EU ETS: IMPLICATIONS FOR THE

AVIATION INDUSTRY

Gary CrichlowSenior Analyst

ASCEND

Westminster Energy, Environment & Transport Forum Keynote Seminar: Aviation and Shipping

11th March 2010

THE EU ETS: INTRODUCES ANOTHER SOURCE OF RISK THAT THE INDUSTRY MUST MANAGE

Credit risk: EU ETS cost burden on industry for compliance

Operational risk: Compliance with EU ETS submissions deadlines

and regulations

Country risk: Political stance towards the EU ETS’ legality

for non-EU-based operators

Asset risk: Aircraft residual values, economic useful life

Reputational risk: Public image for non-compliant carriers

?

3

THE EU ETS – AVIATION’S EXPOSURE

Medium haul: 1,501–3,000nm4% of 2008 mvmts6% of 2008 seats

FRA

EU ETS would have covered 4m scheduled airline movements, 0.5bn seats in 2008

Short haul:<1,500nm90% of 2008 mvmts81% of 2008 seats

Long-haul:>3,000nm7% of 2008 mvmts14% of 2008 seats

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THE EU ETS COST BURDEN ON OPERATORS

Administrative costs of compliance Monitoring, reporting & verification

Cost of CO2 credits

Allocation of free credits

Trading on the open market: current EUA ~ €13/tonne

Penalties for non-compliance / shortfall €100/tonne plus cost of required credits

Competitive distortion — carbon leakage to other regions?

EXAMPLE: EASYJET

London Gatwick(LGW)

Helsinki (HEL)

Heraklion (HER)

1,863 km

2,683 km

Short/medium-haul A320 fleet Typical daily routing:

4 legs, 2 × daily rotation: LGW-HEL, LGW-HER

1,863 km

2,683 km

LGW-HEL

LGW-HER

Typical round-trip fare €200 €250

Allowance cost per pax* €2.52 €3.39

CO2 allowance add-on 1.3% 1.4%

* Assuming round-trip, 65% load factor, €40 cost per allowance

Source: Ecometrica, easyJet

2009 pre-tax profit margin 1.6%

EXAMPLE: EASYJET – ANNUAL COMPLIANCE BURDEN

London Gatwick

Helsinki

Heraklion

1,863 km

2,683 km

1,863 km

2,683 km

$0.4m $0.4m

$6.9m

0

1

2

3

4

5

6

7

US

$ m

illio

n p

er

ye

ar

2009 average profitper aircraft

CO2 cost ifcompliant

CO2 cost: worst-case non-compliance

Sources: Ascend, Ecometrica, easyJetAssumes US$/€ exchange rate of US$1.49, EUA price of €40/tonneCompliance includes qualifying for 82% free allowances

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PASSING ON COSTS: DEMAND ELASTICITY

SHORT-HAUL LONG-HAUL

Price elasticity

CO2 allowance cost

Price elasticity

CO2 allowance cost

Carbon leakage risk Carbon leakage risk

Competition from LCCs, rail, etc Fewer alternatives

Level playing field Greater possibility to bypass EU for connections e.g. DXB

EU ETS COST BURDEN: KEY TAKE-AWAY POINTS

Compliance costs marginal BUT industry margins already razor-thin

Cost pass-through: dependent on market

dynamics & underlying economic picture

It will affect weaker players “on the edge”

Heavy penalties for non-compliance

THANK YOU!

Gary CrichlowSenior AnalystAscend

gary.crichlow@ascendworldwide.com

ets@ascendworldwide.com

Barry MossPrincipal

Avocet Risk Consultants

barrymoss@avocetinsurance.com