Like dominos: Airlines globally raise fares after EU Emissions Trading Scheme starts
For all the verbal storms airlines raised in the lead up to the controversial 01-Jan-2012 inclusion of aviation in the European Union's Emissions Trading Scheme (EU ETS), most airlines are now responding by increasing or planning to increase ticket prices to reflect the price of carbon credits they will have to pay (see survey below). While airlines were quick to talk up sums in the tens if not hundreds of millions of dollars, the impact per ticket is so far quite low. Like with fuel surcharges, airlines are implementing flat fees rather than taking the laborious path to get a closer estimate, which may not vary much.
Surcharges could go up as carriers receive fewer free carbon credits, but the market price of carbon could counter-balance that increase or send it rocketing. What will not be seen for some time is the extent of the correlation between a drop in demand and incremental ticket price increases. The correlation may never be discernible in some markets, such as where airlines are shrinking into profitability.
- Airlines are increasing ticket prices to reflect the cost of carbon credits they have to pay under the European Union's Emissions Trading Scheme (EU ETS).
- Most airlines are implementing flat fees rather than calculating the exact cost of carbon emissions for each ticket.
- The increase in ticket prices is primarily seen on commercial flights, while airlines continue to fight politically against the EU ETS.
- The US is considering implementing an access fee to EU carriers on US soil to negotiate with the EU.
- The correlation between a drop in demand and incremental ticket price increases is yet to be seen.
- Major European carriers have not disclosed how their surcharges will fluctuate for different flight distances.
The price increase action is on the commercial side; politically, airlines will likely continue their fight via governments and industry organisations. The US and China are the largest opponents.
The US response, Reuters suggests, has shifted to the Government, which may pursue implementation of an access fee to EU carriers on US soil in order to bring the EU to the negotiating table. What all sides want to avoid is an all-out trade war or suspension of services, but that latter alternative was raised by the EU last week after China defiantly proclaimed its carriers would not pay the EU carbon tax. The EU did note prohibition of services was a last alternative and other measures, like fines, were more likely. This war of words backdrop underscores the need for a global solution, which Vijay Poonoosamy, chair of IATA's Industry Affairs Committee, opined on earlier this week.
See related article: Rising to the environmental challenge to aviation: The need for a global solution
Brussels Airlines, Ryanair and US carriers set prices
Of the airlines that have set a fare increase, so far it has been for a set amount: USD3 from US carriers and EUR0.25 cents from Ryanair, well below the 3% increase OAG forecasts for fares. The set amount is much like the structure of fuel surcharges, which are often calculated on broad regions. Exact carbon emissions, like fuel consumption, will vary not only on route but individual days based on load, aircraft type and operating conditions (underscoring the need for improvements in air traffic management). Implementing a flat fee is logistically easier in reservation systems and easier to convey to customers than a fluctuating fee, whose exact cost, like fuel, is only known once the flight is completed.
A flat fee is most fair and competitive when flight distances are comparable, like the North Atlantic and intra-European flights, and it is primarily there where airlines have so far set figures. The emission cost difference from the shortest trans-Atlantic flight to the longest is little compared to the price of the ticket; a USD1 difference is unlikely to influence even the most price-conscious passenger. Ditto for Ryanair, although its competitor easyJet has not announced its response (lately it has been focussed on its joint effort with British Airways and Virgin to lobby for an end to the UK's Air Passenger Duty [APD], effectively a double environment hit).
Major European carriers have yet to disclose how their surcharges will fluctuate for a London-Manchester versus London-Singapore flight. Brussels Airlines, however, provides a warning: it has set a fluctuating fee of EUR3-10 for its short-haul versus long-haul flights. Some in the public have accused the airline of charging more than the actual cost, saying the environmental surcharge will lead to "profit windfalls". AirAsia X was quick to note its surcharge was implemented to cover costs and not fill coffers.
Shortly into the New Year Delta raised fares on only European flights, with other US carriers quickly following, as is the norm on fees and fare changes. The increase comes amidst relatively stable fuel prices, ruling out a connection to higher fuel prices, although the US carriers have yet to confirm their move was a response to the EU ETS.
If the US is successful in avoiding the ETS through political wrangling, US carriers who impose an ETS surcharge could face calls to refund the price, as happened in 2011 during the Federal Aviation Administration (FAA) shutdown. During that brief event, the FAA lost its ability to collect taxes from airlines. Nonetheless, some airlines collected the taxes for their own bottom line. (Virgin America took advantage of the opportunity and promoted an "Evade Taxes. Take Flight" sale.)
Like with fuel surcharges, airlines will only collect payment for forward bookings, meaning airlines will be footing the bill for most passengers flying in the next few months.
Currently airlines are currently capped at 97% of their baseline average from a period last decade. For carriers exceeding their baseline average, they must obtain allowances, 85% of which are free. From next year, the cap is dropped to 95% with a determination awaiting on free allowance distribution. Exceptions are made for new carriers (starting EU operations post-2010) or high-growth (in excess of 18% p/a) carriers. Carriers with fewer than 243 annual flights or 10,000 carbon dioxide emissions per year are exempted.
Selected airline fare responses to the EU ETS
| Carrier | Action | Commentary |
|---|---|---|
| Air France-KLM | Increase "inevitable" | ETS charges would "inevitably" be passed on to Air France and KLM customers, although no firm plans have been made yet, a spokesman said. |
| Air New Zealand | Will increase prices | "Any increased costs to passengers is not ideal, but similar to the recently increased UK departure tax, higher costs due to the EU ETS will need to be passed on to passengers and will be advised in due course," an ANZ spokesman told The Australian. |
| AirAsia X | MYR20 (EUR5, USD6.5) one-way | Airline has been collecting the surcharge on its website for its two European routes, London Gatwick and Paris Orly, although it has not issued a formal statement. CEO Azran Osman-Rani told the Malay Mail the surcharge will not go to its coffers. "We feel the move will only benefit them, and not us directly, but we have no choice but to impose the additional cost," he said. |
| American | Increased European fares by USD3 one-way | Followed Delta |
| British Airways | None yet | BA has not yet made a decision but said it would watch the cost of compliance with the EU ETS. |
| Brussels Airlines | EUR3-10 (USD3.80-12.70) | Will impose varying surcharges based on sector length. Some have criticised the airline for charging more than what the airline will pay for excess carbon. |
| Cathay Pacific | Increase "inevitable" | Cathay echoed Air France-KLM, with a spokeswoman telling Reuters, "It's inevitable that increased costs will be passed on to passengers. We will share the details at the appropriate time". |
| Delta | Increased European fares by USD3 one-way | Delta was the first US carrier to raise European prices, doing so shortly after the New Year amidst relatively stable fuel prices, but has yet to confirm the move was a response to the EU ETS. |
| Emirates | Expects to increase prices | CEO Tim Clark remarked the carrier expects to add the ETS cost to fares but said details had not been worked out. Mr Clark estimated Emirates will spend USD51 million this year on carbon credits. |
| Etihad | Fare increases likely | "It is inevitable that such a cost would have an impact on fare levels," Etihad head of environment Linden Coppell said. The ETS could cost Etihad upwards of USD394 million over nine years. |
| Lufthansa | Will include ETS fee in fuel surcharge | Although ETS compliance will be included in the fuel surcharge, Lufthansa will not yet raise the fuel surcharge. Lufthansa estimates the ETS will cost USD170 million in 2012. |
| Qantas | USD5 increase expected | Qantas will pass on the cost to passengers and is working on the final cost, which it expects to be around USD5. The carrier is advantaged that baseline emissions were calculated last decade, and in Mar-2012 it will end two of its five European routes as part of its international restructure. The decrease in capacity (albeit slightly offset by use of higher-capacity A380s than Boeing 747-400s when the baseline was calculated) will reduce the amount of carbon offsets it needs to buy. |
| Ryanair | EUR0.25 cents (USD0.32 cents) charge one-way | Ryanair will implement a flat surcharge for all tickets. A spokesman said of the ETS, "We do not agree with it and we do not believe there will be any environmental benefit." |
| Singapore Airlines | None yet | SIA flagged its intention to first reduce emissions before adding a surcharge. Its European routes are now primarily operated by A380s and Boeing 777-300ERs, which are more efficient than the 747-400s and 777-200s the carrier primarily used last decade when the EU calculated each airline's emission baseline. But a spokesman said SIA is "not yet ruling out any options for recovering the additional cost". |
| Thai Airways | None yet | Thai Airways has not made a decision but says the cost will be THB500 million (USD16 million) this year. |
| United | Increased European fares by USD3 one-way | Followed Delta. A spokesman remarked: "We at United know the estimated cost impact of EU ETS and have incorporated it into our cost and revenue models." |
| US Airways | Increased European fares by USD3 one-way | Followed Delta |