Turbulence ahead

The airlines’ operating model is going to be affected deeply by both direct and indirect climate change consequences. IAG is already addressing some of this issues, while others are not making any changes arguing that air travel is an irreplaceable industry.

Air travel currently represents 4-6% of the total greenhouse gases. However, it is the fastest growing source of GHG[i]. Just in the EU their contribution grew by 87% between 1990 and 2006 and cheap tickets and increased cargo needs are only exacerbating this issue.

The airlines’ operating model is going to be affected deeply by both direct, such as extreme weather conditions, and indirect climate change consequences, such as increase in fuel prices due to taxes. Some companies are addressing issues like fuel pricing risk by passing this risk down to the customer, while others are not making any changes arguing that air travel is an irreplaceable industry.

International Airlines Group, the result of a merger between the British Airways and Iberia, is the sixth largest airline company in the world. Given that it is an EU company it likely is going to face a heavy regulatory pressure. Moreover, the company destinations are highly diversified and can be affected by negative weather conditions.

Implications

On the demand side: Businesses[ii], with their shifts to video conferencing, and consumers[iii] movements have appeared that are advocating for moving away from this industry after learning about their lack of sustainability. Additionally, Norway has been the first government to try and reduce demand by limiting the benefits that airlines can offer through their frequent flyer programs[iv].

While domestic aviation CO2was under the scope of the first period of the Kyoto protocol (2008-2012), international aviation, which makes up most of the contamination, was excluded. In 2012 the EU started requiring its airlines to be incorporated into the Carbon Credits Scheme[v], a type of security developed to offset the excess of CO2 produced by some companies.
As recent as October 2016, UN’s International Civil Aviation Organization has put forward an agreement[vi], signed by 191 countries, in which the every airline will have to offset their international flights emissions by funding forestry and carbon capturing activities.

Finally, the core operation of airlines, flying, might be at risk due to climate change effects. It has been forecasted that increased level of CO2 will result in increased turbulence, mainly during transatlantic flights. The effects of turbulence include, delays, damages to airplanes and to people, that in some cases are even fatal.

Reaction

In 2014 the company was ranked as the second to last least fuel efficient in transatlantic flights.
To answer this allegations and to combat some of the potential effects of climate change, the company started to include a chapter in their annual report about their efforts in sustainability and the potential climate change-related risks.

Their current objectives are more ambitious that those of the industry average and in line with the objectives of the COP21 conference. They plan to reach those objectives by pulling on 4 levers[vii]:

  • Incorporating new, low-carbon fuel alternatives not only on their airplanes, but for the whole industry
  • Phasing out their current inefficient airplanes and introducing more efficient versions, such as the 787 which has a footprint 20% smaller than the most frequent plane, the 767
  • Investing donations made by their customers into community renewable energy projects
  • Supporting regulators in bringing their ideas to practice

 

Impact of Climate Change measures by one of IAG subsidiary
Impact of Climate Change measures by one of IAG subsidiary

 

Recommendations

While IAG has been doing their homework and is updating their policies to reach a more sustainable state, their starting position as of 2014 was slightly behind their peers. I see three potential areas, order by potential impact and urgency, in which they could improve their positioning:

Delay the plane phase out: it is remarkable that they have committed to abide by this new regulation by its earliest deadline. However, given that the results will be measured with the emissions level of 2020 as a benchmark, I would delay phasing out the planes so that they are not setting the bar, reducing the benchmark emissions by 80%, too high.

Give customer a sustainability incentive: the Customer Fund is a good start, but customers and regulators will see that there is no difference between donating through IAG or directly to the projects. To make the customers feel like IAG is invested, they have a program to match the customers’ donations or make an annual donation by every frequent flyer program member.

Develop a regulatory observatory: while it is true that they are now generating some goodwill with the regulator thanks to volunteering for one pilot, this does not mean that they will enjoy any benefits or should be less wary of potential, unannounced changes in their local or international regulation. (754 words)

 

 

 

[i] https://www.foe.co.uk/sites/default/files/downloads/aviation_climate_change.pdf

[ii] http://tyndall.ac.uk/sites/default/files/twp161.pdf

[iii] http://climatedenial.org/2009/07/24/why-we-still-dont-believe-in-climate-change/

[iv] http://www.sciencedirect.com/science/article/pii/S0160738311000193

[v] http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32008L0101

[vi] https://www.theguardian.com/environment/2016/oct/06/aviation-emissions-agreement-united-nations

[vii] http://responsibleflying.ba.com/environment/climate-change/

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5 thoughts on “Turbulence ahead

  1. I enjoyed your article on IAG! I wonder if your suggestion to delay phasing out older planes to retain a higher (and easier) emissions benchmark to beat is feasible. As you know, IAG operates in a highly commoditised industry where controlling costs is a key success factor. New planes have materially lower fuel consumption rates per block hour. IAG may need to harvest some of these savings between 2016 and 2020 to stay competitive. Furthermore, I wonder if increased focus on fuel efficiency and emissions is going to trigger more R&D spend by engine makers. It is conceivable that airplane engine product cycles start to compress and airlines will switch engines on their planes on a more frequent basis to ensure they keep up with the competition. This may be great news for engine makers.

  2. Thanks for the post Vicente.
    I think that the steps IAG is taking to reduce its environmental footprint are the correct ones. However, I think IAG should explore additional green initiatives, especially regarding IAG’s ground operations. The equipment used in the terminal could be upgraded and adapted to reduce its CO2 emissions. For example, the buses used to transport passengers from the terminal to the airplane, or the vehicles used to carry catering services and luggage could function with electrical engines.
    I believe there is also room for improvement in the emissions of aircrafts while they are on the ground, by optimising the gate assignment and ground itinerary a plane must follow before takeoff or after landing. This type of initiative should be promoted in partnership with the airport authorities, like London’s Heathrow airport has done [1].

    [1] http://www.heathrow.com/company/community-and-environment/responsible-heathrow/case-studies/reducing-co2-from-aircraft-on-the-ground

  3. Thanks for the article Vicente. I totally agree that the airline industry represents one of the biggest challenges on the fight against climate change. One of the first challenges that I see is the fact that the industry has experienced a significant decrease in yields due to an over capacity situation. Luckily, the low fuel prices have aided airlines to survive the adverse market conditions and in some cases even make profits. Nevertheless, the industry has suffered a transformation with a lot of mergers and acquisitions. The latter has helped mayor airlines increase their bottom lines and allowed them to invest in more efficient planes, as you correctly mentioned in your post. Many airlines are receiving up to 7 new planes daily and quickly replacing old equipment with these new B786, A350 with the hopes of making their routes more profitable and reducing the impact on the environment. However, I do see an area of tension inside the industry and that I wanted to share with you. Currently the business model of low cost airlines is driven by the concept of add-on pricing. A concept that in most cases can be extremely profitable for the airline. Nevertheless, these low-cost players tend to use old planes since they do not posses the capital to invest in newer technology. As a result, we have airlines that are profitable driven by a business model that will not incentivize them to change. I believe governments, should closely look at this issue and find ways on how to alleviate this situation. Global players will always look for ways to reduce cost, which in the airline industry translates to reduce fuel consumption, however I do not see that in low-cost players. Something else needs to be done to protect both the industry and the environment of an operating model that hurst the customer on our planet.

  4. Great article Vicente. While service providers like United/IAG/Southwest can do a lot to optimise operations and increase asset utilisation, use of newer fleets, do you agree that majority of the responsibility for emissions comes down to the aircraft manufacturers like Boeing/Airbus/Embraer/ATR/Bombardier and engine manufacturers such as GE/Rolls Royce? What is most challenging is firstly educate consumers about contributors to climate change (from an airline point of view) and secondly educate them on the different firms involved that can help make air transport sustainable. Unless Boeing/Airbus come under pressure from the end consumer/regulation, it will be very difficult to compete in a low cost industry while focussing on long term investments at the same time.

  5. Great article Vicente !

    While I agree with your plan proposed, I checked online about shocks that could impact the industry in a dramatic way. I found a group of silicon valley people that are developing a ” new way to move people or things anywhere in the world quickly, safely, efficiently, on-demand and with minimal impact to the environment” called Hyperloop (1). Considering this possible threat it might make sense for International Airline Group to use its size to diversify and try to build Hyperloop technology in Europe, or at least to keep the technology closely before they become a problem even worst than climate change.

    Sources
    (1) https://hyperloop-one.com/what-is-hyperloop

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