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Aviation sustainability: US ageing fleets under the spotlight

If there was any doubt that environmental stewardship is rapidly gaining traction among investors, look no further than the annual letter from the BlackRock (Investment) CEO declaring that sustainability is taking centre stage in the company’s investment approach. The declaration is not surprising; however, it should serve as a wake-up call to business executives worldwide that their respective companies need to have a viable environmental, social and governance (ESG) plan in place in order to attract investment. 

The scrutiny of the aviation industry’s environment footprint continues to grow, and airlines are touting a range of environmentally responsible practices they have adopted, but arguably it is tough to garner a unified message from the industry. 

The letter from BlackRock shows that environmental responsibility will become a core part of business for industries worldwide – sooner rather than later. For its part, Delta Air Lines has pledged to become more vocal in the environmental movement in 2020.

Summary

  • BlackRock’s CEO declares that companies, investors and governments need to prepare for a significant reallocation of capital as climate change is a structural, long term crisis. 
  • That shift is yet to take place, but over the course of the last year Delta Air Lines has been stressing that it understands the growing importance investors place on environmental stewardship. 

Sustainability is now a key factor in BlackRock's investment choices 

In his annual letter to CEO’s of some of the world’s largest companies, BlackRock CEO Laurence Fink outlined a number of initiatives “to place sustainability as the centre of our investment approach”.

Those elements include making sustainability integral to portfolio construction and risk management, exiting investments that present a high sustainability related risk, launching new investment products that screen fossil fuels, and strengthening the firm's commitment to sustainability and transparency in its investment stewardship activities. 

Mr Fink remarked that over his 40 years in finance, even when crises such as inflation spikes, the dot-com bubble and the global financial crisis lasted many years, “they were all in the scheme of things, short term in nature”. 

Climate change is different, he said. “Even if only a fraction of the projected impacts is realised, this is a much more structural, long-term crisis. Companies, investors and governments must prepare for a significant reallocation of capital”. 

Fleet age is becoming a feature of airline environmental emissions

Mr Fink’s letter was released the same day Delta Air Lines reported its 4Q2019 and full year 2019 financial results, in which the company posted a 6% increase in top line revenue growth for 2019, to USD47 billion. 

During a discussion with analysts and investors regarding the company’s financial performance, Delta’s executives fielded a question about the prospect of ESG compliance having capex implications.  (ESG (Environmental, Social, and Governance) criteria are a set of standards from a company’s operations that socially conscious investors use to screen for potential investment.)

Delta CEO Ed Bastian reiterated previous statements he had made in 2019, stating that Delta takes ESG very seriously, and fleet plays a big part in the airline’s sustainability goals. 

Putting a positive spin on an obvious weakness, Mr Bastian said having a somewhat older fleet “actually has given us opportunities to move faster in that space, maybe than others”. 

Mr Bastian observed that the aircraft that Delta is adding to its fleet are approximately 25% more fuel efficient than the jets the airline is retiring. The airline’s average fleet age of 15.2 years falls in between those of its rivals American and United.

Fleet age is recently coming under the spotlight more, as LCCs like Europe's Wizzair highlight the point that its unit emissions are around half those of their legacy competitors thanks to the use of modern aircraft. Wizzair's 110 average fleet age is 5.7 years (with orders for 269 more). In the US, Spirit Airlines' average 144 aircraft fleet age is 6.1 years.

Average fleet age for American, Delta and United, as of mid-Jan-2020

Airline Average fleet age
American  11.6 years 
Delta  15.2 years 
United  16.1 years 

It appears that over the course of the last year Delta has been asked more questions about aviation and the environment than any other North American airline. Previously, Mr Bastian has concluded that investors will increasingly pay more attention to ESG, noting that it is “probably a bigger point of emphasis in Europe today than it is in the US, but it is going to grow here as well”. 

In addition to adding more fuel efficient jets to its fleet, Delta also engages in day to day activities to reduce its carbon footprint, including a commitment to eliminating single use plastics onboard aircraft and in its lounges, and phasing out the use of plastic wrappers for its blankets. 

Mr Bastian also highlighted the fact that Delta was the only airline in 2012 to cap its carbon footprint at 2012 levels voluntarily, and “we’re looking at ways by which we can go even more aggressively”. 

In late 2019 Delta’s CEO admitted that “…We have been terrible advocates of our own cause…we’re seen in the world’s eyes as somewhat of a dirty industry, yet we have done a tremendous amount of good with all the reinvestment in our business and capital we’re investing in new engine technologies”. 

He stressed that in 2020 “I think you are going to see us become more of an active voice in the conversation [about the environment].” 

The timing of that declaration is interesting, as Mr Fink said that with the impact of sustainability on investment returns increasing, “We believe that sustainable investing is the strongest foundation for client portfolios going forward”. 

Airline industry sustainability: the industry needs a coherent message on the environment 

Sustainability is now firmly entrenched in the business landscape, and the letter from BlackRock’s CEO reflects that necessary reality. 

As investors increasingly place a greater importance on a company’s sustainability initiatives, time is of the essence for the aviation industry to come together and present a unified message about its efforts to combat climate change. 

Scrutiny of the industry will only intensify in 2020 and beyond. 

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