Aviation – Current Energy Challenges: A View from the Airline Industry on Energy & Environment AIAA Inside Aerospace

1. Aviation – Current Energy Challenges: A View from the Airline Industry on Energy & Environment AIAA Inside Aerospace Conference – May 11, 2010 Nancy N. Young Vice President, Environmental Affairs Air Transport Association of America, Inc.

2. The Challenges Jet fuel costs, supply and price volatility Climate change pressures and policies Airline Initiatives to Meet the Challenges The Need for Complementary Government Policies That “Do No Harm” Overview Air Transport Association of America, Inc.

3. Challenge: Jet Fuel Price, Crack Spreads, Fluctuating Wildly “Passenger airlines have probably been hurt more significantly by high energy prices than any other sector… First, fuel represented a major operating expense for airlines… Second, the cost of jet fuel is a function not only of oil prices, but also of the added cost (known as the ‘crack spread’) to refine oil into aviation kerosene. That added cost has surged from historical levels of $5-$10 per barrel to around $30 recently.”“S&P Looks At How Two Airlines Try To Offset Ever-Higher Fuel Costs,” Standard & Poor’s (July 3, 2008) Average Price per Barrel Air Transport Association of America, Inc. Source: Energy Information Administration 3

4. Investors Have Increased Volatility of Crude Oil MarketsComposite Crude Oil Volume* Set New Record of 2,028,736 Contracts on 12/9/09 Oil Traded Daily on Exchanges (Million Barrels)* * NYMEX WTI + ICE WTI + Brent Sources: Citi Futures Perspective and IEA, from New York Mercantile Exchange (NYMEX) and London IntercontinentalExchange® (ICE) Air Transport Association of America, Inc. 4

5. In 2008, U.S. Passenger and All-Cargo Airlines Spent $16B More on Fuel Than in 2007 and $42B More Than in 2003 Gallons Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs Sources: ATA, Energy Information Administration, Department of Transportation Air Transport Association of America, Inc. 5

6. Perception Aviation is a major climate change contributor Reality Aviation is a relatively small contributor Domestic US commercial aviation = 2% GHGs (source: EPA) Worldwide aviation = 2% man-made CO2 (source: IPCC) The airlines and industry are working on further reductions Challenges/Concerns Aviation demand is projected to grow and, therefore, so are aviation emissions … Regulatory drive for emissions reductions Challenge: Climate Change Pressures & Policy Air Transport Association of America, Inc.

7. Fuel Burn Has a Direct Relationship to Carbon Emissions and Affects Other GHGs ATA Climate and Energy Policy Elements Continually enhance fuel efficiency Accelerate development and deployment of alternative aviation fuels Complementary regulatory framework For aviation and climate change, the “global sectoral approach” Other Energy Policy Elements Reform energy commodities markets Expand domestic supply (alternative fuels + others) ATA Energy & Climate Policies Are Integrated Air Transport Association of America, Inc.

8. Airlines’ Excellent Fuel Efficiency Record US airlines improved fuel efficiency ~110% between 1978 and 2008* 2.7 billion metric tons of CO2 savings = taking ~19.5 million cars off the road each of those years* From 2000 to 2008 Reduced absolute fuel burn and emissions ~ 5.5%* Increased passengers and cargo 17%* To Continue to Improve, Must Be Able to Invest Fuel Efficiency = Emissions Efficiency *Fuel/savings/traffic source: U.S. DOT Form 41; automobile equivalent calculations from www.epa.gov/cleanenergy/energy-resources/calculator.html Air Transport Association of America, Inc.

9. Technology Invest in newer aircraft Invest in fleet enhancements (e.g., winglets) R&D for breakthroughs in engines and airframes Operations Weight reduction; maintenance (e.g., engine wash) Operational procedures within existing ATM Infrastructure ATC modernization; NextGen/NowGen! Already Motivated to Get as Much as We Can out of These Measures Fuel is our #1 cost center Means of Enhancing Fuel/GHG Efficiency Air Transport Association of America, Inc.

10. Co-Founded and Co-Lead the Commercial Aviation Alternative Fuels Initiative (CAAFI) ATA Alternative Fuels Principles Safety/Fuel Quality Supply Reliability Economic Feasibility Environmental Benefit Examples of 2009 Accomplishments − Agreement for Purchase of Renewable Diesel for GSE at LAX − Airline MOUs with Two Suppliers for Future Jet Fuel Purchase Agreements March 2010 Strategic Alliance with DOD/DESC − Combining knowledge, experience and jet fuel demand ATA & Alternative Fuels Air Transport Association of America, Inc.

11. By Stimulating R&D and Technology Deployment . . . But Harmful, Punitive Economic Measures Are Proliferating . . . European Emissions Trading Scheme (ETS) U.S. legislative proposals Proliferation of taxes and charges Positive Financial Incentives Can Help . . . Air Transport Association of America, Inc.

12. Emissions Monitoring and Reporting Obligations for Airlines Began in 2009 Emissions Trading Required Beginning in 2012 Terms 2012, cap airline emissions at 97% of 2004-2006 emissions levels, 2013+ = 95% Airlines must purchase 15% of emissions allowances below cap Airlines must purchase all emissions allowances above cap Governments “own” the initial allowances up to the cap (source of revenue) Applies to both EU and non-EU airlines for entire flight to/from Europe Bad policy – siphons money out of aviation Violates international law absent mutual consent ATA challenging in court But ATA airlines are complying in the meantime European ETS and Aviation Air Transport Association of America, Inc.

13. Waxman-Markey Cap-and-Trade Legislation Approved by House of Representatives Airlines would be covered indirectly, but fully All emissions from the eventual burning of jet fuel must be covered “upstream” by fuel providers = significant tax/surcharge Significant cost exposure, e.g., @ $25/ton carbon dioxide “charge” = $0.24 additional cost per gallon of jet fuel No reinvestment of funds into aviation This specific piece of legislation likely is “dead,” but the concepts continue to be considered . . . Kerry-Lieberman (Graham?) Expected Sector-specific, not one-size-fits-all . . . But transport fuels – maybe including aviation -- could still be covered by defacto tax U.S. Legislative Proposals Air Transport Association of America, Inc.

14. Negative Impacts on the Airlines’ Ability to Invest in Improvements within the Industry How Best to Split up Carbon Pie? Aviation is an extremely fuel- and carbon-efficient economic engine Consistency with International Law and Policy International aviation is subject to treaty (“Chicago Convention”), limiting unilateral action Key Concerns with Punitive Measures Air Transport Association of America, Inc.

15. Global Sectoral Approach Framework for Aviation International and domestic aviation emissions under framework Collective aviation-specific emissions targets Fuel efficiency improvements that result in annual average improvement of 1.5% through 2020 Make the growth of the industry’s emissions “carbon neutral” beginning in 2021 Aspirational goal of 50% reduction in emissions in 2050, relative to 2005 levels All subject to government investment and “do no harm” so technology, operations & infrastructure improvements flourish The Way Forward – ATA & Industry Position Air Transport Association of America, Inc.

16. Why These Targets? They address the key concern . . .growth … While global aviation currently contributes only 2% of the world’s man-made carbon dioxide (CO2), the concern is that growth in demand will result in growth in emissions The industry proposal addresses this head-on While seeking to keep sufficient resources within the industry to allow it to continue its strong record of continuous environmental improvement The Way Forward (cont.) Air Transport Association of America, Inc.

17. CO2 Emissions Forecasted Emissions Growth Absent Reduction Measures Ongoing Fleet Renewal / Technology Development ATC/NowGen/ Operational Improvements Low Carbon Fuels Baseline 2050 Carbon Neutral Growth and Reduction Timeline How Do We Meet Our Targets? Technology, Fuels, Operations & InfrastructurePotential Role for Carbon Offsets to Bridge Notional Example 17 Air Transport Association of America, Inc.

18. Framework Should Be Established under the International Civil Aviation Organization (ICAO) Authority for international aviation emissions Domestic Legislation Should Incorporate This Not a “carve out,” but a “carve in” Complementary policy framework: countries must Implement accelerated ATC modernization, including federal funding for aircraft equipage, training, etc. Support development and deployment of aviation alternative fuels Reinstate (and increase) research and development and investment for aircraft technology Do in context of solid energy policy, including stable fuel supplies and appropriate control of commodity futures speculation Need International & Domestic Adoption Air Transport Association of America, Inc.

19. If You Want to Feel Good About the Future, Look Up! We Have a Better Way! We Are America’s Airlines Connecting and Protecting Our Planet® Air Transport Association of America, Inc.