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Goodbye To Cheap Air travel

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Popeye Express

Shares in British Airways rose sharply this morning after preliminary results for the 12 months to March revealed annual pre-tax profits up by 44.5% to £883 million. These excellent figures are bucking the trend in airlines around the world, and particularly in the US, where the airline sector as a whole posted an $11 billion loss in the first quarter of this year. BA warns that the next year will be “challenging”, in the light of continuing economic slowdown and oil prices showing no sign of a significant retreat below the $125 a barrel mark. The airline expects its fuel costs for the past year to have been more than £2 billion, around a quarter of its cost base, rising to £2.5 billion in the coming year.

In the last 90 days, jet fuel prices have jumped 38%. As oil has hit record high after record high, fuel costs have exceeded labour costs for many airlines, accounting for as much as 40% of operating expenses. Airlines can’t set their ticket prices high enough to keep their businesses in the air. According to Delta CEO Richard Anderson, ticket prices would have to rise 15-20% just to cover increased fuel costs. Of 769 million passengers on US flights last year, many are thought to be on non-essential trips which will be cut back as times get harder.

The budget carriers’ business models have always relied on the thinnest of margins, and fuel price rises have so far caused eight airlines to go under, with more tipped to follow. One of them, ATA Airlines, left US soldiers stranded in Iraq, unable to get home to Vermont as the company went bankrupt.

The larger carriers have responded to mounting fuel costs by eating into their cash reserves to keep prices artificially low. At its current spend of $3.3 million a day, American Airlines could have spent its $5 billion cash reserves, the largest in the industry, in four years. There’s only limited scope for cutting costs by tricks such as economising on maintenance, taking safety risks like flying with inadequate fuel reserves, and skimping on customer service. Carriers are hoping that mergers will ensure their survival, at least for a while. Northwest Airlines and Delta have a proposed merger under review, with United Airlines thought to be in talks with both Continental Airlines and US Airways.

Cheap air travel is almost certainly doomed. Depending on how you feel about flying, that may or may not be the downside. The upside is that rail travel is bound to gain market share in the years ahead. Rail is the cheapest and most fuel-efficient form of transport, using a third less fuel than air for personal travel, and as little as 3% of the energy for freight. Rail companies have recently been attracting substantial investments from some of the wealthiest US investors:

These are all freight companies, the North American passenger business having withered in the face of cheap, aggressively-marketed air travel, but there is good reason to expect that passenger services will follow growth in freight traffic. In their book ‘Transport Revolutions: Moving People & Freight Without Oil’, Richard Gilbert and Anthony Perl predict that in 2025, no more than 25 airports will be operating. Electric powered transportation and rail will be the standard transport options. In a post-peak oil world, rail is probably the longest safe bet one could possibly make.

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Written by Pete Smith

May 16, 2008 at 12:31 pm

U.S. Biofuel Dumping

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D1 Oils share price graph

Shares in AIM-listed biofuels outfit D1 Oils plc (LSE: DOO.Lnews) are showing more sharp falls this morning after a 36% drop on Friday. The company said the influx of heavily subsidised US biodiesel is putting the entire EU green fuel industry at risk. The US government is promoting the production and use of biodiesel for transport under the so-called B99 scheme, in which producers could claim a subsidy of up to $1 per gallon if they blend 99 pct biodiesel with 1 pct mineral diesel.

Massive exports of unfairly subsidised biodiesel are now threatening the EU green fuels industry by seriously eroding the available margin on refining vegetable oils and putting at risk jobs in both Europe and in developing countries that are able to produce sustainable biodiesel from crops such as jatropha curcas. Around 1 million tonnes of B99 biodiesel are believed to have been ‘dumped’ by the US into the EU this year. About 10% of that consisted of biodiesel produced from palm plantations planted on rainforest in Southeast Asia, blended in the US and then sold on to the EU.

‘If these practices are not stopped, there will be no biodiesel refining industry in Europe,’ said Karl Watkin, founder and non-executive director of D1 Oils.

Update: Karl Watkin, founder and former chairman, has resigned from his role as non-executive director of D1. In a statement, Watkin said he is quitting out of frustration over the investment community’s inability to differentiate D1’s strategy from that of the suppliers of palm, soya and rapeseed ‘whose biodiesel products have been well documented as being environmentally unsustainable.

”I am particularly disheartened by the plethora of so-called experts on climate change who fail to distinguish between jatropha and other non-sustainable biodiesel feedstocks.

‘This lack of differentiation, combined with the London Stock Exchange’s failure to address both the liquidity problems of AIM and the impact of shorting of illiquid stocks, have conspired to erode the value of D1″.

D1 Oils has teamed up with UK oil giant BP PLC for a $160 million biodiesel project that uses jatropha, an inedible oilseed bearing tree, as a feedstock. The joint venture, called D1-BP Fuel Crops Ltd, intends to plant 1 million hectares of jatropha in its first four years. Production is expected to start next year. D1 has started a consultation process with employees on the future of its Middlesbrough and Bromborough sites, as part of a review of its downstream refining and trading operations.

‘Imports of heavily subsidised biodiesel have eroded margins to the point where we have no choice but to consider how to reduce operating costs. We are taking this action to manage the business proactively in a difficult market,’ chief executive Elliott Mannis said.

The distortion effect of subsidies is magnified by EU targets specifying that 2.5% of all fuel sold from pumps must be obtained from renewable sources. One tonne of B99 from the US costs about $1200, while buying soya to produce your own costs $1400, with another $150 for processing costs. You don’t have to be a rocket scientist to see where the biofuel to satisfy our renewables obligations will come from.

D1 is a company that’s ticking all the right boxes in terms of sustainability, producing biodiesel from a non-food plant that they are planting in marginal and non-agricultural land in developing countries round the world. They are being put under severe pressure by market distortions caused by US subsidies for biodiesel, wherever it comes from: American corn, rainforest palm oil, who cares? It does make you wonder, though, what the US government thinks about their subsidised oil being exported, rather than going to meet domestic biofuel targets. Or is the US economy in such a desperate state that they’ll export anything for foreign currency?

Perhaps the UK should consider ‘tuning’ its tax rebates on biofuels to exclude these imports. I feel another trade war coming on.

Written by Pete Smith

March 10, 2008 at 11:10 am

Polluter Pays

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A court in Paris has found oil giant Total responsible for the sinking of the tanker Erika. The world’s fourth-largest oil company must pay a fine of €375,000 for negligence, plus €200 million in damages.

The incident, in December 1999, caused a 20,000 tonne slick of heavy oil which polluted 250 miles of the French Atlantic coast, killed or injured 300,000 seabirds and left a toxic legacy in the food chain. In all, 270,000 tonnes of waste comprising seawater, oil, sand and stones, had to be cleaned up. Prior to the court ruling, Total had already spent €200m on the cleanup operation. This may sound like a lot, but it’s a fleabite compared with Total’s latest record profits of €12 billion.

This is tremendous news. A major reason for global oil companies like Total being able to report such huge profits is that they can use a maze of paperwork and off-shore registration to evade or conceal responsibility for cost-cutting policies such as chartering unseaworthy rust-buckets like the Erika. Ségolène Royal, head of the Poitou-Charentes region, said in the Guardian:

“It is a very severe warning to careless transport groups, to the floating garbage cans that cross the seas, often in total impunity”

I hope this puts the fear of God into all companies. Quite frankly, anyone responsible for envionmental destruction on this scale should be tried on the same basis as war criminals.

Written by Pete Smith

January 17, 2008 at 2:48 pm

Ceres Power Holdings

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Ceres Power Holdings

Shares in Ceres Power Holdings (CWR.L) rose sharply this morning on the news that Centrica, the parent company of British Gas, has taken a 10% stake in the AIM-listed fuel cell company. The shares are being bought at £3.00 per share, substantially lower than the £3.25 they reached last September when Ceres announced successful trials of their domestic combined heat and power (CHP) boiler. (“Domestic Micro-CHP”)

The total investment is around £20m. Centrica will also pay £5m to Ceres in staged payments to support the development of the CHP units, with £4m conditional upon the achievement of specific milestones. The agreement will grant British Gas rights in Great Britain to market and sell the Ceres CHP unit to domestic customers for four years. Last September, British Gas commented:

“Plans are underway to move from the demonstrator prototype to field trials which will culminate in a commercially available product, but it will be a few years off before we have anything on sale to customers.”

Today’s announcement is consistent with that position, providing a guaranteed investment stream for product development, so no immediate prospect of having our own gas-powered power station. We can only speculate on the kind of take-up BG will get for this product. Those who remain skeptical of the idea that small individualistic gestures can ever change the world will no doubt dismiss it as an irrelevance. And what use will it be when the gas runs out?

These uncertainties don’t seem to bother E.ON, who have today announced a similar agreement, with Energetix Group (EGX.L), to develop a micro-CHP device. E.ON will fund the testing and evaluation of a Genlec micro-CHP system at the Energetix facility in Cheshire. The evaluation, scheduled for completion in the first half of this year, will outline the energy savings achieved during testing of the system and assess its commercial value. E.ON estimates that the device could reduce residential energy bills by up to £150 a year.

Written by Pete Smith

January 14, 2008 at 10:40 am

Pssst! Wanna Buy Some Green Energy?

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Private Walker

The Observer reports that Britain is running out of renewable energy, as a surge in demand from businesses has outstripped the supply of electricity generated from ‘green’ sources. Firms’ interest in reducing their carbon footprint has far exceeded new capacity coming on-stream. This leaves companies which have pledged to become ‘carbon neutral’ with a sizeable headache. EDF is ‘prioritising’ existing customers, Npower says the amount it can supply depends on how much customers can pay, and Good Energy, a renewable-only electricity supplier, is turning away very big orders.

What some might consider a surprising popularity of renewables in the business fraternity is being led by large companies, who are obliged to pay the climate change levy on electricity from fossil fuels. The situation isn’t helped by the snail’s pace of the UK planning system, with wind energy projects which could supply one in six British homes mired in bureaucracy.

So much for the power of the market.

‘Business runs out of green energy supply’

Greenwash: And The Winners Are…

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Last month The Coffee House drew your attention to the
Worst EU Lobbying and Greenwash Awards 2007.

The winners were announced at a festive awards ceremony in the Witloof Cellar in Brussels on 4 December 2007.

Winner of the Worst EU Lobbying Award 2007

BMW, Daimler and Porsche – nominated together in the worst EU lobbying category – gained more than 30% of the votes. Their joint lobbying offensive, designed to water-down and delay the mandatory CO2 emission reduction targets proposed by the Commission after voluntary targets were not met, was deemed to be the worst and most deceptive by voters across Europe.

Winner of the Worst EU Greenwash Award 2007

The special greenwash prize for the most audacious attempts to gain unjustifiable green credentials was awarded to the German Atomic Forum, which received more than a third of votes cast. It was nominated for its campaign aimed at improving the image of nuclear energy. Under the slogan “Germany’s unloved climate protectionists” it featured images of nuclear power plants placed in unpolluted and unspoilt natural environments.

More than 6600 people across Europe took part in the online poll, which frankly was more than I would have expected. For a breakdown of the votes cast, click this link and also this one. Don’t forget to vote next year.

Written by Pete Smith

December 7, 2007 at 9:13 am

Biofuels Issue Brief

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biofuels.jpg

The World Business Council for Sustainable Development (WBCSD) has published an ‘Issue Brief’ on biofuels. The document, the first output from WBSCD’s new workstream on clean energy technology, provides an overview of biofuel production and use with a special focus on the transport sector. It describes first and second generation biofuels and explores their potential as a possible substitute for fossil fuels.

The Issue Brief tries to unpack key issues and analyse the many variables involved in biofuels policy so as to open debate by business on the main challenges for this energy source. Although intended primarily for a business audience, the brief provides a general understanding that could serve to inform the general public as well.

Read the press release online

Download the Issue Brief (PDF 751 kb)

Written by Pete Smith

November 17, 2007 at 9:53 am