Aviation’s sustainability dilemma | Analysis | Airfinance Journal

Aviation’s sustainability dilemma

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Someone has to pay for a green future, and investors, governments and passengers all have to be on board to reach emissions targets.

As aviation emerges from the worst crisis in its history, airlines look forward to a cleaner, greener future in which their march to net-zero emissions proceeds in lockstep with improving profitability and lower debt.

Of course, such a symbiotic relationship is pure fantasy, especially as airlines look to repair their balance sheets from years of borrowing and losses. 

Airline losses could top $200 billion over the 2020-2022 period because of the crippling impact of Covid-19 on air travel, according to the International Air Transport Association (IATA). 

And while the pandemic further prioritised investing with conscience across all sectors, it is yet to be seen whether this is merely a trend or a fundamental shift in how people invest. 

The stickiness of ESG investors is critical if the aviation industry is to meet its 2050 goals. 

Will the sustainability focus shift from being a gently tinkered corporate plan to a somewhat moral one, with passengers and governments helping to pick up the tab for greener skies? 

Just days before the UK hosted perhaps the most important climate summit in history, it implemented a tax cut on domestic flights. 

Environmentalists were quick to criticise the cut for undermining the fight against greenhouse emissions, but the UK chancellor defended the move, saying it “cut the cost of living”.

The planet is in the throes of a climate emergency; however,  aviation is one of the hardest sectors to decarbonise, so a shift in approach is required with a shared understanding of the serious commitments to sustainable development, investment and innovation.

Environmental stewardship must be the responsibility of airlines, governments and passengers to ensure the industry adheres to its pledges. 

The USA's reopening of its borders on 8 November to vaccinated travellers should serve as a turning point in the sector's transition to net zero, 

The lifting of the pandemic travel ban, put in place nearly 20 months ago, is expected to prompt a surge in bookings. 

Delta Air Lines reported a 450% increase in international point-of-sale bookings after the announcement versus the prior six weeks.  

American and British Airways are ramping up their London service and expect to get closer to a pre-pandemic schedule in early 2022.

Critical regulation

Recent reports from the UN Intergovernmental Panel on Climate Change are helping the net-zero narrative by ensuring that the ecological costs of market behaviour appear on daily news feeds.

However, a lessor source argues government regulation will be required for a full-fledged adoption of a sustainable mentality because "airlines will be motivated by the dire state of their finances to look at cost-cutting".

Without regulatory mandates and subsidies, airlines will always go for the cheapest option, adds the lessor. Does this mean governments will need to collect a fuel surcharge – so that the price of flying increases one way or the other? 

An aviation banker agrees that sustainability targets "ultimately will be regulated", adding: "It is a matter of time." However, he notes change will come at both the consumer and investor levels.

While some consumers support sustainability efforts, they do not necessarily want to pay for it.

According to IATA, aviation contributes about 2% to 3% on average of global carbon dioxide emissions annually. However, with dramatic growth forecast during the next 20 years, the challenge of lowering emissions will intensify as passenger numbers rise.

And with high debt burdens, airlines may struggle to hit sustainability targets.

The good news is that investors across all asset classes have become more engaged with ESG concerns since the onset of the crisis, and linking profitability to a green plan is becoming more common as consumer consciousness increases.

Data from Bloomberg Intelligence's ESG 2021 mid-year outlook shows that ESG assets are on track to exceed $50 trillion by 2025.

Sustainability versus debt

Airlines were given essential liquidity from governments and investors during the pandemic to survive a collapse in traffic.

The financial support was a "lifeline" for many airlines during the crisis," IATA's director general, Willie Walsh, said at an October meeting in Boston.

"Much of that – about $110 billion – is in the form of support that needs to be paid back. Combined with commercial borrowing, the industry is now highly leveraged," he adds.  

The helping hand came at the cost of balance sheets. 

According to Airfinance Journal's The Airline Analyst, balance sheet debt in the 2020/21 timeframe (including operating lease liabilities under ASC 842/IFRS 16) increased from $392 billion to $596 billion and the debt/equity ratio more than doubled from 2.3x to 5.4x.

To achieve net zero, Walsh estimates that $2 trillion is needed to support an industry-wide resolution by 2050.

Not only will the sector have to invest billions of dollars in sustainable aviation fuel (SAF), air traffic control and infrastructure, but also manufacturers will have to develop newer, greener aircraft designs.

But if the industry is to meet its 2050 goal and decarbonise airlines, they will need SAF that is cheaper and more widely available.

Refuelling

SAF prices are currently about five times higher than prices for conventional jet fuel, shows data on European spot market prices collected by OPIS. To hit its net zero emissions target, IATA wants 65% of all aviation fuel to be SAF by 2050. It says 450 billion litres a year of SAF will be needed in 2050.

SAF is currently less than 1% of the aviation fuel, but IATA believes one billion passengers will have flown on a SAF-blend flight by 2025, and penetration should approach a tipping point of 2% of jet fuel.

But SAF is not the only alternative being researched to cut emissions. This year, Air Liquide said it would study liquid hydrogen supply at 30 airports globally with Airbus. The European manufacturer's chief executive officer, Guillaume Faury, told a sustainability event in September that Airbus is confident its hydrogen-powered aircraft will enter service by the target date of 2035.

Passenger pressure?

Some airlines think passengers will help fund the transition to net zero.

British Airways' 'Better World' initiative invites passengers to pay for SAF for their flights and contribute to carbon-reduction projects, such as reforestation. United Airlines is giving customers the ability to contribute funds for SAF purchases.

But passengers have not been big supporters of green measures to date.  

According to the Aviation Environment Federation, the take-up rates by passengers on the option to offset their carbon emissions when they buy a ticket is very low – typically not more than about 1%. 

For the sector's net-zero goals to materialise, there needs to be a paradigm shift in investment that supports a green agenda in aviation. Also, the industry needs to structure opportunities that support this change in investment.

There are also many questions about how nation states should leverage their burgeoning involvement in aviation. For example, should airlines that received bailout money be allowed to bring back older, less fuel-efficient parked aircraft? 

Another lever might involve tying new route authorities to airlines tracking along stated ESG goals. Then there is the possibility of export credit agencies accelerating the transition to more efficient fleets with low-cost loans.

Al Gore made this point speaking ahead of the COP26 climate conference. He called for increased regulation and disclosure to force banks, traditional asset managers, private equity firms and other asset owners to overhaul how they deal with climate change risks.

"It is suicidal for the human race to continue on this track and to pretend that it can be somehow negated by promising to plant trees here, there or elsewhere. This is simply not realistic," says the former US vice-president.

The flying public, governments and investors need to be on board to fund and enforce the transition to net zero. Of course, a sure way to lower emissions is to fly less, but that view, currently, is not part of the sector's sustainability focus.

 

 

 

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Transaction Snapshot
Air Company | Bond issue | 01-24 | $1.5bn
Financial Close:
11/02/2024
SPV:
Some Aviation Trust
Value:
$1,500.00m USD
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