During a session at the event CAPA – Centre for Aviation and its sustainability analysis partner, Envest, revealed some early findings on the significance of sustainability for the airline industry, ahead of the publishing of a landmark report on the topic, due in Oct-2021. The research presented 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 were very significant differences presented between best in class and worst.
The session also reviewed 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 showed 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/T 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.
Speaking at CAPA Live, Envest Global executive director Brett Mitsch noted that there is still “a climate change question to deal with” and there “is a demand for doing better”. He said: "I think people are starting to turn their attention to climate change," and that there is “still a climate change question to deal with". He acknowledges that COVID has “amplified and accelerated some of that thinking… around… where to next", adding climate change has "not gone away in that regard".
“The question of 'what's after COVID', this is, we believe that this [sustainability] is truly an existential threat, because… there is a demand from customers, from investors, from society in general," he claimed. "Even though it's a hard to abate industry, there is a demand for doing better, because the airline industry is part of the global climate change question… or issue".
Fellow speaker, Envest Global executive director David Wills said major customers are now “on an aggressive net zero trajectory, more aggressive than corporate customers" and warned if airlines cannot align net zero emission timeframes with corporate customers, "then it kind of forces a reduction in travel" to enable large corporate customers to meet their goals.
Mr Wills added the "most obvious" is that if the company is committing to a 30% to 50% explicit travel reduction commitment, then the follow effect may "be a 30% to 50% reduction in corporate travel… which would be quite… profound". Mr Wills also noted the commitments are typically a reduction in carbon from travel, "not a blanket, absolute reduction in… travel spend or travel miles", with companies setting carbon budgets or carbon emission limits.
Historically across most industries, including the airline industry, there have been two main drivers for environmental change or progress: government policy and regulations, often in response to changing social demands or expectations; and 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.
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.
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 us all.