Sustainability – it is time for airlines and the industry to update its thinking?

Transcript

Henry Harteveldt:Good morning. My name is Henry Harteveldt. I'm the airline industry analyst and president of Atmosphere Research Group, an airline industry market research firm. We're here to talk about sustainability, and that is a topic that, frankly, we did not hear very much of yesterday, which is a concern to all of us on this panel. As you can see, I am joined by 4— 3 terrific people: Ourania from Airlines for Europe, Marylin from EUROCONTROL, and George from Kenya Airways. And again, I would like to encourage everyone, please, to submit questions for us on slido.com with the hashtag #CAPAsummit, so that we can make sure we are addressing your questions during the course of our session. You know, the title of this is Sustainability: Is It Time for Airlines and the Industry to Update Its Thinking? We know sustainability is important to our consumers. We heard from Marjan earlier. It is something KLM is focusing on. It is important in the Netherlands. But I would like to bring up the slide that Jonathan shared with us yesterday about the challenges with SAF. This is the data that Jonathan put together, and as you can see, there is this anticipated, hoped-for fairy tale dream, frankly, that we are going to somehow get to some enormous level of SAF production, although we are still going to be short of the target that we will need for air transport to be truly net zero. The other point that I would like to remind everyone is we in aviation are often held out as the proverbial boogeyman when it comes to harmful greenhouse gas emissions. In truth, there are other industries that we know and governments know and others know that produce far more of the harmful greenhouse gas emissions. Farming and agriculture, manufacturing, ground transportation. And again, a point that Jonathan brought up yesterday on one of his other slides, the new emerging network of these power-intensive AI data centers are going to be contributing almost as much, perhaps as much greenhouse gas emissions as airlines do. So against this background, uh, let's, let's, uh, uh, talk about what we, what we are seeing happening. Um, uh, you know, the, the— I think that, that clearly we heard this before, we've heard it often, but we do need to discuss it. The cost of, of sustainability is much— is a much talked about topic. Um, We are a thin margin industry. We do not enjoy the margins, say, that software and other industries do. So, and we heard Marjan talk about something in the Netherlands that would— they want to add €71 or something to the price of a ticket to cover this. What can we do? What can we afford to do from a financial standpoint? George, I'm going to ask you to talk about this because you're the airline, but also you've got your own challenges at Kenya Airways in the part of the world you come from because you don't have the same margins that airlines in other parts of the world do. Perhaps you can start us off with this.

George Kamal:Great. Thank you so much, Henry. I'll speak not only about Kenya Airways, but I'll speak generally about the African continent. When you speak about margins, we have the bottom-line profitability of $1.20 per seat. The profit margin is approximately $1.20 per seat versus in Europe, you're talking about between $6 and $7 per seat versus in the Gulf region, you're talking about $26 per seat. With this $1.20 per seat, you want me to Go for a SAF fuel, which is about 3 to 5 times the price of a normal fossil fuel. That for us is something will hit our P&L, will hit our bottom line significantly. I don't think any of us here, if I offer a ticket 3 times the price, they will be happy to pay that.

Henry Harteveldt:Yes.

George Kamal:If the ticket is $700 today, if I tell you, you pay $2,100, you will not be very amused or getting into that airline. The second thing I'd like to put in place is the current African continent, the passenger numbers. We're looking at 98 million passengers today we're carrying, and we are looking forward to 2050, to have approximately 550 million passengers. It's 5 times. You're talking about 460% increase in number of passengers. This on its own makes a difference. The carbon emissions will increase. What do I do as an African carrier with a very small margin? What do I do? I will have to cancel. I will have to shrink actually my network. Not to grow in 2050 projections. It is something where we need to look at. It needs a consolidation in Africa. This is one. It needs us to work together, 2, as an airline, as an airport, as airspace, and SAF production units. We don't have any in Africa. We have zero.

Henry Harteveldt:Right now?

George Kamal:Now, we have zero. What are the plans? Where are the finances? What are the capitals put in there? I will later probably speak about the new European rules coming up for 2040. How can we cope with that?

Henry Harteveldt:Actually, I want to segue from that. First, I would like to ask Ourania to talk about this from the standpoint of airlines for Europe. You know, the fact that your airlines are being held to meet certain standards. There's a new legislation coming out of Brussels about 2040 commitments to reduce emissions, which airlines and aviation will be part of. You know, Your member airlines may have a greater profit margin than George here, but, you know, that's $7 per passenger, $6 per passenger, whatever. That's still not a lot of money. And this is really a question for you. How do we afford to get this? Are we seeing the level of response from government to help with this? You know, to, to, you know, subsidize SAF, to facilitate production, etc.?

Ourania Georgoutsakou:No, is the short answer to that question. But, but let's go back a step. Okay, I mean, we're all trying to get to net zero. That, that is a vision, a target, something we do for our children. Okay, and then you have to think, what is the right way to get there? What are the ingredients in the recipe, and how much of each are you going to stick in, and how much does every partner in that process pay? How do they contribute so that we do get there? In Europe, we did what we do best. We regulated something that does not exist and expect it to become a functioning market. That's— Europe excels at regulating stuff that's not out there, from AI to SAF to whatever. Why? Because Europe is good at setting itself a very ambitious target. We've done it for renewable energies. We've done it for many things in life. Where we struggle is actually reaping the business benefits of that. Today, Europe has legislation in place that says that as of January this year, we're supposed to be receiving as airlines kerosene at the airport, which is 2% blended SAF, sustainable aviation fuel. By 2030, that will be 6%, and 1.2% of that will be synthetic fuels. Now, there's 40 projects to produce synthetic fuels in Europe today, and zero of them actually produce anything because we're still waiting for the the investment decision. So clearly, and this I think Europe has already confessed, clearly just a target like this does not get you to a functioning competitive market. And if I may, we are talking about the SAF, but there's another big chunk of how we get to net zero. The roadmap is 55% fuel, but then there's a 30% which is aircraft and engine, and that's running behind, as we heard as well, significantly running behind. And that means that the cost increases for airlines as we run less efficient fuel and pay more money for the planes we need. It depends on better airspace management, and that remains a significant problem in Europe because we don't have enough capacity, not only in terms of space, but in terms of technology rollout, in terms of air traffic controllers manning the stations and bringing the flexibility we need in order to, again, make the savings in carbon and in emissions and in fuel costs. It's a bigger story than just that. In Europe, so far, the governments have focused and have been ambitious only on imposing obligations and costs with regard to the SAF. Lately, you see, I think 2 weeks ago, right, or 3 weeks ago, we saw 8 member states stand up and say, you know what, you're right, we need to put more money where our mouth is, where our policy is, and we need to be investing and incentivizing investment in SAF production. I am a pragmatic person in life. I think we can do this. I have no idea how we will do this. We have a plan that we put together in 2021, and it is the plan for now. Maybe in 2, 3 years' time, something amazing happens, like China decides to produce SAF and it becomes dirt cheap, just like they decided to do photovoltaic panels and it's dirt cheap now. It's by learning and doing. What I work for in Brussels is politicians who are ready to tweak a policy, that we don't do dogmatic policy. policymaking in Europe or globally to say this is the target and this is the way we're going to get there. But we tweak along the way to keep it affordable because fundamentally, people, as you have said, still need to fly. It still needs to be affordable.

Henry Harteveldt:Yes, Marylin. Yeah.

Marylin Bastin:Yeah, I would like to be a little bit provocative here because we are speaking about the cost of decarbonizing aviation. I would like to speak about the cost of doing nothing to decarbonize because climate change now is also affecting our operation more and more. It's affecting our infrastructure, also our operation. We have more and more delay. Look at the network. You were speaking about lack of capacity during— not this summer, but the summer before. We were losing a lot of capacity because of extreme weather conditions that are happening everywhere. We should balance a little bit the cost of the decarbonization with the cost of damaging our operation because we are not ready. We need to decarbonize, and we need also to look at the cost of being better prepared to adapt and to mitigate the risk due to this extreme weather condition that is happening everywhere. So just to say one side on that. Now, on the sustainability side and the decarbonization side, I also believe that sustainability is also about the social and the economical aspect. So when we speak about environment, the solution needs to be affordable. That's clear. Maybe this is where we are lacking of support as the aviation industry, because our sector is still perceived like not green compared to other transportation sectors, for instance. This is not fair, actually, because no transportation sector is sustainable today. We need to find a way, especially in Europe, to find some incentive to reduce the cost, to help the aviation sector to decarbonize. I'm going to give an example. Now, in Europe, Airlines, and not only airlines, it's the whole aviation industry, are really suffering to get access to green funds because the financial sector needs also to be green. And so they don't want to invest so much in the aviation industry. And on the other side, we are criticizing aviation not to boost, to accelerate the decarbonization, but we are a little bit penalized to get access to those funds. So we really need to work on that part as well. We need to better communicate about what we do to convince also the financial sector that we can make it like any other transportation sector. And from a Eurocontrol point of view, I'm really convinced that we have a roadmap. We know how we could decarbonize the aviation sector, but now it needs to be financed at an affordable cost. And, uh, yes, for now, it's what I would like to say on that.

Henry Harteveldt:I'd like to just, uh, build on something you made, a point you made, which is, uh, uh, we are seeing more weather events.

Marylin Bastin:Yeah.

Henry Harteveldt:And I'm just curious if if you know offhand, roughly, like, compared to a few years ago, how many more major weather problems are happening in Europe? And George, I'd like to get your perspective also because you're the COO of Kenya Airways. You know, I'm hearing it from the pilots that I know that they're encountering not only more major weather issues, but they are more severe. Turbulence seems to last a little bit longer perhaps than it used to. I'm just curious from your perspectives what you are seeing in terms of your organization.

George Kamal:We see a change, definitely, especially in Africa. The change in Africa is huge. Let me just enlighten everybody how many airlines we were just speaking, me and Ourania, about African airlines. More than 130 active airlines in one continent, some with a smaller number of aircraft, some with a bigger number of aircraft. In addition to that, it's outdated aircraft because of access to facilitation funds and all of this. You don't see a lot of updated engines, aircraft, and all of those. Yes, we've seen in the last few years, I would say last 10 years plus, there is a change, climate change. There is more of weather phenomena in Africa and in Europe as well. We can see that. Again, this is just a small thing to add. Aviation takes about 2% to 3% of the Carbon emission, of the emissions in general. When we speak about all other sectors, all other sectors are struggling. It's not only us who's struggling. I'm not saying that the model is not viable. The model is viable. However, the implementation of this model, the fragmentation we have, Europe has rules and penalizing airlines which is out of Europe even to come in. If you go to the US, It has different fragmented rules as well. If you go to China, they are producing SAF in bigger quantities. If you come to Africa, we still don't have anything very solid to look at. In Kenya specifically, yes, we do. We have targets starting 2024, moving forward, but in most of Africa, we don't have those rules. When you fly to every country, You're either getting penalized, you're either getting a fragmented regulation somewhere else. Every country has its own. If ICAO can consolidate this and put one rule across so we know that it incentivizes the airlines to get the 2%, I don't know how many of the airlines today are doing more than 2%.

Ourania Georgoutsakou:I think it's 2%.

George Kamal:In Europe, I don't know, Ourania, can you enlighten us a little bit? No, it doesn't cost no one. If this is not happening there, I am being penalized from Africa to go to Europe. What do I do? I stop the flights or change the network, or what do we do exactly? Those are— or we get support from the EU, from the industry, African continent as well to support SAF production into Africa, within Africa itself.

Marylin Bastin:I would like to say, because you are complaining that when you are flying in Europe, you are penalized, but you have to think that European airlines are even more penalized than you are because there are some specific regulations that apply only to EU flights, like the new MRV, the Monitoring Reporting Verification framework, on non-CO2, meaning that the airlines now since last year, they have to report on their non-CO2 emissions, including contrails. I think this is the only region in the world that has to do that. This is an additional burden that the airline has to do. There is a lot to say about that, so maybe I will not start to speak too much about it.

Ourania Georgoutsakou:I think we both picked up on an important point. First of all, I fully agree with you. We need to be going— this is a global problem. Global problems need global solutions so that the EU shows ambition. It's typically you, but ultimately, we should be moving towards an ICAO framework that functions and that applies to everybody. I definitely advocate for that as Rania and as Airlines for Europe. When people tell me ICAO is not too strong, well, ICAO exists. It has the merit of existing. The maritime guys didn't manage to get a global framework a month ago. Aviation, let's just pat ourselves on the back for a moment, has something which is there, might have teething problems like everything else in life, but exists. I think that's definitely the path that we should be going down. Then if we're going to talk about what to do next, I think we should be thinking about how are we going to redistribute the obligation and the burden and the cost among everyone, because right now what I see is that the airline is a choking point. We pay for the fuel. We pay the surcharge of the fuel when it doesn't exist because still someone needs to whatever, make some money in life. We pay for the passenger rights. We pay for the airport. We pay— we have decided to become the clearinghouse of all these costs and then end up complaining as airlines that it's too expensive, we have too much. In the world of SAF and in the world of sustainability, maybe we should think about distributing all those costs a bit more fairly, right? I mean, the EU is looking for €500 million over 2 years just to kickstart some ESF production, what Marianne was talking about earlier this morning. And at the same time, we're negotiating a review of passenger rights legislation, and one proposal that came out 3 weeks ago would cost just one of my groups— and I represent 17 groups, so just one— it would cost them an extra €230 million per year. So at some point, politically, we all need to make a decision about What is it we're prioritizing? How expensive do we really think flying can become? I mean, what are the limits of price elasticity before the elastic band snaps, basically? As a Greek, I'm firmly attached to that. There is no other way to get to Greece than by flying. 8 out of 10 go by plane. The same applies to Portugal and many other parts of the world. Let's put the big picture. The big picture is how do we manage this transition, which just for Europe will cost about €1.3 trillion. That's my last name in zeros. Okay, so how do we manage that cost with everything else and share that cost fairly among everybody so that people still fly?

Henry Harteveldt:So €1.3 trillion for aviation?

Ourania Georgoutsakou:Europe.

Henry Harteveldt:In Europe.

Ourania Georgoutsakou:To reach net zero.

Henry Harteveldt:To reach net zero by 2050.

Ourania Georgoutsakou:Yep.

Henry Harteveldt:You know, the world— it seems governments love to use airlines and aviation as their piggy banks. We need to tell them the piggy bank is empty. George, you had a comment.

George Kamal:Yes, it's just a comment between Africa and just to put the continent in the equation. For example, in Europe, you have the free routing airspace a very long time ago. We just started. We are just an emerging market. Looking at that market, with a very huge number of airlines, even probably more than Europe, not the number of aircraft, but number of airlines as AOCs. When you look at that market, you have financial issues, you have all the SAF are produced somewhere else, and I have to import that, which comes to me with, instead of 3 5 times, it comes to 6 and 7 times when it arrives to Africa. Those African airlines fly into Europe, fly in and out of Europe. This also needs to be looked at. Yes, I do understand that European airlines get a little bit more pressure. However, the African airlines with the margin of $1.20 per seat profit margin is too far.

Marylin Bastin:Yes.

George Kamal:Too far. We need, again, I'll ride on what Ryanair was saying, we need to look at global solution for all of us. The model is working, but the implementation, it's not one size fits all. It cannot fit. When I speak about manufacturer, I don't know why we don't have an OEM here. It's very important to have an OEM as well. sitting with us to tell us how they are speeding up the engine production levels in 2026 and what are they doing to ensure that those engines are available on time and not delivery of the aircraft are delivered by delay by 1 year, 2 years delays.

Henry Harteveldt:We just heard the gentleman from Air Canada say that when Airbus says you're going to get an airplane, you know, they add 6 to 18 months to that because of the supply chain challenges. I'm curious, you know, again, as COO, you are probably being pitched all the time at Kenya Airways about new aircraft and these new engines, including whether it's unducted fans or whatever. Are you seeing anything that you believe is going to help you operate your aircraft more efficiently and meet sustainability objectives that you can afford to invest in. You know, I learned a long time ago airplanes are expensive and they have to be paid for, and that's not easy.

George Kamal:We actually look for facilitation and financing to be similar to Europe. I will not ask for financing which is without any interest rate, but the interest rates are very, very high in Africa, always because of the risk. They require more money as a security, and it's more expensive for aircraft acquisition in Africa in general. This is, again, what we are looking for. We're looking over Financing, better financing. We're looking for stuff to be produced in Africa, and that's what we're trying to do. We're trying to push for that. Kenya Airways is working on that. Today, we're doing tactical operations, which means I'll do all the optimizations for flight optimization, flight planning system. I'll do the free-routing airspace. That's what's in our hand to do today. Africa through AFRA and others, IATA as well. We're working all together to try to do this, but number one in Africa, we need to consolidate.

Henry Harteveldt:Yes.

George Kamal:As I said, there are too many airlines with a lot of smaller— one has 2 aircraft, the other has 1 aircraft. If we try to consolidate those airlines into a major, 2 or 3 or 4 carriers, 5 carriers, Then you will be able actually to work more efficient. All of them, some of them are, we heard yesterday, are flying 4 hours, so utilization is very small and old aircraft as well. We need to modernize the fleet. That's what we're doing in Kenya Airways. We operate 787, going into MAXs now and going into NGs and MAXs. That's what we're currently doing.

Unknown speaker:Yes.

George Kamal:But it costs a lot.

Marylin Bastin:Yeah, I would like maybe to react on the SAF production, how to decrease the cost, how to upscale SAF. We published some study as Eurocontrol about that, in which we were assessing the amount of feedstock and energy that we would need to produce enough SAF for 42 countries to decarbonize all long-haul flights. You know what we need? 72 nuclear plants to get enough energy to produce the stuff that we need to decarbonize the long-haul role in, in ECAC area, which is more than 40 states. This is clearly an energy problem. It's first an energy problem, and it's also a feedstock problem. We need enough feedstock for the biofuel, and we need the green hydrogen for the synthetic stuff. The problem with green hydrogen is that again, you would need a huge amount of energy. In that study, we are explaining all of that. This energy gap that we have, it needs to be financed as well. Actually, according to me, this is the biggest challenge of the aviation decarbonization, is to get access to enough renewable energy, clean energy, whatever the energy, but the energy that we need to decarbonize. Let's be clear. This is not It's also valid for the maritime, for the road, for the rail. It's why I was saying that there is no sustainable transport yet. If you are taking a train in Poland, the electricity is produced by coal. This is not sustainable. Clearly, that energy challenge is really a shared challenge, and it's the same in Africa. If you want to develop stuff in Africa or in other regions, you will need to get access to clean energy.

Unknown speaker:Thank you.

Marylin Bastin:to your feedstock for your own purposes and also to the energy. For Europe now, we are really relying on China to give us the feedstock that we need to produce SAF. But what is going to happen if China now is also keeping the feedstock because they want to produce their own SAF? Then we are in trouble. We should not forget the geopolitical context that we have today in which we try to be less dependent. on other regions like in Europe for our energy, because you mentioned it, it's also a matter of security to be independent for getting access to our resources.

Henry Harteveldt:When we were having our preparation call for this, it was discussed that China is planning to build, I believe, 10 factories to produce SAF. To your point, Marylin, If they are planning on that and they're going to do it, then that does mean reduced feedstock or other items that could be used, whether it's in Europe, in Africa, or elsewhere, to produce it. And of course, we don't know how much of that SAF that China would produce would be exported versus used for, you know, within the country. George, as you As you talk with the Kenyan government and any other governments in Africa about the need for government support, or whether it's academia or others, are you hearing the answers and are you getting the commitments you want to get as one of Africa's largest carriers to help you achieve the objectives that you have?

George Kamal:Look, in Kenya itself, Yes, they are looking in general, not only for the aviation sector, but they are looking in general on the sustainability, and they're looking to have about 30% to 32% by the year 2030. That's what they're looking for. Let me be also looking at what Marylin was saying regarding the Feedstock. Regarding also riding on what Ourania said regarding the global work together, number one, Kenya and Africa has a lot of feedstock. It has the land, it has the sun, it has the availability of feedstock. We do have in the continent the availability to produce. We need the funding, We need the capital, we need the support. Even if China is in that direction, we can start producing there, which is going to reduce by even half of the cost as per our studies. We can start, but we need the support. If the EU today is looking for 90% reduction than 2019, They said they will go for a 5% credit. Why don't we use that to finance some SAF units into Africa?

Ourania Georgoutsakou:I think honestly, the discussions I'm having in Brussels, not necessarily in public, but at least bilaterally, is that fundamentally continents like Europe or the EU as an international organizations who have decided to make this ambitious target need to also decide, are we going to reap the business opportunities of that? Are we also going to put loads and loads of money behind getting the production in Europe, or are we going to focus on maintaining a leadership maybe on the aircraft or engine side and decide to make excellent collaboration with our neighbors? Because fundamentally, this is all about, especially today in Europe, It's about energy security, energy independence, strategic independence, and autonomy. Europe is at a point where clearly we cannot afford everything we want to have today, plus we have a war at our doorstep, so our priorities have really changed. Then you have to start making choices. Am I going to start shoveling money down trying to get HEFA production even though 80% of the feedstock is owned by China and they're looking to create new sites? Or am I going to make friends in Africa, in India, in Brazil, in wherever, and start getting some assurance that I will source the SAF I need at a very affordable price and focus on something else in life? That is, I think, the bit where we're not ready to make that decision yet in Europe, but I think that's the breaking point. That is the bit we will need to decide. Otherwise, we can't afford the policy we have today when it costs us $1.3 trillion $3 trillion when the cost of SAF today is what it is, it's only going to cut us off and decrease our connectivity, and that's the end of Europe then. I mean, if the Greeks can't go to Brussels to vote at a meeting, that already becomes a problem, right? Or the Germans can't travel to do business with someone else because it's just too much of an overhead. Right.

Henry Harteveldt:I just want to check to see if we have any questions from the audience on the Slido, or if we do not, if anyone has a question for the panel, please raise your hand. I can see we have one up there. Just one question for you, Ourania. Do you think that there is the desire in Europe to help work with Africa on SAF development, production, etc.?

Ourania Georgoutsakou:I think Europe is open to many things in life, and I think that that's the discussion we're having now because after our targets, then we said, okay, let's be honest, we're not doing well, and we maybe need to review what we have fix it. As part of that review, I certainly talk about who are you talking about with and what can we source from whom. I see an opportunity there and the timing is right. If we don't do it now, then someone will go to market first and let's see who that is, if it's a European or a non-European company.

Henry Harteveldt:The question in the front— oh, you've got the mic. Okay, great.

Unknown speaker:Victoria Moores with Air Transport World. My question— actually, I've got 2 questions. I have 2 questions for George. One of them is specific to Kenya Airways, the other is broader to Africa. So the first one for Kenya Airways is you've been working in partnership on a SAF project within Kenya, and I'm curious to know whereabouts you're up to and what roadblocks you might be experiencing with that. And then the second question is sort of Africa is continuously developing its regulation through the AU in a similar way to Europe developing its regulation. Do you think there's a possibility that we might see some mirroring of things like ETS regulations or RefuelEU for SAF mandates, or do you not think that that's on the cards for Africa at the moment? Thank you.

George Kamal:Let me answer the first one. We are committed to 10% by 2030 as Kenya Airways. For the partnership, yes, it's work in progress. We're waiting for the approvals, the specific approvals to come. Once it comes, we will be starting to look at the first SAF produced. This is an airline supported by some other initiatives from OEMs and other investors. The second question of Putting the rules, yes, but I will not be encouraging punitive rules to the airlines at the current time because when I go to Europe, I get punished entering Europe, and when I go to different places, I can have an incentive. I'm looking for— we're looking for rules and regulations to incentivize more than penalize the airlines, because we tell the airlines to always do so, always on the shoulder of airlines. As I said, the profit margin is very small in Africa because the cost of normal fossil fuel is extremely high. We have a very high cost, so we need a moderate—

Henry Harteveldt:Yes.

George Kamal:Regulatory requirements within Africa and to be harmonized across all the countries of Africa. Africa infrastructure as well needs to be built before we tell the airlines to start decarbonizing and working. Yes, we have to, and that's what we're doing in Kenya Airways, but we must also look at the infrastructure, the airports. Airports are not We are using electrical equipment, but I cannot use all my equipment are electrical because the infrastructure cannot take such equipment, such a load.

Marylin Bastin:Okay.

George Kamal:We know the power energy, whatever coming from the power, is about 26% of the carbon emission. It's one of the highest. We are 2% to 3% as an aviation, And when you try to go to the power, it's 26%. So what are we doing?

Henry Harteveldt:Yeah. We have gone slightly over time, and so I want to be mindful of that. Please, ladies and gentlemen, join me in thanking George, Marylin, and Ourania for their great perspectives on sustainability. Thank you all very much.

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