EU policymakers have created new regulation for the aviation sector. ReFuelEU Aviation mandates the use of sustainable aviation fuels (SAF) and bans fuel tankering—a common practice globally. It is another climate-related initiative that will hamper native industry, increase prices, and reduce choice for consumers.
Cheap fuel out, expensive fuel in
The main thrust is to increase use of sustainable aviation fuels (SAF), which are incredibly expensive. To cite a conservative estimate, SAF is around 250 percent more expensive than conventional jet fuel. This is somewhat alarming because fuel costs typically make up 25-30 percent of an airline’s total costs.
With the aim of bringing down the cost, the legislation aims to “de-risk” development. It imposes requirements on SAF usage, from 2 percent in 2025 to 70 percent in 2050, and grants favorable financing terms to producers. They will have access to funds raised by the EU’s “green bonds” and investment from the EU budget, itself raised by taxation from member states. Some funds will also come from revenues generated by another burden on airlines, the Emissions Trading Scheme (ETS), which airlines operating flights within the European Economic Area (EEA) and the UK are obliged to participate in (the UK ETS is slightly different but broadly aligned—it remains to be seen if a similar thing happens with ReFuelEU.)
Tankering Ban
Fuel tankering is where an aircraft operator loads extra fuel on a particular flight for the purpose of avoiding or reducing the amount of fuel required to be loaded for the return or next leg of a service. Sometimes the cost of carrying the extra weight is more than offset by higher fuel costs at the destination airport. But legislators have decided that as extra weight means more emissions, it must be banned on all flights arriving or departing the EU. This is curious logic, as it means that extra weight that reduces cost is treated differently to extra weight that increases revenue (passengers and cargo), despite both resulting in more emissions.
Eurocontrol estimated that 21 percent of flights tanker to some extent. This is not surprising, as fuel prices can vary up to 55 percent within Europe—consider the cost of getting jet fuel to a Greek island or rural airfield (and the diesel burned to get it there!). The ability to tanker ensures that fuel suppliers face an elastic demand curve. For single-supplier airports, as many rural and remote airports are, it now becomes inelastic to the point where airlines stop serving the airport altogether.
What does this mean for operators?
The effect of this policy depends on the business model of the airline. For example, what type of airports do they serve, how long are their flights, and what is their competition?
Consider that large hubs generally have a more competitive landscape than regional airports, which may only have a single fuel supplier. This means that point-to-point operators will be impacted more than hub operators. The former are generally the low-cost carriers, which operate more frequently to secondary and regional airports that tend to have less competitive fuel prices.
Another factor is that the cost of carrying extra fuel increases with length of flight, so increasing price differentials are required to justify tankering as flight length increases. Among EU airlines, a higher proportion of the low-cost carriers’ flights are shorter sectors, though the hub and spoke “majors” also have significant short-haul operations. That is, all big operations are affected, but the former relatively more so.
The EU majors have one problem that the intra-European, low-cost carriers do not, though. In the long-haul market, they compete with operators that connect passengers onwards from their non-EU hub, notably the large Gulf and US majors. As only the EU leg is affected by this legislation, EU carriers offering direct flights are at a disadvantage versus those who offer connections via non-EU hubs.
It is worth noting that this is not the first relative advantage handed to non-EU carriers by legislators. EU and UK airlines have far greater exposure to the ETS, which is 25 times costlier than the international equivalent, called CORSIA. Additionally, several nations also charge Air Passenger Duty, which is foisted on the whole operation of an airline based in affected nations and tends to be greater for longer direct flights than those connecting through an intermediate hub.
Finally, it also means new administrative costs. There are many reasons flights leave with more fuel than legally required—the fuel load is a point of safety, first and foremost—and one can imagine ways to at least partially tanker without calling it as such.
Conclusion
In summary, EU aviation faces significant headwinds with SAF mandates and the ban on tankering. While the SAF mandates pose a greater threat to the viability of operators of all types, the tankering ban introduces immediate cost increases. The degree of impact on individual operators depends on their business model and competition, and though native EU carriers are burdened more than their non-EU peers, none are made better off in absolute terms. As ever when regulators burden industries with new terms, consumers will pay the price. They will experience a combination of higher ticket prices, less competition, and less choice than would otherwise exist.
