A new year...a new tax...but same old story

1 year
365 days
8760 hours

This is approximately the time since my last post on my blog. That is just too long, but a job as an assistant professor with family and social commitments requires priorities. Unfortunately, the blog was relegated to way down the list. However, I hope to increase my rate of posting in the future…at least it probably can’t any worse.

A lot has happened during my absence. Overall, the industry has been suffering from the affects of a global recession and depressed economies. Lately, there has been some positive development, but there is concern that the upward trend is slowing. There has been consolidation all over the globe; Southwest’s acquisition of AirTran has been particularly interesting, if for nothing more than confirming that business models are not chiseled in stone but dynamic models. The developments in Asia with incumbent and fresh low-cost airlines finding common ground through joint ventures, off-shoots, new airlines, etc. is making for interesting reading. In Europe there are repercussions from the economic situation (e.g. Air Berlin and its shake up) and expansion in particular regions (e.g. FlyBe’s entrance into the Nordic region). However, this isn’t a post with a summary of the past year’s events, but a commentary on the political influence in the industry. In this little Scandinavian country there has been an election and the incoming government has announced their passion for an aviation environmental tax of 75 DKK ($14 or €10 as of writing) per departure. This tax has been here before; it was removed a number of years ago and subsequently there has been a positive growth in passenger development, especially on domestic routes.

This proposal does not differentiate itself particularly. It is an equal tax on per passenger ticket per departure from a Danish airport. So, a round trip on a domestic trip will experience an increase of 150 DKK. This can be a large portion of the ticket price, especially when prices can be found as low as 500 DKK round trip. Now it has to be recognized that the proposers of this tax admit that the ambition is to reduce the number of air passengers due to environmental concerns. At least the government recognizes that the tax will reduce the number of travelers. However, they have failed to take into account a number of factors. There is no study researching which transport mode air travelers will chose instead. If a large portion of them jump into their car the environmental affect will certainly go the other way. The train, on the other hand, is a better environmental choice. However, the train is less flexible and requires a higher time-cost. At the same time, a reduction in air travelers will most likely lead to fewer flights, which is an environmental benefit. However, fewer flights mean a need for fewer employees in airlines, airports, suppliers, secondary industries, and tertiary industries. So, the politicians can balance the environmental affects and an increase in state finances on one hand versus fewer employed in the travel industry with the social costs that accompany increased unemployment. One can doubt whether these aspects have been considered. Of course, there are additional aspects. The reduction in flights from outlying areas will reduce their access to the greater world. This reduction means that businesses are unable to sell and attract resources as easily as before. Denmark already has a problem with depopulation and financial struggles in rural areas. This policy will only exacerbate these problems. The costs associated with such a policy far outweigh the benefits, experienced by Ireland and Holland, until they removed similar environmental taxes.

Update (27.9.2011): If politicians just need a reminder of the relationship between the number of frequencies at an airport and employment they need to look no further than Jutland in Denmark. Norwegian, battling for a prominent position in the skies over Scandinavia, just announced that it was going to close the route from Copenhagen to Karup on the 30th of October. Subsequently, the airport announced that it was going to layoff employees at the airport since it was going to be overstaffed after Norwegian ceased operations. A tax will lead to increased ticket prices, which will lead to fewer passengers, which will lead to fewer frequencies (which is good for the environment), which will most likely lead to a reduction in people employed in the airline industry, which will eventually trickle throughout the value chain.

Now, it is commendable that politicians recognize the importance of the environment. However, is aviation really the place to start? The industry accounts for single-digit impact on the environment compared to fields, such as, agriculture, housing, energy, etc. Why not start with the low-hanging fruit rather than punish an industry that is only now crawling out of a financial hole? But what if politicians insist on a tax on the industry? Well, why not actually put some effort into it and reward those airlines that have a lower environmental impact? Why should an airline that strives to reduce its green impact be impacted equally as a notorious polluter? I don’t think this means that airlines will stop striving for green credentials. Remember, a green profile often means fewer emissions, usually from a lower fuel burn, which means less money being burned up in the turbine. Finally, if politicians insist on charging all airlines the same tax, where is this money going? Is it going to improve the industry? Research and development, maybe? Not one has expressed this as a goal; the funds will go into a general fund and improve the transportation infrastructure for other modes. However, I hope the politicians remember the impact of the Icelandic ash cloud in 2010. Airplanes are simply necessary for various types of travel. I am a supporter of the environment, and I do believe in the carrot and stick, however, I disagree with haphazard suggestions of taxes and fees. Implementation of this tax will have repercussions throughout the travel industry, which should not surprise the government if they think about things.

Price differentiated carbon offsets

Airlines are beginning to catch onto the wave of selling carbon offsets to passengers. However, Virgin Atlantic has calculated it down to the exact kilogram...and even categorized it according to cabin class. Not only can passengers purchase carbon offsets while in-flight, but premium class passengers will pay more. Why? Well, their IFE units are heavier and their seats are heavier so these passengers are contributing more to the aircraft's fuel burn than economy passengers. This is bringing the unbundling concept to the carbon offset table.

World's first green airline?

We might as well stay on the topic of sustainability and environmentally friendliness. It appears as if there is a small airline in Costa Rica, Nature Air, which advertises itself as a green airline. The airline pays an annual fee of $60,000 to farmers to entice them not to clear cut forests to graze cattle. The forested sites help offset the airline's annual CO2 emission of 5,000 tons. The airline has had success with the venture since it began in 2004...and the airline is profitable with a margin between 4% to 7% per year. The airline has a fleet of 17 Twin Otters and has 80 daily flights.

The airline does have a green past actually. A consultancy specializing in sustainable tourism in Central America was challenged due to a lack of transportation infrastructure when they decided to purchase Travel Air in Costa Rica to help build up the transportation sector. Now before some of you expect Southwest or Northwest to purchase forest lots to offset their fleets of 400+ aircraft one needs to understand the level of environmentalism in Costa Rica. The country actually makes more money from tourism than all its other commodity exports and employs nearly 50,000 people in its park structures. In 1997 Costa Rica pioneered sustainable tourism certification in Central America and the country is frequented by many eco-tourists. Now, of course the environmental footprint of a European travelling to Costa Rica to enjoy such pristine beauty is quite large, but a flight with Nature Air can help to alleviate one's conscious. British Airways and SAS both offer their customers the option of purchasing carbon offsets, which is a step in the right direction. However, easyJet has recently voiced concern over these schemes as transparency may become an issue. The aviation industry certainly needs to explore the possibilities to help mitigate their footprint, however as stressed before, many other sectors deserve a once-over as well.

Going green for green

Much as taken place in this dynamic and wonderfully exciting industry while I have been abscent. Copenhagen Business School hosted Airways 07, our annual aviation conference held by the Center for Tourism and Culture Management, which I hope to comment on in the near future. Also, I finally managed to get some results from my survey which was mailed to a large number of airlines worldwide. When I finished writing a summary I intend to post some results for all to see here as well. Of course, a few highlights spring to mind when I think about the past few weeks, so I will pick those that I find intriguing.

At the Star Alliance 10th anniversary right here in Copenhagen it was announced that the organisation has created a transport and marketing partnership with UNESCO-MAB, the World Conservation Union (IUCN) and Ramsar Convention on Wetlands. One of the goals is to provide a more forceful and unified communication strategy to defend the industry's position. The environment is an issue close to my heart and in my family, and one cannot deny that aviation does have a negative impact on the environment, as does every other human activity, however aviation has recently come under increasing environmental pressure. Aviation does contribute a small, but growing CO2 amount, as well as, ozone, methane, and cirrus and contrail clouds. Aviation produces roughly 2% of global CO2, 1.6% of green house gases, and about 3% of warming if one considers both CO2 and non-CO2 impacts. If business-as-normal then this will grow to about 5% by 2050.

No doubt this is important when policy makers are discussing ways in which to reduce emmissions, however when one studies the numbers at a macro level then the topic becomes less one-sided. Our power-stations are producing a little more than 21% green house gasses (GHG), land-use and bio-mass burning 10%, agriculture 12.5%, residential 10.3%, and the list continues. Aviation is only a miniscule part of the problem, yet it is getting so much attention. I have yet to see a politician stand up and propose a cap or tax on heating a house, driving an inefficient car, research improved agricultural processes. These policies are not as visible as that orange colored plane we see from the highway, nor are they as popular with constituents. Those other policies may actually force us to change our lifestyles or habits, while an aviation scheme is seen as limiting those that can afford it, yet it is only targeting 2% of the world's CO2.