Great news for the European aviation sector came on Monday when Lufthansa became the first airline to take the brave step of paving the way for higher ticket prices in the face of increasing regulatory costs in the European airline sector. Lufthansa told consumers to brace for higher ticket prices as it refuses to shoulder the costs of the EU ETS scheme.
Lufthansa said it faced €130m in extra costs this year and became the first major operator to announce possible surcharges since ETS went live on January 1, 2012.
This news is a major step and if the European airline CEOs can see sense as their USA counterparts did in 2008, then there may yet be hope for the European airline sector yet in 2012. We have devoted many words to the need for European airlines to increase fares in the face of ETS and APD taxation. Now we require the likes of IAG, Easyjet and AF-KLM to come out and join Lufthansa as a sector voicing as one the need for increased fares due to taxation.
Get trading now?
Meanwhile the partial cause of the need for fare increases took effect the other night – yes ETS is live. To get the scheme up to speed the EU decided that airlines will collectively receive free permits amounting to 85% of their estimated needs during 2012. But we must all remember that the permits are out of date as they were calculated on the basis of 2004-2006 traffic data. Lufthansa said it would need to buy 35% of the permits it needs for 2012 on the open carbon market.
The problem is that while airlines scramble around in the dark wondering if the 2012 carbon trade war between the EU and the US and BRIC countries will mean all possible plans for carbon trading are an expense for nothing; they are missing out on an opportunity to buy permits now on the cheap! Permits have roughly halved in value in the past year to just under €7.9 per tonne of carbon but if the agreement from last month for the new global emissions accord were to be implemented then prices would rise sharply. In addition there is the worry of the Eurozone, which let us be honest, could go either way. If the Euro fails then prices will fall further but if somehow they manage to muddle their way through the mess that they are in then prices could rise sharply as fears of recession abate. It is a minefield but EU-based airlines should have carbon hedges in place already or, if not, then they should be buying permits now while the price is at a record low.
Airlines, unlike energy companies cannot benefit from the carbon carousel where the energy firms within the EU get government grants to build green power plants, which then leads to carbon credit offsets that lead to profits in carbon trading of excess permits – all while the plants are built at a fraction of the cost to the company. Good business. Airlines need to work out a way to manipulate the system in the same fashion – this may come in time with the ability to gain carbon credits through green investment or the like but this will require more lateral thinking from the EU……do not hold your breath. For now though ETS is a shadow of what it will be in 2013, best get ready to make decisions on future plans by September 2012 at the latest.
Please also take the time to scroll down to APAC regulatory section. The Indian government, desperate to save domestic airlines from implosion is looking to open the market to investors at a level of 49% for foreign ownership, this we reported last year when the 26% was announced but also today more or less at the same time another ministry within the Indian government said that all new routes may need to be approved in the future to stop overcapacity wrecking the market. This is a double-edged sword as although overcapacity could be pegged back it also means that investors can be assured that they will have a hard time growing an airline – So why invest?