Open Skies Agreement Provides a Glimpse of What's to Come in a Carbon-Regulated Environment

Today, many executives, and especially those working in carbon-intensive industries, are grappling with how future carbon regulation may impact their businesses and industries.

To deal with uncertainty regarding such strategic issues, many corporate executives turn to scenario planning or even game theory to think about how the future competitive environment may unfold and how it may impact their companies. By doing so, corporate executives are, in effect, peering into the future to get a glimpse of what may come.

Given its contribution to climate change, expected growth rate and evolving regulatory environment, the commercial airline industry presents an interesting case study to learn how competitive dynamics may change in a carbon-regulated environment.

今天，航空公司负责散发2-4% of greenhouse gasesfrom manmade sources. Significant gains in fuel economy have been made with each generation of aircraft; the new波音787, for example, promises a 20% increase in fuel efficiency. Yet,总排放continue to rise as industry growth (4.4%) has outpaced fuel economy (1.3%) by more than 3:1.

There have been attempts made to regulate carbon emitted from commercial aviation. TheKyoto Protocol, for example, counts emissions from domestic airline sources in its targets. Emissions from international travel are omitted, however.

While there is growing support to include international aviation under any successor treaty to Kyoto, it is far from certain that this will happen. As such, the EU has takenunilateral actionby imposing higher landing fees based on a plane's greenhouse gas emissions (pending parliamentary approval). This arrangement would include not only internal EU flights (by 2011) but, very importantly, international flights that take off or land from the EU (by 2012).

By doing so, the EU is flexing its muscle, establishing its authority to regulate carbon emissions for companies that operate, but are not based, within the EU. While similar to how more terrestrial multi-national corporations operate today, this is groundbreaking in the airline industry: historically the industry was regulated through bilateral negotiations or the UN's International Civil Aviation Organization. In effect, the EU is simultaneously balancing growth objectives in aviation with its efforts to mitigate environmental impact.

TheOpen Skiesagreement between the US and the EU is a great example of this. Tomorrow, Phase I of this agreement goes into effect. Its primary impact will be to provide open access for airlines to fly between the US and the EU.

Not surprisingly, this agreement has caused a heated debate. While the EU expects an increase of up to2600万休闲旅行者over the next five years (representing a 14% increase in passengers), there are many that cry foul and accuse the EU of undermining its own efforts to reduce global warming. In fact, adding the new passengers mayincrease global emissionsby the airline industry up to 0.7%.

但是，这不是全部。排放的变化不包括其他商务旅行者或空运。此外，这个数字仅表示航空旅行者的净增加；它不包括那些由于价格下降而可以代替国际旅行来代替其当前国内旅行的人。转移到欧盟的长途航班有可能增加空中旅行距离。结果，航空业的全球排放可能increaseby 2.8% more, for a total of 3.5% rather than 0.7%. Off a global base of2.3 billion air travelers，这是一项双边贸易协定的碳排放量大幅增加。

To balance growth with the environment, the EU will require airlines to participate in an emission trading system that will provide the incentive for airlines to both reduce overall emissions and offset the rest. While implementation will be gradual, the result will be to create a dynamic case study by which we can discern how the competitive environment will be transformed as carbon regulations take hold. Here is how the scenario may unfold:

Governments may wield new influence to demand higher standards. In the aftermath of the Kyoto negotiations, there is a belief that substantive progress on climate change will be held back by a few, albeit influential, nations. While this is possible, there is another scenario that is more likely given the interdependence of the global economy: higher standards will be achieved by using economic leverage to achieve them.

The Open Skies agreement is a classic example of this. The US wants more access to European markets for US carriers while the EU has clearly tied this access to increased regulation on carriers.

Indeed, the rhetoric has been intense.Jacques Barrot, the EU's transport commissioner, has made it clear that the EU was prepared to "[reduce] the number of flights or [suspend] certain rights" if EU emission regulation were not honored. Not surprisingly, theBush administrationhas vowed to fight the unilateral imposition of emissions caps by the EU.

Such opposing views reflectpublic opinion: while 40% of Britons support an increase in airline fares to reduce global warming, only 20% of Americans say they do. Nonetheless, there is a growing consensus that the US will acquiesce under a new presidency.

在法规生效之前，公共情绪可能会加速行动。JPMorganpredictsthat required carbon offsets under the Open Skies agreement will not significantly increase prices until 2015 or beyond: 87% of the necessary permits will be distributed for free to incumbent airlines, reducing pass through costs to consumers. Instead of an estimated 20 euro surcharge, international passengers may pay an additional 4 euro per roundtrip in the foreseeable future (though rising substantially after 2020).

Nonetheless, public sentiment will not likely stand still - especially in light of the 3-year, $300 millioncampaignthat Al Gore'sAlliance for Climate Protectionis expected to launch next month to raise awareness and change people's minds regarding the environment. AsJPMorgan指出, it is likely that "carriers that present themselves as unconcerned about environmental degradation or deny the airline industry's responsibility to address the problem could find themselves targets of activist campaigns, with negative implications for both public image and revenue."

As such, Marketing Green recommends that airlines stay ahead of public sentiment, regardless of the status of environmental regulation. This can be done by publicly recognizing the challenge and by taking action steps to reduce its environmental impact directly from air travel or ancillary services such as travel to and from the airport.

This is all the more important for carriers flying on international routes. The Open Skies agreement, for example, will likely increase competition between airlines as more airlines establish direct routes between US and EU destinations. US airlines must be sensitive to European concerns about the environment, for example, if they are to win a share of the market.

Even in a carbon regulated market, green remains a differentiator. By imposing carbon emission fees, the EU is effectively setting a minimum standard for an airline to be green. In effect, the imposition of regulation resets the competitive environment by clearly defining what it means to be green and insulating companies from further criticism if they meet the standards set by government.

While this is generally true, companies should recognize that even with standards in place, green will remain a powerful market driver.

For example, airlines will still be vulnerable to activists who call them out for not being consistently green across their operations. While regulation offsets the impact of aviation fuel, it does not necessarily apply to corporate operations, the ground crews servicing the plane, or even the manufacturing of the plane itself, for example.

Moreover, customer needs are evolving and airlines need to adjust their offering to align with them. For example,KPMG UKoffersits 11,000 employees additionalMembership Rewardspoints on theirAmerican Expresscards if they take a mode of transportation that has less impact on the environment (trains versus planes). They are also promoting greater use of teleconferencing which reduces travel time and environmental impact altogether. currently

Airlines are starting to respond. For example, on trans-Atlantic flights to Paris,Continental Airlinesoffersconnecting rail service to Lyon. Moreover,Silverjet, a new player in the premium category, was thefirst to become carbon neutral, embedding carbon offsets in its ticket purchase price.

Marketers should carefully watch how the Open Skies agreement unfolds with time. The agreement provides a window into how governments may negotiate carbon emission reductions in the future, as well as how marketers could respond to changing consumer sentiment and needs in a carbon-regulated environment.