1. www.ecometrica.co.uk ETS IMPLICATIONS ON ROUTE AND NETWORK DECISION MAKING Barry Moss Special Advisor ECOMETRICA Gary Crichlow Aviation Analyst ASCEND

2. www.ecometrica.co.uk 2 Introduction 1.The fleet (Ascend)  Traffic analysis  Current fleet  2012 and beyond: fleet evolution 2.The science (Ecometrica)  CO 2 calculation modelling  Scenarios: indicative emissions costs in context  Cost of compliance versus non– compliance 3.The implications AGENDA

3. www.ecometrica.co.uk 3 OUR THESIS: ETS IS EFFECTIVELY A FUEL “TAX”  ETS  higher costs, in proportion to fuel burnt  “Tax” set by market forces: fluid  Fleet / route planning: already a dynamic exercise EUA cost EUA market demand CO2 emitted FUEL BURNT

4. www.ecometrica.co.uk EU ETS Price elasticity of demand Profitability Monitoring, Reporting & Verification Fuel efficiency Science: 1kg Jet A-1 = 3.15 kg CO 2 Compliance costs EU ETS IN CONTEXT 4

5. www.ecometrica.co.uk 5 SETTING THE SCENE — ETS-COVERED ROUTES Long-haul: >3,000nm 7% of 2008 mvmts 14% of 2008 seats Medium haul: 1,501–3,000nm 4% of 2008 mvmts 6% of 2008 seats Short haul: <1,500nm 90% of 2008 mvmts 81% of 2008 seats Frankfurt EU ETS would have covered 4m scheduled airline movements, 0.5bn seats in 2008

6. www.ecometrica.co.uk 6 SHORT-HAUL 2008 SCHEDULED AIRLINE MOVEMENTS  90% of 2008 scheduled airline movements  A320 family / 737 types dominate  Average stage length: 800 km (440 nm) Source: OAG, Ascend analysis

7. www.ecometrica.co.uk 7 MEDIUM-HAUL 2008 SCHEDULED AIRLINE MOVEMENTS  4% of 2008 scheduled airline movements  A320, A330, 757 and 737NG dominant types  Average stage length: 3,800 km (2,000nm) Source: OAG, Ascend analysis

8. www.ecometrica.co.uk 8 LONG-HAUL 2008 SCHEDULED AIRLINES MOVEMENTS  7% of 2008 scheduled airline movements  Widebody twins dominate  Other types include:  757 (mainly transatlantic sched / charter)  737 / A319 long-haul premium operations  Average stage length: 7,500 km (4,000nm) Source: OAG, Ascend analysis

9. www.ecometrica.co.uk 9 EUROPEAN NARROWBODY FLEET FORECAST  Older generation virtually nonexistent in Western Europe by 2014  No A320 / 737 NG replacement before 2020 Source: Ascend Global Aircraft Forecast 2009-2019

10. www.ecometrica.co.uk 10 EUROPEAN REGIONAL JET FLEET FORECAST  Decline in smaller RJs  Balance shifting towards Embraer E-Jet family  Superjet expected to be strong in Eastern Europe / CIS Source: Ascend Global Aircraft Forecast 2009-2019

11. www.ecometrica.co.uk 11 EUROPEAN WIDEBODY JET FLEET FORECAST  Twinjet trend  Conversions extend life of current-generation models Source: Ascend Global Aircraft Forecast 2009-2019

12. www.ecometrica.co.uk 12 THE FLEET — KEY POINTS  A320 / 737 families’ dominance will continue well into the foreseeable future  Short-haul flights account for the vast majority of movements and seats  majority of ETS impact  Long-haul flights have a proportionally greater CO 2 footprint than movement data indicates  2004–2006 average baseline: 2012 fleet more fuel-efficient BUT larger  growth in carbon footprint

13. www.ecometrica.co.uk 13.  Aviation greenhouse gas (GHG) emissions come from combustion of jet fuel and aviation gasoline  Aircraft GHGs :  70% CO 2  ≤ 30% H 2 O  ≤ 1% each for NO X, CO, SO & particulates  1 kg of jet fuel = 3.15 kg of CO 2  CO 2 has the same climatic effects at all altitudes  Generally about 10% of emissions occur during LTO phase and 90% during cruise  Except hydrocarbons & CO where emissions are closer to 30% during LTO phase and 70% during cruise THE SCIENCE

14. www.ecometrica.co.uk 14 ALLOCATION OF ALLOWANCES  Cap CO 2 emissions to 97% of baseline levels (being average emissions between 2004 – 2006) in 2012 and 95% of baseline levels from 2013  3% of allowances to be set aside for new entrants and operators whose activities have rapidly increased  85% of baseline allowances to be issued free of charge – This may only be 82%!  15% (or 18%) of allowances to be auctioned

15. www.ecometrica.co.uk 15 REGIONAL: ZRH–AMS GCD: 603 km LX RJ100 KL F.100 Allowance cost per pax*€2.08€1.80 Typical round-trip fare€130 CO 2 allowance add-on1.6%1.4% Assuming round-trip, 65% load factor, €40 cost per allowance

16. www.ecometrica.co.uk 16 LONG-HAUL: LHR–SIN GCD: 10,869 km SQ 777 SQ 747 Allowance cost per pax*€17.68€18.68 Typical round-trip fare€500 CO 2 allowance add-on3.5%3.7% Assuming round-trip, 80% load factor, €40 cost per allowance

17. www.ecometrica.co.uk 17 Scenario – EU ETS Compliant, Purchase 18% of Allowances – Short Haul Airbus A320 COMPLIANT ETS allowance cost Approx. €144,000

18. www.ecometrica.co.uk 18 Scenario – Non Surrender of Allowances (100%) Airbus A320 No Grandfathering NON-COMPLIANT ETS allowance cost approx. €800,000 plus Fines €2,000,000

19. www.ecometrica.co.uk 19 Scenario – EU ETS Compliant, Purchase 18% of Allowances - Long Haul Boeing 777

20. www.ecometrica.co.uk 20 Scenario – Non Surrender of Allowances (100%), No Grandfathering – Long Haul Boeing B777 NON-COMPLIANT ETS allowance cost approx. €5,000,000 plus Fines €12,500,000

21. www.ecometrica.co.uk 21 SUMMARY AND KEY TAKE-AWAY POINTS  EU ETS: equivalent to fuel tax  Allowance costs directly proportional to fuel burnt  Penalties for non-compliance are stiff  Practical implications still far from set in stone  Supply-side costs vs demand elasticity — ability to pass on costs will vary by market  Technology development incentives e.g., engine tech, biofuels – weak, but will eventually strengthen as fossil fuel prices rise