Carbon emissions policy setback: EU suspends scheme

THE European Union (EU) has succumbed to international pressure to suspend the Emissions Trading Scheme (ETS) that it introduced on January 1 this year. The ETS rules that airlines that land at EU airports will have to pay a carbon emissions tax.

Among the chief protesters are the United States, China and India – the last two countries actually banning their airlines from participating in the scheme.

Imperfect as the ETS may be, its suspension is a setback in the efforts to combat pollution and global warming. The EU commission on climate change had earlier said it was going ahead with the implementation only because international agencies such as the International Civil Aviation Organization (ICAO) had failed to come up with any proposal. There is little evidence that while airlines brag about their commitment to the green effort, they are keen on any framework that would add to their operating costs, in spite of the EU’s argument that the ETS would add but only between four and 24 euros (US$1.27) to the price of a long-haul flight. To the airlines, it is 17.5 billion euros (US$22.3 billion) collectively over eight years.

EU Climate Commissioner Connie Hedegaard, Courtesy reuters.com

The EU is prepared to allow the ICAO another go at working out an acceptable framework, with EU climate commissioner Connie Hedegaard saying, failing which the ETS would be reintroduced a year from now. Having taken a step backward, it may be difficult to re-implement the veiled threat in the absence of a compromised solution emerging. The game belongs to ICAO – no doubt an unenviable task – so long as it can demonstrate progress, a little each time even if it is the mere act of meeting and agreeing to disagree, and the commitment to continually meet again to try and resolve previous disagreements.

Meantime, will Australia succeed where the EU has failed? The proposed date of its implementation of a similar scheme by July this year has come and gone. And lest it be forgotten, Qantas and Virgin Australia announced early in the year that they would be adding a carbon tax to the fare. Travellers would be wise to check out the component costs of their tickets – another controversial policy that makes you wonder why so many airlines are finding it so hard to be honest about what they are charging their customers for!

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Four more airlines go green – Porter, Air Canada, Aeromexico and GOL

IT is good news when yet another airline makes the effort to go green. This time, under the auspices of the International Civil Aviation Organization (ICAO), four airlines participated in four connecting flights from Montreal to Rio de Janeiro, each using different types of sustainable biofuels. Dubbed the Perfect Flight, operated by Porter Airlines, Air Canada, Aeromexico and GOL, it departed Montreal at 1130 hours on June 18 and arrived in Rio at 1400 hours a day after.

Picture courtesy The Vancouver Sun

Air Canada, which operated the second leg from Toronto to Mexico City, expected its flight to generate at least 40 percent fewer emissions by using jet fuel derived from recycled cooking oil and through other fuel-saving measures such as fuselage wash and wax to improve aerodynamics, installation of lightweight aisle carpet, streamlining push-back procedures to reduce fuel usage, taxiing aircraft to runway with one engine, minimizing taxi time to runway, reduced thrust takeoff, and optimized climb to optimal cruise altitude.

Air Canada executive vice-president and chief operating officer Duncan Lee said: “Air Canada fully accepts its responsibility to reduce its footprint and our first flight using biofuel tangibly demonstrates our ongoing commitment to the environment. Since 1990 our airline has become 30 percent more fuel efficient and we are determined to increase these gains through cutting-edge measures.”

Indeed with increasing pressure from environmental groups and following the controversy of the European Union’s carbon trading scheme which some nations and their airlines have voiced their objection to, there is an urgent need to find an acceptable global solution. Lest the industry becomes embroiled in messy disputes that could result in unnecessary and damaging retaliatory actions by the parties concerned, ICAO will have little choice but to play a more active role in pushing the agendaSo said Airbus President and CEO Fabrice Bregier: “To make this a day-to-day commercial reality, it now requires a political will to foster incentives to scale up the use of sustainable biofuels and to accelerate the modernization of the air traffic management system. We need a clear endorsement by governments and all aviation stakeholders to venture beyond today’s limitations.”

Full-fare disclosure gains momentum

JUST as the United States kicks in a new regulation on January 24 requiring airlines to publish the full fare including taxes and surcharges in their sale pitch, Australia is taking Malaysian budget carrier AirAsia to court for misleading advertisements.

According to the Australian Competition and Consumer Commission, AirAsia’s website did not show the full disclosure fares for some routes out of Melbourne, Perth and the Gold Coast. The commission said: “Businesses that choose to advertise a part of the price of a particular product or service must also prominently specify a single total price.” As a consequence, AirAsia may be fined.

The new rule introduced by the US Department of Transportation (DOT) has already been in force within the European Union (EU) although there, it applies only to EU carriers. Now Canada is working on a similar implementation which Canadian carriers have argued is unfair because foreign carriers are excluded. Quite rightly so, why should any airline targeting the same market be exempt?

More disturbing is how all these arguments actually lend weight to the new rule to protect the right of the consumer. Indeed, are there no ethical considerations in the business of making money?

After the EU, North America and Australia, it should be expected that the rule should gain momentum in other regions, especially if it applies to all carriers. The absence of universal applications is apt to raise concerns about unfair competition. So, recalling all that fuss about not leaving the carbon emissions issue to the International Civil Aviation Organization (ICAO) to come up with a global procedure (instead of the EU going ahead on its own to introduce the carbon emissions trading scheme in this specific case), this may be an opportunity for international aviation agencies to not later regret being sidelined.

US and EU cross swords on carbon emissions

COME January 1, 2012 all airlines that land or take off from any point within the European Union will be subject to the carbon emissions trading scheme (ETS).

The United States has objected to the scheme, perhaps a little too late even though the US House of Representatives had two months ago directed the US transport secretary to prohibit US carriers from participating in the plan. That is now seen as a veiled threat with little bite, with no real option for US carriers. A spokesman for EU Climate Change commissioner Connie Hedegaard said the EU would not bow to pressure from the US. Sauce for the gander is sauce for the goose. It is to be seen what the US would do next, with the latest threat from an official no less than Secretary of State Hilary Clinton warning that the US would respond with “appropriate action” if the scheme went ahead but stopping short of saying what action.

Naturally the US is concerned about its carriers being disadvantaged by the EU ruling and would prefer the matter to come under the ambit of the International Civil Aviation Organization (ICAO). But ICAO has done little to develop or promote concerted alternatives, let alone efforts by some airplane manufacturers and individual airlines demonstrating their green commitment.

The US has argued that the ETS is an infringement of the Open Skies agreement, but that has been refuted by the EU, which has rebutted that it is a regulation implemented within EU territory, in all likelihood no different by comparison how other countries have also imposed certain local charges within their own jurisdiction. The International Air Transport Association (IATA) is lending support to the US’s argument, saying it is “extra-territorial”, hence an infringement n the rights of airlines flying in international airspace.

IATA also claimed that the EU initiative is a tax on carbon emissions, and this breaks international conventions. But spokesman Isaac Valero Ladron of the EU Commission refuted that argument, saying: “This is not a tax, it’s pollution saving.” How much more is this a tax than, say, the fuel surcharge that permits airlines to unilaterally pass on additional fuel costs to their customers with no considerations of efficiency? At its very best, though punitive, the ETS is supposed to motivate airlines to be more fuel-efficient in their operations.

Canada, China and other countries in Asia and Africa – practically almost the rest of the world – have also expressed their disapproval of the EU’s regulation. So far Australia is the only country outside the EU that may be following in its footstep by the middle of next year. For now, there are concerns that the EU ruling may lead to a trade war, which Airbus and some national carriers are keen to avoid, urging the EU to modify its plans. Airbus chief Tom Enders said it was “madness to risk retaliation” from these countries.

There may be compromises yet the EU has indicated it may consider exemption for airlines whose countries are implementing similar ETS plans, suggesting reciprocity. But Mr Ladron made it clear that “we (EU) don’t work on the basis of threats, but on discussions.” ICAO may be wishing it had long ago started working on an acceptable global system.

Airlines fly into the ‘green’ divide

A ‘green’ divide is fast developing as climate change legislators turn their attention to airlines, which together contribute about 3 per cent of the world’s total carbon emissions.

When the European Union (EU) announced plans to extend the emission trading scheme (ETS) to cover all airlines landing or taking off in EU territory, North American airlines were first to object, citing an infringement of the Open Skies agreement. Now India, which has a growing aviation industry of some 20 airlines including international operators such as Air India and Jet Airways, has joined in the fray, tabling a paper for the forthcoming climate summit at the end of the month in Durban, South Africa. India argues that the emissions trading scheme is a violation of the UN climate convention.

India’s motion is supported by Brazil, China and South Africa which together with India formed the BASIC group. It asserts that “unilateral measures on climate change, such as the inclusion of emissions from international aviation in the EU-ETS would violate the principles and provisions of the convention and jeopardise the effort of international co-operation in addressing climate change.”

Whether or not the EU-ETS violates the Open Skies principle or the UN climate change convention is likely to develop into a long-drawn, unproductive and inconclusive debate swayed by arguments of perceived inequality, self-interest and political pressure. Consider the Kyoto Protocol which in 1997 set binding emission targets; almost 15 years after, the United States has yet to commit to being a signatory.

However that debate may develop, the day of reckoning has arrived. There is no turning back the clock as far the EU is concerned as it pushes to implement the proposal for universal application next year. The European Court of Justice Advocate General Juliane Kokott said: “The inclusion in the EU emissions trading scheme of flights of all airlines from and to European airports is compatible with the principle of fair and equal opportunity laid down in the Open Skies Agreement.”

Indeed, why should foreign airlines enjoy an advantage over EU carriers? Ms Kokott added: “Indeed, it is precisely that inclusion that establishes equally of opportunity in competition, as airlines holding the nationality of a third country would otherwise obtain an unjustified competitive advantage over their European competitors if the EU legislature had excluded them from the EU emissions trading scheme.”

North American airlines would have preferred that any measure to be implemented be driven or sanctioned by the International Civil Aviation Organization (ICAO), which is committed to “limit or reduce the impact of aviation greenhouse gas emissions on the global climate.” It has proposed carbon-neutral growth from 2020. A resolution passed last year in Montreal called for the development of a global framework on market-based economic measures to be tabled at its meeting in 2013. ICAO has resolved that “emphasis should be on those policy options that will reduce aircraft engine emissions without negatively impacting the growth of air transport especially in developing economies.”

But the EU legislature has run out of patience waiting. Besides, it is convinced that there is no conflict of interest between the ETS and the ICAO Resolution. ICAO’s priority is the sustainability of the airline community; to the EU, airlines are only one of the polluters for whom the same rules must apply. UK Energy and Climate Change Minister Greg Barker said: “The aviation industry, in the same way as other industries, needs to play its part in reducing emissions.”

Perhaps it is a question of timing. At a time when the airline industry is still reeling from the throes of uncertainty, the scheme is likely to add to the pain. But as necessity is the mother of invention, there is optimism that it may drive the airlines to be more efficient and even benefit from the trading, and that it will be catalytic in speeding up innovation of more fuel-efficient equipment and the development of a viable, environment-friendly biofuel. However, less endowed airlines that operate older aircraft may be disadvantaged, hence the argument of equitability as developing countries and emerging economies feel that developed countries should do more and not demand the same measures of them.

In its broad applications, the principle of the ETS acts quite like the basic carrot-and-stick method. Not surprisingly, the affected airlines are apt to focus more on the stick than the carrot.

The costs of trading may percolate down to pinching the pockets of air travelers, and it is unbelievable that the EU may not be aware of that consequence. But there is always the comfort that competition will be the leveler to ensure that only the fittest survive, and in a volatile economy where the consumer is presented with ample choice, there is greater pressure to offer the best value for money to attract or retain customers.

Besides, public opinion is likely to swing in favour of saving the environment though not specifically targeting the airlines.

Australia, at the other end of the lucrative kangaroo route, too has plans to introduce the ETS to include airlines next year. Asia, for its geography of disparate nations, is not likely to follow any time soon, although it is encouraging to note how airlines such as Singapore Airlines and Cathay Pacific Airways are supporting the green movement as evident by their early membership of the Sustainable Aviation Fuel Users Group, which pledges to accelerate the development and commercialization of sustainable aviation biofuels. But in a more urgent global call to action, as with the implementation of the EU-ETS, which side of the ‘green’ divide will these airlines find themselves – although that’s not saying they have much of a choice..

Neither is Africa nor South America quite ready. The paradox is North America, more specifically the United States – a champion of Open Skies that is quoting this very principle to protest the EU-ETS. But with two major aviation blocs determined to push ahead with the ETS, it is interesting to see for how long the US would avoid a similar proposal at home when American carriers are not exempt overseas, before they concede that reciprocating might be the best way to level or counter the competition. It is a matter of time.

To fly or not to fly through Icelandic ash cloud

EYJAFJALLAJOKULL continues to spew, causing occasional closure of airports in Iceland and some parts of northern Europe. The good news is that the worst seems over. There is also relief that the twin eruption of nearby Katia volcano – which is potentially more dangerous – is not happening as feared. The bad news is that one never quite knows when Eyjafjallajokull will cease belching out ash completely. The last time it erupted in December 1821, it continued doing so for more than a year.

Passengers numbered in the millions have been affected by airspace closures in Europe. Airlines are reporting early losses to the tune of some US$2 billion. This could not have come at a worse time than when the airlines are beginning to see some signs of economic recovery after a long dry spell of red ink. Other businesses around the world also suffer – as far away as garment manufacturers in Bangladesh with piles of the goods held up at the airport and sushi restaurants in Japan deprived of prized Norwegian salmon.

In the flurry of dust, two issues stand out – safety and compensation, the latter going beyond the obligations of airlines to their customers that are generally covered in the carriage contract and governed by regulations laid down by the relevant authorities.

Instead of praise for the concern over the safety of passengers, the massive airspace shutdown incurred the ire of European airlines and criticism from the International Air Transport Association (Iata). Even as the sky continued to be blanketed with drifting volcanic ash, pressure mounted on governments in the region to lift the “no-fly” restrictions. The contention is that the decision was based on scientific theory – not fact – and there was no real risk assessment.

Iata chief Giovanni Bisignani called the situation “embarrassing, and a European mess.” The airlines joined hands in faulting the governments for reacting too slowly. Mr Bisignani said it did not make any sense that while the airlines were losing millions and more passengers were being inconvenienced, “it took five days to organize a conference call with the ministers of transport.”

In defence, EU Commissioner for Transport Siim Kallas said the matter was not “in the hands of arbitrary decisions” as the lives of people were at stake. Spanish Transport Minister Jose Blanco reiterated that safety must be the main consideration in any decision to reopen the airspace. He said: “We must be prudent and act rigorously. People need to understand that we are working to ensure their safety even if this causes numerous problems and heavy losses.”

Are Iata and the airlines driven by the concern about losing even more millions so soon after the global economic meltdown? Yet if confronted, airlines will not hesitate to affirm that they will never compromise on the safety of their passengers and crew. And there is no reason to doubt that.

So what really is the issue?

In the absence of scientific data, the legislators chose to err on the conservative. The International Civil Aviation Organization (ICAO), which operates the International Airways Volcano Watch system, has recommended the implementation of a no-fly zone if volcanic ash is detectable in airspace. But the council has clarified that final decisions about safety rest with the governments.

However, the operators insisted that safety decisions must be based on fact, not theoretical modeling. They claimed that test flights conducted by Iata members subsequently showed no irregularity, so the models were wrong and that there were indeed safe areas to fly. It is easy to forget that the prerogative to decide comes with moral responsibility for its outcome.

Faced with the prospect of another round of deep financial loss, airlines may find it expedient to blame a third party for their misfortune and gain some sympathy for their woes. Mr Bisignani said governments “must take their responsibility” and consider ways to compensate the airlines for lost revenue, particularly when, in his opinion, the situation has been “exaggerated by (their) poor decision-making process.” British Airways has echoed the same message to the UK government.

In response, the EU Commission said it was prepared to authorize exceptional financial aid to airlines. Governments are recognizably not in an enviable position as ultimately they may feel obligated to bail out businesses whose failure may have wider national implications than the mere fallout of just another commercial enterprise.

In adversity, unity. Unfortunately, this does not look to be the case as governments are pitched against airlines in the decision to fly or not to fly through the Icelandic ash cloud. What matters now is how much better prepared we will be the next time it happens, through a more coordinated approach and accelerated review of standards for volcanic ash conditions as the EU works towards a single regulator for the common European sky. And we rest comforted by the common commitment of both airlines and governments to place safety before all else.

The irony of a falling fuel price

THE NEW YEAR started on a promising note, so it seemed. Stock prices moved up, and so too the price of fuel.

 

 

What paradox this is that the past year had been a punishing one both sides of the coin. The soaring fuel price in the first half of the year – from US$95 to US$147 a barrel of crude oil – brought jitters to the world. Analysts were quick to predict the ceiling was nowhere in sight, some of them confidently placing a finger on $250 a barrel by 2009.

 

What then followed might have been good news when the trend reversed and the price of crude oil fell close to $40 a barrel by the end of the year, but that did not bring the much-needed relief in a global economy beset with the woes of a financial meltdown.

 

Few businesses are as affected by fluctuations in the fuel price as the airline industry, considering that fuel consumption can be as high as 30 to 40 per cent of the operating costs. One might already be asking why airfares have not come down in tandem with the falling fuel price, when many airlines had been quick to raise their fares or fuel surcharges when the fuel price rose. 

 

 

 

The truth is that the declining fuel price is not necessarily good news for the airlines. In an industry where fuel hedging is a common practice, many airlines have been caught flying ahead of the rising curve.

 

Cathay Pacific Airways announced losses from hedging fuel contracts that would run through 2011, costing an estimated HK$7.6 billion which only Oct 31 last year was estimated to be HK$2.8 billion. Other airlines affected by the costly gamble include All Nippon Airways, Air China, Air Canada and almost every American carrier from the giants of United Airlines and American Airlines to the smaller carriers such as Alaska Airlines and Southwest Airlines.

 

 

 

Few airlines have reported benefiting from their hedging policies. Among them was British Airways, which recently announced it was cutting the fuel surcharge by one third to reflect the falling fuel price

 

It would follow that the falling fuel price would induce increased air travel. In light of this, the International Air Transport Association (IATA) has revised the loss forecast for the world’s airlines from US$4.1 billion next year to US$2.5 billion. International Civil Aviation Organization (ICAO) council president Roberto Kobeh Gonzalez was also optimistic that the industry could regain profitability as early as this year.

 

Therein lies the irony, when the falling fuel price reflects a strained global economy badly in need of a stimulant to recover. Until the economy gets kicking again, air travel is unlikely to get the boost. And it does not help that many airlines are still holding on to their prices to make up for the fall in revenue.

 

The problems of the lackluster economic climate are compounded by political unrests, terrorism threats and social issues, which have taken a toll on air travel. ICAO has warned that airports could be the next soft targets of terror attacks.

 

Ironically, therefore, a rising fuel price may augur well for the airlines, if not to cushion against the hedging losses but as a signal of an economic recovery. At the very least, airlines will be relieved of the pressure to justify their reluctance to reduce airfares when the fuel price is falling. But if the economy continues to sink and with it, the fall in the demand for seats, even a falling fuel price is not going to help. The airlines may have no choice but to reduce airfares and fuel surcharges (some airlines have already waived fuel surcharges for domestic travel) to stimulate demand.

 

While the glimmer of hope that 2009 brings has some experts prematurely dusting their crystal balls in the belief that they can see clearly now, the New Year’s spike – triggered by the escalating conflict in the Middle East and the dispute between Russia and Ukraine over gas imports – seems shortlived. Soon after, the price of crude oil plunged from US$48 to below US$40 a barrel.

 

Lest we forget, the year that passed has proven us wrong too many times. But for the nagging uncertainty, who knows what will happen next?