Environment
Airlines outraged by 'windfall' charge
February 1st 2013
Airlines worldwide have rebutted the findings of a new study by Dutch consultancy, CE Delft, which accused them of reaping huge ‘windfall’ profits - some $1.82 billion worldwide last year - from surcharges they placed on ticket prices to cover the cost of Europe’s controversial emissions trading scheme (ETS). Read More » Industry leaders have described the claim as deeply misleading.
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| 'The report does not reflect the real world of the EU [European Union] ETS or of the airline business' |
| Tony Tyler Director General IATA |
The Association of Asia Pacific Airlines (AAPA) director general, Andrew Herdman, said claims of big windfall profits were “a complete fallacy”. International Air Transport Association (IATA) director general, Tony Tyler, said the report was light on facts and heavy on assumptions.
Both said the industry’s 1% net margin last year indicated how much airlines struggle to cover the real cost of air transport with air fares.
“Suggesting that airlines have been able to recover hundreds of millions of euros from passengers for costs that they did not face is ludicrous,” said Tyler. “The report is a very simplistic analysis of a complex situation.
“It is based on assumptions and guesstimates that the authors themselves acknowledge. Moreover, it does not reflect the real world of the EU [European Union] ETS or of the airline business. It is surprising that CE Delft has put their name to research of this quality.”
The report, released last month, was commissioned by the Brussels-based green campaign group, Transport and Environment. It said airlines were still collecting extra money from passengers to cover intercontinental emissions obligations even though the requirement to pay them has been waived for a year.
It also suggested that although the bulk of allowances (about 85%) were handed out free, many airlines had been passing on the full cost and not only the value of allowances they had to buy.
The EU scheme took effect on January 1, 2012. The announcement of a 12-month freeze on non-European carriers paying for emissions was made last November after a lengthy and fiery global campaign by airlines and governments, which accused Europe of breaking international law by charging for emissions outside European airspace.
In drawing attention to inconsistencies in the CE Delft study, Tyler observed it said in one part that Chinese airlines were prohibited from raising ticket prices. In another part, the report suggested Air China made a €3.7 million profit. In fact, Chinese carriers refused to take part in the scheme.
“The report’s conclusion that airlines ‘could’ have made windfall profits of up to €1.358 billion would equate to over a quarter of the entire global airline industry’s 2012 profit,” he said. “In that year European carriers [purported by the report to have profited the most from the scheme] just broke even. This begs the question: if airlines profited from the ETS so much, why would they oppose its implementation?”
“In a competitive market place, windfall profits simply do not arise, they are competed away,” said Herdman.
He pointed out any airline that introduces an unreasonably high charge, for whatever reason, finds it has to reduce its underlying fares to compensate, as the passenger bases their airline choice on overall cost, inclusive of all charges.
“The experience of fuel surcharges, orders of magnitude greater than current emissions costs, illustrates the point well,” said Herdman.
“Some airlines imposed substantial fuel surcharges of fifty dollars or more, others chose not to impose any fuel surcharges at all. But the overall costs of fares, inclusive of surcharges, were always kept strictly in line by the market, with no impact on airline profitability one way or the other.
“The key point is that when the underlying costs affect all airlines, it does not really matter how you package the pricing, the overall impact on consumers and producers is more or less the same.”
Another problem is that individual airlines took different approaches to dealing with the cost of the EU ETS. Some operators, such as Singapore Airlines and Cathay Pacific Airways, did not add an emissions surcharge to their ticket prices, opting to compensate by focusing on such things as improved fuel efficiency.
Others did take action. Major U.S. carriers all introduced a $3 surcharge on European flights. In February last year, Qantas Airways announced a one-way A$3.50 surcharge on flights to Europe to cover the cost. A surcharge still applies, but it has been reduced to $1.50 due to a drop in the price of carbon in Europe, said a Qantas spokesman.
But it is not just a matter of the EC removing the surcharge. It has still to be formally approved by the European Parliament, which is not expected to be any earlier than May.
“It would be premature for airlines to change policy without this legal certainty,” said the Qantas spokesman. When the freeze is formally approved the airline would review its policy immediately, he added.
Nevertheless, environmental campaigners want action. Bill Hemmings, aviation manager at the Transport and Environment campaign group, said passengers have paid towards fighting climate change.
“It is unjust for airlines to retain these windfall profits. Air carriers should act responsibly and contribute these additional profits to the UN’s Green Climate Fund,” he said
Herdman said the sudden decision by the EU to “stop the clock” does raise the problem of what should be done about those passengers who have bought tickets priced assuming the ETS costs would be levied.
“The situation is complicated by the fact that there is no standardization of how such charges are recovered from passengers. In order to be compliant with competition and antitrust laws, each airline has to make its own decisions,” he said.
“This leads to a situation, already familiar from our experience with the application of fuel surcharges, where individual airlines each take a different approach.
“Emissions costs may be itemized on a per passenger, or per sector basis, either on a flat rate basis or according to distance bands. Some airlines did not make a separate charge, but simply treated such costs as internal costs reflected in the overall fares offered to the public.”
With regard to retrospective adjustments, Herdman said in practice “it would be very complicated and somewhat arbitrary to calculate the appropriate refunds for individual passengers and frankly, at the current level of emissions charges, any refund would likely be exceeded by the administrative costs involved”.
