### (54 pages)

CAEP/8

- IP/029 

### International Civil Aviation Organization



## INFORMATION PAPER CAEP/8

- IP/29 6 / 1 / 1 0 English only



## COMMITTEE ON AVIATION ENVIRONMENTAL PROTECTION (CAEP)

EIGTH MEETING Montreal, 1 to 12 February 2010

Agenda Item 2: Review of technical proposals re lating to aircraft engine emissions

AVIATION ENVIRONMENTAL PORTFOLIO MANAGEMENT TOOL FOR ECO NOMICS

(APMT

- ECONOMICS) AND IT S APPLICATION IN THE CAEP/8

NO x STRINGENCY ANALYSIS (Presented by the United States )

SUMMARY This paper updates the status and capabilities of the Aviation Portfolio Management Tool for Economics (APMT

- Economics). 1 

### It also documents the use of the tool in supporting the CAEP/8 NO X 

### stringency analysis.
The Federal Aviation Administration (FAA), in collaboration with the National Aeronautics and Space Administration (NASA) and Transport Canada, is developing a comprehensive suite of software tools to facilitate thorough consideration of aviation's environmental effects. The main goal of this effort is to develop a critically needed ability to characterize and quantify the interdependencies among aviation

- related noise and emissions, impacts on health and welfare, and industry and consumer costs, under different policy, technology, operational, and market scenarios. The APMT

- Economi cs component of the tools suite models airline and aviation market responses to environmental policy options. The ICAO CAEP Forecasting and Economic analysis Support Group (FESG) reviewed and conclud ed that APMT

- Economics was appropriate for use on the CA EP/8 NO X 

### stringency analysis. 2 

### APMT

- Economics analysis results, using both the Operations

- led and Economics

- led modes, are included in the Appendix.

1 The Aviation Environmental Portfolio Management Tool (APMT) was formally introduced to the CAEP Steering Group at the November 2004, Bonn meeting. Since that time the Steering Group, FESG, and MODTF have been kept informed of APMT research and demonstration developments. CAEP/7_IP/25, APMT Progress 2 CAEP

- SG/20082

- IP/06

### CAEP/8

- IP/29

1

. INTRODUCTION

1

. 1 In the past, modeling tools that supported CAEP generated either noise or emissions out puts, against which policy costs were calculated. CAEP considered the cost to implement a policy against a single environmental performance indicator (e.g., noise emitted). With the advent of the work on common databases and inputs, for a given policy sc enario CAEP will have the ability to consider noise, local air quality, fuel burn, greenhouse gas emissions, plus industry and consumer cost interdependencies. The Federal Aviation Administration (FAA), in collaboration with Transport Canada and the Natio nal Aeronautics and Space Administration (NASA), is developing a comprehensive suite of software tools to facilitate thorough consideration of aviation's environmental effects. The main goal of this effort is to develop a critically needed ability to chara cterize and quantify the interdependencies among aviation

- related noise and emissions, impacts on health and welfare, and industry and consumer costs, under different policy, technology, operational, and market scenarios. The component of the tools suite that models airline and aviation market responses to environmental policy options is entitled the Aviation Portfolio Management Tool for Economics (APMT

- Economics). 3



### 1

. 2 Beginning in 2004, information on APMT has been submitted to CAEP and stakeholders, inclu ding the initial APMT requirements and architecture studies and prototyping plan. 4 

### APMT Progress was last reported to the CAEP in February 2007, in CAEP/7_IP/25.

1

. 3 In accordance with Task F.03 , t he Forecasting and Economic analysis Support Group (FESG) r eviewed the economic components of the Aviation Environmental Portfolio Management Tool, namely the APMT

- Economics. The review was completed and results presented to the CAEP Steering Group in September 2008. APMT

- Economics was subsequently used in the CAE P/8 NO X 

### stringency analysis

. 5



### 1

. 4 This paper serves to update CAEP on the progress and capabilities of APMT

- Economics

. 2

. NO X 

### STRINGENCY ANALYSIS AND COMPARISON

2

. 1 CAEP tasked FESG and the Modelling and Database Task Force (MODTF) to conduct an analysis of string ency scenarios to reduce emissions of nitrogen oxides ( NO X 

### ) relative to the ICAO CAEP/6 standard a s an element of the CAEP/8 work programme. Ten stringency options were analysed for two potential implementation years, 2012 and 2016, with potential changes ranging from between 5% and 20% compared to the current standards. The analysis was based on an assessment of the extent of the technology, environment and costs that would result from modifying, where appropriate, the existing in

production engines to m eet the range of scenarios. For the analysis, MODTF assessed emissions reductions and potential environmental trade

- offs for the scenarios. FESG established the costs assumptions and assessed overall cost

- effectiveness of the stringencies. The final cos t

- effectiveness

3 APMT

- Economics was formerly named the APMT Partial Equilibrium Block (PEB) 4 Requirements Document for the APMT. Ian Waitz, et al. June 2006. (Report No. PARTNER

- COE

- 2006

- 001), http://m it.edu/aeroastro/partner/reports/apmt

- requirmnts

- rpt2006

- 001.pdf ; Architecture Study for the APMT. Ian Waitz, et al. June 2006. (Report No. PARTNER

- COE

- 2006

- 002), http:/ /mit.edu/aeroastro/partner/reports/apmt

- arch

- rpt2006

- 002.pdf ; Prototype Work Plan for the APMT. Ian Waitz, et al. June 2006. (Report No. PARTNER

- COE

- 2006

- 003), http://mit.edu/aeroastro/partner/reports/apmt

- prototype

- rpt2006

- 003.pdf 5 The FESG NO X 

### Cost Spreadsheet Model ( NO X 

### - CSM) w as used as the primary tool in the economic assessment of the NO X 

### stringency scenarios under consideration for CAEP/8. APMT

- Econo mics was used to compare results to the FESG NO X 

### - CSM for a selected number of scenarios. [CAEP/8

- IP/14]

### - 3

- 

### CAEP/8

- IP/029

results were presented as costs per tonne of NO X 

### reduction for the ICAO Landing Take

- Off (LTO) cycle in a joint MODTF

- FESG paper to CAEP/8 (WP015).

2

. 2 For the CAEP/8 NO X 

### stringency analysis, the NO X 

### Cost Spreadsheet Model ( NO X 

### - CSM) was the p rincipal tool used for calculating costs , and APMT

- Economics was used to verify the results. Specifically, APMT

- Economics was used to compute cost

- effectiveness for two of the higher stringency scenarios , with high range cost assumptions , using the differ ent APMT

- Economics modes. The Operations

- led mode employed MODTF representation of the FESG forecasts of aircraft operations

. The Economics

- led mode used APMT

- Economics representation of the FESG forecasts

. 2

. 3 Prior to analyzing all of the scenarios with t he NO X 

### - CSM, the cost outputs from APMT

Economics in both operations

- led and economics

- led modes were compared to the results from equivalent tests using the NO X 

### - CSM . APMT

- Economics and NO X 

### - CSM employ different approaches; namely, the NO X 

### - CSM computes cost s derived from the differences in aviation activity computed by MODTF, while the APMT

- Economics approach is to compute the total industry costs with and without the stringency options and then compare the total cost differences. Consequently, there are so me differences in the computation and treatment of individual cost components; these effects, however, are understood and are reasonable given the differences in modelling approaches. Indeed, as the figure illustrates the results from the alternative mode lling approaches show a consistent ranking and a consistent contribution to the overall costs is made from the various components

.

Figure 1: Comparison of Costs by Component between APMT

- Economics and NO X 

### - CSM

2

. 4 T he consistency of the overall forecasts i s robust

. P articularly when the range of total cost outputs ( $1Bn to $4Bn ) resulting from the two modelling approaches are viewed in the context of the overall airline industry costs, which are projected to range between $420Bn in 2006 to approximately $1 , 600 Bn in 2036

.

### CAEP/8

- IP/29

3

. CONCLUSION

3

. 1 Through this analysis APMT

- Economics demonstrates its application to a NO X 

### stringency analysis. It also demonstrates flexibility in employing assumptions that match those prepared by the ICAO CAEP FESG. Further, when appl ied in economics

- led forecasting mode, APMT

Economics produces comprehensive and internally consistent forecasts of NO X 

### stringency effects, including consistent demand responses to cost changes.

3

. 2 In the economics

- led mode APMT

- Economics demonstrates suffic ient fidelity to reliably and consistently model the demand and costs of interventions relative to a Baseline, that invoke only relatively small cost changes, down to the level of a 0.2% annual increase in overall airline operating costs. The demand respo nsive and comprehensive cost forecasting features of APMT

- Economics proved true the FESG assumption that demand effects can be largely ignored for the main CAEP/8 stringency analysis

. 3

. 3 The APMT

- Economics results compare well to those of the NO X 

### - CSM overall . Despite using different approaches to modelling the stringency measures and the overall scale of aviation industry costs, the results at a component level were shown to have a good degree of consistency. CAEP

- FESG can therefore have confidence that the results from the NO X 

### - CSM were independently confirmed for a sample of the stringency tests being undertaken for CAEP/8

. 3

. 4 A comprehensive description of APMT

- Economics and analysis results, using both the Operations

- led and Economics

- led modes , are include d in the Appendix.

— — — — — — — —

### CAEP/8

- IP/ 29 Appendix


### APPENDIX

APMT

- ECONOMICS AND ITS APPLICATION IN THE CAEP/8

NO x STRINGENCY ANALYSIS

### CAEP/8

- IP/29

Appendix



# APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis

Report f or the U.S. Federal Aviation Administration, Office of Environment and Energy , and the US DOT Volpe National Transportation Systems Center
November 2009

### CAEP/8

- IP/29 Appendix

This report, and information or advice which it contains, is provided by MVA Consultancy Ltd solely for internal use and reli ance by its Client in performance of MVA Consultancy Ltd’s duties and liabilities under its contract with the Client. Any advice, opinions, or recommendations within this report should be re ad and relied upon only in the context of the report as a whole. The advice and opinions in this report are based upon the inform ation made available to MVA Consultancy Ltd at the date of this report and on current UK standards, codes, technology and construction practices as at th e date of this report. Following final delivery of this report to the Client, MVA Consultancy Ltd will have no further obligations or duty to advise the Client on any matters, including development affecting the information or advice provided in this report. This report has bee n prepared by MVA Consultancy Ltd in their professional capacity as Consultants. The contents of the report do not, in any way, purport to include any manner of legal advice or opinion. Th is report is prepared in accordance with the terms and conditions of MVA Consultancy Ltd’s contract with the Client. Regard should be had to those terms and conditions when considering and/o r placing any reliance on this report. Should the Client wish to release this report to a Third Party for that party's relianc e, M VA Consultancy Ltd may, at its discretion, agree to such release provided that: (a) MVA Consultancy Ltd's written agreement is obtained prior to such release, and (b) by release of the report to the Third Party, that Third Party does not acquire any rights , contractual or otherwise, whatsoever against MVA Consultancy Ltd and MVA Consultancy Ltd, accordingly, assume no duties, liabilities or obligations to that Third Party, a nd (c) MVA Consultancy Ltd accepts no responsibility for any loss or damage incurred by the Client or for any conflict of MVA Consultancy Ltd's interests arising out of the Client's release of this report to the Third Party. 

# Document Approval

Primary Author: Richard Hancox
Other Author(s): Caroline Sinclair
Reviewer(s): Caroline Sinclair
Formatted by: 

# Document Control

Project Title: APMT

- Economics and Its Utility in NOx Stringency Analysis
MVA Project Number: C39175
Document Type: Report

### CAEP/8

- IP/29

Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis i 

# Contents

1 Introduction 1.1
1.1 Background 1.1 1.2 Analysis Overview 1.1 1.3 Report Structure 1.3



# 2 The APMT

- Economics Model 2.1
2.1 Introduction 2.1 2.2 The Aviation Environmental Tools Suite 2.1 2.3 APMT

- Economics 2.2 2.4 Reported Validation APMT

- Economics Datum for NOx Stringency 2.5 2.5 Baseline Calibration 2.10



# 3 The Analysis and the Modelling Processes 3.1
3.1 Introduction 3.1 3.2 Scope of APMT

- E conomics Modelling and Output Comparisons 3.2 3.3 Modelling the NOx Stringency 3.4 3.4 Assumptions Employed 3.6



# 4 Results from APMT

- Economics with the Economics

- led A pproach 4.1
4.1 Introduction 4.1 4.2 APMT

- Economics Cost

- effectiveness Results 4.1 4.3 Demand Sensitive Forecasts with APMT

- Economics 4.5



# 5 Comparing APMT

- Economics and NOx

- CSM Results 5.1
5.1 Introduction 5.1 5.2 Comparing APMT

- Economics Operations

- led Results with the NOx

- CSM 5.1 5.3 Comparison of t he APMT

- Economics Results from Economics

- led with the Operations

- led Approach 5.9



# 6 Concluding Remarks 6.1

### CAEP/8

- IP/29 Appendix 

# Tables

Table 2.1 Datum Year Validation against 2 006 Global Supply and Demand 2.7 Table 2.2 Datum Year Validation/Calibration at 2006 Global Costs and Revenues 2.9 Table 2.3 Comparison of APMT

- Economics and FESG Passenger Forecasts 2.11 Table 3.2: Common Modelling Assumptions 3.8 Table 4.1 Total effects from 2006 to 2036 of NOx Stringency with APMT

- Economics 4.4 Table 4.2 Effects of Costs on Demand for Selec ted Metrics from 2009 to 2036 for Stringency Option 10

Implemented in 2012 4.6 Table 4.3 Relative Effect of Costs on Demand and Other Metrics from 2009 to 2036 for Stringency

Option 10 Implemented in 2012 4.6


# Figures

Figure 2.1 Modelling Blocks within the Aviation Environmental Tools Suite 2.2

Figure 2.2 Main processes in APMT

- Economics 2.4


# Appendices

Appendix A

– Revenue Loss Assumptions

### CAEP/8

- IP/29

Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis iii 

# Summary

This report contains an update on the status and capabilities of the A viation Portfolio Management Tool for Economics (APMT

- Economics) . It also documents the use of the tool in supporting the International Civil Aviation Organization ( ICAO ) Committee o n Aviation Environmental Protection (CAEP) NOx stringency analysis prepar ed for the CAEP/8 Meeting in February 20 1 0

. Through this study APMT

- Economics demonstrate s its application to a NOx stringency analysis. It also demonstrate s flexibility in employing assumptions that match those prepared by the ICAO CAEP Forecasting and E conomic Support Group (FESG)

. Further , when applied in economics

- led forecasting mode, APMT

- Economics produce s comprehensive and internally consistent forecasts of NOx stringency effects , including consistent demand responses to cost changes.

In the econ omics

- led mode APMT

- Economics demonstrate s sufficient fidelity to reliably and consistently model the demand and costs of interventions relative to a Baseline, that invoke only relatively small cost changes, down to the level of a 0.2% annual increase in o verall airline operating costs. The demand responsive and comprehensive cost forecasting features of APMT

- Economics proved true the FESG assumption that demand effects can be largely ignored for the main CAEP/8 stringency analysis.
The APMT

- Economics resu lts compare well to those of the NOx Cost Spreadsheet Model (NOx

- CSM) overall. D espite using different approaches to modelling the stringency measures and the overall scale of aviation industry costs, the results at a component level were shown to have a good degree of consistency. CAEP

- FESG can therefore have confidence that the results from the NOx

- CSM were independently confirmed for a sample of the stringency tests being undertaken for CAEP /8

.

### CAEP/8

- IP/029 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 1.1 

# 1 Introduction

1
. 1 Background

1

. 1

. 1 The Federal Aviation Administrat ion (FAA), in collaboration with the National Aeronautics

and Space Administration (NASA) and Transport Canada, is developing a comprehensive suite of software tools to facilitate thorough consideration of aviation's environmental effects. The main goal of this effort is to develop a critically needed ability to characterize and quantify the interdependencies among aviation

- related noise and emissions, impact s on health and welfare, and industry and consumer costs, under different policy, technology, operat ional, and market scenarios. The APMT

- Economics component of the tools suite models airline and aviation market responses to environmental policy options

. 6

1

. 1

. 2 In 2007, CAEP was tasked to conduct an analysis of stringency scenarios to reduce

emissions of nitr ogen oxides (NOx) relative to the ICAO CAEP/6 standard. Ten stringency options were analysed for two potential implementation years, 2012 and 2016, with potential changes ranging from between 5% and 20% compared to the current standards. The analysis was based on an assessment of the extent of the technology, environment and costs that would result from modifying, where appropriate, the existing in

- production engines to meet the range of scenarios. For the analysis, the CAEP Modelling and Database Task F orce (MODTF) assessed emissions reductions and potential environmental trade

- offs for the scenarios. The CAEP Forecasting and Economic Support Group (FESG) established the costs assumptions and assessed overall cost

- effectiveness of the stringencies. The principal tool used for calculating costs was the NOx Cost Spreadsheet Model (NOx

- CSM) developed by FESG ; APMT

- Economics was used to verify the results calculated with the NOx

- CSM. The final cost

- effectiveness results were presented as costs per tonne of NOx reduction for the ICAO Landing Take

- Off (LTO) cycle in a joint MODTF

FESG paper to CAEP/8 ( WP015)

.

1
. 2 NOx Stringency Analysis and Comparison Overview

1

. 2

. 1 For the CAEP/8 NOx stringency analysis, the FESG NOx

- CSM was the principal tool used

for calculating co sts; APMT

- Economics was used to verify the NOx

- CSM results. Specifically, APMT

- Economics was used to compute cost

- effectiveness for two of the higher stringency scenarios, w ith high range cost assumptions.

1

. 2

. 2 APMT

- Economics can be applied in two ways for a stringency analysis

.

 Using the forecast mix of aircraft operations by aircraft type for future years generated by other models

– in this case using aircraft operations by aircraft type supplied by MODTF after applying the FESG fleet and operations foreca sts. This is referred to as the Operations - led mode

.

6 APMT

- Economics was formerly named the APMT Partial Equilibrium Block (PEB)

### CAEP/8

- IP/29

Appendix
 Generating a forecast mix of aircraft operations by aircraft type for future years by

applying the FESG fleet and operations forecasts directly, and therefore the mix of new aircraft introduced to the f leet in forecast years is sensitive to the forecasts of aircraft operating costs. This is referred to as the Economic s - led mode.
1

. 2

. 3 Prior to analyzing all of the scenarios with the NOx

- CSM, t he cost outputs from APMT

Economics in both operations

- led and econ omics

- led modes were compared to the results from equivalent tests using the NOx

- CSM. APMT

- Economics and NOx

- CSM employ different approaches ; namely, the NOx

- CSM computes costs derived from the differences in aviation activity computed by MODTF , while the APMT

- Economics approach is to compute the total industry costs with and without the stringency options and then compare the total cost differences. Consequently, there are some differences in the computation and treatment of individual cost components; t hese effects, however, are understood and are reasonable given the differences in modelling approaches. Indeed, as the figure illustrates the results from the alternative modelling approaches show a consistent ranking and a consistent contribution to the overall costs is made from the various components

.

Figure 1: Comparison of Costs by Component between APMT
- Economics and NOx - CSM

1

. 2

. 4 The consistency of the overall forecasts is robust. Particularly when the range of total

cost outputs ($1Bn to $4Bn) resulti ng from the two modelling approaches are viewed in the context of the overall airline industry costs, which are projected to range between $420Bn in 2006 to approximately $1600Bn in 2036

.1 Introduction



### CAEP/8

- IP/29 Appendix A

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 1.3 1
. 3 Report S tructure

1

. 3

. 1 Chapter 2 presents a brief description of the APMT

- Economics model and notably

describes the calibration and validation statistics for the version of the model employed in this analysis.

1

. 3

. 2 Chapter 3 provides an overview of the modelling processes ; describing the inputs and

assumptions to the analysis, the co st and environmental outputs, the processing steps required and highlighting observations on the process and any difficulties that were encountered.

1

. 3

. 3 Chapter 4 presents the outputs from applying APMT

- Economics in Economics

- Led mode

and includes the effects of demand effects that might result from increases in costs if all of these costs are assumed to be passed to consumers.

1

. 3

. 4 The comparison of the results from the NOx

- CSM and APMT

- Economics with Operations

Led Approach are presented in Chapter 5 focusing on t he comparative environmental outputs, overall and detailed costs and finally illustrating the similarities in the overall cost

- effectiveness metrics. A comparison is made between the outputs from APMT

Economics in operation s - led and economics

- led mode is presented at the end of this Chapter.

1

. 3

. 5 Chapter 6 presents conclusions.

### CAEP/8

- IP/29

Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 2.1 

# 2 The APMT

- Economics Model

2
. 1 Introduction

2

. 1

. 1 The following section s describe the Aviation Environmental Tools Suite , APMT

- Economics

and a validation of the Datum and Baseline

.

2
. 2 The Aviation En vironmental Tools Suite

2

. 2

. 1 The Federal Aviation Administration (FAA), in collaboration with the National Aeronautics

and Space Administration (NASA) and Transport Canada, is developing a comprehensive suite of software tools to facilitate thorough considerati on of aviation's environmental effects. The main goal of this effort is to develop a critically needed ability to characterize and quantify the interdependencies among aviation

- related noise and emissions, impact s on health and welfare, and industry and co nsumer costs, under different policy, technology, operational, and market scenarios

.
2

. 2

. 2 Figure 2

. 1 i s a schematic of the Aviation Environmental Tools Suite 7 . The main functional

components of the Tools Suite are as follows:

 Environmental Design Space ( EDS) : estimates source noise, exhaust emissions, and performance for potential future and existi ng aircraft designs ;

 Aviation Environmental Design Tool ( AEDT) : models aircraft performance in four

- dimensional space and time to produce fuel burn, emissions and noise ;

 Aviation environmental Portfolio Management Tool for Economics (APMT
Economics) : mode ls airline and aviation market responses to environmental policy options;

 Aviation environmental Portfolio Management Tool for Impact s 8 (APMT Impact s) : estimates the environmental impact s of aircraft operations through changes in health and welfare endpoin ts for climate, air quality and noise; and

 Cost Benefit with the Aviation environmental Portfolio Management Tool (APMT - Cost Benefit) : combines Tools Suite output to perform cost benefit analyses

.

7 Additional information is available on the FAA website at http://www.faa .gov/about/office_org/headquarters_offices/aep/models/

. 8 Additional information on APMT

- Impacts is available at http:// www.apmt.aero

.

### CAEP/8

- IP/29 Appendix

Figure 2
. 1 Modelling Blocks within the Aviation Environmental Tools Suite

2
. 3 APMT - Economics

2

. 3

. 1 APMT

- Economics is designed to model aviation market responses to a range of aviation

scenarios and environmental policy measures that directly affect the aviation industry. The model is centred on the decisions that would be made by airlines in response to future market conditions where these decis ions lead to changes in aviation demand, supply and environmental factors. It operates at a relatively disaggregate spatial level of detail, but includes a detailed representation of individual aircraft types, aircraft ages and fleets.

2

. 3

. 2 From an established Datum (Base) year database of air transport demand, supply and

costs, APMT

- Economics projects the future aviation:

 operating costs;

 demand projections and capacity requirements;

 fleet development projections; and

 fleet assignment to an aggregate set of op erations.
2

. 3

. 3 APMT

- Economics produces a set of internally consistent forecasts of the Baseline

(projection without scenario measures) and Policy (projection with scenario measures) situations, allowing for a wide range of aviation industry and consumer respons es to the potential introduction of environmental policy measures. A principal aim of the model is



# Aviation Environmental Tools Suite

Policy and Scenarios

APMT Impacts Aviation Environmental Design Tool Environmental Design Space

What are the airline supply & consumer demand effects? What are the aircraft design characteristics?
What are the noise, emissions and fuel burn outputs? What are the

physical & socio

economic environmental impacts ?

APMT Aviation E

nvironmental Portfolio Management 

### Tool What are the monetized benefits of decision alternatives? 

## APMT Economics2 The APMT - Economics Model



### CAEP/8

- IP/29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 2.3

to contribute to the APMT assessment of the interdependencies between aviation

- related noise and emissions effects and associated environmental costs, and t o provide a comprehensive analysis of aviation environmental and economic impact s
.
2

. 3

. 4 A number of different types of main policy responses are distinguished, specifically:

 supply side responses : airlines changing their fleet mix and/or characteristics of airc raft in their fleet and measures considered as evasive responses such as responses of airlines or airline clients to avoid payment of a charge or taxation;

 demand side responses : changes in air transport demand through fare increases following from cost in creases; and

 operational responses : airlines changing their flight operation to off

- se t policy induced cost increases
2

. 3

. 5 The main objective of APMT

- Economics is to establish a comprehensive projection of air

transport demand and supply, while taking into acco unt:

 the need for additional future aircraft capacity, given the projected air transport demand and the retirement of aircraft from the existing fleet;

 a scenario and policy sensitive selection of fleet replacement and flight operations; and

 the cost

- driv en relationships between demand and supply.
2

. 3

. 6 The matching of demand and supply within APMT

- Economics is based on a so

- called

partial equilibrium approach. In this approach, the analysis of changes is limited to the market for air transport only, without d irectly taking into consideration how changes in the air transport market might imply changes in other markets. In the context of APMT, this means that a new equilibrium is brought about in the market for air travel after a change in policy, and the effec t of that change on the travelling public and air carriers. Within the APMT

- Economics functionality, changes in costs to air carriers are translated into changes in air fares, leading to an adjustment of air transport demand. Where appropriate , exogenous effects that are consistent with the scenario specification can also be input to the model; for example, some research has shown that higher fuel prices could lead to lower GDP and while APMT

- Economics would not compute the GDP effects directly, these cou ld be input to the model as part of the scenario specification.

2

. 3

. 7 Main functional requirements of APMT

- Economics include:

 the handling of different Baseline projections of relevant factors affecting air transport demand (passengers and freight) and air trans port supply (fleet development and flight operations);

 the assessment of alternative aviation scenarios and the effect of a variety of different air transport related environmental policy measures;

### CAEP/8

- IP/29 Appendix
 the provision of a coherent and detailed description of pr esent and future air transport activities (flight operations) on global, regional, national and local scale; and

 the provision of a detailed set of inputs for the computation of the economic effects on relevant actors in terms of costs, revenues and other direct economic effects.
2

. 3

. 8 Figure 2

. 2 is a diagram of the main steps in the APMT

- Economics tool.

Figure 2
. 2 Main processes in APMT - Economics

2

. 3

. 9 Given the present air transport demand and operations for a set reference or Datum year,

an aggregate future air transport demand projection (in terms of passengers and freight by country pair) is provided from external so urces. Future fleet capacity is adjusted to match demand requirements, taking into account the retirement of aircraft from the existing fleet. Newly purchased aircraft to replace and expand existing fleet capacity are drawn from a set of candidate aircra ft designs based on both existing and new technology.

2

. 3

. 10 The actual selection of newly purchased aircraft depends on the set of eligible candidate

designs and a comparison of unit aircraft operating costs (costs per seat). In this selection process, the eff ects of policies (such as operating restrictions or charges that increase certain cost components) are taken into account. Changes in aircraft operating costs due to the effects of policies may lead to a change in fares, subsequently leading to a change i n demand. Based on a translation of changes in unit costs to changes in fares,2 The APMT - Economics Model



### CAEP/8

- IP/29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 2.5

the partial equilibrium between air transport demand and supply is approximated within the APMT

- Economics module.

2

. 3

. 11 Following the achievement of the partial equilibrium, the (ad justed) information on

demand projection, aircraft retirements and aircraft replacements for the forecast situation is provided to AEDT. In contrast with the APMT

- Economics module, which operates on a country

- pair 9 level of spatial aggregation, AEDT works on the level of individual airport pairs with fully specified aircraft flight characteristics. Given the specification of the detailed flight operations in the present situation (based on the information in the Current Air Transport Database), the inform ation provided by the APMT

- Economics module is used to make the detailed future flight operations projection as required by the AEDT. The detailed forecasts are generated by applying a series of distributions to the APMT

- Economics aggregate forecasts. Th ese distributions apply splitting factors for country pair to city pair, engine family to UID and carrier region to carrier code.

2

. 3

. 12 Within the APMT

- Economics module, detailed computations of aircraft operating costs

take place for all relevant aircraft types , as well as computations of air fares and revenues. The information on costs and revenues generated in the APMT

- Economics module provides the basis for the assessment of actor specific direct economic effects . In addition to the air carriers, relevant a ctors might include: manufacturers, airports, the air traffic management operators, and the repair, overhaul and maintenance sector, as well as consumers and governments. Direct economic effects may include: (changes in) operating costs, revenues and resu lts, employment effects, loss in fleet value, income from charges and consumer surplus.

2

. 3

. 13 Further details of the functionality of APMT

- Economics are contained in the Algorithm

Design Document (ADD).

2
. 4 Reported Validation APMT - Economics Datum for NOx Stringenc y

2

. 4

. 1 This section reports the outturn validation of the Datum and Baseline for the version of

APMT

- Economics used for the CAEP/8 NOx Stringency analysis. It is important that the model is validate d well against available data in order that it may be consider ed to be a reliable basis from which to analyse the effect of introducing aviation policies. For the NOx stringency analysis, the validation of the volume of traffic and fleet is of greater importance than the underlying cost validation. The reason for t his is that the costs of implementing the stringency were provided as additional costs to the industry per engine or engine family. So the industry costs of the stringency are derived by applying the additional costs to the number of engines affected so t he absolute level of cost validation is less important.

9 Each country

- pair flow is disaggregated into groups of routes with common stage lengths and the combination of country

- pairs and stage lengths are referred to as ‘schedules’.

### CAEP/8

- IP/29 Appendix 2

. 4

. 2 The APMT

- Economics Datum was calibrated using a dataset that contains the aircraft

operations and traffic that is consistent with the MODTF work for CAEP /8 Goals analysis. This dataset was used for t he Datum calibration of APMT

- Economics because it is a more complete dataset , which includes aircraft of all sizes and is most appropriately calibrated to match the FESG fleet and ICAO cost information. However, a different dataset and assumptions were us ed for NOx Stringency analysis and these underlying analysis assumptions have some effect on the completeness and the overall level of validation.

2

. 4

. 3 APMT

- Economics w as not re

- calibrated specifically for the NOx Stringency analysis and

therefore the level of validation obtained is not as good as that obtained with the full dataset. In particular, the APMT

- Economics model application for NOx stringency employs the previously calibrated metrics, such as aircraft annual utilisation . It also shares commonality o f underlying assumptions with AEDT/the NOx

- CSM including the following :

 assumes flights follow great circle routes (i

. e ., not actual distances flown);

 excludes underlying higher growth between airport pairs with longer stage length s ;

 exclude s aircraft with fewer than 20 seats Russian

- built aircraft
2

. 4

. 4 The MODTF NOx Stringency analysis use s great circle distance for future aircraft

operations rather then more accurate representations of aircraft routings based on radar track informati on. This approach was empl oyed as a simplification for the emissions modelling and has no effect on the ranking of alternatives. Great circle distances were used in the APMT

- Economics analysis. The use of great circle distances lead to greater variation from observed data than in previously reported Datum validations 10 . Metrics such as total distance and number of aircraft (as fewer aircraft will be required as the distance flown is shorter) and cost data that are based on aircraft kilometres or block hours flown will be affected by this approach.

2

. 4

. 5 The FESG forecasts include an inherent increase in average distance by distance band

through time, which is not captured in the MODTF data that we re derived by applying factors by stage length (and route group and seat class) to the Datum representation. I n order to mirror the NOx

- CSM as closely as possible , n o growth in average distance through time was modelled in APMT

- Economics

. This lead to further deviation of operating costs and revenues in the Baseline from the outturns that would be obtained using all aspects of the FESG forecast s
.
2

. 4

. 6 The 2006 Datum was developed from a six week sample of operations from the MODTF

consensus dataset (AEDT) , consistent with the base data used to generate the forecasts used in the NOx

- CSM analysis. The data was processed to remove freighter operations and passenger aircraft with fewer than 20 seats. The data was then matched to fleet data for 2006 from Campbell Hill and FESG to provide the characteristics of the fleet undertaking the operations. This data provided the starting point from which the FESG demand and supply forecasts were applied to establish the Baseline.

10 Analysis of Aviation & Fuel Price Scenarios for U.S. Participation in the ICAO Group on International Aviation and Climate Ch ange ; MVA Consultancy, May 20092 The APMT - Economics Model



### CAEP/8

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APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 2.7

Supply and Demand

2

. 4

. 7 The validation of the Datum was undertaken against available data from FESG, ICAO and

AEDT. Table 2

. 1 contains a summary of the supply and demand validation at a global level.

Table 2
. 1 Datum Year Validation a gainst 2006 Global Supply and Demand

Metric APMT Economics Observed Δ % Δ Observed Data Source Total Aircraft 1 578 3 173 10 11

- 1527

- 9 % FESG

Operations (m) 2 3.3 2 5.6

- 2.3

- 9 % AEDT, but including aircraft < 20 seats Distance (bn km) 3 2.6 34 .4

- 1.9

- 5 % ICAO Passenger km (bn km) 4 195.8 4222 .0

- 26.3

- 1% ICAO Passenger load factor (%) 75 76

- 1

- 1 % FESG

Fuel use (bn kg) 177.0 175.5 1.5 1 % AEDT, but including aircraft < 20 seats

2

. 4

. 8 As noted above, t he average aircraft utilisation rates (aircraft hours per annum) were

calibrated so that the APMT

- Economics model for an equivalent of the CAEP/8 Goals analysis matches the number of aircraft in the FESG fleet , adjusted to remove Russian

built aircraft since these are excluded from the MODTF analysis . The calibration was undertaken on a seat class basis, so each seat class replicates the corresponding FE SG value. The seat class aircraft utilisations have then been applied to the NOx problem version of APMT

- Economics. As noted earlier, t he calibration was undertaken for the

‘ Goals ’ version of the model as it has a more realistic representation of aircraf t movements as actual flight distances are included. The reduced distances flown in the NOx analysis version of APMT

- Economics means that less aircraft are required to undertake the operations , since the calibrated individual aircraft utilisations have no t been adjusted for the specific NOx stringency analysis

.
2

. 4

. 9 The number of operations undertaken was validated against the number of operations in

the 2006 AEDT operations, and used as the basis for the NOx

- CSM modelling. Table 2

. 1 shows that the APMT

- Economics operations are within 9% of the AEDT operations. The 9% difference is due to the inclusion of aircraft with fewer than 20 seats in the AEDT but not in APMT

- Economics. There are 23.3m (0% different) operation s in AEDT by aircraft with greater than 20 seats. Data from ICAO suggests that there were approximately 27 million movements per annum in 2006, which would include operations of aircraft with fewer than 20 seats.

11 Minus Russian

- built aircraft and those <20 seats.

### CAEP/8

- IP/29 Appendix 2

. 4

. 10 The number of aircraft kilometres (34 bill ion km) operated in 2006 according to ICAO is

slightly higher than in APMT

- Economics due to the additional operations by small aircraft included in the ICAO data. The passenger demand estimates in APMT

- Economics were taken directly from the FESG reported data. APMT

- Economics has slightly lower passenger kilometres in the Datum than the ICAO equivalent.

2

. 4

. 11 The fuel and NOx per km and per cycle for airframe/engine combinations was derived

from the MODTF ( AEDT ) dataset used for the NOx stringency analysis. The global fuel consumption and NOx emissions are within 1% of the AEDT equivalents.

Costs and Revenues

2

. 4

. 12 ICAO also produces cost and revenue data that was used for validation and calibration of

the Datum representation in APMT

- Economics. A summary of the vali dation is shown in Table 2.2

. This validation is affected particularly by the assumption for NOx stringency to work with great circle distances rather than actual flights and the result of this is that the model is expected to under

- represent the costs an d revenues associated with air transport operation.

2

. 4

. 13 Validating against costs and revenues is not as straightforward as validating against

supply and demand data, given different reporting of the data by aircraft type. Average operating costs for individua l aircraft types in APMT

- Economics are based on Form 41, reported regional variations in labour costs, aircraft prices from AVMARK, fuel use from AEDT, and the average Quarter 1 fuel price for 2006. Fares were calibrated so that the global profit margin r eported by ICAO for 2006 was achieved. All cost and revenue metrics were validated against ICAO data.2 The APMT - Economics Model



### CAEP/8

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APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 2.9

Table 2
. 2 Datum Year Validation/Calibration at 2006 Global Costs and Revenues

Metric APMT Economics Obs erved Δ % Δ

Crew costs ($bn) 32 .2 31.9 0 .3 1 % Maintenance costs ($bn) 3 3. 9 4 1.7

- 7.9

- 19 % Depreciation & Finance ($bn) 5 7.0 6 1.6

- 4.6

- 7 % Landing costs ($bn) 14.9 1 5.5

- 0.6

- 4 % Route costs ($bn) 9 .0 9.8

- 0.8

- 9% Total fuel cost ($bn) 10 5.6 10 5.7

- 0.1 0 % Operating expenses ($bn) 384.2 439 .5

- 55.3

- 13 % Unit costs (Op exp/ATK) U.S. cents 66.5 71.0 4.5

- 6 % Operating revenues ( $bn) 396.8 452 .5

- 55.7

- 12 % Yields (Op rev/RTK) U.S. cents 93.5 96.0

- 2.5

- 3 %

2

. 4

. 14 The results that airlines report to ICAO are open to considerable interpretation about the

data items that go into each category and therefore we have allowed a higher deviati on from the validation data. Given the lower number of operations and aircraft in APMT

Economics than in the ICAO reported data, the data in Table 2.2 shows that APMT

Economics is within 10% on most items which is considered to be an acceptable level of

v alidation, given a level of uncertainty in the reported aggregate data.

2

. 4

. 15 The validation against crew costs is very close as the overall unit labour costs were

adjusted downward on a regional basis to meet the overall target.

2

. 4

. 16 The maintenance costs in APMT

- Ec onomics for NOx Stringency are somewhat lower

th an the reported level from ICAO yet the global maintenance costs in the Goals calibration version are around 9% lower than ICAO data. The lower number of aircraft in the fleet in the NOx stringency version h as a large effect on the reported maintenance cost validation which also affects the reported overall op erating cost and revenue validation for the NOx stringency version of the model

. A future task could be to improve the maintenance cost information use d in APMT

- Economics.

2

. 4

. 17 Capital, landing and route costs in APMT

- Economics are close to, but slightly less than

the ICAO equivalents and these costs are all low due to the assumptions employed in the NOx stringency version of the model . Capital costs in APMT

- Economics include all ownership and leased costs since it is not possible to separate these costs, and they must all be included for the fleet selection algorithm in APMT

- Economics.

2

. 4

. 18 The APMT

- Economics Datum uses fuel consumption data from AEDT and an aver age fuel

price of 60 U.S. cents/kg, with regional variation from ICAO data. The resulting overall fuel cost in APMT

- Economics is very close to that published by ICAO.

### CAEP/8

- IP/29 Appendix 2

. 4

. 19 Overall Operating Expenses and Revenues in APMT

- Economics are just over 10% less

than t he data reported by ICAO, however the yields and unit costs in APMT

- Economics are only 3

- 6% lower than the ICAO data.

2

. 4

. 20 At a global level, the cost and revenue results of APMT

- Economics appear to validate

reasonably well against the ICAO data , despite the re moval of Russian aircraft, aircraft with fewer than 20 seats and not considering actual flight distances.

. As noted above, th e absolute level of cost validation is n o t c ritical to the NOx stringency analysis as the Intervention models additional costs to the industry.

2
. 5 Baseline Calibration

2

. 5

. 1 A 30 year Baseline was modelled using the FESG demand and capacity forecasts and

applying the FESG retirement curves to the fleet. For the purposes of the NOx stringency analysis a n underlying growth in average distance through time was not included in the APMT

- Economics representation to maintain similarity to the AEDT/ NOx

- CSM modelling. The average utilisations by seat class were modified through time so that the fleet by seat class matches the FESG fleet by seat clas s. As with the Datum utilisations, the utilisation calibration is based on the Goals representation. There are no improvements in the underlying aircraft technology

– it is ‘frozen’ at the technology offered in the Datum. The NOx stringency anal ysis ass umptions (see Chapter 3 ) dictate that the fuel price increases from an average 60 cents/kg in 2006 to 97 cents/kg in 2016, and remains constant at this rate until the end of the forecast period.

2

. 5

. 2 The key trends in demand and supply in the NOx Problem Baseli ne are illustrated in

Figure 2.3:

 Passenger demand grows faster than seats

– implying higher load factors (consistent with FESG);

 Seats grow faster than flights

- implying increases in aircraft size;

 Aircraft kilometres grow faster than flights

– implying an increase in aircraft trip length (and there is also an increase in passenger and seat km); and

 Aircraft km grow faster than Fleet

– demonstrating higher aircraft utilisation.
2

. 5

. 3 The underlying passenger data from APMT

- Economics and the FESG forecast is als o

provided, and shows that the 10 year period growths in the key elements is within 2 percentage points for all metrics apart from the fleet. Note that the APMT

- Economics fleet was calibrated to the FESG fleet, adjusted to remove Russian aircraft2 The APMT - Economics Model



### CAEP/8

- IP/29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 2.11

Figure 2
. 3 Forecast Growth in Demand and Operational Parameters

Table 2
. 3 Comparison of APMT
- Economics and FESG Passenger Forecasts

APMT Economics 2006 2016 2 026 2036 Growth 2006 - 2016 Growth

2016 - 2026 Growth

2026 - 2036
ASK (bn) 5585 8880 13719 21281 59% 54% 55% RPK (bn) 4196 6927 11073 17152 65% 60% 55%
Fleet in Service 15754 22265 29957 41680 41 % 35 % 39% Flights (m) 22.2 31.9 44.7 63.1 43% 40% 41%
Total K m (m) 30593 45784 65381 93170 50% 43% 43%

FESG Data 2006 2016 2026 2036 2006 - 2016 2016 - 2026 2026 - 2036

ASK ( bn) 5666 8989 13837 21341 59% 54% 54% RPK (bn) 4269 7024 11196 17247 65% 59% 54%
Fleet in Service 18773 25906 34787 47503 38% 3 4% 37% Flights (m) 27.1 38.7 54.1 75.7 43% 40% 40%

### CAEP/8

- IP/29 Appendix Total Km (m) 32550 48410 68634 96720 49% 42% 41%

2

. 5

. 4 Figure 2

. 4 illustrates the growth in costs in the Baseline. The growth in direct operating

costs is accelerated in the initi al years of the forecast, driven by the assumed increase in fuel price during this period.

Figure 2
. 4 Growth in C osts in the NOx Problem Baseline

2

. 5

. 5 These effects on demand and supply lead to the following ch anges in costs :

 the outturn unit costs are forecast to reduce , despite the cost components not changing through time and this is due to changes in the forecast mix of aircraft types and the natural retirement and turnover of the fleet;

 Fuel/RTK decreases b y about 17% by 2036, as old, less fuel efficient are retired and replaced by more efficient aircraft. I ncreases in load factors and changes in aircraft size type also lead to fuel use efficiencies;

 Direct operating costs increase initially, driven by the assumed increase in fuel price to 2016, and then reduce steadily over time, due to changes in aircraft sizes and associated crew to passenger ratio efficiencies; and2 The APMT - Economics Model



### CAEP/8

- IP/29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 2.13

 Total unit costs fall slightly slower since there are capital costs of new aircraft to
con sider and these do not fall so quickly in unit terms

.

Figure 2
. 5 Baseline G rowth in K ey O perations M etrics

### CAEP/8

- IP/29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 3.1 

# 3 The Analysis and the Modelling Processes

3
. 1 Introduction

3

. 1

. 1 Ten NOx stringency cases are being analysed as part of the CAEP/8 work programme

(Table 3 .1) with alternative potential im plementation dates of 31 December 2012 and 2016

. Figure 3
. 1 NOx Stringency Cases

NO x Str ingency Case Small Engine

(26.7kN / 89kN) Large Engine (Slope>30OPR)

1

- 5% /

- 5%

- 5% 2
2

- 10% /

- 10%

- 10% 2.2
3

- 1 0% /

- 10%

- 10% 2
4

- 5% /

- 15%

- 15% 2.2
5

- 15% /

- 15%

- 15% 2.2
6

- 5% /

- 15%

- 15% 2
7

- 15% /

- 15%

- 15% 2
8

- 10% /

- 20%

- 20% 2.2
9

- 15% /

- 20%

- 20% 2.2
10

- 20% /

- 20%

- 20% 2.2

3

. 1

. 2 The CAEP analysis method focuses on the effects on engine and aircraft typ es that are

currently or scheduled to be in production. Each of the currently ‘available’ engine types is assessed for compliance against each of the potential stringencies and each passes or fails a compliance test for their NOx emissions. CAEP Working Group 3 (WG3) has then provided an assessment of the modifications that would be needed to make these current engine types compliant with each stringency level and this assessment is based on the margin by which the existing engine would fail the stringenc y.

3

. 1

. 3 The modifications were grouped by engine family type and categorised in ascending level

of requirement for technological improvement and cost into three levels :

 MS1

– minor changes to engine requiring no substantive material change to engine combustor h ardware or operating costs.

 MS2

– scaling up of best

- proven technology to ensure compliance of the engine with the stringency.

### CAEP/8

- IP/29

Appendix
 MS3

- applying new combustor technology from research programmes.
3

. 1

. 4 A common set of cost assumptions was agreed by FESG with the su pport of other CAEP

Working Groups. The classification of the aircraft engines into these modification categories to ensure compliance at each stringency level is key to the analysis and this is reflected in the definition of the cost and operational mode lling assumptions.

3
. 2 Scope of APMT
- Economics Modelling and Output Comparison s

3

. 2

. 1 As previously described, the NOx Cost M odel is being used by CAEP FESG to prepare the

main cost and cost

- effectiveness analysis of NOx Stringency for the CAEP/8 work programme. In this context , APMT

- Economics is being used as an alternative tool to cross check these findings for a sample of the NOx Stringency test cases. For the purposes of demonstrating the capability of APMT

- Economics and comparing the results from the two model s , APMT

- Economics was used for two of the more stringent cases only: case 7 and case 10 (highlighted in Table 2.1). These two stringency levels were chosen for comparison because they were expected to give rise to the largest cost changes of all of the te sts since these required some aircraft engines to undergo MS3 modifications to comply with the stringencies. The comparisons are made for both the 2012 and 2016 implementation scenarios.

3

. 2

. 2 As described below, the two tools use different computational method s to derive the costs

of the stringency measures, but the analysis is based on the same detailed projections of aircraft operations used by MODTF to compute the environmental effects

.
3

. 2

. 3 The focus of the overall CAEP analysis is to present the cost

- effectiven ess of the

stringency measures in reducing NOx emissions associated with the LTO cycle and therefore this is the key comparison that is made between the two sets of modelling results. In addition, it is appropriate to show the comparison of the overall co sts and, where possible, the breakdown of the costs by component.

3

. 2

. 4 The categorisation and components of costs considered in the analysis are summarised as

follows:

Non - recurring C osts

The ‘one

- time’ costs for manufacturers associated with developing the ne w technology engine designs and undertaking the aircraft certification process

 Research and development costs for new engines

– a high and low range of non

recurring costs that could be incurred by manufacturers is presented, noting that it is assumed that these costs would not be passed to airlines (or consumers) through higher aircraft purchase prices. For the purposes of the stringency test analysis, the n on - recurring costs are assumed to be incurred by the manufacture r s equally in each of four years pr ior to the implementation of the stringency (so for the 31 December 2016 implementation the costs are assumed to be spread across 2013 to 2016)3 The Analysis and the Modelling Processes


### CAEP/8

- IP/29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 3.3

Recurring Costs
Ongoing additional costs would be incurred in production of future new purchases of compliant e ngines which for APMT

- Economics are assumed to be reflected in their purchase price . Furthermore some additional operating costs would be incurred by airlines in operating aircraft with the compliant engine types.

 Incremental Engine Production Costs

– the additional costs associated with the production of new engines through more expensive manufacturing processes.

 Annual Maintenance Cost Increase

– there are some additional maintenance costs associated with engines that are compliant with the stringency.

 A nnual Fuel Cost Increase

– there is a potential fuel use penalty associated with ensuring the engines are compliant with the NOx stringency of between 0% (no penalty) and 0.5% for the MS3 modified engines. For the purposes of the comparison with the NOx

- C SM , the maximum 0.5% penalty is assumed.

 Annual Loss in Revenue (MTOW limited flights)

– given the potential for the fuel use penalty there is the likelihood that for longer flights , the MTOW will be limited and in some operational instances this would res ult in the need to limit payload and hence a potential loss in revenue.

 Additional Spare Engines as a measure of the potential requirement for aircraft to hold two sets of replacement engines for their fleet where they hold both stringency compliant and no n - compliant engines together

. 3

. 2

. 5 There is a further cost component associated with the Loss in V alue for existing fleets

where the aircraft are fitted with engines that become non

- compliant (and potentially less tradable between airlines) following the introd uction of the stringency. The APMT

Economics analysis and comparison to the NOx

- CSM presented without this cost component

.
3

. 2

. 6 In the full NOx

- CSM analysis a range of discount rates of 0%, 3%, 7% and 9% are

applied to the costs and the LTO NOx emissions to es tablish the present value of the cost

effectiveness under a number of discounting scenarios. The analysis with the NOx

- CSM has illustrated that the discounting does not affect the rank ordering of the stringency effects

. As a simplification the compariso n work with APMT

- Economics was undertaken without discounting of the costs and benefits

.
3

. 2

. 7 The full CAEP analysis with the NOx

- CSM splits the effects between those for the small

and large engines. For the purposes of the comparison between the NOx

- CSM and A PMT

Economics , the combined effect alone was presented since in cost terms this is dominated by the potential compliance costs associated with the large engines for the stringency options analysed with APMT

- Economics. However, it is noted that in cost

- eff ectiveness

### CAEP/8

- IP/29

Appendix terms the cost of reducing LTO NOx through stringency on the small engines is

significantly higher than that for the large engines.

3
. 3 Modelling the NOx Stringency
Steps Required for the NOx Stringency Analysis with APMT
- Economics

3

. 3

. 1 Following the cal ibration of the APMT

- Economics Datum and Baseline, the steps involved

in the NOx Stringency Analysis with APMT

- Economics in either operations or economics led modes require the:

 Allocation of named aircraft engine types to compliance categories MS1 to MS3 (and non

- compliance or non

- modified) for each of the stringencies.

 Creation of model inputs to represent the new compliant aircraft types as copies of the existing replacement fleet with appropriate modifications to reflect the cost and operational changes necessary to make the existing aircraft compliant, at the appropriate enforcement year. Effectively an input database is required for each stringency test because the modifications required to define each of the replacement aircraft differ between the st ringencies (for example, an aircraft may need an MS2 modification under one stringency scenario and an MS3 modification under a scenario with a more stringent certification standard).
3

. 3

. 2 In Operations - Led mode the steps are then to:

 Run the stringency scenari o for APMT

- Economics in Economics

- Led mode to establish the fleet age profile.

 For each stringency scenario and forecast year (2016, 2026, 2036), a separate APMT

- Economics single year database is created for the Baseline and Intervention ( i.e. with stringe ncy applied) by importing the forecast of aircraft operations provided by MODTF and appl y ing the fleet age profile determined from the Economics

- led run. This essentially requires a ‘match’ between the aircraft operations and the APMT

- Economics representa tion of fleet.

 Once the aircraft operations are input to the database, the APMT

- Economics Datum cost calculations are performed to generate the overall operating costs by aircraft type for either the Baseline and Intervention situations.

 The complete outp ut databases are then interrogated to provide the necessary data for a standard APMT

- Economics output scorecard spreadsheet to facilitate the interpolation of data for intervening years.
3

. 3

. 3 In Economics - led model the processing is more straightforward:

 The FE SG forecasts are input to the model by seat class, stage length and route

group
.3 The Analysis and the Modelling Processes


### CAEP/8

- IP/29 Appendix

APMT

- Economics and Its Ap plication in the CAEP/8 NOx Stringency Analysis 3.5

 The Baseline is executed from each of the input databases and the output results are exported from the database to the standard APMT

- Economics scorecard 12

.
 Intervention tests are executed for each of the stringency test databases for each of the potential implementation years. (A single run of APMT

- Economics in Economics

- led mode forecasts on a year

- by

- year basis and therefore no post processing interpolation to obtain the int ervening year outputs is required.)

 The output databases are interrogated to provide additional analysis specific computations of number of spare engines, lost revenue and, where appropriate, the loss in aircraft value. Summary of Modelling Differences

3

. 3

. 4 The re are some differences in the modelling approaches between the computations in the

NOx

- CSM and operating APMT

- Economics in operations - led mode which will contribute to different, though explainable, results being output. These are summarised as

 Recurring Manufacturing Costs: APMT

- Economics treats these costs as an increase to the new aircraft purchase price and consequently an increase in the annual capital (finance and depreciation) costs in any one forecast year. The additional purchase costs that refl ect the manufacturing costs are therefore spread across the whole life operation of the aircraft. The NOx

- CSM treats these additional costs as occurring wholly in the year in which a modified aircraft is purchased. Consequently, the recurring manufacturi ng costs computed from the NOx

- CSM should be expected to be slightly lower than those computed from APMT

Economics.

 Maintenance Costs: The APMT

- Economics cost functions include an increasing penalty for maintenance costs as aircraft age, but the NOx

- CSM do es not include information about fleet ages so constant maintenance costs are assumed. Consequently the maintenance costs would be slightly higher from the APMT

Economics calculation compared to the NOx

- CSM

.
 Fuel Costs: The APMT

- Economics interpolation of the fuel costs takes into account the assumed growth in fuel costs based on a change in oil price from $65 per barrel in 2006 to $100 per barrel in 2016. The NOx

- CSM applies a constant fuel price for all forecast years. The consequence of these slightly different assumptions is that for the 2012 implementation there is a marginally lower average cost of fuel in the APMT

- Economics outputs.
3

. 3

. 5 The balance of the contribution of these slightly different modelling treatments will effect

on the overall differenc es in output costs.

12 In this analysis the Baseline results are identical for these two stringency levels as the effect of the different aircraft definitions is only invoked in the model’s Intervention responsive mode.

### CAEP/8

- IP/29

Appendix 3

. 3

. 6 There are also some differences in the modelling approaches between APMT

- Economics in

operations - led and economics - led modes which will contribute to different, but consistent, results being output, as follows:

 Retirement : In economics

- led mode, APMT

- Economics applies the FESG aircraft retirement curves on a year

- by

- year basis compared to the one

- time application and effect on the Datum aircraft fleet that is applied by MODTF. Consequently a greater number of new replacement aircraft wo uld be needed in the APMT

Economics forecasts and this would be expected to lead to higher costs of the stringency measure compared to the outputs from the operations

- led mode.

 Fleet Market Share: The MODTF forecasts include a fixed and equal market share across all replacement aircraft types within an aircraft seat category. APMT

Economics computes the market shares using a model that is sensitive to the cost per seat and consequently forecasts a lower market share. Further NOx Stringency Analysis Capabil ity of APMT
- Economics

3

. 3

. 7 The APMT

- Economics model (in economics

- led mode) has a demand responsive

functionality which, by FESG defined assumption, is switched

- off for the purposes of the main analysis, since the stringency measures are not expected to generat e large costs overall. However, to confirm the validity of the fixed

- demand assumption the APMT

Economics, demand sensitive forecasting procedures were invoked for a series of sensitivity tests for one of the higher costs NOx stringency specifications.

An alysis Observations

3

. 3

. 8 Few difficulties were encountered in preparing the comparison of the NOx

- CSM and APMT

Economics in operations

- led mode.

3

. 3

. 9 However, in making the comparison between APMT

- Economics in operations

- led and

economics led mode, it was discovere d that the MODTF processing had only partially applied the FESG forecasts such that:

 Aircraft in new seat class 10 (over 600 seats) were omitted.

 There are no operations in the MODTF forecasts for some seat classes that were not represented in the 2006 Co mmon Operations Database (COD), where these had been introduced through the FESG forecasting process.
3

. 3

. 10 These omissions do have some bearing on the overall forecasts and the magnitude is

described in Chapter 5. However, there is no effect or bias anticipate d on the ranking of results.

3
. 4 Assumptions Employed

3

. 4

. 1 Common assumptions are employed in the analysis undertaken by the APMT

- Economics

and the NOx

- CSM , although the differences in modelling structures requires that in some cases these assumptions are input to the process in different ways.3 The Analysis and the Modelling Processes


### CAEP/8

- IP/29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 3.7 3

. 4

. 2 Table 3 .2 presents a summary of the common modelling assumptions. There are some

detailed underlying analysis assumptions that underpin the derivation of the parameters for the revenue loss calculation and the recurring manu fac t u r ing costs; these are described in Appendix A.

### CAEP/8

- IP/29

Appendix

3 The Analysis and the Modelling Processes

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 3.8 Table 3
. 1 : Common Modelling Assumptions

Modelling Item CAEP/8 Assumptions Comments
FESG Traffic and Fleet forecasts Central forecasts on the basis of unc onstrained demand Forecasts assume that airport and airspace capacity is available to meet projected demand growth

. Underlying trend in NOx technology No change over time Simplifying assumption in view of difficulty in making projections of trend in NOx e missions and not essential for assessment of NOx stringency

–

frozen technology assumption will not affect ranking of options Future tightening of NOx stringency No further stringency beyond options under consideration Isolate assessment of costs and NOx savings to stringency options being analysed Product compliance Market driven production cut

- off that takes effect on implementation

date (2013 or 2017) Consistent with evidence following past stringency standards, but sensitivity tests to be applied to r eflect alternative outcomes, in particular for 2013 changes requiring MS3
Time

- in

– mode and thrust settings ICAO certification factors used Likely to over

- estimate NOx savings from stringency but more work necessary before performance based settings can b e used Market shares Equal market split between manufacturers within each seat category Simplifying assumption that avoids difficult assessment of market share projections for future years

Technology Response Categories MS1, MS2, MS3 ICCAIA cross

- referen ce to CAEP/6 NOx stringency analysis TL concept: MS1=TL1, MS2=TL2, MS3=TL5A

NOx Stringency Options 5% to 20% from CAEP/6 Increments of 5%. When considering stringency proposals for small and large engines, the resulting number of stringency options to be evaluated is 10. See Table 1 in Appendix A
Base Year 2006 The base year fleet is based on the Campbell

- Hill Aviation Group’s commercial airline fleet database updated to represent the 2006 year

end.
Time Horizon 2006

– 2036 FESG CAEP/8 20

- yr fleet f orecast with 10 year extension NOx Stringency Implementation Years 2013, 2017 NOx stringency implementation starts on 1 January of 2013 or 20173 The Analysis and the Modelling Proce sses


### CAEP/8

- IP/29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 3.9 Modelling Item CAEP/8 Assumptions Comments
Fuel Price $1.50

- $4.50 per gallon ( aver . = $3.00/gallon) Recommendation for CAEP/8 is to use crude oil price s of $50

- $150/bbl, with $100/bbl the midpoint. Multiply crude oil price by 1.25 to arrive at fuel price per barrel. (42 barrels per gallon) Financial discount rates 0%, 3%, 7%, 9% Use same discount rates as CAEP/6

Non

- recurring costs MS1= $1M

- $15M MS2= $50M

- $100M MS3= $100M

- $500M See CAEP/8 Seattle SG paper number CAEP

- SG/20082

- WP/18 For further description of the NOx technology response. Non

- recurring costs applied once per engine family
Cost from increased noise tradeoff for NOx technology
r esponse Incremental non

- recurring for MS3 = $0, $10M, $100M [3 sensitivity runs] Per WG1 recommendation, NSTG to conduct a cost sensitivity analysis on three different non

- recurring (E&D) scenarios as shown to the left. Applied only to MS3 technology resp onse

Incremental recurring manufacturing (production) costs MS1 = $0 MS2 = 0

- 0.5% (0.25%)

$ 20,000 MS3 =0.2

- 0.8% (0.5%)

$ 40,000 For CAEP/8 analysis, continue to use the CAEP/6 method for estimating

recurring costs. Recurring engine manufacturing cos t increase is due to complexity, material, etc. (does not include amortized non

- recurring costs).

Incremental fuel burn MS1= 0% MS2= 0% MS3= 0%

- 0.5% From WG3 / ICCAIA Technology Response assumptions.

Incremental engine maintenance cost ($/EFH) MS1= $0 MS2= $0

- 2 ( aver .= $1) MS3= $0

- 4 ( aver .= $2) ICCAIA recommendations show n to left.

### CAEP/8

- IP/29

Appendix
Modelling Item CAEP/8 Assumptions Comments
Lost revenue due to incremental fuel burn effect from MS3 technology response.
Aircraft payload / range capabilities not preserved. Instead, estimate cost of los t revenue Percent of Annual Trips MTOW limited:

- Twin

- Aisle aircraft: 5%

- Single

- Aisle aircraft: 0.5%

Representative distance for MTOW limited flights: Single aisle = 2100 NM Twin aisle = 5000 NM

Revenue offload Single Aisle =

- 1 PAX (100kg) For Tw in Aisle: 750lb (340 kg) Revenue Yields at representative

stage lengths: Passenger rev. yield = $0.075/RPK Cargo rev. yield = $0.26/RTK For CAEP/8, the FESG NOx stringency task group agreed to replace the CAEP/6 approach, which assumed aircraft mission and payload maintained, with a method to calculate the revenue loss resulting from an increase in 0.5% fuelburn for MS3 technology response. This loss of revenue would be incurred on long

- range MTOW limited missions. The frequency of operating at the payloa d / range limits may be a few percent of the annual utilization.

Cost for Incremental Spare Engine Inventory ICCAIA had recommended engine inter changeability as follows:

MS1

- 100% MS2

- 100% MS3

- 50% For the MS1 and MS2, where the engines are ass umed to be 100%

interchangeable with the same engine models being manufactured before NOx stringency was implemented, then no incremental spare engines would be required. For MS3, 50% of the engines receiving MS3 technology response will require increment al spare engines to support the fleet after NOx stringency is implemented due to lack of commonality and inter changeability3 The Analysis and the Modelling Processes


### CAEP/8

- IP/29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 3.11 Modelling Item CAEP/8 Assumptions Comments Engine price for spare engines Average = $8.6 M For the 15% stringency for Large Engines, a weighted average price for engines req uiring MS3 was estimated to be $24.3M For the 20% stringency for Large Engines, the weighted average price for engines requiring MS3 was estimated to be $12M The average engine price for the CAEP/8 analysis based on review of the mid

- 2008 AVITAS Engine Val ue Guide for new engine prices and applying engine cycles for the engines to be delivered as growth and replacement over the 30 year time horizon as weighting factors is estimated to be $8.6M.

A more detailed assessment was used to estimate a weighted ave rage engine price to be used for spare engines, considering only those engines that would require a MS3 technology response for each stringency option. Only the 15% and 20% stringency options required MS3 responses for some of the engine families. Spare engine function Use CAEP/6 spares curve Spares curve from CAEP/6 to be used: # installed engines vs. % spares The equation for estimating the number of spare engines required at the global fleet level is: number spare engines = 0.5891 * number installed e ngines ^

- 0.3758 Loss of Asset Value (Residual Value) ICCAIA recommends using CAEP/6 values MS1 = no modification MS2 = $250,000 per engine MS3 = $500,000 per engine Loss of Asset Value is a cost applicable to the production models that will not comply wi th NOx stringency being delivered before the stringency implementation year. Once stringency is implemented these same non

compliant engine models receive the MSx technology responses.

### CAEP/8

- IP/ 29

Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 4.1 

# 4 Results from APMT

- Economics with the Economics

- led Approach

4
. 1 Introd uction

4

. 1

. 1 This Chapter presents APMT

- Economics results for CAEP/8 NOx Stringency Options 7 and

10, which comprise potential stringencies on the certification of new engines as follows:

NO x Str ingency Case Small Engine (26.7kN / 89kN) Large

Engine (Slope>30OPR )

7

- 15% /

- 15%

- 15% 2
10

- 20% /

- 20%

- 20% 2.2

4

. 1

. 2 The results described in this Chapter are obtained from running APMT

- Economics in its

primary Economics - led mode.

4
. 2 APMT - Economics Cost - effectiveness Results

4

. 2

. 1 Figure 4.1 presents the cost

- effectiveness resul ts , in terms of the cost per tonne of LTO

NOx reduced, obtained from APMT

- Economics assuming the high recurring development costs

. The figure plots the trade

- off between the reduction in LTO NOx (horizontal axis) and the increase in CO2 (vertical axis) wi th the size of the ‘bubbles’ representing the LTO NOx reduction cost

- effectiveness . The rank order of the cost

- effectiveness results appears intuitively rational such that:

 Absolute effects on LTO NOx (and CO 2 ) for stringency option 10 are higher than tho se for stringency option 7;

 The rank ordering of the effects on LTO NOx match the rank ordering of effects on CO 2 .
 Delaying implementation from 2012 to 2016 reduces the relative cost

- effectiveness of the measure since the reduction in LTO NOx is smaller bu t the overall costs are similar.
4

. 2

. 2 The breakdown of costs by component is displayed in Figure 4.2. The largest effect for

Stringency option 10 is that on fuel cost . However, for Stringency Option 7 the effects on fuel costs are lower, since fewer engines r equire an MS3 adjustment but there is an increasingly significant contribution to the overall costs from the estimated cost of holding spare engines , where the approach adopted is similar to that used in the NOx

- CSM

.

### CAEP/8

- IP/29 Appendix Figure 4
. 1 Cost - effectiveness of NOx Stringency Options with Outturn NOx Reduction and CO2 Increase Trade - Off

Figure 4
. 2 NOx Stringency E ffects by Cost Component from APMT
- Economics4 Results from APMT
- Economics with the Economics - led Approach



### CAEP/8

- IP/ 29 A ppendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 4.3 4

. 2

. 3 The overa ll effect s for a sample of APMT

- Economics output metrics for these tests relative

to the Baseline are illustrated in Table 4.1 . The table shows the cumulative effect over the forecast years from 2012 to 2036 compared to the forecast Baseline outcome. By test assumption there no effect s on demand (RTK), operation s and aircraft km and it is noted that:

 Fleet 13

- The cost sensitive replacement aircraft selection in APMT

- Economics results in a very small reduction in the number of aircraft required with the in terventions compared to the Baseline forecast. The reason for this is that within each seat class there is a very small shift to operating aircraft with more seats.

 Fuel Use and Total CO2 14

- The percentage effect on fuel use and CO2 relative the Baseline forecast of overall industry output is small, 0.14% or less. Total NOx 15

- as the driver for the stringency is forecast to reduce significantly, by up to 6.8%

.
 Total Cost

– due to the stringency measure the modelled airline operating costs
are expected to increase by at most $28

. 0 Billion (0.09 %) in the default forecast. The total costs reported here are those that relate to the recurring costs due to additional fuel, maintenance and production costs. The loss in revenue and the costs of holding additiona l spares are computed through post

- processing of the model outputs. Effectively these costs are assumed not to be passed to consumers by airlines but if they were included they would add a maximum of $9Bn to the costs and increase the largest percentage i ncrease from 0.06% to 0.08%.
4

. 2

. 4 Sensitivity tests were conducted and reported below been conducted to illustrate the

effect of including all of the costs using the demand responsiveness capability of APMT

Economics invoked, since no demand effects are includ ed as a core assumption for the NOx stringency analysis.

13 2036 Outturn rather than cumulative total

14 APMT

- Economics approximate calculations based on input data from AEDT

15 Note that this is full flight NOx and APMT

- Economics approximate calculations based on input data from AEDT

### CAEP/8

- IP/ 29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 4.4

Table 4
. 1 Total E ffect s from 2006 to 2036 of NOx Stringency calculated with APMT - Economics

Stringency 7

Metric Unit Baseline 2012 Absolute Difference 2012 Percentage Difference 2016 Absolute Difference 2016 Percentage Differenc e 2036 Fleet aircraft 41680

- 2 0.00%

- 2 0.00% Fuel Use Million tonnes pa 10821 4.3 0.04% 3.3 0.03% Total CO2 Million tonnes pa 34139 13.5 0.04% 10.4 0.03% Total NO x Million tonnes pa 157

- 8.4

- 5.37%

- 6.7

- 4.28% Total Costs billion US$ 30048 12.1 0.04% 12.2 0.04%

Stringency 10

Metric Unit Baseline 2012 Absolute Difference 2012 Percentage Difference 2016 Absolute Difference 2016 Percentage Difference 2036 Fleet aircraft 41680

- 3

- 0.01%

- 3

- 0.01% Fuel Use Million tonnes pa 10821 14.3 0.13% 11. 4 0.11% Total CO2 Million tonnes pa 34139 45.3 0.13% 36.1 0.11% Total NO x Million tonnes pa 157

- 10.7

- 6.82%

- 8.5

- 5.43% Total Costs billion US$ 30048 28.0 0.09% 24.3 0.08%

### CAEP/8

- IP/ 29

Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 4.5 4
. 3 Demand Sensitive Forecasts with APMT - Economics

4

. 3

. 1 Two sensitivity tests were und ertaken with APMT

- Economics for NOx stringency option 10

with a 2012 implementation year to illustrate that the demand effects that might result from stringency measures would be relatively small:

 The first of the two tests assumed that the airlines would pass - on all of their increased recurring costs of additional fuel, maintenance and production costs (affecting purchase prices) through increased fares; and

 The second of the tests assumed that additionally the airlines would also incur the
non - recurring c osts of engine upgrades and they would pass

- on all of these costs and the increased recurring costs through increased fares.
4

. 3

. 2 The effects of a sample of APMT

- Economics output metrics for these tests are illustrated

in Tables 4.2 and 4.3 as a cumulative effe ct over the forecast years from 2012 to 2036.

 RTK

– The stringency costs would be expected to only have a small effect on the demand forecasts, reducing the total RTK over the period 2006 to 2036 by up to 0.0 7 % of a total cumulative forecast of 32420 billi on RTK.

 Aircraft Operations and Aircraft KM

– Given small changes in forecast RTK there are correspondingly lower forecasts of aircraft activity.

 Fleet 16

- Given the smaller total requirement for aviation activity then the model estimates that the fl eet in 2036 would comprise at most just 45 fewer aircraft (0.09%) than for the Baseline forecast

.
 Fuel Use and Total CO2 17

- Fuel use is forecast to increase by 14.3 million tonnes (0.13%) due to the stringency measure without demand effects and this increase is f or fuel use to increase by a smaller amount, 10.1 million tonnes (0.09%)

 Total NOx 18

- is forecast to reduce by 6.8% and is forecast to reduce by very slightly more due to the demand effects

.
 Total Cost

– due to the stringency measure is expected to increas e by $28.0 Billion tonnes (0.10 %) in the default forecast.
4

. 3

. 3 These outputs confirm the premise underlying the analysis that the effects of the costs of

stringency on demand are relatively small and for the purposes of ranking the stringency options in cost

- e ffectiveness terms can reasonably be ignored for the purposes of ranking NOx stringency options

.

16 2036 Outturn rather than cumulative total

17 APMT

- Economics approximate ca lculations based on input data from AEDT

18 Note that this is full flight NOx and APMT

- Economics approximate calculations based on input data from AEDT

### CAEP/8

- IP/ 29 Appendix

APMT

- Economics and Its Application in the CAEP/8 NO x Stringency Analysis 4.6 Table 4
. 2 Effect s of Costs on Demand for Selected Met r ics from 200 9 to 2036 for Stringency Option 10 Implemented in 2012

No Demand Effect s Demand Effect s Demand Effect s and Recurring Costs

Metric Unit Baseline Absolute Interventi on Effect %

Intervention Effect Absolute

Intervention Effect %

Intervention Effect Absolute

Intervention Effect %

Intervention Effect
RTK billion RTK pa 32420 0.0 0.00%

- 19.5

- 0.06%



### - 22.4

- 0.07% Operations million flights pa 1281 0.0 0.00%

- 0.7

- 0.05%



### - 0 .7

- 0.06% Aircraft Km billion ac

- km pa 1894 0.0 0.00%

- 1.0

- 0.05%



### - 1.1

- 0.06% 2036 Fleet aircraft 4 1680

- 3.0 0.00%

- 41.1

- 0.09%



### - 45.5

- 0.10% Fuel Use million tonnes pa 10821 14.3 0.13% 10.1 0.09% 

### 9.2 0.09% Total CO2 million tonnes pa 34139 45.3 0.13% 3 1.9 0.09% 

### 29.0 0.09% Total N O x million tonnes pa 157

- 10.7

- 6.80%

- 10.7

- 6.84 %



### - 10.7

- 6.84% Total Costs billion US$ 30048 28.0 0.09 % 15.6 0.05 % 

### 16.4 0.05 %

Table 4
. 3 Relative Effect of Costs on Demand and Other Metrics from 200 9 to 2036 for Stringency Option 10 Implemented in 2012

Metric Unit Demand Effect Recurring C ost and Demand Effect
RTK billion RTK pa

- 19.5



### - 22.41 Operations million flights pa

- 0.7



### - 0.73 Aircraft Km billion ac

- km pa

- 1.0



### - 1.13 203 6 Fleet aircraft

- 38 .1



### - 45.5 Fuel Use million tonnes pa

- 4.2



### - 5.1 Total CO2 million tonnes pa

- 13.4



### - 16.2 Total NOx million tonnes pa

- 0. 1



### - 0.1 Total Costs billion US$

- 12.4



### - 11.6

### CAEP/8

- IP/ 29

Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 5.1 

# 5 Comparing APMT

- Economics and NOx

- CSM Results

5
. 1 Introduction

5

. 1

. 1 The results from the APMT

- Economics tests can be compared to those from the NOx

- CSM

for both the 2012 an d 2016 implementation scenarios for these two stringency levels

. The results from APMT

- Economics presented in Chapter 4 are from the model operating in economics - led mode and as noted earlier the model can also be run in operations - led mode where the operations forecasts by aircraft type are those used by MODTF.

5

. 1

. 2 This chapter reports a comparison of the consistency of the results from APMT

- Economics

in operations

- l ed mode with the NOx

- CSM and then with APMT

- Economics in economics

led mode:

 The operations

- led to NOx

- CSM comparison illustrates the degree of commonality between the cost computations and processing of the MODTF application of the FESG forecasts

.
 The ope rations

- led to economics

- led com parison illustrates the effect s of the economics

- led modelling approach and application of the FESG forecasts.

5
. 2 Comparing APMT - Economics Operations - led Results with the NOx - CSM

5

. 2

. 1 The presentation of the comparison between APMT

- Economics in operations

- led mode and

the NOx

- CSM is broken down as follows :

 Emission comparison, noting that the APMT

- Economics computations of Fuel use and NOx are approximations of the computations made by AEDT;

 Overall comparison of the costs and a comp arison of the cost components; and

 The comparison of the outturn cost

- effectiveness measures
5

. 2

. 2 The outputs for both the APMT

- Economics and the NOx

- CSM are based on the sum of the

effect s between 2009 and 2036.
Emission Output s

5

. 2

. 3 Figure 5 .1 presents a compariso n of the total saving in NOx used in the two modelling

approaches for the cost

- effectiveness analysis. The NOx

- CSM does not itself compute NOx emissions and the figures shown here are from the Local Air Quality forecasts prepared by MODTF. The APMT

- Econo mics model approximate s the computation of NOx based on inputs from AEDT, however for the purposes of this comparative analysis these outputs have needed to be calibrated to the values computed from the MODTF local air quality modelling.

### CAEP/8

- IP/29 Appendix 5

. 2

. 4 As Figure 4.1 show s, the LTO NOx used in the comparison of the Cost

- effectiveness is

very similar.
Figure 5
. 1 Forecast Total S aving in LTO NOx

Reduction in LTO NOx (Million Tonnes)5 Comparing APMT - Econ omics and NOx - CSM Results



### CAEP/8

- IP/ 29 A ppendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 5.3 5

. 2

. 5 Figure 5 .2 illustrate s the changes i n fuel use implied from the two modelling approaches.

The CO 2 values for APMT

- Economics are approximations based on the detailed computations of fuel use and CO 2 from AEDT. The NOx

- CSM does not compute fuel use or CO 2 and the values used in the compariso n are drawn directly from the MODTF models. For NOx S tringency O ptio n 10 the results are shown to demonstrate a particularly close match

. Figure 5
. 2 Forecast Increase in Full Flight CO 2 Emissions due to NOx Stringency

Increase in CO 2 (Million Tonnes)

### CAEP/8

- IP/29 Appendix Forecast Cost Effect s

5

. 2

. 6 The APMT

- Economics computations of cost s are made without discounting and including

the maximum assumption for the MS3 fuel use penalty, since this will illustrate the maximum effect and when compared to the NOx

- CSM expose the maximum absolute differences between the two models.

5

. 2

. 7 Figure 5

. 3 demonstrates that overall there is strong agreement b etween the total costs of

the NOx stringency measures computed from the NOx

- CSM and APMT

- Economics. The results from using the different models, with the same input assumptions, compare well with the largest difference between the two models being 7 % . Th e computed values between the two models are very close for Stringency option 10 , within 1%

.
5

. 2

. 8 APMT

- Economics consisten tl y computes smaller cost effect s of stringency measures and

the contribution of the individual components are described below.5 Comparing APMT - Economics and NOx - CSM Results



### CAEP/8

- IP/ 29 A ppendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 5.5

Figure 5
. 3 Total Cost Outputs from APMT
- Economics and the NOx - CSM (0% Discount Rate)

Costs in $Millions

### CAEP/8

- IP/29 Appendix 5

. 2

. 9 Figure 5 .4 demonstrates the similarities between the APMT

- Economics and NOx

- CSM

computations of the stringency effect s b y cost.

5

. 2

. 10 There are some differences in the computation of the other individual cost components

and each component makes a varying contribut ion to the overall comparison . T he individual differences in computations therefore only make a limited contribution to the total cost difference and given the different modelling approaches the differences are sometimes more marked at a detailed level

. Generally there is a consistency in the pattern of differences between the two approaches and t he following observati ons and explanations for the differences between the two modelled estimates can be made:

 Production Costs

– Account for 8% of the total NOx

- CSM costs for Stringency option 7 and 5% of the total NOx

- CSM costs for Stringency option 10. APMT

Economics comput es recurring production costs that are slightly lower that those computed by the NOx

- CSM . The reason for this is the different treatment of the additional production costs in the two models. In the NOx

- CSM , the costs are assumed to be incurred in the yea r that new aircraft are purchased and in APMT

Economics the new aircraft purchase price is increased to account for the additional production costs and then manifests itself in the computation of annual capital costs (through the sum of ongoing depreciatio n and finance costs) in each forecast year. In absolute terms , the differences between the two methods are not large and APMT

- Economics would be expected to compute a lower effect since the additional costs for the purchase of an individual aircraft are s pread over the aircraft’s lifetime.

 Maintenance Costs

– Account for 16 % of the total NOx

- CSM cos ts for Stringency option 7 and 10 % of the total NOx

- CSM costs for Stringency option 10. APMT

Economics consistently computes slightly (13%) higher maintenance costs than the NOx

- CSM across each of the stringency options and implementation years. The difference is explained by the APMT

- Economics modelling of maintenance costs that assumes that these costs increase as aircraft age . In this analysis , the maintenan ce cost of the response to the stringency was assumed to apply to the maintenance costs for a new aircraft and therefore increases on an annual basis compared to the static assumption employed in the NOx

- CSM

.
 Fuel Costs

- Account for 27 % to 32% of the tota l NOx

- CSM cos ts for Stringency option 7 and 44 % to 50% of the total NOx

- CSM costs for Stringency option 10. APMT

- Economics computes a lower fuel cost than the NOx

- CSM in all scenarios. In percentage terms the difference is approximately 8% for Stringency Option 7 , and less than 1% for stringency option 10 implemented in 2016

. As noted above there is a small difference in the fuel use/CO 2 effect s used by the two models, and this cost difference is explained by the different treatment of the fuel price. I n the NOx

CSM the fuel price is fixed however APMT

- Economics takes account of the change in the fuel price from its value in the calibrated 2006 Datum situation and the interpolation between the outputs for 2006 and 2016 for the forecast years 2012 to 2015 include s a steadily growing fuel price up to the fixed 2016 level. Therefore in the 2012 implementation , the effective average fuel price in the APMT

- Economics computation is expected to be less than that employed in the NOx

- CSM

.5 Comparing APMT - Economics and NOx - CSM Results



### CAEP/8

- IP/ 29 A ppendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 5.7

 Lost Revenue

– A ccount s for 10 % of the total NOx

- CSM costs for Stringency option 7 and 1 5% of the total NOx

- CSM costs for Stringency option 10. The APMT

Economics for Lost Revenue is lower than that for Stringency Option 7 and slightly higher for Stringency Option 10. Overall t he percentage and absolute differences between the two modelled computations are relatively small.

 Spare Engines

– Account for 33% to 42% of the total NOx

- CSM costs for Stringency option 7 and 19% to 27% of the total NOx

- CSM costs for Stringency option 10. Again the largest differences between the two computations are for Stringency option 7 where the individual differences are up to 14%.
Figure 5
. 4 Differences between APMT
- Economics and NOx - CSM by Cost Component

APMT - Economics Forecasts of Cost - effectiveness

5

. 2

. 11 The overall cost

- effectiveness comparison is presented in Figure 5.5 for eight tests as

combinations of stringency options, non

- recurring cost estimate and implementation year , assuming no application of discounting (0% rate). Given the previous presentation of very similar NOx saving outputs and the similarities i n the overall cost computations , the overal l cost

- effectiveness comparisons are consistently close between APMT

- Economics and the NOx

- CSM 19

.

19 It is noted that t here is a difference in the assignment of one engine type where the NCM has this classified as an MS2 modification and APMT

- Economics modeling has assumed it to be compliant. However, this engine would

### CAEP/8

- IP/29 Appendix Figure 5
. 5 Comparison of Overall Cost - effectiveness Results (0% Discount Rate )

Cost per Tonne LTO NOx Reduced

only be used on less than 3% of flights and the costs of MS2 modifications are relatively small (i.e., no fuel effects and small production and > maintenance costs relative to those for MS3) so this is not sufficiently material to explain the higher difference between the NCM and APMT

- Economics for stringenc y 7.5 Comparing APMT - Economics and NOx - CSM Results



### CAEP/8

- IP/ 29 A ppendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 5.9 5
. 3 C omparison of the APMT
- Economics Results from Economics
- led with the Operations - led Approach

5

. 3

. 1 The comparison betwe en APMT

- Economics in operation s - led and economics

- led modes

needs to be made with the default assumption that there is no effect on demand in response to cost changes; effectively using the common assumptions employed in the NOx

- CSM

.
5

. 3

. 2 There will be some dif ferences in absolute forecasts from APMT

- Economics in Operations

led and Economics led mode because even though the same underlying operating cost processing is used, the forecasts are based on different forecasts of aircraft operations and representations of the FESG fleet forecasts at an aircraft level. However, the cost differences between the two approaches are expected to be broadly of the same order and the rank ordering of effect s expected to be consistent.

5

. 3

. 3 Figure 5.6 illustrates the total costs of stringency o ption 7 and option 10 tests for the

economics

- led and operations

- led approach approaches . As expected, the costs of the stringency measures are forecast to be consistently higher from the tests using APMT

Economics in both percentage and absol ute terms. Overall the economics

- led computations are 15% higher for Stringency option 10 and 30% higher for stringency option 7. Importantly, t he ranking of the effect s of the measures is intuitively consistent and the contribution of each of the cost c omponents to each of the outputs is also consistent

.
5

. 3

. 4 Part of the cost difference is explained by the inclusion of a greater part of the FESG fleet

and operations forecasts in the Economics

- led tests ; as noted in Chapter 2 the MODTF application of the FESG forecasts excluded seat class, route

- group and stage length combinations that were not present in the 2006 Datum . Therefore , the economics

- led figures are produced from a slightly larger volume of underlying aviation activity. This accounts for approxima tely one third of the absolute difference, $1.3Bn in absolute total cost terms. Without this effect, the size of the differences between the two approaches would be much smaller and separate tests where the operations are more closely matched demonstrate that the costs would be higher by between 10% and 20%

.
5

. 3

. 5 At a detailed level, t he remainder of the difference in results can primarily be explained by

the difference in treatment of aircraft retirement; where, in the economics

- led mode there is a continual r etirement of aircraft for the model to remain internally consistent and this leads to an increased requirement for new fleet turnover and hence an increased effect on all cost components.

5

. 3

. 6 The size of the differences in the forecast of the effect s between t he two approaches of

$3Bn need to be put in context of the overall airline industry costs of approximately $420Bn per annum in 2006 and forecast to rise to approximately $1600Bn in 2036. At

### CAEP/8

- IP/29 Appendix this level the total costs of stringency option 10 ranges from be tween $30Bn to $35Bn across all forecast years from 2012 or 2016 to 2036.
Figure 5
. 6 Comparison of Total Costs from Economics
- led and Operations - led APMT - Economics Tests (High Recurring Costs, 0% Discount)

### CAEP/8

- IP/ 29

Appendix

APMT

- Economics and Its Application in the CAEP/8 NOx Stringency Analysis 6.1 

# 6 Concluding Remarks

6

. 1

. 1 Th rough this study th e APMT

- Economics tool has demonstrated its application to a NOx

stringency analysis. It has demonstrated flexibility in employing assumptions that match those prepared by FESG and also importantly, when applied in economics

- led forecasting mode, can produce comprehensive and internally consistent forecasts of the effect s of NOx stringency measures including consistent demand responses to cost changes.

6

. 1

. 2 In economics

- led model APMT

- Economics has demonstrated that despite being a complex

and detailed model it has the fidelity to reliably and consistently model th e demand and costs of interventions relative to a Baseline, that invoke only relatively small cost changes, down to the level of a 0.2% annual increase in overall airline operating costs.

6

. 1

. 3 The APMT

- Economics results compare well to those of the NOx

- CSM over all. At a detailed

level, despite using different approaches to modelling the stringency measures and the overall scale of aviation industry costs, the results at a component level were shown to have a good degree of consistency.

6

. 1

. 4 The overall benefits of un dertaking this analysis with APMT

- Econom i cs are that:

 The APMT

- Economics tool has demonstrated its ability to provide consistent results in two modes of operation.

 The demand responsive and comprehensive cost forecasting features of APMT

Economics have pro ved valuable in demonstrating to some CAEP

- FESG members that the underlying assumption that demand effects can be largely ignored for the main stringency analysis using the NOx

- CSM is reasonable.

 CAEP

- FESG can have confidence that t he results from NOx

- CSM were independently confirmed for a sample of the stringency tests being undertaken for CAEP.

### CAEP/8

- IP/29 Appendix

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