Examination of Witnesses (Questions 500
WEDNESDAY 24 MAY 2006
24 MAY 2006 DR
Q500 Emily Thornberry: If you are
to fly from London to Cyprus you will be charged depending on
which countries you pass over, so, for example, it can be more
expensive to fly over France than, say, Eastern Europe?
Mr Essex: Whilst that may be true,
it is pretty much at the margin. We would always be looking for
the most direct routeings.
Q501 Emily Thornberry: But you would
always be looking for the cheapest route, would you not?
Mr Essex: The most direct routeings,
because the economics of the aircraft are geared around the amount
of time in the air. We would not be taking a circuitous routeing
through third countries just to get the benefit of a reduced navigational
Q502 Emily Thornberry: You would
not make a journey which was 15 or 20 minutes longer to avoid
flying over some of the more expensive countries? You would rather
go over the more expensive countries than make a slightly longer
Mr Essex: Yes; we would be looking
for the most direct routeing.
Q503 Emily Thornberry: There is no
example of your doing otherwise?
Mr Essex: I am wracking my brains
to think of one, but as a general principle, no.
Chairman: Gentlemen, unfortunately I
have to leave to go to the dentist, but I shall read the remainder
of what you say with interest.
In the absence of the Chairman, Joan Walley
was called to the Chair
Q504 Mark Pritchard: Is it true that
you can save fuel in terms of oxygenating the cabin? I do not
suggest that you do not oxygenate the cabin because if you did
you might lose some passengers pretty quickly. Is it true that
you can reduce fuel costs by not putting in new oxygen as readily
as you could and that can, directly or indirectly, cause air sickness?
I ask a question rather than make a statement.
Dr Sentance: I am not aware of
that. To make a more general point, in the desire to improve the
fuel efficiency of aircraft manufacturers are looking at the use
of auxiliary power sourcesfor example, the use of fuel
cell technologywhere one does not necessarily need to draw
power from the engines. While in terms of the bulk power source
of the aircraft we are dependent on existing technologies, we
know that in some other applicationspowering things that
are taking place in the cabinit may well be possible to
look at alternative power sources. We know that in its new aircraft
Boeing is looking at fuel cell technology in that context, but
as airlines we would not put health issues at risk in a desire
to make economic, or even environmental, improvements.
Q505 Mark Pritchard: You referred
to fuel cells and you used the future tense. Therefore, in the
absence of fuel cells and alternative technology given the future
tense in which you kindly replied that, you are using existing
technology which would not bring about the alternative ways of
oxygenating the aircraft to which I referred earlier. Currently,
are the engines and, therefore, the main fuel supply being used
to oxygenate aircraft? I presume that the answer must be "yes".
Dr Sentance: I think that a number
of the applications in the aircraft would draw their power from
the engines. One of the things that we can look at in terms of
fuel efficiency as new power sources come along is providing substitutes,
but I am not sure that those substitutes are yet available in
normal commercial aircraft.
Mr Essex: In general terms, there
is perhaps a 4% opportunity for fuel saving just through quality
operational procedures, for example by ensuring that the weight
and balance of the aircraft is as accurate as possible and that
pilots are not over-filling the aircraft and taking too much fuel.
Q506 Ms Barlow: The latest Budget
Report froze air passenger duty for the fifth year running. It
said that "decisions on APD rates need to be considered in
the context of wider social and economic factors, particularly
the current volatile oil market". How has the rise in oil
prices affected both fares and passenger demand over the past
year? I realise this is quite a difficult question, but what do
you anticipate will happen over the next year?
Mr Essex: Different airlines can
afford the increasing cost of fuel in different ways: some will
place a fuel surcharge on passengers to recoup it and others will
not. We are not necessarily seeing a change in demand at that
level because different airlines will deal with it in a different
way. What you see is pressure on airline operating margins and
their profitability. If one has higher costs one needs to make
cost savings elsewhere. If you fail to do that with the same amount
of revenue your profit will go down. Typically, the industry will
be trading at between zero and 4% operating margins. One can imagine
the amount of extra effort that has to go in to recover a 15%
increase in one's cost base due to fuel price increases. One has
to turn attention to other things to get greater efficiency and
Dr Sentance: We are one of the
airlines that has put in fuel surcharges particularly because
on our long haul route network the fuel cost is such that it is
very difficult to avoid doing so and remain economic. We have
not seen much reaction yet in terms of the impact on demand. We
put that down to the fact that the world economy, including business
travel, has been pretty strong and therefore the drivers behind
travel have in a sense offset the possible impact of fuel surcharges,
but we are obviously concerned that there could be some impact
on demand. Normal economic analysis suggests that demand should
begin to respond in some way, but it might take some time to feed
through. Our hope would be that possibly by that time the fuel
price would have come down, but there is not much sign of that
Q507 Dr Turner: The aviation industry
seems to be unanimous in its support for the inclusion of aviation
within the European emissions trading scheme. This gives us pause
for thought because turkeys are not normally in the habit of voting
for Christmas, so it makes us suspect that the industry is regarding
this as rather a soft option and it will not have much impact
on the avoidance of dangerous climate change.
Mr Essex: I am perhaps surprised
to see that you are so suspicious. In the first instance, we have
to note that there is no design for aviation to go into emissions
trading scheme yet, so the position we have taken is to say we
would welcome that but not at any cost. There are two aspects
of that. One is that the design has to incentivise the best behaviour
and in consequence punish the worst behaviour; otherwise, we will
not see the achievement of environmental goals. The other aspect
is that it needs to be effective. If the design that emerges is
very narrow in scope it will tackle a very small percentage of
the EU carbon footprint. We would therefore have concern that
we would be going to a lot of trouble and effort to achieve a
very small benefit. Once we have seen a design we will be able
to evaluate it, and perhaps then you can take a view as to whether
or not we see it as a soft option.
Q508 Dr Turner: From your point of
view, how do you see the system operating in a way that will lessen
the global warming impact of aircraft? How would you incentivise
airlines to make improvements, and what specific ones would you
make that you would not otherwise make?
Mr Essex: We see the inclusion
of aviation in the scheme as a way of achieving the objectives
of that scheme, not in terms of achieving emissions reductions
per se from aviation. We said earlier that we anticipated aviation
emissions to continue to increase in the short to medium term.
It is a mechanism that can include aviation and provide economic
benefit to those who can abate and reduce CO2 emissions
at a lower cost.
Q509 Dr Turner: You said that you
would support inclusion in the ETS but not at any cost. One would
assume from that that you would be lobbying to make sure that
the future caps did not bear too heavily on the aviation industry?
Mr Essex: That was not what I
meant. I think that the two tests I gave were, first, that it
would incentivised best behaviourclearly, there are different
behaviours in the industryand, second, that it would actually
Q510 Dr Turner: But if it does not
cost the industry how will it be effective?
Dr Sentance: We need to be careful
with the European emissions trading scheme. Mr Essex and his business
operate solely within Europe, but it could apply also to airlines
that fly outside Europe and so there would be a potential competitive
impact. It would be perverse if we introduced a mechanism that
hit certain airlines.
Q511 Joan Walley: I would be grateful
if you would confine your replies to Dr Turner's original question.
Dr Sentance: If we are talking
about the impact it would have we are looking at two main ones.
We have the experience of operating within the UK emissions trading
scheme. While it is different because it is a voluntary scheme
it has been very noticeable how it has a much sharper focus and
created an economic reason to look at the emissions of the aircraft
that are covered by that scheme and also the properties that generate
emissions under that scheme. The second way it would have an impact
is in investment decisions. One would know that at the margin
if one expanded one's emissions beyond the allowance one would
have to buy permits for all those new emissions from new aircraft.
As airlines went into new investment decisions on aircraft they
would look at the emissions consequences and financial implications
Mr Essex: My position was that
at a cost, not any cost, the aviation industry could be expected
to be a net buyer of allowances in entering the UETS and, therefore,
there would be an economic cost.
Q512 Dr Turner: Is it fair to say
that you are prepared to accept some cost but clearly it must
affect your operating costs and reflect on fares, so it will have
the potential to dampen demand? If demand is dampened that would
certainly have a downward effect on emissions because people would
fly less often. The same effect could possibly be achieved by
raising air passenger duty while one waited for the ETS to accommodate
you. How would you react to that?
Mr Essex: The reason we are supportive
of the ETS is because it is about achieving the overall environmental
objectives and does not focus solely on aviation. Our experience
of APD or equivalent taxes is that while they are perhaps aimed
at dampening demand they do not do anything for the environment
because they are not hypothecated.
Q513 Emily Thornberry: You have heard
of the European Environment Agency which has recently endorsed
research which says that the environmental impact per passenger
kilometre is 3.6 lbs. If that is right do you accept that as a
fair amount that you should be compensating us for flying? An
additional and obviously linked question is: with the best will
in the world, none of this will kick in until 2012-13, so what
will you do between now and then?
Dr Sentance: As to imposing just
that charge, that is not related at all to the emissions. First,
if one imposes it on a per passenger basis it could be on an individual
who generated very different emissions profiles. Secondly, that
money would then just go into a general exchequer pot, whereas
in an emissions trading scheme the money flows to offset the emissions
to generate emissions reductions elsewhere. Therefore, it is much
more environmentally effective. The notion that while we are waiting
for emissions trading we should just impose a tax is really heading
off in a totally different direction.
Q514 Emily Thornberry: Let us not
impose a tax; let us put it into some other kind of carbon offset.
I am sure that if you were to volunteer to do that nobody would
Dr Sentance: We have provided
a facility for our customers to do that. That is something that
customers are free to do.
Q515 Emily Thornberry: I am sure
you do not stop them from doing so, but that is not really the
question. It is not that you stop your customers from offsetting
their carbon emissions, but if your industry is generating that
level of carbon given that the problem is now what are you doing?
You are simply allowing your customers to make a decision; it
is not as though it is a dominant feature of your website. If
one books tickets with British Airways one does not see a pop-up;
it is not even something that is available that people can opt
Dr Sentance: If you talk about
what we are doing, as noted before the UK aviation industry has
been ahead of perhaps any other country in working alongside its
government to try to get emissions trading on the agenda. It is
very important certainly for our business that in this area we
get international action applied consistently across different
countries; otherwise, we will just be penalising the UK aviation
industry and damaging its competitive position. Our view is that
we should continue to press it. We have made a good deal of progress
in the establishment of an emissions trading scheme first in Europe
and then more broadly internationally and we should make that
our main focus because we know that that is the most environmental
and cost-effective way to move forward.
Q516 Mr Hurd: If ETS was open for
business tomorrow how much difference would we see between the
best and worst performing companies in relation to the carbon
footprint? My perspective is that there is probably not that much
difference between you and the underlying concern is whether we
will see that genuine market and level of incentive for the best
performers appear immediately given the long timeframes and long
lives of aircraft?
Mr Essex: It is a somewhat hypothetical
question because it is in the hands of the regulator to design
a scheme to achieve the very goal you outline. Until we have seen
something that we and you can evaluate I am not sure how we can
take a view as to whether or not it will be an incentive.
Q517 Mr Hurd: My point is that for
the market to work you have good and bad performers and you must
have those incentives in place. My question is: how big is the
gap between the best performing and worst performing companies
in terms of age and efficiency of fleet today?
Dr Sentance: If you look at it
internationally you will find a very big spectrum. There are many
airlines in the world that do not operate according to normal
commercial disciplines. That is something of which we have complained.
There are many airlines in the world that operate old aircraft
with far inferior fuel efficiencies compared with the most modern
aircraft. There are big differences. You put your finger on it
when you talk about investment. In any emissions trading schemethis
is true for all industries, not specifically aviationultimately
it will have its greatest effect over an investment cycle. When
the emissions trading approach can be seen almost as an ongoing
feature of the commercial environment in which people have to
live, is an established part of business thinking and is built
into their investment decisions in all sectors then we will see
the maximum benefit.
Q518 Mark Pritchard: One of the most
obvious competitive disadvantages of having to adhere to an emissions
trading scheme is that other airlines such as those from Asia
and the United States clearly are not part of it. Do we need to
create a level playing field for the industry and British airlines,
whether they be small or large, and a global emissions trading
scheme for aircraft rather than just a European one?
Dr Sentance: The worst case scenario
in terms of competitive distortion arises if one has two carriers
flying on the same route and one is subject to the scheme and
the other is not. That is a scenario that we are most keen to
avoid. We can certainly avoid that for intra-European travel but
we see some quite big risks if we try to apply unilaterally in
Europe an emissions trading scheme for flights outside Europe,
but a situation could arise either accidentally or by design whereby
carriers based outside Europe will not be subject to the same
regime or have a lesser standard.
Q519 Mark Pritchard: Can you give
an example of a route?
Dr Sentance: The scenario that
we are most concerned about, if we take the United States to Europe,
is that the US takes a very different approach from European governments
to climate change issues. The United States authorities have said
that they would not see US carriers as being bound under the Chicago
Convention by an emissions trading scheme in Europe. If that was
allowed to persist and they asserted that position two very important
consequences would emerge: first, potentially European carriers
would be subject to a charge that US carriers did not have to
bear; and, second, there would be an international dispute in
aviation, which would probably disrupt travel between the United
States and Europe. I think that that is a scenario we have to
try to avoid when we introduce emissions trading in Europe.
Mr Essex: That is a riskthere
are a lot of risks in lifebut if we had a scheme that was
focused only on intra-European travel we would be focusing only
on 1% of Europe's CO2 footprint. We do not see that
as necessarily as an effective solution. Clearly, there are trade-offs
to be made, but I think it is in everybody's interests to have
an effective scheme.