Strategic Reactions of Airlines to Their Inclusion in the European Trading Scheme



Strategic Reactions of Airlines to Their Inclusion in the European Trading Scheme

Authors

Estelle Malavolti, French Civil Aviation University (ENAC) and Toulouse School of Economics, Marion Podesta, Universite de Savoie (IREGE)

Description

The air transport sector entered the European Trading Scheme in 2012. What are the strategic reactions of airlines to this new regulation ? We model both the implemented regulation and the airlines production cost, focusing on fuel consumption.

Abstract

The air transport sector entered the European Trading Scheme (ETS) in 2012. What is the impact of this new regulation on the air transport sector ? How will airlines react? Are the research questions we plan to address in this paper.

To achieve this goal, we propose a model of both the implemented regulation and the airlines production cost, focusing on fuel consumption. This work is innovative with respect to the existing literature : to our kowledge, there are very few attempts to model the regulation and the airlines choices at the same time. Theoretical papers focus on the economic instruments to deal with the problem of externality. However, they do not consider the specific case of the air transport sector. More applied papers try to analyse the impact of the regulation on the air fares, but they use survey analysis which prevent from making predictions. We instead propose a model of both the ETS regulation and of the airlines production cost. Moreover, parameters are chosen in order to be able to run simulations using real data.

The ETS regulation is very specific and relies on assumptions which have an influence on the strategic choices of airlines such as the number of passengers carried, the choice of the fleet, the choice of the network... Moreover, free allowances are given according to airlines past activity. This means in particular that if an airline is efficient enough, i.e. if it has bought a new plane or operate more efficiently its fleet, it could receive more free allowances than needed and resell them to others. Hence, modeling precisely the emissions of airlines becomes crucial. Emissions are directly linked to the fuel consumption of airlines. We build a fuel cost function which incorporates planes technical characteristics according to the different ranges they operate. The relevant parameters are the marginal fuel consumption per tonne kilometers transported and a fixed cost which corresponds to the minimum cost to be supported if the plane is used on a given distance (including staff and cargo, but without passengers).

Our results are as follows : although regulation means a direct increase of the airlines marginal production cost, we observe for some range of parameters that airlines increase their activity. This effect is due to a bias of the regulation towards more activity : airlines optimize their emissions in order to get more free allowances. This result is robust to different market structures. However, we show that it is profitable for the airline to buy a new aircraft because the marginal production cost decreased. Again more activity is reached at equilibrium but at the cost of less CO2 emissions.
A calibration is then perfomed leading to interesting results in terms of aircraft efficiency when considering different distance of travel. We calibrate parameters for the regulation and for the fuel consumption and build 5 scenarii to take into account different general economic conditions. We are able to evaluate for different aircraft or fleet the impact of the regulation.

KEYWORDS : European Trading Scheme, Regulation, Industrial Organization, Calibration, Sustainable transport

Publisher

Association for European Transport