Low-costs and the environment - Europe takes the lead

From the Centre for Asia Pacific Aviation

LCC’s have been at the aviation forefront of the global climate change debate, a result of their strong public profiles, combined with consumer perceptions (rightly or wrongly) of low cost carriers as purely a leisure-based sector of the market.There continues to be a misguided belief that somehow tourism does not have the same “economic value” as, for example, business travel. This wholly illogical perception particularly threatens LCCs, as the cause of “unnecessary” additional environmental pollution.

The publication in late 2006 of the Stern Review on the Economics of Climate Change and of the Intergovernmental Panel on Climate Change in early 2007 and the labelling of the Dec-06 doubling of the UK Air Passenger Duty as a “green tax”, have rapidly forced aviation and the environment firmly into a single theme in Europe. It will not be long before this agenda disperses widely.

“Air transport is conspicuously a growth industry, and LCCs are the fastest growing sector of that market”...
According to the European Commission’s Directorate General for the Environment, aviation accounts for just 3% of total EU greenhouse gas emission. On a worldwide scale, the proportionate impact is smaller than Europe’s, accounting for just 0.5% of total greenhouse gas emissions.
But, despite its small overall contribution, European aviation is very much part of a worldwide industry and its share of total emissions is increasing rapidly.

Air transport is conspicuously a growth industry, and LCCs are the fastest growing sector of that market. Since 1990, greenhouse gas emissions from aviation have risen 87%, as air travel became increasingly inexpensive, pushed by liberalisation and the growth of LCCs through Europe. Between 2001 and 2006, European LCCs increased their share of intra-European seat capacity from 5% to 24%.

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An early reaction to environmental issues from European LCCs occurred in Nov-06, following the release of the UK CAA’s report on the impact of low-frills airlines on the UK aviation market. Increasingly, these carriers have moved towards adopting the most environmentally friendly policies and practices, reacting to both public perception and legislative pressures, as well as efficiency concerns.

This shift towards environmental ‘best practice’ has been accompanied by an increasing move by European LCCs to promote their credentials as the world’s most environmentally efficient airlines. In effect, European LCCs are turning good practice into good marketing.

LCCs leading the way in reducing environmental impact

According to easyJet CEO, Andy Harrison, “the same business model which gives us low fares also gives us environmental efficiency in the skies”.

The low-cost model lends itself towards environmental efficiency. European LCCs operate a point-to-point model, typically to secondary and regional airports, avoiding major hubs and the hub-and-spoke model, providing passengers with direct access to their destinations, reducing both congestion and the number of take-offs and landings per passenger.

Operations to secondary airports also have the added benefit of minimising noise impact, typically operating over smaller population centres or being located away from major cities.

Using younger aircraft with more recent technology, higher seating density and higher load factors all contribute to reducing fuel burn and emission per passenger.

The European Low Fares Airlines Association (ELFAA), whose membership includes easyJet, flybe, MyAir.com, Norwegian Air Shuttle, Ryanair, Sky Europe, Sterling, Sverige Flyg, transavia.com and Wizz Air, reported that its members had an average fleet age of 3.9 years (as at 31-Dec-06) and, with high seating density (most LCCs offer little or no business class seating), averaged load factors of 83%.

In each measure, LCCs have the edge over longer established airlines.

easyJet - corporate and social responsibility

In Nov-06, easyJet performed an environmental pre-emptive strike on other European LCCs, announcing plans to launch an advertising campaign focusing on its ‘environmental credentials’ and high levels of environmental efficiency, both in the air and on the ground. According to easyJet there are “obvious benefits to pushing our environmental credentials as part of our advertising”, not the least of which would be getting a step-up on rival, Ryanair. Environmental marketing is “serious business” for the carrier.

Instead of more traditional media campaigns, which use price, destination or service differentiations as major marketing points, the carrier is attempting to tap into the developing ‘green traveller’ market by emphasising its combination of high efficiency aircraft, low fleet age and success in reducing its carbon dioxide emissions.

The carrier took another step forward in its quest for green credentials in Feb-07, with the publication of its ‘Corporate and Social Responsibility Report’, outlining its policy on the environment, as well as other issues such as training and development, employee information and consultation, staff rewards and recognition and its ethical responsibilities as an employer.

The document highlights easyJet’s impact on the environment, including greenhouse gas and particulate emissions, waste and noise, and the steps the carrier is taking minimise its ‘environmental footprint’. easyJet has reduced its CO2 emission per passenger by 18% since 2000, and has brought its average fleet age down from 3 years to 2.2 years since Sep-05. The carrier has also committed to a policy of “expecting more” from its ground handlers and secondary suppliers at its airport operations.

Even the carrier’s latest aircraft order (converting 52 A319 options and securing another 75 purchase option) has been advertised with an angle towards not only supporting its growth but its environmental credentials as well. easyJet stated that it now emits “nearly 30% fewer emissions per passenger kilometre than traditional airlines flying similar routes”, due to its lower fleet age and relatively high levels of aircraft utilisation, and has promoted the new A319 order as a continuation of that success.

easyJet has also campaigned vigorously to bring aviation into the European Union Emissions Trading System (ETS) as early as possible. The carrier plans to use its role as the chair of the ELFAA environment-working group to press for an EU ETS that will cover the largest possible ‘carbon footprint’. This would include services both within Europe and all departing and arriving flights, whether long or short haul. On top of this, easyJet will also push for a scheme to “reward airlines that are environmentally efficient, and punish those that are not”.

Ryanair - Europe’s greenest airline?

Europe’s largest LCC - handling 25 million passengers and revenue of EUR1.7 billion in FY06 - Ryanair also claims to be its most environmentally efficient. However, its green image has not been helped by a relationship with politicians and environmentalists that has not always been harmonious.

When UK Chancellor of the Exchequer, Gordon Brown, announced the doubling of the UK APD was effectively an environmental tax, Ryanair CEO, Michael O’Leary, stated (with some justification) that he was “just using the environment to steal more taxes from ordinary passengers”. Mr O’Leary also labelled the UK Environment Minister, Ian Pearson, “foolish and ill-informed”, following comments by the Minister that Ryanair was the “irresponsible face of capitalism”, with regard to its pursuit of growth in Europe.

Ryanair has also differed from ELFAA over the EU ETS. While the industry body’s position is that its members are in favour of the principles behind the scheme, Ryanair appears to be the voice of dissent.
Mr O’Leary has stated that he will be “far too busy doubling Ryanair over the next few years to be joining any carbon emissions trading scheme”.

This attitude could be for market differentiation - especially from easyJet - but is probably not a tenable position in face of the often irrational popular responses now appearing.

The carrier, with an average fleet age of approximately 2.5 years, commenced a EUR17 billion fleet replacement and expansion plan in 1999. All of Ryanair’s B737-200s have been replaced with larger and more efficient B737-800s, allowing it to minimise fuel burn and C02 emissions.

According to Ryanair, the move from the older aircraft, combined with fuel saving measures such as the installation of winglets and commercial measures aimed at maximising load factors, has reduced its C02 emissions per passenger by 45%.

“I’ll be far too busy doubling Ryanair over the next few years to be joining any carbon emissions trading scheme” - Michael O’Leary, CEO, Ryanair
However, improved efficiency in the air isn’t the only contributor to the carrier’s reduction in fuel burn and emissions. Part of the success in Ryanair’s claim to being Europe’s greenest airline is another of the characteristics of the LCC model and often, coincidentally, in contrast to arch-rival easyJet: operations to secondary airports.
Ryanair stresses that secondary airports offer the benefits of reduced or non-existent holding delays and reduced taxiing and waiting times as well as with passengers connecting directly with their holiday destination, instead of taking a second flight or hire car, via the hub-and-spoke model.

Flybe - low cost… but not at any cost

Flybe promotes itself as a champion of regional transport and as a carrier at the forefront of efforts to minimise environmental impact and promote sustainable growth in the aviation industry. The carrier has voiced its support for the EU ETS, backing the concept that it will provide direct financial incentives for airlines to become more environmentally efficient.

Like easyJet and Ryanair, Flybe is promoting its efforts to reduce its environmental impact, and enhance it eco-friendly image, by concentrating on the environmental benefits of its new aircraft.
Flybe is in the middle of a GBP1.5 billion re-fleeting plan, expanding its fleet to 82 aircraft by 2009. The programme will give it “one of the youngest and most environmentally sensitive fleets in the world,” once complete.

Overall, the carrier expects its new aircraft to reduce fuel consumption by over 50% per seat.

Existing Flybe BAe 146 regional jets, as well as similar regional equipment acquired in the carrier’s recent takeover of BA Connect (creating Europe’s largest regional airline) are being quickly phased out. Flybe commenced deliveries of its new Embraer 195s in Sep-06. Compared to the BAe 146, the E195s are expected to reduce overall fuel burn by more than 20%, reduce gas emissions by up to 25% and cut noise levels at take off/landing by up to 35%.
Flybe is the launch customer for the E195, having ordered 14 aircraft (and 12 options) in Jun-05.

The other major element of Flybe’s re-fleeting programme is its turboprop aircraft, which has received similar green promotion. Flybe is the world’s largest operator of the Q400, which, according to the carrier, is among the most environmentally-sensitive aircraft available, offering a 30% increase in fuel efficiency over older generation aircraft. The carrier will operate 41 Q400s by 2009.

Flybe’s other major green initiative is its eco-labelling system, which is due to be implemented in May-07, taking a similar strategy to easyJet’s environmentally focused marketing. The scheme will provide passengers with detailed environmental information about their flight. It will measure the carbon footprint, noise emissions and fuel burn of each airline’s fleet, giving passengers a direct comparison of the ecological impact when they go to purchase a ticket.

UK CAA report’s significant findings

In assessing the overall effect of LCCs, the UK CAA’s Nov-06 report has some important findings, which also add to the argument for supporting LCC expansion. Despite a counter-intuitive finding that LCCs had not accelerated growth above long term trends in the UK-Europe market (with much of the traffic being transferred from “charter” services), the report found two areas in particular which have been strongly affected by the new breed of airline.

These findings have more global significance:

LCCs have stimulated more travel by smaller businesses. The CAA found a “significant impact on business passengers”, who have a lower income profile overall now than ten years ago, prior to opening of Europe’s skies (over one in five low frills airline passengers is now travelling on business). Lower fares “to and from more destinations (and in particular the removal of fare restrictions) have made trips on a range of airlines more viable for lower income business passengers, particularly from the UK regions”. It concluded that this growth was linked directly to the effect no-frills airlines have had on the market; and
Regional air services have increased significantly. The report found a “marked increase in the availability of flights from the UK regions”. This has been an important feature in opening up new, smaller airports in the UK. Many of them have lain near-dormant for years, often former military bases in the second World War. This new access, for local residents to international services and for foreign visitors, has delivered extensive economic benefits for local communities.
In using these smaller airports, there is inevitably too a great cost saving in otherwise providing new extensions at established airports. An example of this regional expansion occurs in the Poland market: “In July 2000, there were only five scheduled services between the UK and Poland: four from London to three Polish cities (Warsaw, Gdansk and Krakow) and one from Manchester to Warsaw. In July 2006 there were 37 scheduled services linking 10 Polish cities and 13 UK airports, covering virtually the whole of the UK.”

In addition to the clear economic benefits of these developments, the CAA’s second finding adds weight to the arguments for more efficient point-to-point operation.

The EU position

The European Commission has a somewhat contradictory position when it comes to LCCs confronting their environmental “responsibilities”. It was in fact the EU Commission that made intra-EU liberalisation possible, admitting the surge in LCC growth. But in politics, logic never gets in the way of a good story.

In July last year, Commissioner Jacques Barrot congratulated the EU on its achievement in these terms: “The liberalisation of air transport is a European success story: citizens enjoy more travel opportunities and lower fares than ever before. We want to consolidate this success by removing all restrictions to the free provision of air services and ensuring fair competition between airlines”.

By Dec-06, as the environmental juggernaut swept through Europe, the tone had changed notably and the airlines were in the spotlight for different reasons. Under the heading “Aircraft emissions capped to tackle climate change”, the Commission’s website continued: “Flying is one of the fastest-growing sources of greenhouse gas emissions in Europe - including it in the EU emissions trading scheme (ETS) could lead to a 46% reduction in CO2 attributable to aviation by 2020 compared to projected emissions without further policies.”

In order to rectify this position, the Commission’s new proposal will give airlines annual, tradable CO2 emission allowances. “At the end of each year, operators must exchange a proportion of their allowances in relation to their emitted tonnes of CO2.” The average level of emissions (in tonnes of CO2) in 2004-2006 forms the cap for future trades.

Under the proposal, intra-EU flights are to be covered from 2011, with all international flights to be covered the following year.

IATA responds - UK tax is “42 times less cost effective”

The effect of the EU’s seemingly innocuous announcement could be extreme. As IATA has pointed out: “capping emissions at 2004-06 levels will require airlines to cut flights, invest in emission reductions or buy allowances to cover 12.9 million tonnes in 2011 and 66 million tonnes in 2012 out of projected baseline CO2 emissions. Not as bad however as the UK tax which attracted Michael O’Leary’s wrath.

Under the EU ETS, it would cost EUR0.22 per passenger to cut one million tonnes; the UK tax would cost EUR9.18 per passenger - “42 times less cost effective than the ETS”.

IATA estimates that, even under the EU ETS, the average fare for an intra-European return flight will increase by EUR2.60-5.60, with a significant effect on this price sensitive market and “between 5 and 11 return trips will be put off as a result” of the higher fares.

And AEA - a reasonable scheme, provided the fine tuning is right

The European carriers’ association, AEA, which represents most of the region’s network airlines, pointed to the media-focus of the proposal: “The text (issued by the Commission) was the third in as many weeks, none of which were officially released to the industry, although all were widely leaked to the media”, also bemoaning the fact that normal consultation procedures were not followed.

This practice of playing to the galleries has become commonplace with environmental matters, as politicians and bureaucrats scramble to make a name for themselves. As IATA’s CEO, Giovanni Bisignani said recently, “Beating up on aviation for its record on the environment has become a professional sport in the UK and much of Europe.”
Nonetheless, the general principle being followed by the EU is seen as the least of the potential evils for the industry. As the AEA’s Director General noted: “A well-designed ETS can act as a catalyst, enhancing the effectiveness of other measures, such as the operational and technological developments which can deliver real environmental benefits.”

But there are qualifications to this. “A poorly designed scheme, on the other hand, could, like a tax, strip the airlines of the financial means to fund such developments”.

What next? The EU Benchmark

In a recent speech IATA’s Bisignani promoted the idea of a “a regional approach to the environment”. The speed of developments has caught most governments outside Europe on the hop and airlines will have to move quickly to head off aberrations like the UK tax - with its non-environmental tax raising attractiveness to national treasuries. Other regions are not as clearly defined as Europe, so this may be more difficult elsewhere.

The other major issue to be addressed - notably in Europe - is that of inefficient infrastructure and procedures. Bisignani again: “Governments must implement efficient infrastructure with a vision for the future…particularly in air traffic management.”

Only too often, airlines suffer from major delays and ponderous ATC requirements, frequently due to under-investment by governments and obscure nationalistic hangovers in airspace.

Because the EU has taken the lead in developing a mechanism, it is likely to become the benchmark for all future government actions. At least that is what most of the industry is hoping for - if the alternative is blunt-edged and largely ineffective taxes like the UK recently imposed.
The important issue with any emissions trading system is then to ensure that the calibration mechanism is appropriate.

Also, the particular impact on the highly price sensitive low fare end of the market justifies different treatment, especially where the - often younger - airline fleet is already highly fuel-efficient. Otherwise the LCCs are subject to a double whammy: a much higher proportionate increase in (previously lower) fares and the inability to introduce more environmentally friendly operations because they are already using new equipment, with high seating density and high load factors.

As ELFAA Secretary General, John Hanlon, explains: The best way to address aviation’s impact on the environment is to encourage the kind of environmental efficiency delivered by the low fares airlines across all sectors of the industry. This cannot be achieved by taxes levied on a per passenger basis and requires a market driven solution, for example, a well designed scheme to include aviation into the EU ETS extending to ALL flights to and from the European Union.”

Penalising the LCCs with a double whammy is not just a negative for the airlines themselves. In many cases, especially in emerging markets, whether in Europe or elsewhere, the opportunity for lower-income travelers to fly represents the opportunity to join the world community. And tourism offers the best hope of economic development for many countries.

It may be fine for a well-heeled cleric in the UK to talk of the “sinfulness” of LCCs in the environment, but the vast majority of the world’s population has not even had the opportunity yet to be sinful. The debate needs to be focused on sensible and reasoned approaches - which will deliver outcomes with limited negative impacts and maximum useful outcomes.
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