Airlines greet the unwelcome arrival of the EU ETS with passenger surcharges to cover their anticipated costs
Wed 18 Jan 2012 – There were no fireworks on January 1 to usher in the introduction of the EU Emissions Trading Scheme (EU ETS) for airlines serving European airports, just disgruntled announcements by a number of major airlines – including Lufthansa and Ryanair – that passengers would face an increase in their fares to cover the costs of compliance. US airlines too have introduced surcharges on transatlantic routes but won’t publicly attribute them to the EU scheme. Up till now, airlines have generally refused to reveal whether they would soak up the costs or pass them on to customers but the early signs are that many will decide on the latter course of action. A paper just published by MIT’s Department of Aeronautics and Astronautics finds the economic impact of the EU ETS on US airlines is likely to be small, with a potential for windfall gains under the current permit allocation rules.
Lufthansa was one of the first airlines to announce that it would be increasing its fuel surcharge to offset expenses of around €130 million ($167m) it estimates in 2012 as a result of the scheme. The airline group reveals that it will have to buy at least 35% of the certificates it needs as a result of growth since the 2004-6 baseline period on which free allocations are based. In 2011, Lufthansa’s jet fuel bill totalled over €6 billion ($7.7bn).
It says costs will have to be passed on in higher ticket prices because of tough competition, especially from non-EU carriers “whose operations are only subject to limited emissions trading rules.”
The airline said it would include the cost of purchasing the certificates in its existing fuel surcharge but had no immediate plans to carry out the increase.
“The incorporation of airlines in the EU ETS means that European operators are now facing additional costs which will make flying within and via Europe more expensive for passengers,” commented Deutsche Lufthansa Executive Board Member Carsten Spohr. “It will also distort competition and impact on the sustainability of the aviation industry if it proves impossible to implement with the competitive neutrality promised by policy makers. However, given the huge resistance at international level, it is unclear just how the situation will develop.”
Lufthansa has been consistently less supportive of the EU ETS than its major European rivals and in a policy brief published last month, Lufthansa called for a postponement of the scheme because of the international differences brought about. It said countries should instead show resolve and not give up on efforts to achieve a global solution through ICAO.
“In the current situation, Europe cannot afford to let far-reaching conflicts escalate with its most important partners. It is clear that only further negotiations will bring about a solution,” said the briefing.
With Europe’s largest international airline group less than enamoured with the EU ETS, the scheme was derided as an “eco-looney” tax by Europe’s largest intra-EU airline, Ryanair. The low-cost airline became the first to put a price on the cost of the scheme by introducing a €0.25 (32 US cents) levy per passenger from January 17. Ryanair said the introduction of the EU ETS would cost it, and therefore its passengers, €15-20 million ($19-26m) during 2012.
It claimed the 25-cent one-way charge would be less than its EU rivals as it was “Europe’s greenest, cleanest airline which enjoys lower ETS costs then high-fare European flag carrier airlines who operate older, noisier, more polluting aircraft.”
Said Ryanair’s Head of Communications, Stephen McNamara: “Ryanair does not believe that European aviation should be included in the ETS scheme since it accounts for less than 2% of the EU’s CO2 emissions. This latest EU stealth tax will damage traffic, tourism, European competitiveness and jobs at a time when no other economic block is including aviation in their ETS schemes.”
Ryanair is a member of the European Low Fares Airline Association (ELFAA), whose Secretary General, John Hanlon, had a different message.
“ELFAA, whose members represent 43% of intra-Europe point-to-point scheduled air traffic, has lent its strong, public support to the inclusion of aviation in EU ETS as the most appropriate MBM to take account of aviation’s emissions of CO2,” he said. “The ELFAA support for EU ETS has always been contingent on its environmental effectiveness. With 80% of European aviation emissions being from long-haul flights to and from EU airports, environmental effectiveness necessarily requires the inclusion of all flights to and from EU airports, as provided for in the legislation. ELFAA did not support those airlines and trade associations which challenged the Directive.
“ELFAA agrees with the conclusion reached by the European Commission that after reviewing the range of options available – including taxation – to take account of aviation’s CO2 emissions, inclusion in ETS offers the greatest environmental benefit at the lowest cost to society.”
However, Hanlon added support was predicated on the withdrawal of the growing taxes on aviation “many of which masquerade as ‘environmental’ measures but which offer no environmental payback whatever in reality.”
The incoming Chairman of the Association of European Airlines (AEA) for 2012, Brussels Airlines CEO Bernard Gustin, said a priority over the coming year would be delivery of the Single European Sky but feared the row over the EU ETS would dominate the political focus.
“The ETS debate is like a volcano,” he commented. “When the tensions erupt, it is going to be extremely damaging for European air travel. A globally acceptable solution and a shift of focus from politics back to the environment is an absolute must for 2012.”
In the United States, Delta Air Lines has announced a $3 one-way surcharge per passenger on flights between the US and Europe, the timing of which has been seen by many as an EU ETS levy. However, the airline refuses to confirm this. American Airlines, US Airways and United Continental are also understood to have followed Delta’s lead with a similar surcharge, although none has publicly commented on the reason for the charge. They are perhaps mindful of proposed US legislation banning all US aircraft operators from participating in the EU ETS and could therefore find themselves in a position where they had passed on costs to their customers in respect of a scheme the airlines were later prohibited from joining. Similarly, if the EU amended, postponed or scrapped the scheme, there would be a question as to whether the airlines would be forced to recompense passengers who had already paid an identified ETS surcharge.
The US airline association Airlines for America, formerly the ATA, has estimated the scheme will cost its members around $3.1 billion through to 2020. However, market prices for carbon have slumped dramatically and are less than half what they were when many industry cost estimates were drawn up. Having fallen to a four-year low last month, the current price is less than €7 ($9) per tonne of CO2, which many airlines may see as a buying opportunity although allowances to cover their 2012 emissions shortfall do not need to be surrendered until April 2013. The price may recover if proposals by the European Parliament’s environment committee to restrict the supply of permits succeed. Aviation is expected to be the second-biggest sector in the EU ETS after power generation.
Meanwhile, a partially FAA-funded paper by MIT’s Department of Aeronautics and Astronautics just published in the Journal of Air Transport Management estimates the scheme will only have a small impact on US airlines and emissions, and the growth of aviation operations will continue to grow.
The airline industry has consistently argued that unlike other sectors in the early phases of the EU ETS, there will be no windfall profits to be made from the scheme due to the competitive, price-sensitive environment in which it operates. However, the MIT paper calculates that if carriers passed on the additional costs to consumers, including the ‘opportunity’ costs associated with free allowances, their profits would increase. Where there is a full cost pass-through, US airlines could receive windfall gains of $2.6 billion from the ‘grandfathering’ of allowances, finds the paper.
“Windfall gains from free allowances may be substantial because under current allocation rules, airlines would only have to purchase about a third of the required allowances,” says the paper’s abstract. “However, an increase in the proportion of allowances auctioned would reduce windfall gains, and profits for US airlines may decline.”
Lead author of the paper, MIT research scientist Dr Robert Malina, told GreenAir that it was very hard to exactly quantify what impact the EU ETS will have on US airlines. “What we can say is that we think it highly unlikely carriers will absorb the extra costs and it would be unsustainable not to pass them on at all,” he said. “When you look at what Delta, Brussels Airlines, Lufthansa and others are doing right now you can see that they try to pass on something.
“One general conclusion that we draw from our work is that the overall impact of ETS on US carriers will be small. In the best case – our ‘Full’ scenario – they might enjoy some extra profits in the medium run but those are likely to disappear in the future because of changes in the allocation rules which we expect to see, similar to the broader EU ETS.
“In the ‘Expense’ scenario, profit margins remain constant and overall profits decrease slightly compared to a scenario without ETS – which we call Business as Usual – because of the smaller increase in traffic on the North Atlantic. And if airlines are not able to pass on all the expenses we would end up somewhere between the Expense and the Absorb scenario, which would imply a slight reduction in profit margins. That would be the ‘worst case’.”
A new report released by aviation intelligence and data provider OAG predicts higher air fares averaging around 3% per passenger as a result of the EU ETS, based on annual industry costs of €3.5 billion ($4.5bn) that assume a carbon price level of €30 ($38) per allowance.
“These costs are likely to be spread unevenly amongst affected operators, as specific emission levels vary widely between aircraft,” it says. “The costs for emission allowances will effectively introduce an additional commodity price risk into an operator’s business model. The additional costs to the airline will result in the costs being passed onto the customer.”
OAG says the degree to which an individual airline is able to pass on this cost will be influenced by the efficiency of its route network, market pricing and price elasticity of the route.
“Those airlines with a higher proportion of premium revenues may find it easier to pass on carbon costs to passengers, as these costs will be a proportionately lower percentage of the ticket price than for lower priced economy passengers,” it argues. “Low-cost and short-haul airlines that have lower premium revenues, and particularly those with older aircraft fleets, will be more affected by the ETS scheme across their business.”
The report also predicts some airlines will use non-EU points as intermediate stops to avoid the additional costs. “The impact of introducing this new carbon tax will be visible not only in carriers’ capacity and frequency, but in European airports and airports outside the area affected by carbon regulation,” it adds.
Carriers will begin receiving their free allowances in February and many are already preparing their carbon trading strategies. Air France has just announced that it had started trading on BlueNext, the Paris-based international exchange for the environment that operates markets in carbon emission allowances and credits.
“Air France is the first airline to register for trading in emission rights directly on BlueNext,” it said in a statement. “Air France has thoroughly prepared for its compliance and this membership is a new expression of its long-lasting environmental commitment.”
BlueNext, along with other exchanges including the European Energy Exchange (EEX) and ICE Futures Europe, are amongst the sponsors of Aviation Carbon 2012, a major conference taking place next month in London and co-organised by GreenAir Online. Over 250 delegates from 58 countries – including China, Russia and the United States – and nearly 90 airlines and business jet operators have so far registered.