Sustainability Facts – Key Numbers in the Transition to Net Zero

Transcript

Simon Elsegood:My name is Simon Halls-Good. I am CAPA's Head of Research, which means I get to look at a lot of spreadsheets and try to make sense of them and then work out what's going on in the industry. The topic for this afternoon is aviation sustainability. And I'm going to run through some numbers that CAPA and our partner at Envest Global, who are an international carbon reduction strategy and investment management company, have developed over the last 4 or 5 years. And this hopefully will help to frame the conversation a little bit. So what is being presented here is data that generally dates back to 2019, which is when airlines really started to get serious about the net zero conversation and the industry-wide commitment out to 2050. So collectively, the industry in 2021 set that goal that it would have net zero by 2050. So CAPA and Envest started collecting data, and what we've done is we've analysed information from more than 100 different airlines and airline groups And globally, these airlines represent somewhere around 75 to 80% of passenger kilometres. And what we've discovered is hopefully fairly interesting. So generally, we've found that there was a lack of transparency and a lack of disclosure, and there was also substantial confusion about the industry's progress towards net zero. We've heard sort of the phrase, we don't know, this morning about how we're going to achieve that goal. So what we did is we sort of sat down and we wanted to compile an independent, high-level source of industry data that provides a real macro-level overview of what's going on with sustainability and to give CAPA members the ability to compare like for like with airlines and how they're progressing on their sustainability journey. So let's look at where we are today. This is emissions that is just from flight operations, looking at 2019 to last year, and essentially we are back to where we were 5 or 6 years ago. In some ways, and somewhat counterintuitively, this could actually be quite In 2024, we were seeing the last of the rebuild phase post-COVID, particularly in parts of the Asia-Pacific. We have, as we've heard today, ongoing supply chain and MRO issues, aircraft delivery delays, grounding of older— of newer aircraft, which meant that we kept older fleets in operation. On the other hand, though, it does show that from an efficiency perspective, the airline sector has really been standing still. In 2024, aviation as a whole handled around 200 million more passengers than it did in 2019, and it did it on about 100,000 fewer flights. So there have been some gains, but factors like slow OEM delays have seen average fleet ages climb from about 13 years in 2019 to 15 or a little over 15 years, and the pace of fleet replacement has essentially halved since 2018. Now, as we move past the post-COVID operational disruptions, the efficiency of flying has been restored. We're still seeing some things like geopolitical conflicts which are leading to Airspace difficulties, airlines flying longer routes than necessary. So just want to dive a little bit deeper into some of the data and look at specific airline models. So fundamentally, what we've seen since 2019 is that low-cost carriers have about a 20% operating efficiency margin compared to their full-service counterparts. This is fundamentally a part of the model. LCCs operate at much higher densities. They tend to operate medium-haul point-to-point routes into less congested hubs, and they tend to operate at slightly higher load factors as well. They've also seen a big step up from LCCs in terms of their operational performance in the post-COVID period. Particularly in average load factors. And also in some markets, they've really stepped away from a lot of the short-haul flying that they used to do. We've seen a significant reduction in the number of domestic routes that LCCs are flying, particularly in some regions like Europe, but also in the Asia-Pacific. So what does it look like if you put this 100 or so airlines that we've been comparing All together in a chart. So this graph shows the industry average grams of CO2 per RPK, which stands at about 89. The big standout on this chart is obviously Wizz Air that is operating at about 52 grams of CO2 per RPK. And then you have some of the short-haul regional carriers and some of the airlines that tend to operate significantly older equipment, you know, fleet ages above 25 or even above 30 years in Africa and in some of the Central Asian carriers that tend to have very, very low efficiency. But generally what we see is that airlines are within about a margin plus or minus about 10% of that industry average. We see very high levels of efficiency with other LCCs. Notably Scoot in the Asia-Pacific, Volaris, Ryanair, and Pegasus consistently place in sort of that top 10 carriers by efficiency. If we turn away to some— from efficiency to some broader considerations, when you start to really examine what the industry's options are to lower its carbon efficiency, carbon emissions, we have to turn away from efficiency and look at other solutions. These are big picture solutions. Technological developments like new aircraft, hybrid electric, hydrogen, that sort of thing, are at least a decade away, probably substantially longer. So for the moment, jet turbines is where it's at, which means that we need to turn to alternative fuel sources if we're actually, actually going to reduce the industry's emissions overall, not just on an efficiency basis. And SAF is really the only technology that is mature enough right now to start to deliver any emissions reductions. Unfortunately, SAF only accounts for about 0.3% of total industry fuel burn last year. It's also worth looking at some of the numbers around SAF. That 0.3%, we are at the early stages of the SAF journey. Technically, airlines have been operating commercial frequencies with sustainable aviation fuel blends for about a decade now. But if you compare it to something like the ramp-up of solar power, which is now sort of well beyond what industry experts were expecting, both in terms of deployment and in terms of cost per unit, SAF is following a very similar growth trend to a kind of the ramp-up we've seen in solar panel. Some airlines are making some standout progress. So KLM and British Airways were the first airlines in 2023 to exceed a 1% SAF threshold of their total fuel burn. IAG carriers reached almost 2% last year, but distribution and consumption is very, very concentrated. About 70% of all SAF consumption occurs by European airlines. So in this region, there is no large-scale sustainable aviation fuel production. Everything is essentially at trial. stages. We are seeing some significant developments in the region. We've already had Brazil put in a SAF mandate, and we've seen regulatory process— progress with SAF in Colombia and Chile. And there are other countries in this region that are strong biofuel producers where there is infrastructure already in place that can be used to produce low-carbon alternative fuels. So Argentina, Paraguay, and Uruguay. Um, so Latin America faces the same challenges as much of the rest of the world. There isn't enough SAF to go around, and what is being produced is being consumed by a small minority of airlines. Um, generally speaking, policies and incentives are desperately needed to support SAF, and these are mostly absent in this region. And because there's not sufficient demand and the regulatory environment is so uncertain, financing is a trouble. Lenders are hesitant to invest in projects that they're not certainly going to get a return on. So given the importance of SAF to decarbonization, it's really important to start to look at what costs SAF is going to bring to this sector. And the numbers are reasonably depressing, unfortunately. So just starting with some, some fairly basic assumptions, what we've done here is calculated the cost of SAF sort of on a per-ton basis and how much it would equate to removing a ton of carbon emissions. What this really comes down to is that Using SAF, it costs about $700 a ton to remove 1 ton of emissions. In comparison, the Corsia tax— Corsia emission units are averaging between €12 and €27 at the moment. So it's quite a substantial difference. That number actually jumps around quite substantially depending on what assumptions you do use, um, you— from market to market, the, the price could be as low as $300 or it could be as high as $1,000. Um, so what does $700 a ton mean to the industry when it comes to EFS? Well, if airlines were to take it, it could 100% fuel their fleets with SAF right now to remove all their carbon emissions, it would essentially mean a 60% increase in international airfares. SAF is not the only lever that the industry has, but most roadmaps have it as the main lever, accounting for somewhere between 50 and 75% of total emissions reductions are the projections. Other things— efficiency gains, new new aircraft technologies and market-based measurement measures like Corsia, EU ETS are expected to maybe be 20%. It's my expectation that we're going to see market-based measures and emissions trading schemes become substantially more important because of the slow roll-up of SAF and the expense. So if it's so expensive, who's best positioned to actually afford SAF. So this is airlines that are ranked by cost and by emissions per unit, per RPK. And one of the good things about Latin America is that airlines in this region tend to have very low cost bases and they tend to be quite efficient. So those airlines in the green are generally well positioned to deal with decarbonization. provided the fuels are available. And airlines that are in the upper left quadrant in the, in the red are less, less well-placed. So LCCs tend to be more favourably disposed towards these things, full-service carriers less so. I'll just switch to something a bit more on a global perspective. One of the things that we noticed when we were crunching the data is that airline global alliance members tended to have substantially higher unit emissions than the rest of their peers. There's a bunch of reasons for this, but generally speaking, it's because full-service carriers are members of airline alliances. They tend to operate at lower densities. They tend to operate longer routes, and those things translate to substantially lower efficiency. What we have seen though is that airline member— member airlines have been substantially successful in lowering their their individual emissions over the course of the last 5 years. Particularly, we've seen refleeting in the widebody space, which means that more and more efficient next-generation aircraft are coming into service. The problem for full-service carriers is that they can't get enough narrowbodies to suit their demands. It also is notable that People who fly with airline alliance members tend to fly more than most other travelers, and they tend to make sustainability a bit more of their decision and thought process around travel. That doesn't necessarily translate into actually being willingness to offset their emissions or anything, but it may affect their purchasing decisions at the time when they sit down to make a booking. Finally, I would like to just turn to disclosure. So the data that CAPA and Envest work to compile comes from publicly available sources, things like the very detailed sustainability reports, annual reports, financial data, all that sort of stuff. As of 2024, about 85% of airlines disclose both their fuel and their CO2 emissions. Now that's up from about 55% in 2019, which was the first time that this data was compiled. So a 30% improvement is pretty good, but it definitely could be better, and it probably should be much better. At the moment, there is no global standard around sustainability reporting, although IATA does provide an industry guidance around sustainability metrics. This means that what has happened is that there are a lot of gaps in the data, even from major substantial international carriers. They underreport, or their reporting is done in non-standard ways, which makes for passengers, for investors, for governments, makes direct comparisons between peer airline groups very, very difficult. So if we as the industry think that there is value in providing accurate, consistent, and transparent information to our customers and to our stakeholders, then the industry just needs to do better around reporting and disclosure when it comes to sustainability. All right, I would like to invite up the moderator of the sustainability panel, Alex from HECO. Thank you, Alex.

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