Select Committee on Environmental Audit Minutes of Evidence

Examination of Witnesses (Questions 480 - 499)



  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.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 7 August 2006