Annex 4 analytical methods

The AERO-MS is a tool owned by the European Union Aviation Safety Agency and has been developed specifically to support impact assessments for regulations to reduce greenhouse gas (GHG) emissions from aviation. The AERO-MS assesses the economic and environmental impacts of a wide range of policy options to reduce international and domestic aviation GHG emissions. Policy options that can be examined include the different taxation (including fuel and ticket taxation), emission trading schemes (such as the EU ETS) and offset schemes like CORSIA, the introduction of sustainable aviation fuels and air traffic management (ATM) improvements. Such policy options, the model shows, can affect both the supply side and demand side of the air transport sector. The AERO-MS forecasts the impact on emission reductions of measures and policies but also the extent by which demand for air travel is reduced due to these higher prices.

AERO-MS has formed a key part of about 40 international studies where the model results have provided a quantified basis for policy judgement. Recently AERO-MS was applied for the European Aviation Environmental Report. Also, AERO-MS has been applied in various impact assessment studies for the European Commissions, also with respect to the inclusion of aviation in the EU ETS. In 2019 the model was used for the evaluation of the air service regulation . Further studies, in which the AERO-MS was applied, were executed for a range of other clients like EASA, IATA, ICAO, Airbus, and national governments (Germany, UK, the Netherlands).

The AERO-MS has a global scope; the analysis is built on a Unified Database containing a detailed record of global aviation movements in the Base Year. The Unified Database records 123,025 airport-pairs, covering a full network of all key airports, derived from the EUROCONTROL WISDOM Operations Database. Airline cost and fare data are based on relevant data from the International Air Transport Association (IATA) and the International Civil Aviation Organisation (ICAO). Aircraft type input data is based on fleet inventory properties from the EUROCONTROL PRISME Fleet, OAG Fleet Databases, ICAO emissions databank as well as retirement curves derived by the ICAO Committee on Aviation Environmental Protection (CAEP) Forecasting and Economic Analysis Support Group (FESG). For the specification of aircraft operational characteristics use is made of the EUROCONTROL BADA data. Hence, all AERO-MS data are based on data sources from internationally well-reputed organisations.

AERO-MS has a global coverage, including data for both Intra-European routes and routes to and from Europe. The data include:

• Connectivity in terms of the number of direct routes, plus the frequency of these routes;
• Total flight km and flight capacity;
• Demand in term of passengers, passenger km, freight km;
• Airline costs and ticket prices;
• Airline employment;
• Fuel use and fuel efficiency;
• CO2 emissions.

The Unified Database and the five modules of the AERO-MS model are briefly described below.

• Unified Database: The starting point for the modelling of air transport demand and aircraft flights is provided by the Unified Database of the AERO-MS, which is a computerised description of the volume and pattern of global air transport activity in the base year.
• Aircraft technology model (ATEC): The ATEC model is used to calculate the technical characteristics by aircraft type and technology level based on a modelling of fleet development over time. Aircraft technology are particularly relevant to the fuel use and emission characteristics of different aircraft types. The technology characteristics are expressed as a function of aircraft ‘technology age’ which is defined by the year in which the aircraft (type) is certified. The technology age distribution is determined by the fleet build-up which depends on the development in time of aircraft sales (following air transport demand) and aircraft retirement.
• Air transport demand model (ADEM): The ADEM model matches the demand and supply side of air transport, i.e. air transport demand in terms of passengers and freight as well as the frequency and capacity of air transport services offered. Volumes of passengers and cargo transported, passenger fares and freight rates are determined in the process of balancing supply and demand. Aircraft flights are determined by origin-destination (airport pairs) and expressed in terms of aircraft types and technology levels, in accordance with available fleets.
• Aviation cost model (ACOS): The ACOS model computes the relevant variable aircraft operating cost components and total operating costs. Variable operating costs are associated with flights by aircraft type and technology level and include: fuel costs; route and landing (airport) charges; flight and cabin crew costs; maintenance costs; capital costs (depreciation) and finance costs. In addition, total operating costs include a number of other, volume-related, costs such as the costs of ground-handling, sales, ground facilities (buildings) and general and administration costs. Based on the total operating costs, ACOS determines the unit costs (per passenger and kg of cargo transported) of air transport by aircraft type, technology level and IATA region-pair. In particular, the model ACOS converts the costs of possible measures in the air transport sector to changes in unit operating costs.
• Flights and emissions model (FLEM): The FLEM model provides a detailed description of the actual flight profiles of individual aircraft flights. Fuel-burn and emissions for each flight are computed in three-dimensional space, taking into account the geographical flight specification and the technical characteristics by aircraft type and technology level. There is a direct connection between ATEC and FLEM allowing FLEM to take into account developments in aircraft technical and environmental performance as projected from a baseline scenario and policies. Finally, FLEM provides information on fuel-burn as a basis for the cost computations in ACOS.
• Direct economic impacts model (DECI): The DECI model is essentially a post-processing model. One of its main functions is to provide a comprehensive overview of the results of the other modules in the AERO-MS, in particular the information related to air transport volumes; airline revenues; fleet size and flight operation. Another main function of DECI is to compute a number of direct impacts on the relevant actors (airlines, government, consumers).

Baseline scenario

The AERO-MS baseline scenario provides a projection, starting from a Base Year of 2016, of European aviation demand under current trends and policies up to the year 2050. Although the user can develop their own specification, the model is currently set up with an update of the EU Reference Scenario, using the projected annual growth rates of transport activity from the PRIMES-TREMOVE model from 2018 onwards. In 2021, the analysis of the impacts of different tax options for the aviation sector has included a further update to the baseline using the Commission’s 2020 update to the Reference Scenario to reflect the impacts of the COVID-19 pandemic.

Assessment of direct impacts from policy options

AERO-MS has specific variables for the modelling of a fuel taxation and the modelling of a ticket taxation, whereby taxation levels are specified through user inputs. This means that any fuel taxation or ticket taxation can be modelled separately, but a fuel taxation and a ticket taxation can also be combined in a single model run. Furthermore, the geographical scope to which the policies will apply can be set fully flexible. This implies that we can model a taxation for the EU plus any set of third countries (e.g. UK, Norway, Iceland, Switzerland, Turkey). Also, taxations can be applied to only flights between a set of countries (e.g. Intra EU) or to all flights departing from a set of countries (e.g. all flights departing from the EU). Furthermore, for an intra-EU only policy option, an issue could for example be if flights between the EU and outermost regions and overseas territories should also be covered. Moreover, in the AERO-MS ticket taxation levels can be varied depending on the flight distance. Because of the global coverage of the AERO-MS and the great level of detail in the model (i.e. over 123,000 airport pairs included in the model), the application of the AERO-MS allows to assess the impact in case of such detailed specification of policy options.

The AERO-MS takes into account various responses to taxations including:

• A demand side response whereby policy-induced cost increases are passed on into higher ticket prices which will imply a reduction in passenger and cargo demand;
• A supply side response whereby airlines shift towards the use of more fuel-efficient aircraft.

In relation to the first response the default assumption in the AERO-MS is that all policy-induced costs increases are passed on into higher ticket prices. The impact on demand which follows from these higher ticket prices is related to the price elasticities of demand in the model. Currently the price elasticities of demand values in the AERO-MS are based on an IATA study (https://www.iata.org/en/iata-repository/publications/economic-reports/estimating-air-travel-demand-elasticities---by-intervistas/), but these can be easily changed if alignment with assumptions adopted in other EC studies is required.

In relation to the supply side response, the AERO-MS takes into account responses will be different for a fuel or ticket taxation. In case of a fuel taxation there is a price incentive for the use of more fuel-efficient aircraft whereas this is not the case for a ticket taxation. This is a key difference between the two taxation alternatives and should be captured in the quantification of impacts. The AERO-MS takes into account the following supply side responses:

• New aircraft technology shift: change in purchase behaviour of airlines towards (available) environmentally more efficient new aircraft and accelerated development of new aircraft technology.
• Accelerated fleet renewal: replacing the older part of the fleet earlier than in the situation without a fuel taxation, based on financial considerations of airlines.
• New aircraft capacity shift: adjustment of mission capabilities to allow for more efficient aircraft operation in view of anticipated fuel taxation impacts on transport flows.

Since the supply response is endogenized into the model, the AERO-MS also allows for the assessment of impacts in case taxation revenues are rechannelled into the air transport sector, whereby taxation revenues can be used for the financing of:

• Development of additional technology improvement of new aircraft;
• Subsiding the purchase of aircraft of the latest technology;
• Improvement in air traffic control.

AERO-MS can assess a wide range of impacts of policy options, including direct impacts on:

• Fleet composition;
• Ticket prices;
• Demand (passengers, passenger km, cargo);
• Number of flights and aircraft-km;
• Fuel use and CO2 emissions;
• Airlines costs, revenues and profitability;
• Taxation revenues;
• Consumer surplus.

Results can be presented by Member States, whereby for each Member State a further distinction can be made between: i) domestic flights; ii) international intra-EU flights; and iii) extra-EU flights. Moreover, AERO-MS distinguishes between traditional scheduled carriers and low-cost carriers (LCC). Hence impacts can also be presented separately for these two types of carriers, whereby impacts can be different because:

• Average ticket prices are generally lower for LCC and therefore a policy-induced cost increase can have a higher percentage impact on ticket prices;
• Average price elasticities differ between passenger purpose (business, leisure) and the percentage of leisure passengers on LCC flights is generally lower.

Key inputs (embedded in the model)

• Base year demand on the global route network
• Base year aircraft fleet
• Base year aviation sector cost data

Baseline definition

• Future year demand growth (by route)
• Future year oil price
• Future year carbon price
• Future year passenger ticket price developments
• Future year cargo rates developments
• Elasticities (demand vs. price)

Policy inputs

• Tax rates
• Technological inputs (e.g. aircraft fleet changes)
• Emissions regulations
• Economics regulations/incentives (e.g. for accelerated fleet replacement)

The AERO-MS can export a wide range of results parameters, including:

• Numbers of flights
• Numbers of passengers
• Demand (passenger-km and cargo tonne-km)
• Ticket price
• Fuel consumption
• Air carrier revenues
• Taxation revenues
• Aviation sector employment
• CO2 and NOx emissions
• Aircraft fuel efficiency

All the above can be exported by route, and hence amalgamated by departure and/or destination country.

The differences between the results for the baseline scenario and the policy cases represents the impacts of the policy option being analysed.

The AERO-MS is a tool owned by the European Union Aviation Safety Agency and has been developed specifically to support impact assessments for regulations to reduce greenhouse gas (GHG) emissions from aviation. The AERO-MS assesses the economic and environmental impacts of a wide range of policy options to reduce international and domestic aviation GHG emissions. Policy options that can be examined include the different taxation (including fuel and ticket taxation), emission trading schemes (such as the EU ETS) and offset schemes like CORSIA, the introduction of sustainable aviation fuels and air traffic management (ATM) improvements. Such policy options, the model shows, can affect both the supply side and demand side of the air transport sector. The AERO-MS forecasts the impact on emission reductions of measures and policies but also the extent by which demand for air travel is reduced due to these higher prices.

AERO-MS has formed a key part of about 40 international studies where the model results have provided a quantified basis for policy judgement. Recently AERO-MS was applied for the European Aviation Environmental Report. Also, AERO-MS has been applied in various impact assessment studies for the European Commissions, also with respect to the inclusion of aviation in the EU ETS. In 2019 the model was used for the evaluation of the air service regulation . Further studies, in which the AERO-MS was applied, were executed for a range of other clients like EASA, IATA, ICAO, Airbus, and national governments (Germany, UK, the Netherlands).

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