Preparing for Impact: Will Airlines Survive Climate Change?

A South American Airline is slowly becoming an industry leader in sustainability

“It’s dominating discussions here in our boardroom” said IATA (International Air Transport Association) Corporate Secretary Paul Steele when asked by reporters how airlines are preparing for climate change.

Airlines are currently responsible for 2% of all man-made Greenhouse Gas emissions, attributable to their highly fuel dependent business. Current demand for jet fuel worldwide is about 5 million barrels per day, or 5.8% of total global oil consumption according to OPEC Energy review.

Historically what kept airline CEOs at night was rising fuel prices that negatively impacted the bottom line, however, the imminent change in Greenhouse Gas emissions regulations is poised to become the new industry headache. Since the ETS (EU Emissions Trading System) was launched in 2005 airlines have managed to narrowly escape the long hand of regulators. In 2006 the industry avoided inclusion in the list of sectors that would have to pay a “carbon tax” that applies when companies go over their maximum emissions cap. A study by IATA estimates that if the industry globally agreed to these conditions, at least 2% of their revenues would have to be invested in carbon credits. The burning question industry analysts are asking is whether an industry that has historically suffered from low to negative margins can survive a global carbon tax.

One South American Airline isn’t going to wait to find out

Surprisingly, an unexpected company is becoming an industry leader in environmental sustainability. LATAM Airlines Group, a South American based airline is leading the pack and getting ahead of regulators. It is currently one of only two airlines that are part of the Dow Jones Sustainability Index, the world’s first global sustainability benchmark. LATAM Airlines is voluntarily planning to become carbon neutral by 2020, and to reduce its absolute carbon emissions in 2050 to 2005 levels. This is an ambitious plan that the company is trying to achieve using a three-pronged approach:

  1. Managing the chain: LATAM has established its global procurement and supply chain policy in a way that guarantees their suppliers are complying with the companies demanding environmental standards. They have periodic audits and have gone as far as including an environmental clause in all their contracts, making suppliers accountable for any possible sanctions.
  2. Joint Construction: The company has been partnering with several organizations to promote debate and actions geared toward sustainability and GHG emission reductions. Among these partners you can find the CPD (Carbon Disclosure Project) which has played an important role as a forum for debate, and to whom the company reports its carbon emissions performance. It is also possible to find Carbon traders such as BAM, an Amazon forest based organization that has worked along with the company to offset 25,046 tons of CO2 emissions since 2012.
  3. Relations with Strategic Stakeholders: Rather than face off with regulators, LATAM has decided to work alongside them to develop a “balanced vision incorporating the mitigation of risks and the pursuit of new opportunities to manage the business’ actual and potential environmental impact, with special emphasis in reducing the company’s carbon footprint, using alternative energy sources, and implementing eco efficiency measures”. It is refreshing to see a company willing to ask for help from the same regulators its competitors seem to fear.

While LATAM’s efforts are laudable and a viable alternative for the short term, there is still an elephant in the room. All these actions are designed to either minimize or compensate the harmful effects of jet fuel consumption on the atmosphere. However, I believe it is time to start asking harder questions. Why does the industry insist on using fossil fuels in the first place?

Skeptics might say that the technology isn’t there yet. I would argue that the public and the airlines have not demanded significant change from aircraft manufacturers. Currently Boeing and Airbus dominate the commercial aircraft manufacturing industry, living in a comfortable duopoly with small competitors such as Embraer and Bombardier making up a very small part of the market. Even though there are several bio-fuel run aircraft that have been tested successfully, none of the aircraft manufacturers have committed sufficient resources to getting them off the ground and making them a viable alternative for airlines.

In the long term, what LATAM and other airlines should do is exert pressure on manufacturers to design and produce aircraft that can work on alternative fuels. The technology already exists in other transportation sectors; manufacturers just need that extra push to be able to translate it to commercial planes. Why should airlines alone bear the brunt of carbon regulation? Shouldn’t it be a shared burden on the manufacturers who have decided to keep investing on fossil fuel operating aircraft?

(783 words)

 

Sources

LATAM Airlines 2015 Sustainability Report: http://media.corporate-ir.net/media_files/IROL/81/81136/Sustainability_Report_2015.pdf

http://www.iata.org/policy/environment/Pages/climate-change.aspx

http://www.verifavia.com/bases/ressource_pdf/122/AQ-ICF-2006-Impact-on-allowances.pdf

http://www.reuters.com/article/us-aviation-climatechange-iata-idUSKCN0YP1YE

https://corporateeurope.org/environment/2015/10/eu-emissions-trading-5-reasons-scrap-ets

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5 thoughts on “Preparing for Impact: Will Airlines Survive Climate Change?

  1. Great piece, Mdel!
    – I thought a bit about your premise that airlines would hit negative margins if regulators decided to impose a carbon tax/ETS on them. Do you think LATAM would be able to pass these costs onto the end-customer? Could their margins remain stable if so? And finally, would this dampen customer demand or would it simply capture some value from a customer that they’d be prepared to pay anyway?
    – I was interested in your “managing the chain” point as it was similar to what I wrote about in my blog post “Our Problem Is Not My Problem” (it’s good, you should read it!) By establishing supplier standards, looks like LATAM was able to pass some of the costs of carbon-mitigation onto supply chain partners. You also argue a similar point in your conclusion that Airbus/Boeing need to pick up their share of carbon mitigation. It’s a good idea; a low-cost way to reduce LATAM’s overall exposure to a carbon tax/ETS.
    – I liked your point about “relations with strategic stakeholders”. I think there’s a lot to be said for firms actively working with regulators, even from a self-interest perspective. If firms dig their heels in and refuse to engage, there’s a risk that regulators will simply impose poorly planned regulation on the industry. So a firm has a choice: to push hard and risk having no influence over the regulation, or accept the situation and minimise the impact to their business.
    – Your conclusion was interesting too. My understanding is that Boeing and Airbus source their parts eg engines, from third party suppliers like GE and Pratt & Whitney. Did you consider their role in the supply chain? Do these suppliers have any alternative fuel technology? Is it undeveloped or is the technology simply too expensive?

  2. Great article!

    -I wonder how the useful life of planes affects an airline’s ability to implement the necessary technology to reduce dependence on traditional jet fuel. Maybe, as suggested by the previous comment, this is an opportunity to work with suppliers like GE to develop small improvements than can be implemented in non-routine maintenance.
    -I believe the International Civil Aviation Organization (ICAO) agreed to a strategy to reduce GHG emissions as recently as October 7, 2016 with two goals. First to sustain an annual 2% global fuel efficiency improvement through 2050 and second to cap emissions at 2020 levels. While this is great progress, I wonder how LatAm’s efforts as an early mover will be rewarded and how they are aiming to influence policy so their early action remains a competitive advantage.

    More on ICAO here:
    http://ghginstitute.org/2016/10/25/international-air-travel-and-climate-change-is-aviation-finally-in-route-to-sustainability/?utm_source=November+Newsletter+2016&utm_campaign=November+Newsletter+2016&utm_medium=email

  3. Nice piece Manuel. I was actually thinking of the elephant of the room while reading through the first half, though I would not be anywhere near optimistic about the long term fate. Harnessing the kind of energy required seems to be a challenge that is decades away at the very least. We are still struggling to see cars adopt electricity – the challenges would be multifold while dealing with air travel. We would need to look at a completely different form of energy creation, which would revolutionize not only this industry, but the world in general. However I am yet to read of any interesting development on that front.

  4. Manuel,

    I am with you that a more profound reflection is needed to tackle the environmental issues in the aerospace industry. Not only are jetliners pollutant in terms if CO2, there are many other pollutants that are present in the jet exhausts. Therefore, in order to really combat this problem, the whole industry has to be reinvented. The question that arises is, why have no changes taken place in the last decades?
    The aerospace industry is highly regulated and certification requirements are extremely demanding. As a result, high upfront investments have to be made before the development of a new idea starts. It seems that main aircraft manufacturers (e.g. Airbus and Boeing) still do not want to really invest on disruptive technologies. Until then, airlines will have a hard time to make the desired profit.

  5. MdelCastillo,

    Thanks for this post. I am having trouble to put together your conclusion with what I am reading in Jaime’s post about Airbus (https://digital.hbs.edu/platform-rctom/submission/airbus-more-value-less-impact/#comment-6686) and Carl’s post about Boeing (https://digital.hbs.edu/platform-rctom/submission/boeing-dreaming-big-to-fight-climate-change/). In my opinion, I see a very regulated industry struggling to adapt to climate change both in the manufacturer and airline sides.

    In this context, would an alternative mode of transportation have a huge advantage competing against airlines? (e.g., See this post about a new transportation system https://digital.hbs.edu/platform-rctom/submission/the-next-mode-of-transportation/ or follow the progress of Tesla)

    I also took a look at AirFrance’s sustainability program, and found an effort to reduce waste, water consumption, energy usage and aircraft noise (http://corporate.airfrance.com/en/sustainable-development/environment-and-climate/minimizing-our-environmental-impacts/) . Would you say LATAM is ready to make commitments in these fronts as well?

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