The human toll of the Coronavirus epidemic is stark and growing. The same could be said of the financial consequences. We learnt this week that the airline sector is amongst the worst affected. There has been a massive reduction in the number of flights bought, and precipitous falls in share prices have wiped over thirty percent from the value of many companies. Investors must stop and take stock. Can there be such a thing as “green aviation”?
A couple of weeks ago the International Air Travel Association (IATA) estimated the airline industry would lose $30 billion from Coronavirus. It became clear this week that is an under-estimate. The spread of the virus to Italy seems to have had a huge effect, not just on direct flights to this major tourist destination (anecdotal reports talk of Venice flight bookings plummeting to zero), but, crucially, on the sentiment of flyers globally.
This week saw the collapse of Europe’s largest regional airline Flybe. It came after British Airways announced a further 432 flight cancellations, and joined United Airlines, Lufthansa, KLM and others in requesting staff to urgently take annual leave. Hong Kong’s main carrier, Cathay Pacific, has put 75 percent of staff on (unpaid) leave, and reportedly now has 120 planes, half its entire fleet, sitting idle on the tarmac.
Experienced aviation investors have long been used to a bumpy ride. Airlines took five years to return to profit after 9/11, and were then quickly hit again by the Financial Crisis. But the last five years might have lulled them into a false sense of security – they were the most profitable period in the industry’s eighty year history. Huge improvements came through the growth of ‘ancillary sales’ – fees for seat assignments, baggage and credit card use. Airlines also got much better at managing cost variables like the weather and the load factor – filling planes and squeezing more passengers into the same space. Since the boom of jet travel in the 1970’s the distance between rows has fallen from 34 inches to 31, and seats are two inches slimmer. But by far the biggest reduction in running costs has come through more fuel efficient aircraft – gains of one to one-and-a-half per cent per annum for nearly twenty years.
This could be about to end. The most important factor in more fuel efficient engine design has been improvements in the so called “bypass ratio” – the ratio of thrust created by the big fan spinning at the front of the engine versus the core. We are reaching the limits of how big that fan can get – both in terms of engine temperature and pure geometry. Consider the issues caused by the new engines on the Boeing 737 Max.
This matters for combating climate change. Since 1990, fuel improvements cut carbon emissions per passenger by more than half and took aviation to only 2.4 percent of global emissions. Now they have started rising, and some forecast they may reach ten percent of global emissions by 2030.
No doubt this lies behind the fall in demand “flygsam” (flight shaming in Swedish) achieved before Coronavirus. Sweden reported a four percent fall – nine percent for domestic flights. Why not use video-conferencing for that all important meeting? And do you really need that last minute weekend in Dublin? One of Europe’s main airline CEO’s correctly identifies his biggest competitor as “the sofa.” Coronavirus has shown just how inviting that sofa can become. Even before the virus, researchers at Citicorp estimated the “green cost” to the industry could represent 44 percent of profits, and argued it was time for the industry to fight back.
The most important factor in more fuel efficient engine design has been improvements in the so called “bypass ratio”
“Do you know you are travelling on the airline with Europe’s lowest carbon emissions…” ran Ryanair’s advert. But some greenwashing just won’t wash. The UK Advertising Standards Authority has just examined Ryanair’s claims in detail and forced them to remove this particular advert. A 2018 report from the European commission found that Ryanair was the tenth largest polluting entity in Europe. The nine above it were all coal fired power stations. Ryanair was in fact the biggest airline emitter in Europe.
The Ryanair case might tempt responsible investors to avoid airlines altogether, but that would be wrong. Some airline travel is unavoidable, and hence a vital frontier in climate change. Many companies are taking real steps. It was interesting that JetBlue this week announced it amended its revolving $550 million credit facility with BNP Paribas “directly linking our commitment to addressing environmental and social issues with our bottom line.”
The more well-trodden route is through carbon offsets – tree planting and renewable energy projects. CORSIA (The Carbon Offset Reduction Scheme for International Aviation) is the UN’s initiative to reduce net carbon emissions by 50 percent by 2050. It is supported by many countries and their airlines, some going further towards a carbon neutral position.
There is also a growing understanding of the role that sustainable aviation fuels can play. Delta recently committed $1 billion over the next ten years to green efforts including significant purchases of biofuel. The provider, Gevo, assert “biofuels hold the key to reducing carbon dioxide emissions.” Many airports are now making biofuel available: Stockholm (obviously) but also Los Angeles. More than 170,000 flights to date have used biofuel blends by airlines ranging from Quantas to United Airlines.
And while aircraft design may be reaching its limits on engine efficiency, this is a good time to think laterally. The airframe itself offers scope – more aerodynamic wings and fuselages, and the use of lighter materials. Further out we may well see innovations in electric (battery driven propulsion) in the smaller aircraft used for short distances (island–hoppers).
Of course, governments can also help. If we ever see a single air traffic control system in Europe it has been estimated this could reduce emissions by fifteen percent. And governments can do a lot to flatten demand with Air Passenger Duty. However, I would prefer them to stop short of the “carbon card” for each individual advocated by the likes of Chris Lyle (Air Transport Economics). He may rub his hands at the idea (even approving China adding air transport emissions to its social credit system), but this is surely “too much government.” I prefer voluntary actions by individuals reducing unnecessary flights and recognizing the role of fresh produce freight in aviation emissions (“buy local”).
Some things are best left to individuals and companies. “We’ll get you there.”
Christopher Walker writes on business and global issues. He ran a large equity fund and has many years of investment experience.