Restoring air connectivity underpolicies to mitigate climate change
20 May 2020
Aviation is one of the sectors hardest hit by the Covid-19 crisis, with many countries
closing their borders and suspending international air travel. Domestic air travel is also
curtailed by social distancing, confinement measures, and shrinking economic activity.
The 80% global drop in flights has caused severe financial disruption to the aviation
sector.

The issue
Restoring air connectivity will be important for economic recovery. Governments, airports,and airlines will need to co-operate closely to agree sanitary measures that allow flights tobe reinstated as rapidly as possible, learning from measures adopted across the globe andin response to previous epidemics pandemics. Intervention to support aviation during thecrisis will need to be compatible with the long-term policy objectives of fostering efficientaviation markets and meeting agreed climate change mitigation targets.

The impact of Covid-19 crisis measures on aviation
The Coronavirus crisis will cause double the loss of economic output of the 2008 global
financial crisis and will create the biggest shock in a century for many economies, according
to April 2020 estimates. A 13% reduction in the UK’s Gross Domestic Product (GDP) for the2020 financial year is expected. The unprecedented nature of the lockdown measures takenby governments make scenarios for recovery particularly uncertain. The longer restrictions
remain in place, the more likely it is that future economic output will be depressed becauseof business failures, cancelled investments, and long-term unemployment.

Aviation activity has fallen to very low levels. The introduction of international travel bans inMarch are highly visible in the accompanying data from IATA. Europe saw an 89% year-onyear drop in scheduled flights in April. Most of the remaining activity is in Chinese, Japanese,and US domestic markets. Scheduled flights in April were down by around 43% compared tothe previous year in China and Japan, and by around 56% in the US.
Worldwide flights down 80%

Air cargo volumes have declined with economic activity, but freight-only flights have grown,with some passenger aircraft converted to carry freight to cover for cargo that is usually
carried in the bellies of passenger aircraft. Supply of medical materials and equipment is
critically dependent on air freight during the crisis. The volume of pharmaceutical products
carried has doubled.
Air cargo traffic has fallen abruptly, albeit less than passenger traffic
Seasonally adjusted

Source: IATA Economics using data from IATA Statistics

Covid-19 will have a much greater impact on air passenger travel than previous corona virus andinfluenza outbreaks

Aviation’s recovery from the Covid-19 crisis will be slower than from other recent corona
virus and influenza outbreaks. While the initial impact of Covid-19 on global revenuepassenger-kilometres (RPKs) was similar to that of SARS on the Chinese market in 2003, therelatively speedy V-shaped recovery from SARS was possible due to a rapid return ofpassenger confidence in flying. The speed of recovery from the Covid-19 crisis will largely
depend on government decisions on international travel restrictions and the relaxation ofdomestic confinement measures.

Key insights
In common with much of the rest of the economy, government assistance is needed in theaviation sector to preserve incomes and jobs through the crisis. Sector-specific measurestaken include suspending requirements for ‘use it or lose it’ landing rights at slot-coordinated airports. Some state-owned airports have suspended landing charges for remaining
traffic, as in Iceland and Norway. Others, like Australia, have focused on protecting services
to remote communities.
Government support to airlines

IATA estimates that airlines had pre-crisis cash reserves allowing them to survive an average
two months of crisis conditions. Unaided, many airlines could go out of business before travel
restrictions are lifted. Some governments have already provided loans or taken temporary
equity stakes in airlines and airports to moderate disruption, for example in France, theNetherlands, Scandinavia, and the US.
There is no single approach to supporting airlines during the crisis. Some governments haveprovided immediate support to airlines. For example, the US government earmarked USD 25

billion for a mix of grants, loans, and equity options for its airlines at the end of March.
Australia and the UK have taken a different approach. Australia has turned down applications
for support, partly because of the potential negative impact on competition. The UK Treasury
will only consider support once all commercial finance options are exhausted.
French government support to Air France-KLM required an undertaking to bring forward thecompany’s commitment to halve CO2 emissions per passenger from 2030 to 2024 fordomestic flights.
Support to airlines in selected countries in addition to payroll support (as of 18 May)

USAFrance
The Netherlands
NorwayAirlines eligible
All US passenger air
Air France
KLM
Norwegian Air Shuttle,carriersSAS, WiderøeGrants
USD 17.5 billion000
Equity stakes
Optional000
Loan guarantees
04In negotiation
NOK 6 billion
Government loans
USD 32.5 billion
3In negotiation
0Total
USD 50 billion
EUR 7 billion
EUR 2-4 billion
NOK 6 billion
Notes: The US Treasury will receive warrants to buy shares (single-digit stakes) from airlines accepting loans.
Norway’s guarantees are allocated to Norwegian Air Shuttle (NOK 3 billion), SAS (NOK 1.5 billion), and toWiderøe and other airlines (NOK 1.5 billion) totalling EUR 537 million. The Danish and Swedish government havealso pledged up to EUR 137 million each in loans for SAS.

Governments must take a long-term view of their air connectivity needs and the commercial
standing of airlines when determining what financial support to make available. Wheregovernments had decided to discontinue support to an airline prior to the crisis, direct
income support for the labour force is preferable and less costly than postponing inevitable
exit from the market. Where carriers exit markets, governments should take measures tofacilitate competition in the recovery, such as reserving relinquished slots for new entrants at
slot-constrained airports.
Ownership and control restrictions limiting foreign investment in airlines could also berelaxed to make equity more available from the market. The crisis could be an opportunity tolift restrictions applied unevenly as a result of international alliances and joint ventures, andstimulate investment.
Protecting essential air connectivity can also support the aviation sector. Air connections areparticularly important where there are no substitutes, which is the case for remote locations
and island states. During the Covid-19 crisis, flight cancellations have had a particularly severe
impact on islands and peripheral regions, many losing all international connections.

Many governments supported routes providing essential air connectivity before the crisis andsome have introduced new support since the crisis, for example in Australia, where support isprovided for services on specific routes rather than to particular carriers. The benefit of suchan approach is its focus on connectivity outcomes. Subsidies should be non-discriminatory
towards carriers and include sunset clauses to ensure that subsidies are periodically revised
and revoked once the crisis is over.
Environmental protection

Environmental policy for the sector is subject to long-standing concerns over noise, air
pollution, and a growing imperative to mitigate CO2 emissions. These policy priorities areunaltered by the Covid-19 crisis. Continued international co-operation to reduce the climate
impact of aviation under the auspices of ICAO continues to be a priority, with muchremaining to be done to complete implementation mechanisms for the measures adopted.
The crisis will temporarily reduce CO2 emissions from aviation. It may also accelerate
retirement of less fuel-efficient aircraft in a depressed market, but delaying or relaxing
environmental protection measures would not be an appropriate part of Covid-19 crisis
recovery policies.
ICAO’s Framework for CO2 Emissions Mitigation from International Aviation

Source: ICAOICAO has established a Carbon Offsetting and Reduction Scheme for International Aviation(CORSIA) that aims to achieve carbon-neutral growth in international aviation from 2020.
Beyond anticipated fuel and operational efficiency improvements, CORSIA relies onsustainable aviation fuels (SAF) and a market-based mechanism (MBM) for offsetting carbon,
mainly through forestry projects. Although emissions reporting under CORSIA has begun,much still remains to be done, notably the definition of non-emissions-related fuelsustainability criteria (e.g. water and biodiversity) and guaranteeing the environmental
integrity of offsets. The MBM architecture can accommodate short-term disruptions, but
action to reduce CO2 emissions will be no less urgent in the Covid-19 crisis recovery.
ICAO’s MBM aims to mitigate CO2 emissions cost effectively through airline-funded
investments to reduce carbon emissions in other sectors. ICAO is currently working on
ensuring that offsets are effective in reducing carbon emissions. Forestry projects raise themost complicated issues. Illegal logging and fires make it almost impossible to guarantee
carbon sequestration over time and inadvertent incentives to fell and replant may be createdwith disastrous impacts on biodiversity. Strong local governance frameworks are needed for
credible offsets.
ICAO’s focus has also been on biofuels delivering certified net CO2 mitigation without undue
impacts on biodiversity, water quality or food production. Experience with biofuel mandates
in the European Union underlines the challenge involved:
Conventional biofuels that meet these criteria are mainly derived from food andagricultural waste, and are available in only limited quantities, insufficient to meetdemand from aviation.
The indirect land-use change impacts of producing biofuels from crops have proved
impossible to quantify or contain.
The direct land-use change resulting from the production of biofuel crops can releaselarge amounts of carbon from soils.
These difficulties have led the European Union to end its biofuel mandate and cap nationalmandates for producing transport fuels from crops (EU 2018, T&E 2018b).
Production volumes of sustainable biofuels are limited by the quantities of agricultural,
forest, and municipal waste that can be collected, and the availability of suitable,
uncultivated land. Fuels can also be produced from algae, but cost-effective techniques for
producing this feedstock at scale are currently not available.
Electrofuels could complement sustainable biofuels in the long run. These are synthetichydrocarbons produced by electrolysis of water and renewable carbon, from either biomass
or air capture of CO2. Sustainable production in sufficient quantities requires very largeamounts of low-carbon electricity. Battery-electric propulsion may also be effective for shortflights with small passenger aircraft and a range of emerging electric assistance technologies
could help reduce global aviation’s overall carbon intensity.
Government support for aircraft manufacturing for post-Covid-19 recovery should prioritisetechnological innovation to mitigate CO2 emissions.
Carbon pricing would facilitate carbon-neutral growth, as it would strengthen the businesscase for investments in energy efficiency, operational improvements, and spending onsustainable aviation fuels. Fuel for international flights is exempt from excise tax, but thebenefits of carbon pricing might make the zero rate worth revisiting. Carbon taxes are
already levied on fuel used for domestic flights in some countries. Experience in California
shows that, if paired with policies supporting technological development such as low-carbon
fuel standards, even moderate carbon pricing levels can effectively accelerate technological
gains and improve the competitiveness of low-carbon fuels.
An alternative carbon pricing instrument is emissions trading. Flights within Europe aresubject to the EU Emissions Trading Scheme (ETS), but plans to include international aviation
were withdrawn to facilitate progress on the development of the CORSIA agreement. Views
on the overall effectiveness of the system in reducing CO2 emissions are divided.
Establishment of the ETS sent a signal of political intent but emissions trading schemes are
harder to administer than a carbon tax. They require periodic negotiation between
governments to set emission caps, opening the door to exemptions and other distortions. In
the ETS, these issues resulted in unstable and weak prices far below the estimated social costof carbon. Applying emissions trading to international aviation also raises the same fiscal
issues as carbon pricing.
Conclusion

Covid-19 contingency measures and post-crisis consumer spending patterns are likely toseverely dampen demand for air travel for an extended period. The disruption will accelerate
the retirement of older, less fuel-efficient aircraft, based on experience with previous
economic shocks. But neither effect will alter climate change impacts significantly anddurably. Achieving international aviation’s carbon neutral growth target is a formidable task
regardless of the impact of Covid-19. Aid to the sector must align with existing sectoral
policies to increase social welfare outcomes, both in terms of environmental impacts andconsumer benefits.