CAPA Chairman’s Update: Environmental Sustainability is THE issue

Transcript

Speaker 1:

Okay. Welcome again to CAPA Live for September. I'm going to run through some of my thoughts on the whole issue of aviation emissions and what the situation is and what perhaps we can do about it. Nearly three years ago we predicted in CAPA, in our airline leader projections for the year, in fact, projections for the decade, that the 2020s would suffer in many ways as the prime issue confronting airlines being the whole environmental sustainability issue. And I think despite or perhaps because of COVID, that is more pungently the case now. It is going to be a massive issue and there aren't any quick fixes. There are no silver bullets, but there are a lot of factors that the airline industry and the aviation industry as a whole has to confront. So we really are in a race against time in several different aspects.

Speaker 1:

I'm going to take a very practical look at the issues. I'm not going to go into the factual matters, which funny, just about everybody including Rupert Murdoch now believes is factual about global warming and climate change, but I'm going to look at how they affect aviation specifically and what the industry needs to be doing and can do to try to address these compelling issues. There aren't necessarily solutions to a lot of the problems and that of course is not just applicable to aviation. It applies to many other industries as well, but there are areas where things can be done and areas where things should be done. There're also areas where things simply cannot be done in a way that's going to satisfy either the demands of many segments of the public, or in fact, the needs of the environment.

Speaker 1:

These are the most complex areas and I'll save those till last, but one of those includes... now, I want to stress this now, measuring what the details are that we're talking about, doing that comparatively and accurately so that we actually can know the size of the issue and what's being improved in it. The starting point, unfortunately, is that today the airline industry is more economically challenged than it has ever been, thanks to COVID. It's a unique moment economically for the airline industry. And what COVID has done is to produce a double whammy on the cost side and on the revenue side. On the cost side there's a massive overhang of debt now because that's what airlines in most cases had to raise to survive through a whole period when there was no revenue coming in.

Speaker 1:

And it's only now that that is starting to be felt because government support in many cases is starting to dry up and things will only of course get worse if the cost of that debt does increase. We're at historically low interest floats at the moment. But what's going to happen in 2022 is airlines are going to collapse. It hasn't really happened in any scale until now, but because of the revenue cost whammy, double whammy, things are going to happen. For those who survive, the ability to absorb additional costs is going to be much more limited than it ever was in the past. And in this process, there's going to be a new profile of successful airline operations. They're predominantly going to be lower cost, short to medium haul with new aircraft.

Speaker 1:

On the revenue side there's enormous uncertainty still about the reopening of borders because of health concerns and we really are learning from one week to the next in terms of making projections or not. Consumer concerns will continue to limit demand and business travel, which is fundamental to the operations of full service carriers, will be severely constrained for a whole variety of reasons. On the positive side and it's not a very happy positive side, one result is that emissions are going to be significantly reduced down from the long-term upward trend. They're going to be significantly reduced up until about 2025 when they start to get back to hopefully, something like where we were in 2019. And that is something that needs to be borne in mind and I think it's often forgotten at the moment.

Speaker 1:

Coming up very, very shortly in just over a month is COP26 and there will be a lot of discussion about aviation along with everything else with that following the IPCC report last month. It's going to be probably a critical meeting in Glasgow next month. And hopefully there won't be any sort of quick fixes for aviation. It's something that needs to be worked out carefully and over time, but you can be certain that aviation will be a significant target at COP26. The airline industry was actually, just to recap, very quick to act as an industry and CORSIA was several years before any other industry got to make some fixed proposals, propositions for activity over the first half of the 21st century.

Speaker 1:

But that said, when it comes to the practical side, environmental sustainability has often seemed over the last couple of years to be a little more than a media exercise. Disproportionately loud promotions about ceasing the use of plastic straws, for example, offsets have been relatively casually offered and very uncertain, token moves to plant trees, which really don't have any major impact on the environment for probably another 10 years if they survive. And you can only plant so many trees. And probably very importantly too, reporting which allows good understanding and supervision of what's going on because it's been very spotty and sometimes quite directly misleading.

Speaker 1:

At the same time too some airlines still have median fleet ages of over 15 years, which makes things very difficult because those aircraft maybe anywhere between 30 and 50% more thirsty for fuel and therefore emissions, than the brand new aircraft that are rolling off the assembly line today. And for the airlines though, the thing is that post COVID, the need to reduce emissions is very, very quickly [inaudible 00:07:33]. I'd like to stress too, it's not just the airlines. The aviation ecosystem is totally interconnected. We talk about the airline industry, but it's about airlines, it's about airports, it's about suppliers, it's about governments as regulators, as arbiters, incentivizes or taxers of the whole system, but also as actors in the system.

Speaker 1:

Air traffic control is a major activity, which in almost all cases is run by governments, quite often without due consideration for the emissions created by the fairly aged processes in many cases. And in most cases too airports are also owned by governments and there's a lot of room for [inaudible 00:08:29] there. And then we have the public, which also has a role to play. In many segments of the public individual consumers might like to... sorry, might wish to make changes to the emission profile that they have, their carbon footprint. There are a wide range of activists, who we call perhaps independent pressures on the industry.

Speaker 1:

There's businesses which have a corporate ESG now, which is really starting to play a role. And I mentioned Rupert Murdoch before, just this week the News Limited has made an about-turn effectively from its pretty much denial of climate change to actually recognising that it is a reality. And that was not done for any idealistic reasons, I think, but it was done, as I understand it, because some of the corporate advertisers with News... and this is why it's important, some of the corporate advertisers had said, "Hey, Mr. Murdoch, you've got to recognise that this is real because we're not going to be advertising with you if you don't." That's the sort of pressure that's filtering all the way through and it's going to have a massive impact.

Speaker 1:

And likewise with investors themselves and particularly the fund managers, who do have a whole increasingly sensitive list of the investors in them, and then pushing it down the line to companies that they invest in to try and reduce the impact of other individual airlines or industries themselves, because that's the way quite frequently large investment organisations do invest. From an airline point of view there are four essential actions necessary. None of them is simple. First of all, the key one is actually to reduce emissions. That's the scientific and operational task. The second one is to respond effectively to governments, to convince governments of the role of aviation and to support the industry in making changes.

Speaker 1:

Thirdly, to convince investors and corporates, as I just talked about. These are key actors. You need investors in the airline industry even though it might not always be a great industry to invest in, but it is very sensitive to invest in. And if you are finding that whole groups of investors are shying away from the aviation industry because it's being seen as environmentally unfriendly, then you have a major issue. So there has to be a convincing now, which is both a political move, but it's also very, very much a factual, operational change. And then fourthly, to respond to the... in the most extreme, the extinction rebellion, to the popular arguments against growth of aviation, which in many cases are justified, but probably more extreme than reality permits.

Speaker 1:

So it's fairly important for airlines to take those in order, the scientific tasks. They've got to be real reductions, they've got to be measurable, that's consistently and scientifically. They've got to be publicised without fluff and avoiding greenwashing because these are not good things to be doing anymore. What are the available responses? Well, we've got carbon offsets. Timeframe for those is in the short term. They're already in use. Sustainable aviation fuels, they are longer term targets although they're occurring at the moment. Improving operating procedures, this is a constant thing of nibbling around the edges, but there are some bigger bites that can be taken [inaudible 00:12:38] continuing activity and it needs a holistic approach to it.

Speaker 1:

Then there's new aircraft technology. In the short term, there are aircraft rolling off the line today, as I mentioned, which are drastically more efficient in terms of both cost to the airline, but also in terms of emissions on a unit basis than the older aircraft. And then there's electric aircraft as well. These are more for the medium term, but in the short term, there are some moves already, but particularly just on the short haul. I mentioned in some respects the conflict in time horizons. This is the key issue [inaudible 00:13:23] that confronts the industry, it's reconciling the need to reduce emissions with what is possible in terms of reducing emissions. The more extremist activists are demanding immediate reductions, and if necessary that involves reducing flying. Well, we do have something, as I said, in that respect which will help to reduce the emission levels in the first part of this decade anyway.

Speaker 1:

The second point is, most of the airlines specific actions which are available only have limited impacts this decade. A lot of what's being talked about will be effective in the 2030s but there's not a lot that's going to make a massive difference in the 2020s. The new aircraft types can make these [inaudible 00:14:12] reductions in fuel consumption and emissions, but unfortunately the great majority of aircraft are older generation and will remain so for the rest of this decade because airlines just are not in a position to replace them with newer aircraft. And so it's really only the carbon offsets that can be implemented quickly.

Speaker 1:

So looking at carbon offsets, they have been described as just licences to emit. They do provide immediate environmental benefits depending on what the offsets are applied to, though it's not sufficient in their case to get to net zero by any means, not in the short-term or the long-term. At the moment they're unregulated and largely voluntary. They arguably don't shift airline behaviour or decision-making until carbon gets to a price where it really starts to make a difference. And it has been argued that they're just financial transactions conducted outside an airline's supply chain or operations. And we'll see later on, the cost impacts can vary uncomfortably widely. This is where the industry does get splintered.

Speaker 1:

Just this week, picking up some numbers on... I mentioned CORSIA before, the aviation industry programme to reduce emissions. Just in the last two months, three months, CORSIA regulated offset prices have more or less doubled in price, which does give you a feeling of some concern that this is not going to be perhaps as greater a reliable leg to stand on, even in the short term for airlines. And if we look at the EU has ETS prices and these are prices on the dollar scale and the Euro scale, [inaudible 00:16:20]. The allowances that the European Union has under these ETSs are individual credits for emitting one tonne of CO2... one tonne of CO2. And as you can see that's gone up from a very low level relatively in April 2020 to almost three times that price today. That's associated with economic recovery, but also it starts to become... this is where it can be quite dangerous, it starts to become a money market play.

Speaker 1:

It can be, to use a word crudely, manipulated. That's perhaps not the right word, but it does become something which goes far beyond the airlines and their actual emissions. It's a market and it's potentially very dangerous for the airlines. Just to look at some actual numbers, in 2019 the industry emitted round about 900 million tonnes of CO2 into the atmosphere. McKinsey suggested that price per tonne should be 40 to US$80. The US government has suggested that the social cost is probably maybe almost twice that amount. Carbon offset prices are still evolving, but as we're seeing there, it's around about $5 a tonne. And even at that price, that's going to cost the industry about four and a half billion dollars.

Speaker 1:

If we go up to 60 euros or 70 US dollars a tonne, that becomes $63 billion a year. Now, again, to put that in context, in about three years of the 75-plus years post-war aviation profits have exceeded $35 billion for the entire industry. So the concept of absorbing an additional $63 billion is beyond the pale. It's not going to happen. So there aren't going to be changes there unless that issue is changed a bit. Looking at SAFs, sustainable aviation fuels, some numbers again, back in 2019, airlines burned 13 million gallons of SAFs. That represents about 0.01 of the 18 billion gallons of jet fuel burned in total. And if we move ahead to 2025, industry targets are somewhere around one to 2% of total burned. And even that perhaps looks a little bit optimistic given the base we're working from.

Speaker 1:

Secondly, for the aviation industry, SAFs are very expensive. They tend to be, depending on the price of fossil fuel, around about two and a half times the cost of fossil fuels [inaudible 00:19:11] cost for the airlines. Distribution of SAFs is quite complex. There's obviously a supply chain for fossil fuels a longstanding one, but for the SAFs it's nowhere near as easy. SAFs need incentives from governments. They need incentives to be investing in a very, very expensive process of trialling SAFs and making adaptations to the whole operation to absorb them. So it's going to take many years to get to 50 to 80% usage and that's well beyond the current horizon of commercial [inaudible 00:19:48].

Speaker 1:

The air is where things can really improve quickly, in operating procedures and new technology. Historically, our longterm airframe technologies improve fuel efficiency at about 2% per annum. And over the last three or four years it's, with the newer aircraft, probably been, depending how you measure it, around about 20%. eVTOLs, electric aircraft, are a new horizon. And then things like operationally enhancing day-of operation strategies. I might go into detail on that, but that really is around the need for airlines to have quick turnarounds, to have quick slots, predictable slots, because if they don't have quick turnarounds it can actually cost numbers of aircraft, but then again, you run up against the whole operating environment where other inefficiencies come into play. And there's a lot that can actually be done there. Certainly improving air and ground traffic control procedures, and I'll come to that in a moment, is a major potential impact.

Speaker 1:

And then fundamentally, and this is entrenching a mindset across the ecosystem that we need to work together to be doing these things and not pointing fingers and not trying one-upmanship. So efficient aircraft, particularly the 321s, the [Maxs 00:21:16], the A220, these are aircraft which really do make a difference. I won't go through these in detail, but these are a range of the electric vehicle aircraft that are seeing quite a lot of interest from airlines and even substantial orders from at least two of the major US carriers in that respect. But it is a long time before we get to a large aircraft. So the right electric [inaudible 00:21:44] which is 80-plus electric airline giving it a range of a roundabout 500 kilometres. That's probably decades away.

Speaker 1:

I mentioned day-of operations. I [inaudible 00:22:01] detail on that, but it is a potential area which is complex, but which can make a big difference. But governments in reality can make the biggest difference by not blaming and taxing airlines, but by actually taking a role in improving the system, particularly in the area of ATC, air traffic control, and by providing incentives and not just taxes, which are often not used to fund research into how to improve the system. The sort of things that we're seeing out of government, this is a UK climate change committee report just at the end of last year. A couple of suggestions there, put in place carbon budgets for long haul flights, which are the worst culprits in terms of emissions, obviously, but also recommending businesses to choose airlines with net zero commitments measurable and which are behaving effectively.

Speaker 1:

Those are important things, but I think the role of government should be much more active than that in terms of doing things themselves as well, because this is where the short fixes are. They're very much under government control and they can really make a big difference, but though instead often taken a comfortable stance of just deflecting [inaudible 00:23:29] away from their own roles, because they're uncomfortable. They involve unions, they involve large processes, which involve government [inaudible 00:23:37] and just casting the entire responsibility for emissions onto the airlines. In fact, governments actually straddle a whole lot of activities that could bring those biggest short-term improvements.

Speaker 1:

And they're acting this way, despite the clear recognition by governments that the aviation industry does deliver immensely invaluable services, both socially and economically. In fact, the world would be a very different place today where it not for our services, as we found, in fact. I want to focus a little bit on innovation services, particularly in Europe, because that's where there really are some of the worst offenders in this respect. And just an extreme example here, but when services at the beginning of this year, we were really only operating on a skeleton basis, it was seen that... well, EUROCONTROL observed that unit-seat emissions were halved. In other words, those aircraft flying were emitting half the level that they were operating in normal systems, because there were no delays, there were no diversions and aircraft were flying pretty much directly.

Speaker 1:

Now, that's obviously not a viable situation when you do get back to commercial operations, but it gives you an idea of just how much the air traffic control and around-airport operations can change things. ANS providers, air navigation service providers, ATC, are mostly under the control of their national governments then they generate revenues for the national [inaudible 00:25:27]. They create jobs which are mostly, very heavily unionised and they do at the same time give an appearance of national control over their airspace. So these are things which should militate against efficiency, but of course, when there are delays it's always the airlines who are liable for passenger compensation. Again, not really something which is logical if they don't have a major part to play in most airlines.

Speaker 1:

The period leading up to 2019, the SESAR study, which is a single European airspace study, produced some numbers, which are really quite alarming. It suggested that every flight in Europe could save between 240 and 450 kilogrammes of carbon monoxide and dioxide, CO2 emissions, per flight. Every flight could save that much. And over the period that they were looking at up to 2035, they would be saving 7 billion kilogrammes of CO2 just by implementing some relatively simple logical rational changes to the system, in the process they'd save over a billion dollars to the airlines. But more importantly, 7 billion kilogrammes of CO2 just by making a few simple changes.

Speaker 1:

And this is another diagram from that study which shows, without going into detail, again, it's fairly complex, but if you look at the average load in that dotted line in the middle, that is about the efficiency of the system. It's about 60% efficient compared with what it actually should be doing. And that's because we've got entrenched and fragmented national airspace limits, multiple air traffic controllers, there's inadequate digitalization, a lot of old systems, quite often incompatible, not enough discussion, not enough coordination across the industry. These things are relatively straightforward. They've been identified, they should be changed and they need to be changed if we really are serious about reducing emissions.

Speaker 1:

Looking at a US and European study of flight inefficiency in air traffic management, about 27 plus 20%, about 47%, nearly half of the contribution to [inaudible 00:28:03] distance, which means [inaudible 00:28:05] more emissions, is around routes and restricted airspace, just having standardised routes and restricted airspace and around arrival, holding and [inaudible 00:28:14] around airports. 30% use a congested airspace, which is perhaps something that's hard to avoid. 30% due to adverse weather, which is only going to get worse. We've seen that and we're seeing it every year, massive disruptions of the airline industry because of an increase in dangerous weather patterns. And departure procedures, which also could be improved. As a result, in the European study aircraft fly around 10% access distance compared to direct routes, additional emissions. And some of that at lower altitude, which means they're burning more fuel as well.

Speaker 1:

In the US, almost the same, but these are things that can be changed. OEMs and suppliers also need to be making changes and are working almost independently of governments in a lot of cases to do this because they have such a vested interest. But personally too, we have an obligation to make a difference. The US, these are numbers which are often used, produces about four times the world's average per person in terms of carbon footprint. And that average, that world average of four times needs to reduce by 50% for it to avoid a two degrees centigrade rise in global temperatures by 2050. There's a lot to be done there.

Speaker 1:

So what is the thinking in doing that? Well, this is from the Tony Blair Institute, a study which has been done quite recently. Only one in five consumers suggested they're likely to be flying less in order to contribute their bit to carbon footprint reduction. That's something also that needs to change, and it doesn't help the airline industry very much if they fly less, but it is an indication that there's perhaps a greater reluctance to take individual action, which is really necessary. And finally, I want to talk about measuring emissions and how to improve, because the only way you can actually move towards improving things is by measuring what's going on and knowing who has changed, and what has changed, and therefore, where are the areas we can improve more.

Speaker 1:

It's clearly very difficult to get an industry position on these things. Every airline is different. The levels of CO2 emissions per RPK, per revenue passenger kilometre, vary widely. And on the other hand, on the cost side, their ability to absorb pricing from carbon pricing varies quite dramatically and it relates to equity and what their profitability is or was. Also, in terms of an industry position, airlines individually are going to compete for that green dollar. They want to steal customers from their competitors. They also want to attract investment from their competing airlines who are also seeking investment. And last but not least, every jurisdiction is evolving differently. There's little coordination globally. EU, the US, but then beyond that, there's really a wide range of attitudes being taken and actions being taken by government or not. So, who needs to know about measuring emissions? What the relativities are and what the improvements are.

Speaker 1:

First of all, they need to be standardised. They need to be impartial. And the ones that need to know this are the governments; are airlines themselves so they can measure their own performance internally; customers who want to know which routes, which airlines are the better ones to fly if they want to reduce their carbon footprint; corporate buyers who have a whole range of interests in terms of [inaudible 00:32:25], in terms of their own carbon footprints as a corporate, but also because of investor activity now that they're going to be told if... You're going to see corporates reporting what their carbon footprint has reduced by and to, almost on a quarterly basis. These things are going to become very much front of mind and the same goes for investors, in fund managers who are going to have investors in them. And so we see it all down the line of this ecosystem.

Speaker 1:

What are the variables that affect CO2 per revenue passenger kilometre? And how different are airlines? They have different stages links. They have different route networks and they're operating different aircraft types, have different seating density on a particular aircraft and load factors will vary quite a lot, anything from 95% load factors down to 80%, which makes a massive difference. And then aircraft age depending on the airline profile. It's those three issues, aircraft type, seating density, and load factors, which generally correlate most effectively with emissions [inaudible 00:33:42], and they're the ones that really are the most sensitive. Externally though, we've touched on weather as an import important feature, route and airport congestion and other operating procedures which are among those variables.

Speaker 1:

Now, in terms of measuring, these are actual airlines. I haven't put the names in there, but they come from [Invest 00:34:08] a company we're working with on creating models for measuring emissions and comparatives. But they're also based on airline reports, which I'll mention in a moment too, but according to the airlines, they're actual emissions per RPK in 2019. As you can see from that, between the best and the worst, and this is from a sample of a majority of the world's emissions effectively from airlines which emit the most in CO2, a hundred percent variance there. And if you go to the other aspect that I mentioned before, the impact of carbon pricing and profitability, the array of different levels of ability to absorb carbon prices is massive. It's just so substantial that it's really hard to envisage how the ones at the far end on the left are going to be able to absorb any pricing. It's quite difficult to imagine, frankly, but that's a fact.

Speaker 1:

And when we are looking at these improvements, I'd just like to stress the fact, there's got to be a credible and substantial improvement before 2035. That's where we run up against this rock and a hard place. We need change, but it's hard to make that rapid change. Secondly, there needs to be a coherent message even though there will be individual ones for competitive reasons. Thirdly, there need to be agreed standardised transparent forms of emissions and of reporting them because at the moment reporting is a dog's breakfast. As we've discovered, as we go through and analyse very carefully what airlines have been reporting, and from one year to the next they'll change the way of reporting in some cases. Sometimes it's a matter of just improving methodology, but there does have to be consistency. There have to be industry standards.

Speaker 1:

And avoiding the BS, this simply devalues all efforts if it is just a media campaign, a PR campaign. And a Refinitiv survey which was recorded by the Wall Street Journal just recently showed that 50% of 250 institutional investors who were polled, and between them they had $10 trillion under management, 57% of those 215 investors believe that greenwashing is rampant and that companies are actually misleading the world with their environmental credentials. Moreover 84% of them believe that the practise is becoming more common. Very good reasons for not embarking on that course, if you are trying to persuade people that you're doing the right thing. So how do airlines respond to governments? First of all, multilaterally as an industry, formulate operational strategies that do embrace government roles that really bring them into the ecosystem.

Speaker 1:

Coordinating responses has got real and practical potential, but it just doesn't bring the government into that thought process and that's where the quick fixes are possible. That's where really there needs to be a lot of attention. Secondly, present a coherent message. Don't leverage, for example, national government to support a strategy that actually benefits you against your competitors because they happen to be more efficient or whatever. These are crucial and sometimes natural things to do, but it's not providing a useful service to the industry as a whole. Thirdly, and this is something that IATA particularly has been very active in, just reinforcing the role that aviation and travel play in shaping the world's economic and social development.

Speaker 1:

It's a no-brainer really. And then if we are going to have taxation, fourthly, you've got to convince governments that it doesn't actually serve national interests. If there is going to be taxation to punish the airlines, then those funds which are collected really need to be applied to achieving emission reductions, to research in that area. And then to come to the conclusion here, the flight shaming approach, there's a whole line of argument that suggest that airlines are really just the vehicles of the rich. It's an overhang from the past, because in fact while obviously wealthy people do fly on airlines, it's actually [inaudible 00:39:17] people. And so, AAF for example, has suggested that... which is a fact, I'm not arguing with it, that between 80 and 95% of the world's population never been in an aircraft.

Speaker 1:

And the flying within the UK is mostly done by a minority of people on higher than average incomes. That's only one end of the stick. The other end of the stick is that, as the WCT has said, last year 62 million jobs were lost because of the [inaudible 00:39:47], because of the airline industry not being able to fly people, but also because obviously a lack of economic activity and borders being closed. But across the industry, there were 334 million... the travel industry, 340 million, give or take, people employed in 2019. And the majority of those are in developing countries.

Speaker 1:

Partly measured in that and partly not is about another 50 million directly employed in the airline and associated industries with enormous flow-on impacts. Now, these are not numbers that change the level of emissions, but they are factors which recognise that there is another side to how we go about getting down to levels which are relevant. You've got to really accept the fact that one in 10 jobs worldwide relies very heavily on aviation, on the airline industry. And if you reject that and focus entirely on emissions and adopt effectively unreasonable, unachievable deadlines for reducing those emissions, then it is going to have a massive impact socially and economically, particularly for many developing nations. So I'd like you to think about those things and let's hope we can get there in a combined way right across the ecosystem. Thank you. Please stay sustainably safe.

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