Under the Obama administration American Airlines (AA) has felt increased pressure to reduce their greenhouse gas (GHG) emissions. Building on the Clean Energy Act from 1963, Obama tasked the Environmental Protection Agency (EPA) to look into airlines. As of July 25th 2016, the EPA concluded “that greenhouse gas (GHG) emissions from certain types of aircraft engines contribute to the pollution that causes climate change and endangers Americans’ health and the environment.” This announcement, while obvious to many, is instrumental to the US imposing restrictions on domestic and international airlines. It builds on the success this past April, where 193 countries signed the Paris Agreement to curtail air pollution by 2020.2 In hopes of putting real action behind the Paris Agreement, just this past month the International Civil Aviation Organization (ICAO) ratified the “Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to address any annual increase in total CO2 emissions from international civil aviation.” 3 CORSIA is described as a “market-based measure” to freeze pollution from international commercial aviation at 2020 levels, beginning as a voluntary measure in 2020 and going into full effect in 2027.4 Under CORSIA countries who cannot maintain their 2020 emissions levels into the future would need to purchase additional GHG credits, thereby impacting their bottom line.4
AA, being the world’s largest airline by revenue and fleet size, is directly impacted by the restrictions enacted under CORSIA, and the dubious upcoming domestic restrictions to be enacted by the EPA. Just days from the election, the future of domestic aviation policy is the air as the EPA, AA, and consumers await the outcome of the election. Under Clinton, it is clear that Obama climate change policy will continue. It’s likely the EPA would implement a domestic policy like the ICAO CORSIA, curtailing pollution at 2020 or even 2015 levels. To mitigate a lot of the upcoming changes, American enacted a new plane a week initiative leading to the youngest fleet of amongst the major US carriers.5 This helps because modern A-321neo aircraft are 20% more fuel and carbon emission efficient than the last generation of A320s.6
Given the likely shift in domestic policy, the upcoming international standards post 2020, and fuel price volatility I think the US airline industry to ripe for a shake-up. AA is positioned to be the most impacted by the shifts and while it’s young fleet of fuel efficient planes will help; it won’t be enough to meet the changes. To prepare for the emissions changes AA has four levers: it can optimize its fleet, create a more dynamic network of routes and schedules, develop strategic partnerships to boost utilization, and or adjust it pricing model to be sensitive to weight.
All of these four options create value for American through increasing efficiency in the form of return on assets. Meaning, how can AA use its planes to create more customer value in the form of flight miles, without emitting more.
First, on fleet. American can phase out older planes, consider swapping engines to new next-gen efficient engines, and or consider swapping interiors for lighter carbon fiber like materials. Most of these options are capital intensive however. Alternatively, AA can consider optimizing routes and scheduling in real-time, meaning remove waste, cost, and ultimately emissions through a demand driven network. In terms of routes, it could remove or add routes in real-time as sales demand fluctuates. Similarly, it could dynamically adjust which planes are scheduled on which routes and try to optimize the number of seats on that route. While historically difficult given range requirements, advancements in ETOPS ratings, proliferation of mid-size aircraft like B-787, and digital scheduling and routing, it’s now become an algorithm problem.
Externally, it can rethink its partner strategy. AA currently sub-contracts its regional flights to local carriers and can extend this practice to more of its domestic routes. Regional carriers operate smaller aircraft, which do not have the scale benefits in terms of emission per customer flight mile, that AAs flagship B-777s and competitor’s A-380s have. This is because of two factors, first scale (e.g., seats) weight benefits in designing a plane, and because the take-off of the plane is the time in which it’s least efficient.7 Partially divesting from its domestic market would be radical but could yield higher profitability.
Lastly, a revenue lever could change customer packing behavior and lead to lower weight being carried onboard and subsequently less fuel consumed. This could take the form of either a scaling cost with carry-on weight, or in the form of an incentive system for individuals with no carry-on. While currently “bare-bone” rates are implemented in lost cost carriers they could become a way to mitigate cost of economy international airfare post the ICAO 2020 agreement. (800 words)