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Aviation’s existential threat is not COVID – it’s the environment

Analysis

Environmental sustainability is looming as a key threat to the viability of the airline industry – and the travel sector at large that depends on it.

Accurate and effective measurement of emissions is key to real reductions

This month CAPA Live will investigate the topic of environmental sustainability and aviation. A vital step to achieving emission reduction goals is accurate and effective measurement of individual airline emissions.

CAPA and its sustainability analysis partner, Envest, will reveal some early findings on the significance of sustainability for the airline industry, ahead of publishing a landmark report on the topic in Oct-2021.

In a CAPA Live session on 08-Sep-2021, CAPA and Envest will present data on 25 of the world’s leading airlines, which together represent about 55% of total industry emissions.

In terms of CO2 emissions per ASK and RPK, there are very significant differences between best in class and worst.

The session will also review the outcomes of a high-level carbon stress test conducted on each airline, including the theoretical break-even carbon price, which is calculated for each airline as annual Operating Profit / Total Carbon Emissions (T).

The test provides a high-level estimate of the price of carbon that would consume all of the 2019 Operating Profit for each airline if carbon emissions were included as a cost in financial reporting. The analysis shows that five of the leading 25 airlines have a break-even carbon price of <USD30/T, which is well within the broad view of the current full cost of carbon. 

The remainder are potentially very vulnerable airlines, as the demand or requirement to fully price in carbon grows.

The peer group average of about USD80/T is at the upper end of the Carbon Pricing Leadership Coalition’s estimate of USD40-80 / tonne as a true reflection of full carbon price.  This suggests that the industry, as a whole, would have been just above break-even in 2019 if the full cost of carbon had been included, but that about half of the airlines would have generated an operating loss in this 2019 carbon-accounting scenario.

IPCC report raises the heat - and probably won’t go back to usual default position

Historically across most industries, including the airline industry, there have been two main drivers for environmental change or progress: (1) government policy and regulations, often in response to changing social demands or expectations; and (2) business improvement and operational efficiency, where actions taken to achieve a better business outcome also deliver a better environmental outcome.

More recently, it has been customers and investors who are increasingly pushing the sustainability agenda, particularly in relation to climate change.

The airline industry has consistently delivered substantial reductions in carbon emission intensity through the adoption of new technology, operational and infrastructure efficiencies, and improvements in fleet utilisation. Since 1990 the airline industry has achieved more than 50% reduction in carbon emissions per passenger km.

However, notwithstanding the impressive historical efficiency gains, the industry is today facing perhaps its greatest financial sustainability challenge.

In 2021 the airline industry has reached a sustainability tipping point, with external pressures from investors, customers and regulators that have increased rather than decreased during the COVID-19 pandemic, pushing for reduction in greenhouse gas (GHG) emissions.

The latest IPCC (Intergovernmental Panel on Climate Change) report provides a soberingly pessimistic assessment of the extent of the climate impacts already locked in, and also the compressed time period in which to act to reduce CO2 emissions and CO2 concentrations in the atmosphere to avoid potentially catastrophic outcomes for the planet.

This report will likely increase the sustainability urgency of influential customers and investors whose decisions on which airlines to fly and which airlines to invest in will have a profound impact on the airlines who will emerge as market leaders in a post-pandemic world that is accelerating to net-zero.

The recent IPCC report is also likely to push policy makers and regulators further to compress their timelines for action and raise expectations and requirements for all industries – including aviation. 

The outcomes and agreements that emerge from the upcoming UN Climate Change Conference of the Parties (COP26) in Glasgow, starting 31-Oct-2021, will be an early indicator of the global political and regulatory commitment to act and the implications for the airline industry.

The first goal of COP26 will be to get countries' commitment to “ambitious 2030 emissions reduction targets that align with reaching net zero by the middle of the century”.  Once done, this will inevitably cascade down to major emitters to act faster. 

Corporate clients and investors will move faster than airlines can

Major airline customers are on a much more aggressive net-zero trajectory than airlines – most of which are targeting net-zero by 2050 (or do not have explicit carbon reduction goals and timelines).  The misalignment of goals between customers and airlines will likely push companies who have more aggressive goals to reduce their travel if airlines cannot match the reduction targets.

The negative impact from the reduction in corporate travel will not be evenly spread across all airlines. Those airlines that are able to differentiate with lower carbon options compared to competitors will be better placed to increase market share because they will enable the corporates to get most miles for their carbon travel budget.

Carbon pricing is significant for a number of reasons, but primarily because most airlines are following the same broad net-zero strategy, comprising:

  • New fuel-efficient aircraft
  • Operational/flight efficiencies
  • Market-based instruments (including carbon capture and carbon offsets)
  • SAF (Sustainable Aviation Fuel)
  • Hydrogen and electric aircraft

In the medium term, SAF will likely have the most impact, and in the long term potentially hydrogen and/or electric aircraft. But market-based instruments will be key to managing the risks of decarbonisation in the short and medium term.

However, increasing demands from global carbon-intensive industries will place increasing pressures on the availability and pricing of carbon offsets. With carbon markets still evolving, prices for carbon offsets are in flux, but if the price of a carbon offset is USD70 / tonne there is a significant and yet-to-be recognised impost on an industry that in 2019 emitted circa 900 million tonnes of CO2 per annum.

What can airlines do?

For those that aren’t already doing it, airlines should be conducting a deep-dive analysis of operational, financial and carbon performance in the context of potential future trends in carbon and SAF investments and prices to review the strategic composition and direction of the airline.

Airlines must also create partnerships (with corporate customers, external investors and technology providers/innovators) to create the solutions of the future at scale and at economically viable prices – SAF, hydrogen, electric.

Airlines can also consider the role of alliances, by asking: what role do airline alliances have in facilitating and coordinating medium and long term solutions, bringing third party capital to the table and providing a clear value proposition to the corporate and leisure travel markets?

It’s time for change

The airline industry is facing (another) existential crisis.

Beyond COVID-19, the world of investors and large corporate customers is changing in response to the broader demands for responsible operations, of ESG and sustainability, and ultimately of working to reduce the impact on the planet.

The airlines that understand these forces and the speed at which they are operating will be ahead of the pack in terms of being a suitable partner for capital and for customers. There is a synchrony here, in that the emerging airline competitive environment will place enormous pressures on airlines to reduce operating costs – which largely translate to reduced emissions, notably using new more fuel-efficient aircraft.

COVID is the challenge of today and tomorrow, but climate risk, decarbonisation and ultimate corporate survival is the challenge that is – and should be – on the radar of airline boards and senior management.

CAPA and Envest look forward to welcoming you to CAPA Live in Sep-2021 and finalising the [Airline Sustainability Report] in Oct-2021, to help make a difference.

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