agreement stipulates the necessity to take measures and procedures for coping with volcanic ash and this initiative will become the basic framework for implementing those measures at regional level as well. The main scope of agreement consists in introducing consistent and fundamental improvements to predicting the foci of volcanic ash. Other objectives involve alterations in fly and flight conducts where responsibility is to be shifted to the airline operators (The Keilir Aviation Academy Conference, 2010, p. 4).

This procedure will be accomplished in a rigidly regulated environment where the risk management and assessment of all operations will be carefully carried out and approved by the pertinent aviation authority. All measures and procedures will be approved and testified by the European Commission that plans to conduct researchers and collect necessary information, including satellite images, and other appropriate date connected with volcanic ash contamination (The Keilir Aviation Academy Conference, 2010, p. 5).

Conclusion

The volcanic eruptions have radically changed the image of international economy. The Icelandic volcano eruptions have specifically altered the airline transportation sector and redirect the focus on other types of transportation. Such areas as tourism, business, export and import have also undergone significant changes. However, the current ecological situation has provided the necessity to introduce solutions which will be closely connected with the above-enumerated fields.

The greatest shifts have appeared in the airline sector whose industries have been considerably aggravated due to the shortage of air flights. Numerous businesses and economies blame airline in their financial losses. Specifically, significant losses were encountered by African importers for whom this is the main source of country’s revenues.

Other developing countries from South American have also experienced the outcomes of volcano eruptions in Iceland. Apart from this, the leading economies of the world have also faced significant challenges. Particularly, Japan and the United Kingdom has been forced to changes their economic and financial strategies to eliminate serious financial losses. A matter of timing and delivery, therefore, has acquired a great importance for the international trade.

The tourism sector is not considerably affected by the volcanic eruptions in Iceland. Despite the fact the tourism industries has suffered some financial losses, still the stranded passengers being unable to return home will have to spend money and this can compensate those losses. If the disruption suspends for a longer period of time, it could have much serious outcomes for this economic sector.

A significant change has occurred to the international trade trends, specifically to supply chain management. The leading just-in-time producers will have to alter their orientation and move their operations back to their countries. A specific focus will now be made on rail and road transportation that greatly benefits from recent volcano eruptions in Iceland.

With regard to the presented problem, serious measures and programs should be introduced to minimize the negative outcomes of this ecological problem. It should be stressed that researchers in this field should be dedicated to the analysis of environmental issues. In addition, little research has been done on tourism, business costs, and economic perspectives. Therefore, these areas should also be regarded more carefully.

Reference List

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