Richard North, 17/02/2019  

In the current edition of Flexcit, there are 17 references to certainty/uncertainty. Writ through the narrative is the need to avoid it – uncertainty that is. And now, nearly 32 months from the referendum, we're seeing the headline: "Regional airline Flybmi collapses blaming Brexit uncertainty".

We were, of course, expecting something to go down in aviation, but not this soon and not in quite in this way. Nonetheless, the British airline Flybmi has gone bust, cancelling all flights with immediate effect. And Brexit is blamed as the main cause of the collapse.

Understandably, the spokesperson for Flybmi speaks about the "heavy heart" with which the company has made the "unavoidable announcement", noting that the airline had faced several difficulties, "including recent spikes in fuel and carbon costs".

But here we learn something completely new. The spike in the carbon cost arises from the EU's recent decision to exclude UK airlines from full participation in the Emissions Trading System.

This decision was made on 19 December last year, after the Commission had become concerned about retaining the integrity of the EU ETS after Brexit.

Thus, it decided temporarily to suspend processes related to the UK in the Union Registry (The relevance is partly explained here). It also adopted an amendment to the EU ETS Registry Regulation to lift the marking of allowances issued by the UK during the transitional period in case of ratification of the Withdrawal Agreement.

The suspension of UK-related processes in the Union Registry, we are told, takes account of the fact that, on the basis of the current legislation, from 1 January 2019, any allowances issued by the UK would need to be identified by a country code ("marked") and excluded from surrender.

In order to prevent the temporary issuance and circulation of marked allowances until there was clarity on whether or not a Withdrawal Agreement would be ratified and enter into force, the Commission decided temporarily to suspend the acceptance by the Union Registry of all processes for the UK relating to free allocation, auctioning and the exchange of international credits.

Consequently, from 1 January 2019 onwards the UK has not been able to auction allowances, allocate allowances for free to operators or exchange international credits. This will apply for as long as the suspension remains in place. Only after both the UK and the EU have deposited their instruments of ratification of the Withdrawal Agreement with the Secretary-General of the Council will the suspension be automatically lifted.

Perversely, BMI Regional claimed to have been the first UK airline to complete the 2012 ETS cycle. This meant that the airline was among the first of more than 11,000 airlines, power stations and industrial plants in 31 countries to adhere to a "cap and trade" method of carbon emissions reduction.

Now, having fully bought into the scheme it has been caught by the suspension of the scheme for UK airlines, having to fund the additional carbon credits which hitherto it had been allocated free of charge.

Currently, under the ETS, the free allocation amounts to 82 percent of airline credits. Three percent are held back for high-growth airlines and the 15 percent balance is auctioned. A credit is needed to cover each tonne of carbon dioxide emitted. Auction values are currently about €23 per tonne. 

No details of the costs involved for Flybmi have been released and data are not easy to find at short notice. To give some idea of the sort of costs involved, some earlier costs of carbon offsets were set at £1.60 for a return London-Paris flight and £3.00 for London to Frankfurt.

Another indicator of the sort of money involved comes from calculations on costs passed on to customers, who are required to pay even for the free allowances.

According to a study by a Dutch environmental consultancy, airlines profited up to €1.36 billion in 2012 by passing on "imaginary" costs. At the time, Ryanair was adding a 25p "green" tax levy to all bookings to cover the costs of the scheme.

With Flybmi having carried 522,000 passengers on 29,000 flights in 2018, overall ETS costs are likely to be substantial. In its formal statement, the airlines says that while the summation of issues have undermined efforts to move the airline into profit, current trading and future prospects have also been seriously affected by the uncertainty created by the Brexit process.

"Against this background", it says, "it has become impossible for the airline's shareholders to continue their extensive programme of funding into the business, despite investment totalling over £40 million in the last six years. We sincerely regret that this course of action has become the only option open to us, but the challenges, particularly those created by Brexit, have proven to be insurmountable".

Predictably, the media focus is on the human interest aspects of this drama, so it has not been fully registered that a major factor has been the failure by the Westminster parliament to ratify the Withdrawal Agreement. For other British Airlines, the pain now only goes away when the agreement is fully ratified but, for Flybmi, this will come too late – if it comes at all.

Presumably, British Airways will be similarly affected but, again, no precise costs are available. However, in 2011, it was reported that the airline faced a bill of nearly €50 million a year, the highest of any airline, when carriers around the world were brought into the ETS, and that was based on 81 percent of allowances being allocated free.

If the free allowance is removed, theoretical annual costs could rise by as much as €300 million, for as long as it took to regularise the scheme for the UK – with or without the Withdrawal Agreement. UK air cargo operations will also be looking at their costs. Sources for auctioned credits must also be established, and the loss of auction rights will have financial implications.

On the other hand, if the UK sorts itself out and ratifies the Withdrawal Agreement, UK operators remain subject to EU ETS compliance obligations for emissions in the years 2019 and 2020. But the marking and the exclusion from surrender of allowances issued by the UK would no longer be necessary. Costs would revert to normal.

Whatever does happen, Flybmi will stand as an unexpected casualty of Brexit uncertainty, costing 376 jobs and damaging a number of regional airports, which rely on the airline, including Bristol, East Midlands and Edinburgh. In what is appropriate for a Brexit-related issue, regional connectivity with Brussels will also be badly affected.

And, as parliament chatters and postures, the costs of uncertainty can only increase, adding daily to the unnecessary burden occasioned by political incompetence.

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