Are you ready to bail out the airlines?

There's a joke doing the rounds at the moment. It's about whether Iceland mis-heard the UK when we asked for cash after the Icesave debacle and instead sent ash.

But the volcanic eruption that closed UK air space for nearly a week is no laughing matter.

The International Air Transport Association (IATA) puts the collective cost to airlines of the no-fly zone at an "initial and conservative" £130 million. A painful £20 million a day of that is draining from British Airways.

"In addition to lost revenues, airlines will incur added costs for re-routing of aircraft, care for stranded passengers and stranded aircraft at various ports," says IATA's Anthony Concil.

Accountancy firm KPMG says the figure is closer to £200 million a day, assuming that all ticket sales would have to be refunded to passengers.

The effect on the wider economy, however, is not expected to be as great, with freight industry experts saying the impact on trade will be minimal.

But concerns remain the travel industry will see longer-term fallout as passengers opt for alternatives to air travel; the last thing that the airline industry needs at the moment.

Taxpayers to the rescue

Inevitably, talk has turned to bail outs. On Radio Four's Today programme on Monday morning, secretary of state for transport Lord Adonis said it would be irresponsible to rule out taxpayer help for the airline industry in the wake of the losses they have faced due to the ash cloud covering much of Europe.

"We'll have to keep this situation under review, obviously we have a very serious situation if this continues and discussions are taking place at a European level with the aviation industry," he said.

"I don't rule out any option at the moment and it would be irresponsible to rule out options given the extent of the crisis that we face but our first priority is helping those who are stranded abroad, which we are doing."

But taxpayers will be relieved to know that the government cannot just opt to dip into Treasury coffers to prop up airlines. European state aid rules forbid EU governments from handing out grants, loans or subsidies that could give struggling companies an edge over competitors.

They were quick to prevent the Irish government helping Aer Lingus in 2001 and scrutinised the short term EUR300 million of bridging finance issued to ailing Alitalia by the Italian government in 2008.

If the EU Commission finds that a government loan violates EU rules then any airlines which have benefitted could be taken to court and made to repay the money.

But this should be viewed as a good thing. No fewer than half a dozen Asia Pacific airlines are currently in a handout holding pattern.

Governments in Japan, China, India, Malaysia, Indonesia and Thailand propped up national carriers to tune of $10 billion in the first three months of this year.

In February, Russia shelved plans to form a second big state airline and will instead fold six small state-owned airlines into its flagship state airline Aeroflot, in an attempt to consolidate the country's troubled aviation sector.

British taxpayers are unlikely to walk away from this 'act of God' unscathed, though.

"There is talk of a special aid package for the industry and I'd expect that to occur," says Paul Charles, crisis management expert at Lewis PR, which is advising several airlines.

He adds: "However, that may not be enough to help small operators. Many are already suffering from the recession and have been struggling to get any cash onto their books."

Compensation claims

On Monday, British Airways chief executive Willie Walsh called for financial compensation for the closure of airspace, saying there was a precedent for this to happen as compensation was paid after the closure of US airspace following the terrorist events of 9/11.

"We welcome the EU's initiative to address the economic consequences of the airspace closure on the air travel industry and the wider European economy," he said.

"We are also in touch with the UK government which has set up a group to work on this issue as it recognises the impact on airlines and the contribution that aviation makes to the British economy."

TUI Travel has also said it expects compensation to cover the tens of millions of pounds it has lost paying for stranded customers to stay at its hotels. "It would have been helpful if governments and authorities had got involved earlier," said chief executive Peter Long.

This article first appeared on our sister-website Interactive Investor