When is loss indemnifiable

Author Heather Wilmot

With the ever-increasing practice of leasing aircraft for operation across Africa, owners and financiers would be well-advised to familiarise themselves with their insurance policies, and to look beyond their policies for additional security in the form of registering rights and mortgages. In addition, the conduct of owners and lessors in their business practices could become the subject of some scrutiny in determining whether a claim is indeed an indemnifiable one.

Air service operations in Africa differ vastly from country to country. Within this competitive and tricky market, many commercial transactions have resulted in disputes, some even resulting in a complete breakdown of the relationship and the retention of aircraft by lessees. Matters are complicated further as the enforcement of written lease agreements is problematic in the foreign legal jurisdiction, and owners can find themselves in a difficult position minus one expensive asset. So what are the owner’s options? The majority of African countries are not signatories to and have not incorporated the Cape Town Convention into their law and do not recognise the far-reaching rights and remedies of lessors and financiers set out in the Convention. Furthermore, many African countries are geographically excluded in aviation policies, and war risk cover in addition to all risk cover is often an essential. Even if the requisite all risk and war risk cover is effected, owners and financiers would be imprudent to assume that the loss is covered. The conduct of both parties to the lease will be carefully considered when determining whether there is a loss, and secondly whether that loss is an indemnifiable one. Indemnity is not a foregone conclusion.

In a matter in which we were involved, following a series of events an operator lessee in Chad refused to relinquish possession of an aircraft to its South African owner. Claims made by the owner under its South African all risk and war risk policies were rejected. The insurers’ rejection was upheld in a subsequent arbitration. The unique circumstances leading to the claims had a significant bearing on the decision of the insurer and the arbitration panel. In a nutshell, in a period of just less than a year, a South African owner concluded a number of contracts with an operator based in Chad relating to a Kingair 200 aircraft. During this period, and all the while not having possession of the aircraft, the Chad operator made various payments to the owner as instalments under various lease/purchase agreements and paid for improvements to the aircraft. The aircraft eventually left for Chad after further agreement, this time a mere rental agreement, was concluded. After some months of operation in Chad, the owner demanded that the aircraft be returned to South Africa for maintenance. Predictably, the operator was not prepared to release the aircraft without reimbursement of the money it had already expended, which the owner sought to retain in terms of a very onerous provision in the agreement. By all accounts the parties came rather close to a settlement, but at a point in the frequent exchange of correspondence, the insured owner elected to abandon the negotiations and pursue a more formal legal route. A South African court order for the return of the aircraft was obtained without notice to the operator and on an urgent basis, and a posse, as the initial arbitrator described it, flew into Chad in the middle of the night to repatriate the aircraft. The Chadian aviation authorities were alerted and put a hold on the aircraft for a period of 30 days so as to enable the operator to exercise its rights in Chad. The mission was a failure and the group returned to South African empty-handed.

It was at this point that the owner lodged a claim for indemnity under a war risks policy issued by a South African insurer, claiming that the aircraft had been seized by a foreign government. The insurer rejected the contention of seizure, and in addition relied on an exclusion contained in the war risks policy excluding any loss caused by a financial dispute. The owner disputed the rejection, and launched proceedings for indemnity. By agreement, the matter was referred to arbitration. Shortly before the close of the owner’s case, the claim was amended to include a claim under the all risks section of the policy for theft or accidental loss, and a further claim under the war risks section for a loss caused by a malicious act.

Turning briefly to the claims under the war risks section of the policy, a unanimous panel of three appeal arbitrators upheld the decision of the initial arbitrator in dismissing the claims. The panel found that the conduct of the operator did not constitute a malicious act as required by the policy, because it lacked the requisite sinister intention or ill-will. In addition, the panel found there to be no seizure, as any restraint by the Chadian aviation authorities was not for it or its government’s title or use as specified by the policy.

The pivotal point in the claim under the all risks section was whether on the facts, an aircraft in a foreign jurisdiction which the owner had failed to recover had been lost within the context of the policy, and if so, whether that loss was accidental as envisaged by the policy. On a 2:1 majority, the appeal panel found that the aircraft was indeed lost for purposes of the policy, as there was an uncertainty of recovery. However, on a reverse 2:1 split, the panel found that the failure to recover the aircraft (i.e. the loss) was as a result of the sudden breakdown of settlement negotiations brought by the deliberate decision of the owner not to pursue the dialogue. The resulting loss of the aircraft, although not desirable, was predictable. One panel member found that the non-return of the aircraft was not the result of an unexpected external event, but was the predictable aftermath of a commercial dispute between contracting parties. This result was not in the nature of an accident and accordingly is not a peril covered by the policy. As a panel member put it “This is a business risk, not an insurance risk.”

The result was that based on the particular set of facts, the insurer’s decision to reject the claims for indemnity under both the all risks and the war risk sections of the policy was upheld.

Many aircraft owners lease aircraft to operators positioned and operating all over Africa. Often, armed with an iron-clad lease and a comprehensive insurance policy, owners and financiers don’t give a second thought to the security of what is a fairly substantial asset. The time has come for owners and financiers to remove the rose-tinted glasses and acknowledge what may be considered a harsh reality.

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The repossession of aircraft in Canada: Skyservice Airlines - The latest chapter in the conflict of priority between lessors and aeronautical authorities

Author Richard Desgagnés

In Skyservice Airlines,¹ a decision rendered last April, the Superior Court of the Province of Ontario highlighted the effects of Canadian insolvency laws on the exercise by lessors of their right to terminate lease agreement and the impact these laws may have on the statutory rights of seizure and detention that certain Canadian airport authorities and NavCanada possess pursuant to their governing statutes.²

The statutory right of airport authorities bears a number of similarities with the right of detention of certain English airports under the Civil Aviation Act, 1982, albeit with some notable differences:

• unlike a possessory lien, the remedy can be exercised even if the aircraft is no longer within the jurisdiction of the airport authority seeking the seizure, as long as the aircraft can be found in one of the Canadian provinces or territories
• it cannot be exercised without first obtaining a court order, which, however, can be obtained ex parte if there are reasons to believe that the aircraft is about to leave Canada
• the seizure affects the whole aircraft. As a result, items that are removed and whose title may be with different owners (for example, engines or other aeronautical equipment), cannot be repossessed when the aircraft to which they are attached is seized
• unlike in the UK, the charges incurred by one specific aircraft cannot be the subject of a seizure once the aircraft has ceased to be owned or operated by the airline.

The seizure and detention right of NavCanada is similar in nature.

The seizure and detention right of Canadian airports and NavCanada over legal title holders was confirmed (after much debate in lower courts) by the Supreme Court of Canada in the matter of the bankruptcy of Canada 3000.³

Since that decision, there has been a few cases that have allowed the courts to define the limits of the aeronautical authorities. The first of these cases came before the Ontario Court of Appeal in GE Capital Aviation Services, Inc. v. Winnipeg Airports Authority Inc.⁴ Here, the issue before the court was whether the aeronautical authorities had the right to call on the security posted by lessors in order to obtain the release of their aircraft (pursuant to a release protocol negotiated by all interested parties) and satisfy the unpaid charges.

The Court of Appeal held that, in practical terms, the aeronautical authorities’ detention remedy is a statutory device intended to drive all interested parties to negotiate the payment of any debts owed to the aeronautic authorities, against the prospect of the release of the detained aircraft.

This decision was followed by the Alberta case of Zoom Airlines⁵ where limits to the rights of the aeronautical authorities were first met. In Zoom Airlines, notice of termination of the lease was given by a lessor prior to the relevant aircraft departing from Paris bound to Calgary. Upon landing in Calgary, an agent appointed by the lessor boarded the Canadian-registered aircraft, advised the flight captain that he was repossessing the aircraft on behalf of his principal and collected the aircraft’s Certificate of Airworthiness, the Certificate of Registration and the technical log books. The first two documents were thereafter surrendered by the agent to Transport Canada, the governing regulatory authority which, a few days later, issued a temporary Certificate of Registry in the name of a lessor’s appointee. Meanwhile, the Calgary Airport Authority applied for and obtained an order to seize and detain the aircraft. Seizure was effected thereafter. Despite the absence of notice and the fact that the civil registry still showed Zoom as the registered owner, the Motions Judge held that registration in the name of Zoom had been cancelled in accordance with the Canadian Aeronautics Regulations (“CARs”) upon the lessor terminating the lease and taking possession, through its representative, of the Certificate of Registration and Certificate of Airworthiness and remitting the same to Transport Canada. These acts effectively took possession of the aircraft away from Zoom. The decision was confirmed by a majority of the Alberta Court of Appeal and leave to appeal to the Supreme Court of Canada was denied.

This brings us to Skyservice Airlines, where a judge from the Superior Court of Ontario was asked to determine if, in that other case also, the lessors had successfully taken possession of their aircraft prior to the aeronautical authorities’ application for detention. In this case, the airline was put into receivership by a creditor within hours of announcing that it had ceased operations and its directors had resigned. Following the receivership order, the lessors notified the receiver of the termination of the leases and the receiver confirmed that he had no interest in the aircraft and would assist the lessors in returning them to their owners. However, no actual physical repossession took place prior to the aeronautical authorities having filed their application or their notice of application for detention orders. The Superior Court judge held that, absent effective repossession, the detention rights of the aeronautical authorities could be set up against the legal title holders. It was further held that the immediate effect of the receivership order was to stay the enforcement of any remedy against Skyservice, including the termination of the lease and repossession of the aircraft. Accordingly, by the time the aeronautical authorities’ application for detention order was considered, no repossession had taken place. Unlike the lessors’ rights, the right of detention of the aeronautical authorities was not stayed as a result of the receiving order, since the aircraft were not assets of the insolvent company and the receiver had no intention to carry on the business of Skyservice.

Although we have yet to hear the last word on this case, pending appeal of the decision to the Court of Appeal of Ontario, this decision serves as a useful reminder of the importance of insolvency laws on the exercise of creditors’ remedies, especially when these remedies rest on the exercise of contractual rights against the debtor, as with the termination of a lease agreement.

Footnotes

1. Skyservice Airlines Inc. (Re), 2011 ONSC 703 (hereinafter “Skyservice Arilines”).
2. Airport Transfer (Miscellaneous Matters) Act, S.C. 1992, c. 5, s. 9; Civil Air Navigation Services Commercialization Act, S.C. 1996, c. 20, s. 56
3. Canada 3000 Inc., Re; Inter-Canadian (1991) Inc. (Trustee of), [2006] 1 S.C.R. 865 (hereinafter “Canada 3000”).
4. 33 CBR (5th) 151 (Ont. C.A.).
5. The Calgary Airport Authority v. Zoom Airlines Incorporated 2009 ABCA 306 (hereinafter “Zoom Airlines”).

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The volcanic ash crisis - One year on …

Author Anna Anatolitou

As we reported on 19 April 2010, the eruption of Iceland’s Eyjafallökull volcano, and the resultant ash cloud, caused the worst air traffic crisis in recent history, with the cancellation of over 100,000 flights, affecting over 10 million people.  However, the ash cloud crisis appears to be far from over, with further disruption caused by Iceland’s Grimsvotn volcano erupting in May 2011 and on the other side of the globe, Chile’s Cordon Caulle which erupted in June 2011 causing chaos in Australian airspace. In fact, at the time of writing, yet another Icelandic volcano, Hekla (known by locals as “the gateway to Hell”), was also threatening to erupt…

So one year on, what has changed? Are the aviation industry and its regulators better prepared for the next crisis? This article examines the measures which have been implemented since last year and looks at what further changes still need to be made.

Since April 2010, a number of measures have been taken to ensure better coordination and improved preparedness for similar air traffic crises, including the following key developments:

1. The creation of the European Aviation Coordination Crisis Cell (EACCC), to manage the effective coordination of a crisis in real time. The EACC, which can meet on a daily basis, is a core group co-chaired by the European Commission and Eurocontrol to include representatives from organisations including EASA, Air Navigation Services Providers, airlines, and airports and, as necessary, other organisations such as the National Civil Aviation Authorities and MET offices.
2. New guidelines for managing volcanic ash for Member States and airlines which were published by the European Commission. In practice the guidelines provide for a graduated response to a crisis, whereby airlines submit safety risk assessments for their operations, based upon ash density maps produced by the Volcanic Ash Advisory Centre (VAAC) in London; and member states’ safety authorities can then give permission (or not) to operate, based on the submitted assessments.
3. The implementation of Single European Sky, pursuant to which EU member states are joining forces in managing their airspace.

Commentators agree that the new measures, including those above, have proven to be effective in responding to the recent ash clouds and a better co-ordinated response was evident during ICAO’s volcanic ash crisis exercise on 13 and 14 April 2011 “VOLCEX 11/01”.

However, whilst there have been many positive developments in addressing practical co-ordination between the authorities and stakeholders, crucially there has been little guidance on and no changes made to the relevant EU passenger rights legislation. EC Regulation 261/2004 was exposed by the crisis as sorely lacking both in the clarity of its provisions and the uniformity of its application, resulting in legal chaos which is still in evidence today  with a large number of passenger claims still pending with national courts and the National Enforcement Bodies (NEBs).

The European Commission’s April 2011 report to the European Parliament and Council, examining the application of Regulation 261/2004, admits that “the novelty of some provisions of the Regulation has led to different interpretations, and thus varied application, among air carriers and national enforcement authorities (NEBs), rendering it difficult for passengers and stakeholders to understand the scope and limits of the rights set out”.

The report found according to that there were three main areas where further improvement is necessary in respect of Regulation 261/2004:

1. The harmonised enforcement of the rights afforded by the regulation throughout the EU;
2. Facilitation of enjoyment of the passenger rights in practice, including a clear and easily accessible means of complaint handling; and
3. Raising awareness about the rights afforded by the Regulation - this needs to be done by the EU and by individual airlines.

The report identifies a number of measures to be taken in addressing each of these areas, as follows:

1. The harmonised enforcement of the rights afforded by the regulation throughout the EU.

The Commission’s report found that EU wide enforcement by NEBs at a national level has varied substantially, potentially distorting competition between air carriers and causing passenger frustration at the lack of enforcement. Although the NEBs now work together informally (as the NEB network) to seek to agree a coordinated approach on enforcement, further coordination is needed.

Passengers were concerned that NEBs do not handle complaints quickly and efficiently; that decisions of the NEBs are not always binding and therefore are not always followed by carriers or recognised by judges; and that there is a lack of monitoring, measuring and publication of information on the performance of operators, relating to the application of the Regulation.

In order to redress these concerns, the following measures are proposed:

• The Commission will work with the Member States to overcome shortcomings in their national complaint handling bodies to ensure consistent complaint handling and uniform enforcement of the Regulation. The report noted that national authorities have not made use of the CPC Regulation, Regulation 2006/2004, which covers Regulation 261/2004, to investigate and enforce cross-border infringement on collective consumer interest.
• The Commission will promote a more uniform and quick handling of complaints, notably by submitting to the NEB network Group a common standard form to request information from carriers and a proposal on the competent NEB.
• The NEB Network should implement internal working rules to (i) facilitate the adoption of common decisions on the interpretation and enforcement of the Regulation; and (ii) encourage the exchange of information between NEBs on relevant national administrative and judicial decisions. Crucially, NEBs will also be encouraged to take the necessary enforcement measures against those few carriers which have refused to comply with the Regulation.
• The NEBs will also be encouraged to coordinate at national level with the relevant aviation regulatory authority regarding enforcement measures against carriers.
• An Air Passenger Rights (APR) Consultative Group is being created to reflect the industry and passenger perspectives on all issues related to air passengers’ rights.
• The Commission will work with the NEB Network and the APR Consultative Group to encourage airlines and other relevant operators to regularly report relevant data on the application of the Regulation to NEBs.
• A more level playing field will be implemented among carriers by encouraging the publication of issued sanctions and/or of the operators’ overall performance in complying with the Regulation.

2. Facilitation of enjoyment of the passenger rights in practice, including a clear and easily accessible  means of complaint handling;

The report observed how the crisis had highlighted some of the limits of the Regulation, and the Commission now clearly recognises that the shortcomings “related to the wording and the content of the Regulation, [which] cannot be solved without an amendment of the current rules”. Most notably:

Carriers were particularly concerned at the lack of a limitation of liability relating to the ‘right to care’ in extraordinary circumstances beyond the carrier’s control (e.g. accommodation costs), which merits further assessment.  An assessment of the financial cost of the crisis is currently ongoing and the aviation industry can assist in that process by providing necessary relevant data relating to passenger claims “to ensure no excessive burden is placed on the aviation industry whilst also ensuring that citizens do not bear the financial cost and inconvenience of natural catastrophes alone”.

Passengers were concerned that the Regulation has not been applied by some carriers, particularly the right to be offered re-routing at the earliest opportunity by comparable transport conditions and to receive care whilst waiting to be re-routed. The Commission noted that passengers should be re-routed in comparable conditions based upon their class of travel, not the price they had paid for their ticket (e.g. a passenger who had booked a low cost economy ticket should not be precluded from being re-routed in the same class on a more expensive carrier).

• In this connection, the Commission proposes to launch an Impact Assessment into the proportionality of the current measures, with a view to proposing further measures on Air Passenger rights in 2012, including of a legislative nature, in coordination with the ongoing revision of the Package Travel Directive (90/314/EEC).

3. Raising awareness about the rights afforded by the Regulation - this needs to be done by the EU and by individual airlines.

The report noted that many passengers are still not aware of the rights afforded to them by the legislation. As such the Commission will:

• work with the NEB Network and the Air Passenger Rights Consultative Group to encourage airlines and other relevant operators to regularly report to NEBs on relevant data on the application of the Regulation for publication; and
• raise passengers’ awareness on their rights through widespread communication, such as the ongoing information campaign on passengers’ rights, as well as through the NEB Network and relevant consumer networks.

While it will come as welcome news to all concerned that the Commission remains committed to providing further clarity on Regulation 261/2004, it is disappointing that any further measures - including crucial proposed legislative amendments - will not even be announced until sometime in 2012 and that there is no timetable for any such legislative amendments to come into force.

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Update on the inclusion of aviation into the EU Emissions Trading Scheme

Authors Duncan Batchelor, Ben Peacock and Tim Baines

Since we last reported on the introduction of aviation into the EU Emissions Trading Scheme (EU ETS) in December 2010’s edition of the Legalflyer there have been further developments regarding the scheme which will be of interest to airlines, leasing companies and aircraft financiers. Firstly, on 30 June 2011, another milestone date in the lead up to the inclusion of aviation into the EU ETS passed with the publication of the total quantity of aviation emissions allowances available for 2012, 2013 and each year thereafter up to 2020. Secondly, as we near the 1 January 2012 launch date for full compliance with the expanded EU ETS, there has been growing public opposition from various governments along with manufacturers and airlines to the EU ETS, with threats of retaliatory measures against the EU and EU airlines. Finally, we report on an interesting article published by Standard & Poors looking at the estimated costs which the scheme will have on the aviation industry.

European Commission (EC) publishes historical emissions data on which allocations will be based

In the Commission Decision of 30 June 2011¹ the EC decided that the total number of aviation allowances to be created in 2012 amounts to 212,892,052 tonnes of CO₂ and the number of aviation allowances to be created each year from 2013 onwards to 2020 amounts to 208,502,525 tonnes of CO₂. The number of aviation allowances for 2012 represents 97 per cent of the average historic aviation emissions over the period 2004 - 2006 (with the 2013 - 2020 (Phase 3) allowances cap representing 95 per cent of the average historic emissions). The calculation was based on data from Eurocontrol and actual fuel consumption provided by aircraft operators. In addition, calculations were carried out to account for fuel consumption associated with the use of auxiliary power units on aircraft at airports.

The next step in the process of establishing the EU ETS will be the publication by the EC on 30 September 2011 of the benchmark that will define how many free allowances aircraft operators will receive. Airlines which will be subject to the EU ETS have been monitoring their emissions during the 2010 (being the benchmark year) and were required to verify and report these emissions to their administering Member States by 31 March 2011. Based on the information submitted by Member States and the aviation allowances caps set out above, the EC will calculate the benchmark that will determine how many free allowances aircraft operators receive. The EC will at the same time also publish the percentage of allowances to be auctioned, given away free and allocated to the special reserve (for later distribution to fast growing airlines and new entrants into the market).

Growing opposition to the EU ETS

Until now, public criticism of the EU ETS has mainly come from airlines and industry trade groups. Over the past few months however there has been growing opposition to the expansion of the EU ETS to include aviation, with foreign governments weighing heavily into the debate. In response the EU is holding firm, stating that the legislation will not be changed. Much of the opposition centres on the ‘extra-territorial’ nature of the scheme as it applies to emissions from flights into and out of Europe, including the emissions outside EU airspace - one US airline executive stating: ‘If we’re starting an auxiliary power unit in Los Angeles , [for flights to Europe], the European Union is regulating that’.

The Financial Times reported on 5 June 2011 that the head of Airbus had warned Brussels that it faces a trade war with China and other powerful countries over the EU ETS. In a joint letter with the Virgin Atlantic chief executive, Tom Enders warned that ‘it was madness to risk retaliation’ from major global powers should it proceed with expanding the EU ETS to include aviation. The letter continues: ‘If the EU goes ahead with its plans, China has already….announced its intention to deploy countermeasures against European aviation’. The EU climate commissioner, Ms Connie Hedegaard, responded that it would set a worrying precedent if Brussels caved in to China’s demands. The Guardian reported on 6 June that British Airways and Iberia chief executive Willie Walsh echoed similar concerns to those raised by Airbus at the annual general meeting of the International Air Transport Association held in Singapore in early June. Walsh said that if major powers are forced to pay for carbon dioxide emitted by services to and from the continent, they could impose aviation taxes on European carriers or block flights. Walsh has called for a global emissions trading scheme for airlines and urged the EU to implement a compromise in the meantime in the form of having the scheme apply to intra-EU flights only.

The US administration has expressed ‘strong concerns’ about the EU ETS and has informed the European Union that it does not want US airlines included in the ETS when it comes into effect in 2012. The Financial Times reported on 22 June 2011 that during an US-EU aviation meeting held in Oslo on 22 June 2011 officials from various departments of the US government had set out a list of questions for the EU representatives ranging from what the process was for changing the legislation for ETS to how it could be deferred. The EU officials responded that the trading scheme legislation was set in law and that the EU had no intention of changing it.

There has also been significant opposition from China to including the aviation sector in the EU ETS. The Head of the China Air Transport Association has threatened legal action against the scheme and in an escalation of China’s opposition to the EU ETS and perhaps the most drastic action taken against the EU ETS to date, the Financial Times reported on 24 June 2011 that Beijing had blocked a multi-billion dollar order for 10 Airbus A380 aircraft for Hong Kong Airlines. However China has also announced its own aviation emissions plan which EU officials are studying to assess whether it is an ‘equivalent measure’. The EU ETS legislation provides that airlines may be partially exempted from the scheme if they are from countries with equivalent measures to deal with aviation emissions.

We reported in December 2010’s edition of the Legalflyer about the legal challenge to the EU ETS being brought by the Air Transport Association of America along with a number of major US airlines. While the case was initially heard before the High Court in England, as the challenge raised novel questions on the interpretation of EU law, the High Court referred the case to the European Court of Justice in Luxembourg (ECJ) - the EU’s highest court. The hearing before the ECJ took place on 5 July 2011 and while a preliminary ruling from the ECJ is expected towards the end of 2011 the case is then expected to be returned to the High Court in England, so it is likely to be some time before a final decision regarding the case is handed down.

Cost of EU ETS Compliance

It is likely that the inclusion of aviation into the EU ETS will increase costs for airlines, a point which has always been accepted by the EC. The International Air Transport Association expects airline emissions to grow at a faster rate than the rate at which the industry can improve fuel efficiency and accordingly airlines operating within European airspace are likely to be net buyers of carbon allowances in the EU ETS. Standard & Poor’s estimates that while the initial cost of compliance with the EU ETS will be marginal compared to fuel and lease payments, in such a cyclical, capital-intensive and highly competitive industry, managing EU ETS compliance costs will over time differentiate aircraft operators.²

In terms of the amount of additional allowances which the airline industry will need to purchase, research conducted by Standard & Poor’s suggests that the industry will need to purchase a minimum of 20.5 per cent of its 2004 - 2006 emissions plus actual growth on European routes since the 2004 - 2006 baseline.³ In terms of the monetary cost to the industry, the Carbon Trust believes that airlines are likely to purchase potentially €23 - 35 billion of allowances over 2012 - 2020 (based on a carbon price of €25 per tonne of CO₂).⁴ Standard & Poor’s considers that, prior to taking into consideration any cost pass through, the EU ETS is likely to cost the aviation industry in the area of €1.125 billion (at a carbon price of €15/t CO₂ - which more closely reflects the current price of carbon).

In terms of the potential impact on airline revenues, in the short term analysts consider that the EU ETS will not have a significant impact on rated European airlines. This is because CO₂ emissions are directly related to fuel efficiency - which airlines are already focused on improving. Furthermore, the amount of free carbon allowances is fairly high and carbon prices are relatively low compared with fuel prices.⁵

In the longer term, however, the aircraft operator’s ability to pass on additional carbon cost will be a key differentiator between operators. Some of the factors which will differentiate operators will be the efficiency of an operator’s fleet (i.e. young fuel efficient fleet vs older aircraft), the route network (i.e. long haul non-stop routes are relatively more fuel efficient that short-haul, multi-stop routes covered by the same aircraft) and its marketing pricing point (i.e. airlines with a higher proportion of premium revenues may find it easier to pass on carbon costs to their passengers in comparison with low-cost and/or short haul airlines).⁶

Additional factors which are likely to impact on an airline’s performance under EU ETS are the rate of pass-through of carbon costs from airlines to customers and the resulting change in demand due to increased ticket prices.⁷ In terms of pass-through of carbon costs, according to an EU Working Document, fully passing on the cost of carbon to passengers would mean that by 2020, airline ticket prices for a return journey could increase by between €4.60 and €39.60 depending on the length of the journey.⁸ This assumes coverage of all departing and arriving flights and a high allowance price of €30.⁹

A secondary factor which may impact on airlines’ performance as a result of the EU ETS is so-called ‘carbon leakage’ - that is, the risk of traffic being diverted from EU operators to the benefit of non-EU operators. Flights that either connect at a non-EU airport or fly direct between two non-EU destinations would compete more effectively against those flights that connect at a EU airport.¹⁰ For example a flight from Dubai to New York would not bear a cost of carbon under the EU ETS and would have an increased advantage over a similar flight that connected via Frankfurt, which would bear the full cost of carbon on both legs under EU ETS.¹¹ The issue of carbon leakage may lead to European airport hubs becoming somewhat less competitive for passengers coming from outside the EU and transiting through to an end destination outside Europe.¹²

Many are expecting opposition to the EU ETS to grow as the launch date nears and also from September 2011 when airlines will be informed of the number of free allowances to which they are entitled and when the cost implications of the scheme become more apparent. We will continue to provide updates of developments regarding the EU ETS. However, in the meantime, please do not hesitate to contact anyone from our team should you have any queries or require further information regarding the scheme and how it may impact your business.

Footnotes

1. Commission Decision of 30 June 2011 on the Union-wide quantity of allowances referred to in Article 3e(3)(a) to (d) of Directive 2003/87/EC of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowances trading within the Community

2. 'Airline Carbon Costs Take Off As EU Emissions Regulations Reach for The Skies', Standard & Poor’s, February 18, 2011, pg. 2

3. ibid footnote 2, pg 6.

4. ‘Fasten your seatbelts: Airlines and cap and trade’, (CTC 764), The Carbon Trust, pg. 1

5. ibid footnote 2, pg 8.

6. ibid footnote 2, pg 9.

7. ibid footnote 2, pg 10.

8. Commission staff working document - Summary of the Impact Assessment: Inclusion of Aviation into the EU Greenhouse Gas Emissions Trading Scheme {COM(2006) 818}

9. Loc cit.

10. ibid footnote 3, pg 26.

11. Loc cit.

12. ibid footnote 2, pg. 10.

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The Bribery Act 2010 - Update

Author Emma Humphries

As discussed in our April article, the Bribery Act (the Act) is now in force and applies to all companies which operate their business (or part of their business) in the UK. As a result, to the extent that companies have not already put in place procedures to ensure that they comply with the Act, they must now do so as soon as possible.

As already mentioned, one of the key new offences under the Act is the failure of an organisation to prevent bribery; this is a strict liability offence and the only defence available to companies is to demonstrate that they have adequate procedures in place to prevent bribery which are effectively embedded in the company and monitored.

While ‘adequate procedures’ is not defined under the Act, the Ministry of Justice has stated that they expect these to be ‘reasonable and proportionate’ to the size of the company and the risks of bribery that they face; as such, there is no ‘one size fits all’ approach to adequate procedures and each company must carry out its own risk assessment to establish what is reasonable and proportionate for them.

Adequate procedures can encompass many elements, but could include an anti-bribery policy, the communication of a zero tolerance approach to bribery from senior management and thorough due diligence of third parties acting on behalf of the company (particularly where the entities are located in high risk jurisdictions - see Transparency International's Corruption Perceptions Index).

Finally, much has been made of the effect the Act will have on corporate hospitality. However, reasonable and proportionate business hospitality will fall outside the scope of the Act (for example, taking a client to a sporting event) and companies must continue to exercise their good judgment and common sense as to what is proportionate in the circumstances.

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