Select Committee on Environmental Audit Minutes of Evidence


Examination of Witnesses (Questions 500 - 519)

WEDNESDAY 24 MAY 2006

24 MAY 2006  DR ANDREW SENTANCE AND MR CHRIS ESSEX

  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 charge.

  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 journey?

  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 sources—for example, the use of fuel cell technology—where 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 applications—powering things that are taking place in the cabin—it 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 costs down.

  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 happening.

  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 behaviour—clearly, there are different behaviours in the industry—and, second, that it would actually be effective.

  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 for them.

  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 object.

  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 out of.

  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 scheme—this is true for all industries, not specifically aviation—ultimately 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 risk—there are a lot of risks in life—but 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.


 
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