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Westminster Forum ETS Seminar


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Implications on the aviation industry of the EU\'s emissions trading scheme (ETS)

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Westminster Forum ETS Seminar

  1. 1. EU ETS: IMPLICATIONS FOR THE AVIATION INDUSTRY Gary Crichlow Senior Analyst ASCEND Westminster Energy, Environment & Transport Forum Keynote Seminar: Aviation and Shipping 11 th March 2010
  2. 2. THE EU ETS: INTRODUCES ANOTHER SOURCE OF RISK THAT THE INDUSTRY MUST MANAGE <ul><li>Credit risk: EU ETS cost burden on industry for compliance </li></ul><ul><li>Operational risk: Compliance with EU ETS submissions deadlines and regulations </li></ul><ul><li>Country risk: Political stance towards the EU ETS’ legality for non-EU-based operators </li></ul><ul><li>Asset risk: Aircraft residual values, economic useful life </li></ul><ul><li>Reputational risk: Public image for non-compliant carriers </li></ul>?
  3. 3. THE EU ETS – AVIATION’S EXPOSURE EU ETS would have covered 4m scheduled airline movements, 0.5bn seats in 2008 Medium haul: 1,501–3,000nm 4% of 2008 mvmts 6% of 2008 seats FRA Short haul: <1,500nm 90% of 2008 mvmts 81% of 2008 seats Long-haul: >3,000nm 7% of 2008 mvmts 14% of 2008 seats
  4. 4. THE EU ETS COST BURDEN ON OPERATORS <ul><li>Administrative costs of compliance </li></ul><ul><ul><li>Monitoring, reporting & verification </li></ul></ul><ul><li>Cost of CO 2 credits </li></ul><ul><ul><li>Allocation of free credits </li></ul></ul><ul><ul><li>Trading on the open market: current EUA ~ €13/tonne </li></ul></ul><ul><li>Penalties for non-compliance / shortfall </li></ul><ul><ul><li>€ 100/tonne plus cost of required credits </li></ul></ul><ul><li>Competitive distortion — carbon leakage to other regions? </li></ul>
  5. 5. EXAMPLE: EASYJET 1,863 km 2,683 km <ul><li>Short/medium-haul A320 fleet </li></ul><ul><li>Typical daily routing: </li></ul><ul><ul><li>4 legs, 2 × daily rotation: LGW-HEL, LGW-HER </li></ul></ul>1,863 km 2,683 km * Assuming round-trip, 65% load factor, €40 cost per allowance Source: Ecometrica, easyJet London Gatwick (LGW) Helsinki (HEL) Heraklion (HER) 1.4% 1.3% CO 2 allowance add-on € 250 € 200 Typical round-trip fare LGW-HEL LGW-HER Allowance cost per pax* € 2.52 € 3.39 1.6% 2009 pre-tax profit margin
  6. 6. EXAMPLE: EASYJET – ANNUAL COMPLIANCE BURDEN 1,863 km 2,683 km 1,863 km 2,683 km Sources: Ascend, Ecometrica, easyJet Assumes US$/€ exchange rate of US$1.49, EUA price of €40/tonne Compliance includes qualifying for 82% free allowances London Gatwick Helsinki Heraklion
  7. 7. PASSING ON COSTS: DEMAND ELASTICITY SHORT-HAUL LONG-HAUL Price elasticity CO 2 allowance cost Price elasticity CO 2 allowance cost Carbon leakage risk Carbon leakage risk Competition from LCCs, rail, etc Fewer alternatives Level playing field Greater possibility to bypass EU for connections e.g. DXB
  8. 8. EU ETS COST BURDEN: KEY TAKE-AWAY POINTS <ul><li>Compliance costs marginal </li></ul><ul><ul><li>BUT industry margins already razor-thin </li></ul></ul><ul><li>Cost pass-through: dependent on market dynamics & underlying economic picture </li></ul><ul><li>It will affect weaker players “on the edge” </li></ul><ul><li>Heavy penalties for non-compliance </li></ul>
  9. 9. THANK YOU! Gary Crichlow Senior Analyst Ascend [email_address] [email_address] Barry Moss Principal Avocet Risk Consultants [email_address]