Volcano to boost airlines’ emissions trading costs

By Maria Sheahan and Rhys Jones – Analysis

FRANKFURT/LONDON (BestGrowthStock) – Europe’s cash-strapped airlines could be saddled with mounting costs to buy emissions certificates after a volcanic ash cloud that swept across Europe cut the number of free certificates they stand to receive.

Most of Europe’s airspace was closed for nearly a week from April 15 after a huge ash cloud from an Icelandic volcano stranded millions of business passengers and holidaymakers and paralyzed freight and businesses.

The International Air Transport Association (IATA) said the airlines lost more than $1.7 billion of revenues due to the volcano crisis.

But that’s not the end of it. The less European airlines’ planes can fly this year, the fewer free certificates they will get when the European Emissions Trade System (ETS) is extended to include airlines in 2012.

Under the ETS, each airline gets a certain number of free certificates, or licenses to pollute the air, which is partly based on its emissions in 2010.

Beyond that, airlines need to pay for certificates. IATA has put the industry cost at 3.5 billion euros in the first year, with an increase in costs every year after that.

Airlines operating flights in northern Europe, which were the most affected by grounded flights, will be the ones worst hit in terms of getting fewer allowances.

“If there’s no adjustment, airlines in northern Europe like British Airways would be at a disadvantage to those in the south that were able to continue flying,” said Trevor Sikorski, director of carbon research at Barclays Capital.

British Airways was one of the airlines hit the hardest by the airspace closures, with a daily cost of 15-20 million pounds ($23-31 million). Germany’s Lufthansa lost nearly 200 million euros ($266 million) in total.

COMPLICATES ALLOCATION

Lufthansa has estimated its annual costs from the ETS at 150-350 million euros once airlines join the scheme.

IATA head Giovanni Bisignani said after airspace reopened that the 2010 emissions levels will not represent a “normal” year for airlines and called for a delay of the ETS extension.

“We share the view of all airlines affected that calculations should be based on the full year rather than 360 days because this was clearly an extraordinary situation,” an EasyJet spokesman said.

Analysts believe the ETS scheme is unlikely to be derailed or delayed but expect the different levels of disruption suffered by airlines to complicate the allocation of allowances.

Some also say that the closures will have a limited effect.

“It was one week out of 52 weeks being measured so I don’t expect it will have a very dilutive effect,” said Barclays Capital’s Sikorski.

The European Union has meanwhile brushed off calls for a delay to the ETS.

“Although I know it’s a difficult situation for the airlines, I think that that is not an appropriate excuse for saying, ‘Why should we not be excluded here?’,” said the EU’s climate commissioner, Connie Hedegaard.

IATA “has always argued against this piece of European legislation and now they are just trying to find a new argument,” she said.

COMPOUNDS RECESSION WOES

But the volcanic ash disruption came at a time when the industry was already concerned that the impact of the recession would create a baseline lower than expected.

Some analysts are worried that if the EU does not adjust the 2010 figure to account for recent events it will be extremely difficult for the sector to deliver emission reductions.

“The aviation industry has for some time had recession at the forefront of its mind,” said BGC Partners strategist David Buik. “Recent unavoidable machinations such as the volcanic dust should have necessitated further less ambitious and more realistic adjustments by the EU in terms of emissions reductions.”

The volcano comes as airlines still reel from the industry’s worst downturn in decades last year, and looming costs for emissions certificates are already on the horizon.

“Psychologically, a delay would have a positive impact on the airlines as they would gain more time to recover before being confronted with the additional costs of emissions trading,” said LBBW analyst Per-Ola Hellgren.

IATA has said the world’s airlines lost about $9.4 billion last year, and they stand to lose another $2.8 billion this year on fallout from the downturn.

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(Editing by Sitaraman Shankar)

Volcano to boost airlines’ emissions trading costs