The reason the age of cheap air travel is over
<p>The aviation industry has crossed a threshold. After almost two decades of talks, 191 countries gathered in Montreal last week to adopt a global market-based system to tackle the rise of carbon emissions from international air travel.</p>
<p>The deal has been welcomed by governments as an unprecedented diplomatic success, and by green groups as a hopeful starting point for further environmental progress.</p>
<p>But for some embattled airlines, it could deliver a fatal blow to the gilded decades of low-cost flights.</p>
<p>The second half of the last century played host to a revolution in air travel, driving the globalised economy that is taken for granted today.</p>
<p>In 1945, it might have taken 130 weeks for a person earning the average Australian wage to earn enough for the lowest Sydney to London return air fare. Now it would take less than two.</p>
<p>But the boom in air travel is quickly giving way to an industry-wide bust. Airline profits have plummeted amid terror attacks and economic gloom, sparking aggressive staff cuts and strike action.</p>
<p>Even easyJet, one of Europe's most successful short-haul players has admitted that it is bracing for £90 million hit in its first profit warning since 2009.</p>
<p>Air Berlin, Germany's second largest carrier, is expected to slash 1200 jobs and halve its fleet of 144 aircraft after reporting its eighth consecutive annual operating loss last year.</p>
<p>Even with fuel oil costs at historic lows, European airline bosses say the industry is facing the toughest market in 30 years. The gloom could take until the end of the decade to fade.</p>
<p>By then, airlines will need to face up to steadily rising environmental costs running into the billions of dollars while undertaking green investment totalling trillions as the oil market threatens a return to higher prices.</p>
<p>Under the new deal, airlines will be expected to offset their emissions growth after 2020 by buying "offset credits" in line with their carbon footprint.</p>
<p>The carbon costs are expected to incentivise the industry to develop lower-carbon fuels and technologies, while the money raised by the credits will fund environmental initiatives to help to tackle climate change.</p>
<p>This cost is forecast to grow to as high as $23.9bn by 2035, or 1.8pc of the airlines' revenue. At the same time airlines will need to spend more on developing lower emissions aircraft, technologies and fuel.</p>
<p>Still, there are many who believe that the cost is too low. UN observers at the campaign group Transport and Environment claim the costs are "peanuts" to the airlines and will amount "to little more than adding the price of a cup of coffee to a ticket".</p>
<p>Yet, there seems little doubt that there will be further pressure to ratchet costs higher. The direction of travel raises the question: is the golden age of cheap European air travel losing its gleam?</p>
<p>To date, airlines have avoided the cost burden of addressing climate change, while energy and heavy industry have borne the brunt. But the aviation sector has come under increasing pressure to act after the Paris Agreement, which came into law last week, left out both the aviation and shipping industries.</p>
<p>The global aviation business is a large one to overlook: almost 1,400 airlines operate a fleet of 25,000 aircraft burning 1.5bn barrels of jet fuel every year. Last year alone nearly 3.6bn passengers were carried by the world's airlines, producing 781 million tonnes of CO2.</p>
<p>Currently, airlines contribute 5 per cent of global emissions, but the industry's projected growth of around 4 per cent to 5 per cent a year has unsurprisingly raised concerns that aviation emissions could soon eclipse the progress made in cutting carbon from other areas of the economy.</p>
<p>The world's commercial jet fleet is expected to more than double by 2025, and by 2050 would be responsible for almost a quarter of the world's carbon emissions if no action was taken.</p>
<p>The current global fleet of aircraft is estimated to be well over 80 per cent more efficient than aircraft in the 1960s but the industry has a long, costly road ahead if it is to meet its carbon reduction ambitions.</p>
<p>The Air Transport Action Group estimates that by the end of the decade, the world's airlines will have had to purchase 12,000 new aircraft at a cost of $1.3 trillion to meet its 2020 targets. Still, the group is supportive of the deal in line with other industry groups representing the sector. At first glance it seems counter-intuitive for an industry to welcome a step that could be the first along a costly road, but the framework represents the path of least pain in an environment where costs are bound to rise.</p>
<p>Tim Alderslade, head of the British Air Transport Association, does little to dispel the claims that the industry is getting off lightly. It might be the beginning of the end of cheap travel, but it helps the industry avoid the more costly fate of individual government intervention.</p>
<p>"The [deal] is the single most cost- effective way for airlines to address carbon emissions, more so than any other solution. It would also be substantially less than a tax would end up costing," Mr Alderslade says.</p>
<p>HSBC analyst Andrew Lobbenberg says the new carbon plan matters less than what may follow now that the floodgates of environmental regulation have opened.</p>
<p>"What will matter is how much expense the industry ends up facing. It's a very unprofitable business. In the history of the economy it's only really started to create value in the last few years," Mr Lobbenberg says.</p>
<p>He expects most airlines to experience falling profits next year even if market jitters over terrorism and the UK's Brexit vote begin to wane. The industry's structural issues, he suggests, could persist for the next three years.</p>
<p>"We do not deny the relevance of the terror attacks and the Brexit decision, but the trend is bigger and simpler: the airline industry is doing what it usually does and is adding too much capacity at the wrong time, exacerbating the impact of regular economic cycles," Mr Lobbenberg says.</p>
<p>In addition, by 2020, when the first phase of the carbon plan comes into effect, experts predict that the oil market could face a renewed round of price shocks due to the lack of investment in the current downturn. The price of jet fuel makes up a third of an airline's total costs, potentially delivering a fatal blow to smaller airlines if prices spike.</p>
<p>Accendo Markets' equity analyst, Mike van Dulken, agrees that the days of cheap and cheerful European air travel could be numbered. Holidaymakers may face a more "budget" experience for higher prices, as airlines are forced to invest in new aircraft to escape escalating carbon costs. Already British Airways has announced plans to scrap free food and drink on its short-haul flights in favour of selling snacks and sandwiches from Marks & Spencer.</p>
<p>He says: "Unless lower flying costs through fuel efficiency can offset higher aircraft prices, the difference will almost certainly have to be passed on to flyers. Should the oil price rise again due to undersupply in the next five years, this would add an additional unwelcome headwind for airlines already struggling badly."</p>
<p><em>Written by Jillian Ambrose. First appeared on <span style="text-decoration: underline;"><strong><a href="http://www.stuff.co.nz/">Stuff.co.nz.</a></strong></span></em></p>
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