a UBM Aviation brand The European Union Emissions Trading Scheme

a UBM Aviation brand The European Union Emissions Trading Scheme First Published: January 2012

Contents 1. EXECUTIVE SUMMARY... 3 2. IMPLICATIONS FOR OPERATORS... 4 3. ETS CALCULATION PROCESS... 4 4. POSSIBLE SCENARIOS:... 6 1. AIR FARES RISE DUE TO CARBON TAX... 6 2. CARRIERS USE NON-EU POINTS TO STOP-OFF... 8 5. SUMMARY... 11 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company. 2

1. Executive Summary The European Union Emissions Trading Scheme (EU ETS) was launched in 2005 to combat climate change and is a major pillar of the EU climate policy. Under the ETS, large emitters of carbon dioxide within the EU must monitor their CO2 emissions and annually report them. The 1st EU ETS Trading Period expired in December 2007. It had covered all EU ETS emissions since January 2005. Since January 2008, the 2nd Trading Period is under way which will last until December 2012. In January 2008, the European Commission proposed a number of changes to the scheme, which are only likely to become effective from January 2013 onwards, i.e. in the 3rd Trading Period under the EU ETS. 1 The ETS now operates in 30 countries (the 27 EU Member States plus Iceland, Liechtenstein and Norway). It covers CO2 emissions from installations such as power stations, combustion plants, oil refineries and iron and steel works, as well as factories making cement, glass, lime, bricks, ceramics, pulp, paper and board. Nitrous oxide emissions from certain processes are also covered. The EU ETS will be further expanded to the petrochemicals, ammonia and aluminium industries and to additional gases in 2013. The EU ETS will now be extended to the airline industry as of January 2012 post the recent ruling by the European Court that it is legal. 2 This poses major challenges and risks for airlines. From 2012, aircraft operators will have to surrender one allowance per tonne of CO2 emitted on a flight to/from (and within) the EU. This covers passenger, cargo and non-commercial flights and applies no matter where an operator is based. This will create new costs for the entire sector of about 3.5 billion Euros per year assuming a price level of 30 Euro per allowance. These costs are likely to be spread unevenly amongst affected operators, as specific emission levels vary widely between aircraft. The costs for emission allowances will effectively introduce an additional commodity price risk into an operator's business model. The additional costs to the airline will result in the costs being passed onto the customer. 3 In consequence, the EU ETS will create two possible scenarios. The first one will generate higher air fares due to the carbon tax at an additional average cost of approximately 3% per passenger. The second scenario will see airlines use non-eu points as intermediate stops to avoid the additional costs. The impact of introducing this new carbon tax will be visible not only in carriers capacity and frequency, but also in European airports and airports outside the area affected by carbon regulation. 1 http://ec.europa.eu/clima/policies/ets/index_en.htm 2 http://en.wikipedia.org/wiki/european_union_emission_trading_scheme 3 http://www.pwc.com/gx/en/transportation-logistics/emissions-trading-aviation-frequently-askedquestions.jhtml 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company. 3

Further secondary ramifications include the reaction on non-eu states. Over flight rights, en-route charges and landing fees may all be seen as potential pressure points that these states can employ upon the EU carriers as political tension increases. 2. Implications for operators On 1 January 2012, the aviation sector will join the EU ETS. The first year of participation will serve as an introductory phase in preparation for Phase III. The aviation sector will be subject to the revised rules which are proposed for Phase III. The emissions cap will be set at the EU wide level by reference to a baseline of the average emissions from the aviation sector in 2004-2006, as follows: 2012: the emissions will be capped at 97% of the average; 2013-2020: the emissions will be capped at 95% of the average. The emissions cap set will be converted into allowances. One allowance will equal one tonne of carbon dioxide. The majority of allowances will be issued to aircraft operators free of charge on the following basis: In 2012: 85% of allowances will be issued free of charge and 15% will be auctioned Between 2013-2020: the percentage of allowances that will be auctioned may be changed as part of the general review of the Aviation Directive that the Commission intends to undertake ahead of Phase III. From 1 January 2013, carriers will be able to benefit from a reserve fund if they are: new entrants that started operations after 2010; or growing airlines with an increase in tonne-kilometre data of more than 18% per annum. The reserve fund will contain 3% of the total quantity of allowances allocated to the aviation sector for Phase III. If a commercial aircraft operator performs less than 243 flights per year or performs flights with total annual emissions lower than 10,000 tones per year, it will be exempt from participation in the EU ETS. 4 3. ETS Calculation Process Carriers will be required to monitor yearly emissions, for example from 1 January to 31 December, on a per-flight basis. This data must be placed in an annual emissions report. By 31 March of the following year, independently accredited and verified report must be submitted to the authorities and following acceptance the operator has to surrender the equivalent number of allowances by 30 April. Free allowances will be allocated to aircraft operators by a separate procedure based on passenger and cargo traffic. Once free allowances have been distributed, they will be issued to carriers on a yearly basis before 4 http://www.law-now.com/cmck/pdfs/nonsecured/phase3.pdf 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company. 4

28 February of the compliance year. A monitoring plan outlining the processes, responsibilities and data flows for collating data has to be submitted by each operator in advance of the monitoring period. EUROCONTROL has been chosen to implement the Historical Emissions computation methodology. The following diagram illustrates the calculation process, indicating with numbers 1 to 9 of the steps of the calculation. 5 1 Complement CRCO data Flight records Archives 2004-2006 for all EU27/ EUROCONTROL From State SOURCE (21.000.000 records) In EUROCONTROL/CRCO Data from Estonia CFMU data for Poland French data & Stats for UPR (Guadeloupe, La Reunion) Data from Latvia Lithuania (Linear extrapolation) 2 Add Actual Route Length Info to each flight records Individual Flight Actual Route Length 2004-2006 data (21.000.000 records) Annual Historical Aviation CO2 emissions calculation 9 In EUROCONTROL/CFMU EU directive Exemption by De minimis clause 3 Complement ANCAT CASE, complement ANCAT with more Aircraft Types Fuel Burn EUROCONTROL 2 nd Filtering 8 Fuel Bum & CO2 emissions For each of 21.000.000 Individual Flights For 2004-2006 4 ANCAT Aircraft Types Standard Fuel Burn model Calculation 7 ECAC model 5 Merge Data from 4 & 5 6 EU directive Exemptions -EU 27? -AOP Type? -Flight Type? -Weight < 5.7T? 1 st Filtering In EUROCONTROL PRISME Archive System Emissions computation methodology Source: http://ec.europa.eu/clima/policies/transport/aviation/ 5 http://ec.europa.eu/clima/policies/transport/aviation/allowances/docs/d2_en.pdf 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company. 5

4. Possible Scenarios: 1. Air fares rise due to carbon tax This cost burden on airlines will add further cost pressure to a cyclical, capital-intensive, and highly competitive industry already subject to volatile fuel prices, and may further differentiate aircraft operators. Although the airline sector is currently responsible for a relatively small 3% share of total global emissions, this is set to rise as the sector experiences rapid growth. 6 World CO2 emissions by sector in 2009 Source: http://www.environmentalfinance.com/download.php?files/pdf/4d663c478efb8/airline%20carbon%20costs%20take%20off.pdf In practice, individual airlines' free allowance allocations in 2012 will be based on their level of activity relative to total aviation activity in the EU ETS zone, measured in tonnekilometres, in the 2010 monitoring year. Airlines would then be required to purchase allowances for emissions that exceed their free allocations in 2012. 7 Based on the observations of how the industry has managed fuel price spikes, a significant proportion of ETS costs are likely to be passed to the airlines customers. In the worst case of a high carbon price and low cost pass-through scenario, carriers might abandon some routes, with further economic and social consequences on regional connectivity and local employment. To illustrate the additional costs the airline sector may face in the near future, see the example below. 6 http://www.environmentalfinance.com/download.php?files/pdf/4d663c478efb8/airline%20carbon%20costs%20take%20off.pdf 7 http://www.enviro-news.com/news/2050_aviation_co2_emissions_reduction_plan_unveiled.html 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company. 6

No Non- Carrier Aircraft Average Block Tonnes Aver. ETS (cost: Cost per Average stop Number of Hours of fuel cost Euro passenger percentage flight passengers Euro/tC 15/tCO2) before price O2 per before allowances increase tonne of allowances in Euro per per fuel route passenger 1 SIN- LHR 2 DEL- LHR 3 MIA- TXL 4 GIG- FCO 5 CAI- LHR 6 IST- CDG 7 SVO- FRA Singapore Airlines (SQ) B777-3 334 14.2 98 4,632.46 27.74 1.4% Air India (AI) B777-2 284 9.6 73 3,427.48 24.14 5.2% Air Berlin (AB) A330-2 278 9.5 58 2,754.37 19.82 3.5% Alitalia (AZ) A330-3 278 11.3 68 3,204.06 23.06 1.7% Egypt Air (MS) B777-3 334 5.3 37 1,729.02 10.36 2.4% Turkish Airlines (TK) A330 278 3.7 23 1,072.76 7.72 2.3% Aeroflot A321 147 3.4 11 505.43 6.88 2.0% Russian Air. (SU) ETS cost per passenger Source: OAG Fleet inet and ASM Airport Code TXL CAI DEL FRA IST LHR MIA SVO CDG GIG FCO SIN Airport Name Berlin (Tegel) Germany Cairo Egypt Delhi India Frankfurt Germany Istanbul (Ataturk) Turkey London(Heathrow) England UK Miami(Intl) FL USA Moscow (Sheremetyevo) Russian Fed. Paris(Charles De Gaulle) France Rio De Janeiro(Intl) RJ Brazil Rome (Fiumicino) Italy Singapore (Changi) 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company. 7

The cost per passenger depends on the level of free allowances. The potential effect of the EU ETS on the airline industry in 2012 will be small as this will be a probationary year for carriers, but cost pressure will rise in 2013 as the emissions cap (and therefore the amount of free allowances) is tightened. It is estimated that based on the existing CO2 ETS cost, airfares will see an approximate 3% increase to counter the additional carrier cost. 2. Carriers use non-eu points to stop-off One possible consequence of this additional cost is an alternative scenario the carrier moves its activities outside the area affected by carbon regulation to avoid the compliance cost. They would then be able to either leverage partnerships to feed passengers into Europe or tag on a shorter sector into the EU and paying significantly less. Whilst this is not an option for EU-based passengers, European airports may become less competitive for passengers coming from outside the EU to transit through to an end destination outside Europe. This would benefit those airports in non-ets affected countries just outside the EU as well as those airports such as Dubai, Abu Dhabi and Doha that have configured their businesses around the transfer of passengers across the globe. The map below shows possible substitute airports which can be used by carriers as their alternate points that are exempt from the ETS charges. 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company. 8

St Petersburg (LED) Moscow (SVO) Minsk (MSQ) Geneva (GVA) Zurich (ZRH) Basel (BSL) Zagreb (ZAG) Istanbul (IST) Legend: Legend: Member of ETS Member of ETS Most suitable alternative airports free of ETS Alternative airport free of ETS 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company. 9

Below is an example of ETS charges in the case of airlines using alternative airports just out of the area affected by the carbon regulation. No Non- Carrier Aircraft Alternate Average Block Tonnes Aver. ETS (cost: Cost per stop Number of passengers Hours of fuel (1 tone = 292.4 gallons) Cost Euro/ tco2 per Euro 15/tCO2) before allowances passenger (Return) (Euro) tonne of fuel 1 SIN- Singapore B777-3 334 14.2 LHR Airlines (SQ) 98 4,632.46 27.74 Singapore B777-3 SIN-ZRH 334 13.3 Alternative Airlines (SQ) 92 - routing Swiss Airways A319 ZRH-LHR 147 1.9 (LX) 5 228.86 3.12 2 DEL- Air India (AI) B777-2 284 9.6 LHR 73 3,427.48 24.14 Air India (AI) B777-2 DEL-IST 284 7.5 Alternative 57 - routing Turkish B737-8 IST-LHR 161 4.2 Airlines (TK) 11 541.10 6.72 3 MIA- Air Berlin (AB) A330-2 278 9.5 TXL 58 2,754.37 19.82 Air Berlin (AB) A330-2 MIA-ZRH 278 9.2 Alternative 56 - routing Air Berlin (AB) A321 ZRH-TXL 147 1.5 5 222.98 3.04 4 GIG- Alitalia (AZ) A330-3 278 11.3 FCO 68 3,204.06 23.06 Alitalia (AZ) A330-3 GIG-GVA 278 10.8 Alternative 65 - routing Alitalia (AZ) A321 GVA-FCO 147 1.5 5 222.98 3.04 ETS cost per passenger via alternate airport Source: OAG calculation based on Fleet inet Almost 500 passenger-carrying airlines are now compelled to join the EU s emissions trading scheme. If they do not, they face financial penalties and the prospect of being prohibited from using airports within the European Union. 8 There would appear to be two scenarios for airlines from 2012: to pay ETS charges or to use non-eu points to stop-off to pay less. But the impact of the ETS will be visible not only 8 http://www.enviro-news.com/news/eu_warns_airlines_over_aviation_emissions.html 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company. 10

in carriers costs, it will also reverberate on to the European airports as carriers potentially divert capacity out of ETS affected hub airports. 5. Summary In the longer term, an aircraft operator's ability to pass on the additional carbon cost will be a key differentiator and will vary from operator to operator although it is likely that such costs will be passed on to the passenger. The degree to which an individual airline is able to pass on this cost will be influenced by the efficiency of its route network, market pricing and price elasticity of the route. Those airlines with a higher proportion of premium revenues may find it easier to pass on carbon costs to passengers, as these costs will be a proportionately lower percentage of the ticket price than for lower priced economy passengers. Low-cost and short-haul airlines that have lower premium revenues, and particularly those with older aircraft fleets, will be more affected by ETS scheme across their business. 9 The decision made by the EU to include aviation in the EU ETS has already proven to be controversial. A group of US airlines are pursuing a case on this issue at the European Court of Justice. 26 countries, including China, Russia, India, and the United States, publicly voiced their opposition to the initiative. Adding to confusion on the issue, the US House of Representatives on 24 th October 2011 passed a bill prohibiting US airlines to participate in the controversial EU scheme. The inclusion of aviation into the EU ETS, in long term, will have not only a direct impact on ticket prices to/from and within Europe but also on regional aviation demand. 10 It is forecasted that air fares will increase approximately about 3% due to carriers additional carbon tax that may lead to demand suppression on certain markets. 9 http://www.environmentalfinance.com/download.php?files/pdf/4d663c478efb8/airline%20carbon%20costs%20take%20off.pdf 10 http://ictsd.org/i/news/bioresreview/119707/ 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company. 11

MEDIA CONTACT: Corporate Communications UBM Aviation Worldwide 450 Capability Green Luton Bedfordshire LU1 3LU United Kingdom Email: pressoffice@ubmaviation.com This is an unpublished work the copyright in which vests in UBM Aviation Worldwide Limited. All rights reserved. The information contained here in is confidential and the property of UBM Aviation Worldwide Limited and is supplied without liability for errors or omission. No part may be reproduced or used except as authorised by contract or other written permission. The copyright and the foregoing restriction on reproduction and use extend to all media in which the information may be embodied. UBM Aviation Worldwide Limited a subsidiary of UBM plc, registered in England and Wales, No. 4226716, with it s registered office at Ludgate House, 245 Blackfriars Road, London, SE1 9UY, with it s principle place of business at 450 Capability Green, Luton, Bedfordshire, LU1 3LU, United Kingdome 2012 UBM Aviation Worldwide Limited. All rights reserved. A UBM plc company.