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jun

Newsletter June 2012: Newsletter FLO – Aviation

Arthur Flieger, Attorney at law Flieger Law Office bvba
with the cooperation of Stijn Brusseleers, Attorney at law Flieger Law office bvba
EU ETS : AN UPDATE, AND SOME MORE DISCRIMINATION – AND WHAT ABOUT BUSINESS AVIATION?

I.
Where do we stand today? June 2012
Since January 2012 one will have noticed that the aviation sector, including many non-European Airlines are brought within the European Union arrangement used to reduce green gas emissions.

Despite the European Commission’s warning that it might take actions and measures against those airlines which are not abiding to the system, there are still many voices contesting the EU ETS.

That the scheme is opposed by many States is well-known. In the United States, Transportation Secretary Ray LaHood and Secretary of State Hilary Clinton are opposed to the European legislation. They are on one line with the US airline industry and lawmakers of both sides. China is working on its own system, and is firmly opposed to the European Scheme, and India has warned that it will ban European air carriers from Indian airspace on its promise to sanction Indian Airlines over not complying with EU ETS. Although many non-European airlines did provide the EU with data on their respective carbon emissions, India and China didn’t do so until the beginning of June 2012.
The main question is to understand what EU ETS really is: is it a scheme to protect the environment or is it merely a source of revenue for a cash-strapped Europe?
One needs to stress that none of the monies collected are required to be used for environmental issues!

ICAO from its side is working to devise a global carbon plan that goes into effect ahead of April 2013. The European Union may, once ICAO’s plans are unveiled, replace its carbon scheme and may decide to use ICAO’s version. This would be a more than good decision.

Recently there was a notable change to the scheme, which is more infuriating than interesting. From 2013 static installations will be exempted from the scheme, if they fall below a certain threshold, but those rules do not extend to aircraft operators. Without going into detail of this latest change there is indeed a black and white legal reason for it, but we do not find any argument in favour of this omission from a practical point of view.

According to the EU schedule, airlines should have submitted their carbon emissions data for last year by the end of March 2012, and the taxes will be charged on those emissions starting in March 2013.

II.
Free emissions allowances are insufficient
EU ETS sets a limit on the CO2 emissions of a large number of market actors. Each year companies participating in the EU ETS scheme must surrender a number of emission allowances equivalent to their CO2 emissions to the Emission Authorities. The total number of available emission allowances is limited by law. The emissions trading scheme for aviation covers the CO2 emissions of all flights arriving and departing at airports in the European Union, as well as Iceland, Liechtenstein and Norway. Airlines must possess emission allowances equal to all the CO2 emissions from their flights. A lot has already been written about the scheme, but one should keep in mind that for 2012 the aviation sector has been allocated about 183 million free emission allowances, and for 2013-2020 the sector will receive about 173 million allowances each year. These free allowances amount to 85% and 82% of the total number of aviation allowances which are been added to the existing emissions cap.
The allocation of free allowances to the airlines is based on the activity of each operator in 2010 in terms of revenue tonne kilometres. The remaining allowances are allocated by auction. If the free allowances allocated to the airlines are not sufficient to cover their emissions, they can take mitigating measures to reduce emissions, purchase additional allowances at auction, or buy allowances from other ETS participants, especially from those outside the aviation sector who have allowances to spare.

Airline sector will have to buy emissions allowances for a fortune
The emission allowances that have to be bought are not the same for all airlines. Airlines with high fuel requirements will have to buy relatively few emission allowances compared to other ones. The same is true for airlines that have grown less rapidly the recent years. It occurs from a study published by the Ministry of Infrastructure and Environment in the Netherlands that the biggest European airlines will have to buy a higher than average number: an estimate for Air France- KLM is 30% of their requirement, for British Airways 34% and for Lufthansa 38%.
Low-cost airlines like Ryanair and EasyJet will have to buy a lower than average number, probably 24% and 21% of their requirements respectively. The method for allocating free allowances is favourable for Emirates, which in 2012 will probably not have to buy any or just a small number of emission allowances.

Strategic choice
Will airlines pass on the cost of purchase allowances to their passengers? Ryanair organised a system by which its passengers pay an amount upon purchasing their ticket. Probably airlines will pass on the cost to their passengers if this is more beneficial for their operating result than absorbing the costs. If they absorb the costs, such implies that ticket prices, passenger number and turnover will remain unchanged. Probably airlines will do this only if it improves their operating results compared with passing on only the cost of the purchase allowances. The passing on is a strategic choice to be made by the individual airlines and they will probably consider following factors:

1) The degree of competition with other airlines;
2) The price sensitivity of the consumer groups in different market segments;
3) The possibilities for passing on costs to passengers on routes falling outside the EU ETS ( if the airline in question operates on these routes).

It also occurs that if airlines raise ticket prices in direct proportion to the cost of purchase allowances irrespective of the routes or customers, the tickets would just be a few euros more expensive.

Increase in ticket prices will probably lead to a fall in passengers numbers in all markets from, to and within Europe. If the airlines only pass on the cost of the purchase emission allowances, the number of passengers flying with EU airlines will fall by 0,2% according to some studies. If they also pass on the value of the free emission allowances, passengers numbers will fall by 0,9%.

One would say that the largest decline will be in transfer passengers from and to destinations outside the European Union, via European airports for instance from New York via Brussels to Mumbai. Transfer passengers flying via an airport outside EU will certainly increase.

Reduction in the number of passengers may make certain routes unprofitable, leading to lower frequencies or even to an abolishment of these routes. One should also consider network eroding as a result of the increase in price. In our view it is not possible to estimate at this stage the likelihood of this occurring in advance. One requires accurate information about the margins on each route and the contribution each route makes to the whole network. Only airlines have that information and at this stage there is no common exchange of information by the airlines.

III.
Will airlines avoid European airports?
With the EU ETS it seems that airlines will only make some adjustments to their routes or destinations. One will however consider that a distinction should be made between network airlines and low-cost airlines based in the EU, and network airlines based outside the EU. It will lead us too far from the scope of this newsletter to go into detail, however it occurs that it is easier for a low-cost airline to adjust flight frequencies and scrap destinations. They generally operate only within Europe, and are as such not affected by restrictions imposed by aviation policies. One will keep in mind that within the European Union a free market is operated.

Network airlines based within the EU will – in principle – not operate outside the EU. Landing rights are needed for destinations outside the EU, for which aviation policies play a decisive role. Operational stopovers ( i.e. without boarding or deplaning passengers ) could be included or on intercontinental flights a stopover could be done just outside the EU. No landing rights are needed for these stopovers ( where no passengers board or deplane ) and so aviation policy restrictions do not apply. However, such operational stopovers entail considerable disadvantages, loss of service, quality for passengers, extra take-off and landing fees and fuel costs. Only if the emission allowances reach a rather high level, this option will be interesting for EU network airlines.

Network airlines based outside the EU will have the possibility to avoid EU destinations, but one should also keep in mind that those airlines have chosen EU destinations because of the numbers of passengers they can serve. Those airlines would only choose other destinations outside the EU simply to avoid the costs of the emissions trading scheme if they could serve destinations outside the EU that generate just as much yield.

Probably those airlines that do a stopover at a European airport en route between two non-EU airports for paying passengers or cargo might be inclined to switch to non-stop flights without a stopover. One will also consider that flights without stopovers must still carry sufficient paying passengers or cargo.

IV.
What about business aviation? Another discrimination?
What is surprising, is that business aviation is regarded as some kind of rich and slovenly mark by the EU, and that the EU ETS applies to almost all private business aircraft, but not to smaller commercial carriers, regardless of their equipment. An example will clarify this: under the EU ETS a 50 year old Boeing 707 smoker can operate to and from Europe, logging up to 243 flights per quarter, without paying a single euro emissions fees. But a single visit by a corporate CJ4 will cost some euros! One can only wonder as how the 243 flight limit was arrived at, this all will certainly not involve reducing carbon emissions. One will also keep in mind that EU ETS has also got a financial motivation. Apart from the EUAA market the EU ETS involves administrative and emissions fees for those operators exceeding their cap. Taxing the aviation industry is easy.

V.
Commercial freighters and passenger carriers can simply pass the added cost on to their customers. Business aircraft operators, by contrast, are stuck with the bill. In the business aviation community EU ETS is described as unfair, intrusive and administratively burdensome. The more since the European scheme is discriminatory because businesses that utilize general aviation aircraft are not eligible for emissions exemption granted to larger commercial carriers that can operate hundreds flights per quarter. And then there is as well the question about personal privacy and business confidentiality.
Unfortunately voices of objection of the business aviation have been raised only lately. Why? Probably because the EU Commission considered the objection merely as bluff, and/or that the business aviation flight departments were too busy trying to comply with the EU ETS procedures….
Hopefully Europe will reconsider its view or ICAO will show up with a more acceptable and non-discriminatory system.

The goal of the EU Commission is noble but the execution of the EU ETS and benefits are unsure: as said, the monies are not to be used for environmental purposes.

Sources:
– Air Transport World Online (2011) http://atwonline.com/aircraft-engines-components/news/chinese-government-reportedly-blocks-a380-order-over-eu-ets-062
– KiM Rapport “ De luchtvaart in het emissiehandelssysteem
– EU-ETS and Business Aviation – in Aviationweek May 2012
– Fliegerlaw.com/blog/aviation-carbon
– NBAA-org/news/pr: EU-ETS Discriminatory to Business Aviation, Bolen tells Senate Committee

For further information and comment, please contact Arthur Flieger at Flieger@fliegerlaw.com,
Website: www.fliegerlaw.com, telephone: +32 3 238 77 66

 

Copyright A. Flieger