Global airlines nudge towards carbon emissions trading
In 2012 European airlines are scheduled to be included in the carbon emissions trading scheme for the first time. Aviation is a industry responsible for 650 million tonnes of CO2 annually - around two percent of global greenhouse gas pollution but this share is expected to rise in the years ahead and the industry has been under sustained pressure from stakeholders including the EU Commission and green pressure groups to do something to tackle carbon emissions.
The airlines have complained about being included in the EU scheme - they complain that participation will damage their competitiveness during a difficult time for airline businesses. Swiss International Airlines chief executive Christoph Franz has argued that including airlines in the EU-ETS could actually lead to more greenhouse gas emissions as airlines sought to fly around EU airspace.
But without signs of an active commitment to reducing their emissions, the industry may well find that it is subject to even tougher regulation in the years ahead and/or a specific pollution tax on aviation fuel as a means of ‘making the polluter pay’.
This week four of the world’s biggest airlines have supported a global scheme to curb carbon emissions - they are Air France/KLM, British Airways, Cathay Pacific, Virgin Atlantic together with the under-fire airport operator BAA.
The Aviation Global Deal Group is pushing for a global cap on aviation emissions to take effect in 2013 when the new climate deal to replace the Kyoto Protocol must be in place. A UN body would be charged with auctioning the C02 allowances with some of the revenue earmarked for financing lower carbon investments in developing countries and some to help fund development of sustainable second-generation biofuels for use in aviation.
Watch this airspace .... this is a really important aspect of the climate change policy domain within the European Union.
Airline mergers and competition policy
Today we heard of another instance of consolidation in the European Union aviation industry. Lufthansa has agreed with Michael Bishop, founder of BMI to up their stake in the UK airline from 30 per cent to 80 per cent by buying out Sir Michael’s own equity stake in the business.
Having acquired Swiss Airlines a while back Lufthansa continues to build a broader base for its operations, and in buying BMI it gains a well established mainly short-haul operator which has a significant number of scarce and hugely valuable landing slots from Heathrow. Lufthansa will emerge as the second-biggest carrier behind British Airways at Heathrow. Virgin has 3 percent of slots at Heathrow, the main airport for London; bmi has 12 percent and British Airways more than 40 percent. These land slots represent an important barrier to entry for airlines wanting the green light to expand their operations at chosen airports.
Just as a few weeks back, when the government nudged Lloyds TSB into mating with embattled bank HBoS, at times of great economic and financial uncertainty, many mergers and takeovers are born of necessity rather than excessive optimism.
And this creates a possible headache for the Competition Policy authorities who must make a judgement about whether to allow the integration to proceed without intervention or insist that the newly enlarged business divests some of their operations to ensure that the markets remain competitive.
When the survival of a business is at stake and with it thousands of jobs, are the competition authorities more inclined to turn a blind eye? The answer is probably YES and there will be many more mergers in the airline industry before the current economic crisis is over.
BAA faces break up after Competition probe
Michael O’Leary, CEO of Ryanair has called it the ‘best decision in the history of aviation ever.’ Colin Matthews, Chief Executive of BAA has slammed it as ‘flawed’. The Competition Commission has delivered a report which suggests that BAA should see three of its UK airports including two in London and one at either Edinburgh or Glasgow.
Grounding flights - the shut-down point
I normally teach about there being a shut-down price - a price so low that a business cannot hope to cover even the variable costs of production and one that implies that it might be better to close down production in the short term. Perhaps I should be tweaking this to talk about the ‘shut-down point’ - focusing less on the price facing consumers, but more on businesses making calculated decisions about which shops to keep running, which factories to close and which products to continue selling.
The airlines provide an example of this. Faced with surging aviation fuel prices, slowing consumer demand and expensive take-off and landing fees, Ryanair has become the latest airline to ground some of its flights and cut back on operating capacity in a bid to stem losses. In his typically colourful language, Ryanair CEO Michael O’Leary has blamed the “twats” at the British Airports Authority” for his decision. In today’s Guardian he claims that “the airline would lose less money by grounding its aircraft and not hiring personnel to fly them rather than operating them at a loss from Stansted.”
Grounding planes is his response rather than abandoning route - the airline will be making a 14% reduction in the number of weekly flights at Stansted this winter, from more than 1,850 a week to to just under 1,600 this winter. The number of planes based at Stansted will fall from 36 to 28. The number of weekly flights to Dublin will fall from 58 to 50, to Glasgow from 29 to 20 and to Rome CIA from 35 to 28.
EasyJet (24th July) has also announced reductions in their winter capacity as a cost cutting measure - The Telegraph reports that “Oil price inflation had increased the company’s fuel bill by £185m for the full year”
Cross elasticity: Demand for new aircraft
Over twenty airlines have gone bust since the price of aviation fuel started to climb and the turbulence in the global aviation market is likely to lead to a fall in demand for new aircraft according to a report in today’s Times.
read more...»EU airlines to be included in emissions trading
Airlines will be included in the EU carbon emissions trading scheme and this BBC video provides a good introduction to the issue. All airlines flying into and out of the EU, including non-European carriers, will be included as part of the Emission Trading Scheme, and would have to pay for 15 per cent of their emissions permits from 2012. Will the Americans be persuaded to move towards a global agreement on aviation emissions? How will demand be affected by the expected Euro 2 to Euro 9 increase in the price per passenger for short haul flights?
Good background information is available here from the EurActive website. And here is coverage and comment on the issue from the Guardian.
A new era for air travel
Today marks a momentous triumph for competition over protectionism. Anti-competitive practices dating back to the 1944 Chicago Convention will finally be scrapped for the new Open Skies agreement between the European Union and the United States. Currently, only British Airways, Virgin Atlantic, United and American Airlines are legally allowed to offer direct flights from Heathrow Airport to the US. But after the deregulations of transatlantic air travel, the market will at last be open to competition from challengers.
read more...»Commons Library Research Papers
The House of Commons Library research papers are made available for free download and viewing on the web. I have used these several times in recent months - for example there is a monthly digest of economic statistics; regular information on social trends and information on specifics such as aviation and climate change control and recent changes to the tax system. A recommended site for teachers. Here is the link.
BAA raises passenger charges
British Airports Authority, which owns and runs seven of the largest airports in the UK including Heathrow, Stansted and Gatwicj has been given clearance by the Civil Aviation Authority to increase the charge it makes for each passenger using the airport. It is a good example of how an industry regulator has the power to cap charges or prices in a market and the news has been criticised by many of the major airlines who are lobbying for a breakup of the BAA monopoly. They accuse the CAA of regulatory failure, of collapsing against the pressure placed on them by BAA to give them greater freedom to life passenger charges for taking off.
According to the Financial Times ”The CAA said it was increasing the price cap at Heathrow by £2.44 or 23.5 per cent in real terms to £12.80 per passenger for the coming year from April 2008. Charges in the four subsequent years could rise by 7.5 per cent a year above inflation.”
I wrote about BAA in a recent edition of EconoMax. BAA is now owned by the Spanish firm Ferrovial and is struggling under a mountain of debt. They face huge bills for ramping up security arrangements at all of the major airports and in investing in new capacity and facilities at airports already stretched to breaking point. Ultimately of course, given the nature of the business, it is the passenger who will foot the bill through higher fares.
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