Volcano In Iceland Grounds Airline ETF (FAA)

by on April 17, 2010 | ETFs Mentioned:

The airline industry encountered some unexpected turbulence this week when an eruption beneath Iceland’s Eyjafjallajokull volcano began spewing ash and dust into the atmosphere. The eruption has continued since then, grounding air travel across much of Western and Northern Europe. The blast, which was not very large compared to other eruptions in the past, mixed with the ice in the glaciers to form a type of glass that spread through the atmosphere. This created a potentially dangerous situation; if the glass shards got into jet engines it could cause mechanical issues and even bring down a passenger jet. As such, flights have been grounded or severely limited across much of the British Isles, and the disruptions will continue until at least Monday.

The volcanic eruption has had an adverse impact on the airline industry, which is reportedly losing roughly $200 million dollars a day from the disruptions. And that excludes the added costs that come from redirecting flights and providing accommodations for stranded passengers. “In terms of closure of airspace, this is worse than after 9/11,” a spokesman for Britain’s aviation regulator, the Civil Aviation Authority (CAA) said. “The disruption is probably larger than anything we’ve seen.” The big wild-card in this story is predicting just how long the eruption will last. Smithsonian Institution volcano expert Sally Sennert says that the eruption could last for months, just as Eyjafjallajokull’s previous blast did back in 1821-23.

The Claymore/NYSE Airline ETF (FAA) has been in focus this week as the ash cloud drags on over continental Europe, crushing the as of late soaring industry. Before the event, FAA was up more than 20% this year and close to 75% over the past 52 weeks. While the impact to FAA will be limited due to the fund’s slant towards American carriers (such as Continental and Southwest), the cancellation of profitable international travel could weigh on profits.

Moreover, the impact is likely to be felt by several of the fund’s top holdings–such as Delta and Lufthansa–that have significant operations in Northern Europe. While there is no telling what the final damage toll will be, make sure to keep an eye on FAA to see how this ongoing story impacts the airline industry next week.

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Disclosure: No positions at time of writing.