Examination of Witnesses (Questions 480
- 499)
WEDNESDAY 24 MAY 2006
24 MAY 2006 DR
ANDREW SENTANCE
AND MR
CHRIS ESSEX
Q480 Mark Pritchard: What work has
British Airways as the national carrier undertaken as to the impact
on its business if, for example, Heathrow was not allowed to expand
and the extra runway did not come about?
Dr Sentance: This is something
we have looked at quite closely, because it was debated quite
thoroughly at about the time of the White Paper. Based on a number
of measures of the competitiveness of European airports Heathrow
is already falling behind Frankfurt and Paris Charles de Gaulle,
for example, in terms of the number of destinations served. We
believe that that trend will continue and possibly accelerate
if there is no scope for some expansion at our major aviation
hub. The consequences of that are not just for the aviation industry.
We would be concerned about that because it would impact not only
our own competitiveness but also the competitiveness of the economy
as a whole. As the White Paper pointed out, Heathrow is the sole
international aviation hub of its size and scale for the UK that
can offer the range of international links, particularly for long
haul services, that it does. There are potential competitive impacts
both for our aviation industry and the economy as a whole.
Q481 Mark Pritchard: I want to ask
Mr Essex a brief question on fleet purchase. Obviously, I do not
want to go into numbers, but clearly Boeing is promoting its new
generation aircraft as being particularly environmentally friendly;
Airbus is promoting its aircraft in the same way. Given that a
new generation of aircraft perhaps will be in a longer timeframe
than Boeing's new aircraft, what emphasis is given in procurement
policy vis-a"-vis the environmental aspects of new aircraft,
or is it purely down to the design and build of the aircraft as
far as moving passengers and the cost of it is concerned?
Mr Essex: I think that the environmental
effect is very much to the forefront. The best example is in the
sphere of noise where we had the introduction of progressively
strict noise standards to ensure that new generation aircraft
were quieter. There are airports around Europe which are very
sensitive noise and one will simply not gain access unless one
has the latest technology.
Q482 Mark Pritchard: What about emissions
in particular?
Mr Essex: In terms of emissions,
that has been coming to the forefront. Pushed by the industry
and the overall environment, noise has been a focus for Boeing
and Airbus for some years, but now emissions are coming to the
fore. Fundamentally, we are talking about fuel burn. We would
be looking for a very significant step change because we already
face high oil prices. Unless we see significant improvements Boeing
and Airbus will not be able to sell their new generation aircraft.
Dr Sentance: It may be worth pointing
out that in the sustainable aviation strategy which was subscribed
to by European and UK manufacturers, including Airbus, targets
were set for 2020 versus 200 levels of a 50% reduction in noise,
a 50% improvement in fuel efficiency, and hence a reduction in
CO2, and an 80% improvement in NOx which is a main
contributor to air quality. Therefore, manufacturers—we
are very supportive of them and push them to do as much as they
can—are looking at quite significant improvements in new
generations of aircraft.
Q483 Mr Caton: Projections of growth
in the White Paper The Future of Air Transport were predicated
on a reduction in air fares of 1% a year for the next 30 years.
Are air fares really going to go down by 1% a year over that period
of time?
Mr Essex: They certainly have
historically, and we would expect a decline in yield. The actual
fare that one pays will be going up because there are inflationary
effects, but in terms of netting out those effects one can expect
them to continue to decline.
Q484 Mr Caton: The projections for
that ongoing reduction in air fares were themselves based partly
on the Government's prediction of oil remaining at $25 a barrel
in 2003 up to 2030. You have already mentioned that that has not
been the situation. Two years ago the Department wrote to this
Committee that the then recent rise in oil prices might be only
a short-lived blip. Since then prices have gone even higher. From
what you have already said, it sounds as if you do not know whether
it is a blip or something longer term. What are the consequences
for those global predictions of air fares if it is not a blip?
Mr Essex: I think that that question
can be answered at two levels. One is the individual airline level.
Clearly, different airlines will be able to absorb the impact
of higher fuel prices in different ways. For example, some airlines
will place a fuel surcharge on passengers and others will not.
At the macro-level, we are looking at how this feeds through to
economic growth. At that level we can then correlate it to the
overall demand for aviation. We have already heard that Gordon
Brown fears very high oil prices will adversely affect economic
growth both in the UK and at a global level. At some point that
will feed through to reduced demand for air travel.
Dr Sentance: The growth projections
in the White Paper are the product of two things. There was some
stimulus provided by the reduction in air fares, but even if that
does not come through quite a significant stimulus is provided
by the growth in living standards and GDP in the economy. I believe
that the Government did a simulation in the White Paper. It looked
at an environmental instrument which had the impact of doubling
fuel costs and that knocked a certain amount off the growth but
it was a fraction of a percentage point. One would still see quite
considerable growth even in that scenario. While we cannot say
that the growth of the industry is totally immune to what happens
to fuel costs—clearly, it will have an impact—it does
not detract from the basic conclusion that there will be continued
growth in air travel which needs to be accommodated in some way.
Q485 Joan Walley: Moving from oil
prices to oil supply, I am just wondering what was in the 2003
energy White Paper in terms of the oil projections. What is your
view about how long we have before we reach peak oil production?
Dr Sentance: I do not think that
British Airways has a view. Obviously, our business would depend
on continued availability.
Q486 Joan Walley: Earlier you called
yourself an economist.
Dr Sentance: I call myself an
economist!
Q487 Joan Walley: Do you agree with
the Government that it is between 30 and 60 years?
Dr Sentance: I look at the oil
markets but I do not claim to be an expert. Over the period of
time even while I have been with British Airways there have been
significant changes in view about the amount of oil capacity.
There is now a view that oil supplies are a lot tighter and that
is what has fuelled the price increase.
Q488 Joan Walley: I am asking about
your company.
Dr Sentance: As I say, we do not
have a view on the peak oil hypothesis.
Q489 Joan Walley: Does Easyjet have
a view?
Mr Essex: We do not have a view
that far ahead. To take a 40 to 50-year timescale sounds absolutely
plausible.
Q490 Joan Walley: It is difficult
for us because in a previous evidence session we heard from the
editor of Petroleum Review. His evidence was that we would
reach peak oil availability around 2010. Are you familiar with
that warning and do you concur with it? What would it mean for
your businesses?
Dr Sentance: I think that is quite
possible.
Q491 Joan Walley: So, you are looking
at that as a possibility?
Dr Sentance: The situation in
which we find ourselves in aviation is that in the immediate and
short term we are dependent on oil as our main fuel, but we know
that technologies are available for the development of other types
of fuels. For example, in South Africa kerosene for aviation is
produced from coal. We encourage fuel producers and aircraft manufacturers
to look at the potential for the development of biofuels in the
aviation industry. But, as with all sectors that depend on oil—I
expect this is a bigger issue for ground transport as well—if
oil availability becomes an issue it accelerates the need to develop
alternatives and new technology.
Q492 Joan Walley: But you must be
making some contingency plans in respect of your company as to
how to factor in the possibility of peak oil production in 2010
or in 30 or 60 years' time?
Dr Sentance: If you ask for my
view as an economist I see this reflected in the price. Obviously,
the more that demand becomes tight in relation to supply in the
oil market the more that will be reflected in the oil price. We
have already seen a very big shift in fuel prices. When we look
at our fleet purchase plans we evaluate them on the basis of a
range of different oil prices; it makes obvious sense to do so.
Through the market mechanisms those prices then drive the search
for alternatives. If oil prices continue at their current levels
or go even higher I would expect a renewed drive to look for alternative
sources of energy to switch out of oil in areas where technologies
already exist to do so, for example power generation. Obviously,
it would be extremely inefficient to use oil for power generation.
Those technological substitution possibilities are not currently
as readily available in the aviation industry, but the higher
the price the more the search for them will continue.
Q493 Joan Walley: Does Easyjet concur
with that?
Mr Essex: Yes.
Q494 Joan Walley: You are a low-priced
company. What effect will that have on your prices?
Mr Essex: It is a challenge every
day. If we try to pass on to the consumer any increase in our
cost base, whether it is from oil or anything else, we immediately
see a drop in demand. The market sets the price. Beyond that,
yes, we have the same views as British Airways. The horizon for
the technology change in the aviation industry is in the 2040
time band. We do not anticipate—we know for a fact, and
we have not been told anything different by Boeing or Airbus,
or the engine manufacturers—that there will be a technology
shift until the next generation of aircraft.
Q495 Emily Thornberry: I want to
ask you about what I understand is called tankering. I understand
that you have some kind of computer system to work out how much
fuel an aircraft will use if, say, it flies from London to Cyprus
and back again. You would know how much it would use. I understand
that if the price of fuel was higher in Cyprus than in London
you would put in enough fuel to take the aircraft all the way
there and back again instead of refuelling in Cyprus. I imagine
that applies also to Easyjet. In addition, it gives you a faster
turn-round. While that may make economic sense presumably it does
not make environmental sense because you need to use more fuel
to carry a heavier aircraft there and back?
Mr Essex: I would consider tankering
to be a practice that is pretty much at the margin when there
are significant price variations in the market place. I do not
think we consider that to be the norm in terms of operating the
airline.
Q496 Emily Thornberry: But is it
not right that you will overfill an aircraft when you can save
only $50?
Mr Essex: Overfill?
Q497 Emily Thornberry: It is as sensitive
as that. We are not talking about your saving huge amounts of
money, but even if it makes the difference between paying an extra
$50 or not, you will overfill the aircraft so you fly there and
come back again?
Mr Essex: I am not sure what the
tolerance is, but we would be looking at significant price variations.
If the price of fuel at a specific location was perhaps, say,
50 to 100% higher than the cost that it would be at the point
of origin, that would usually be when we would be sensitised to
move to tankering.
Q498 Emily Thornberry: At the moment
is there any control over whether or not you do that?
Mr Essex: It is a commercial/operational
decision.
Q499 Emily Thornberry: It is only
commercial control that operates; there is no environmental control?
Mr Essex: To go back to the original
question about burning fuel, clearly if we have high fuel prices
then in your equation we also have to look at the consequences
of carrying the fuel and bringing it back again.
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