Airline Management (Analysis of the ‘four pillars’)
In 2008, the aviation sector signed a declaration, committing itself to the ‘four pillars’, an initiative to reduce emissions from the industry, (UNFCCC, 2008).
This tone continued when world government’s met in Montreal in September 2013. The aviation industry recommended that, as part of a broad approach to address air transport’s climate impacts, a single global market-based measure (MBM) be agreed upon, allow for carriers to effectively compare efficiency.
This should be included into a broader package of measures including new aircraft technology, more efficient operations and better use of infrastructure, (ICAO, 2013) [Online].
The industry determined that a carbon-offsetting policy would be the best method, giving carriers the opportunity to tailor their response to their business development; in effect, ensuring that carriers feel the plan still allows for expansion to meet rising demand, (IATA, 2013) [Online].
The meeting concluded with the following, (ATAG, 2013) [Online]:
Agree a roadmap for development of a single global MBM for aviation to be implemented from 2020 that can be adopted at ICAO’s next Assembly in 2016.
Agree the principles for development of a global MBM, including:
o The goal of carbon-neutral growth from 2020;
o That aviation emissions should only be accounted for once;
o That a global MBM should take account of different types of operator activity.
This report will evaluate the progress made on ONE of the four pillars to reduce emissions from the aviation sector; whilst also paying attention to the barriers that carriers face in achieving these targets.
The first section will provide a brief introduction to the four pillars as well as reasoning behind the choice in evaluation. A discussion will then follow answering the requirements of the report, before a conclusion summarises the findings.
The four pillars cover the entire scope of feasible methods to improve efficiency and reduce emissions. The pillars are technological process, improved infrastructure, operational measures and economic measures. Table 1 below provides a summary:
This report has chosen to focus on the development of operational measures; the decision was driven by an interest in the development of fuel efficiency, business optimisation and carrier integration in a bid to reduce emissions from an industry that has always been labelled a major global polluter.
With demand for air travel booming on the back of global urbanisation and emerging economies, more attention is being paid to carbon emissions from air travel. According to data from the Air Transport Action Group [ATAG] (2014), global emissions from air travel total 689mt, against a total of 34Billion tonnes of CO2 produced annually from human activity. With these figures, CO2 emissions from air-travel total 2% of annual emissions; in terms of transport, aviation is responsible for 12% of total emissions, compared with 74% from road transport.
As mentioned above, there are a number of factors, which with improvement can lead to a reduction in emissions. This section will concentrate on fuel efficiency, which will touch upon optimal aircraft use, new aircraft design and route optimisation. Also mentioned with be business optimisation, paying attention to carrier ‘load factor’, optimisation on ground-operations and also integration between carriers, which has included M&A activity and also the introduction of alliances in the industry. The discussion will touch upon carrier cost reduction, which has become a major supporter of reduction on CO2 emissions given its link to fuel usage and so exposure to high oil prices.
In terms of achievements so far, the issue of fuel efficiency has supported in recent years by the economic downturn and high oil prices. Carriers have look to reduce their fuel bills to stay profitable, focusing on a number of methods which also support fuel efficiency. To start, carriers have invested heavily in new aircraft after developments from both Boeing and Airbus support greater fuel efficiency. Airbus experienced its biggest year in 2011, receiving net orders for 1,419 new aircraft, buoyed by the launch of its A320neo, (Morrow, 2013) [Online], with similar success from Boeing, (BBC Business, 2014) [Online].
Figure 1 shows that out of U.S. carriers Alaska Airlines came out as the most fuel efficient airline; what is most surprising is that the company has increased its business and routes by 33% 2000-2010, however has reported no increase in fuel use/emissions as investing in new planes has improved fuel efficiency greatly.
The report also found that the fuel-efficiency gap between the best/worst airlines was 26%, (ICCT, 2013); the report also found that about one-third of the variation in efficiency likely comes from the deployment of different technology; for example Allegiant operates a fleet of McDonnell Douglas aircraft that date back to the 1970’s, while Alaska Airlines uses new Boeing planes that have technologies like ‘winglets’ to reduce fuel burn. These finding bode well for Boeing and Airbus as they continue to offer newer models. Recent additions such as Boeings 777X, a more fuel efficient version of the 777 Jumbo and Airbus’s A320 family have been well received; according to Boeing (2013) [Online], customers for the 777X include Gulf carriers along with Cathay Pacific and Lufthansa, with record breaking orders of 259, while Airbus (2013) [Online] confirmed its backlog of orders for the A320’s at over 10,000. These new planes will reduce both emissions and noise pollution, allowing for negative externalities to be controlled as expansion continues.
Carriers have adopted a number of methods to optimise their operations. One factor has been the adoption of alliances between carriers, allowing for them to effectively ‘share’ their capacity. This has reduced the need for such aggressive expansion by some, which would have created too much competition on some routes. Furthermore, airlines have invested in newer aircraft to meet the needs of routes, such as smaller aircraft for new, short-haul routes and larger aircraft, such as the Airbus A380 for busier, long-haul routes. Emirates currently have orders for 90 A380’s as the carrier looks to expand capacity on a number of routes, (Wall, 2013) [Online].
FOCUS (VIRGIN ATLANTIC)
As more attention is paid by governments and consumers onto CO2 emissions and other negative externalities, company’s such as Virgin Atlantic (2013) have put more into reporting their impact on the environment from sustainability reports; in some continues such as the UK, reporting into emissions and environmental impact are becoming mandatory for listed companies, (UK Government, 2013), which will only increase the amount of information that the aviation sector will make public, (Sustainable Aviation, 2014) [Online].
According to Virgin Atlantic (2013), through its Sustainability Report 2013, the company focuses on a number of programs to improve sustainability. These include:
Reducing CO2 emissions by 30% between 2007 and 2020.
Improving the fleet of aircraft – currently Virgin Atlantic are taking delivery of 10 Airbus 330-300, which will replace the older Airbus 340-600 and be 30% more fuel efficient.
Implementing technology to monitor aircraft fuel-use and routes to identify further carbon savings.
This section will touch upon PESTEL analysis to look into the future possibilities to meet operational measure targets.
In terms of driving-forces, a number of carriers will look to improve operational performance in a bid to lower costs and remain profitable as low-cost carrier reduce market prices and higher oil prices affect carrier margins. However, it has been noted that each carrier will take a differing approach, designed to also meet the requirements of current expansion plans. For example, take British Airways (BA); currently the carrier is involved in its ‘One Destination’ initiative, with a number of schemes underway to make the carrier carbon neutral from 2020, (Brittlebank, 2012) [Online]. According to British Airways (2013) the international community’s aim is to cut net CO2 emissions by 50% by 2050 (relative to 2005 levels). Figure 2 below provides a graphic to the proposal, identifying some of the key factors which will support the reduction.
As mentioned prior, one of main drivers will be the continued improvement and market adoption of new aircraft. For example, British Airways (2013) estimates that the new Airbus A380 will have a 16% improvement in fuel efficiency compared to the aircraft it will replace, mainly down to the capacity of the aircraft, which can be used on longer routes, such as Hong Kong and Los Angeles. Improvements such as these will continue to drive down CO2 emissions per passenger kilometres, a metric widely used in the airline industry to measure efficiency. In 2012, BA aircraft emitted 101.9g/CO2 per passenger kilometre, while Emirates emitted 100.6 (Emirates, 2013), Lufthansa 109.3 and EasyJet 95.6 (EasyJet, 2013) [Online]. One factor that each airline has in common is major deliveries of new aircraft. While new aircraft will continue to benefit both the environment and also the airline in terms of lower fuel bills, headwinds will appear in the long-term. While the current spate of aircraft orders has been supported by growth opportunities and profitability in the industry, long-term risks to demand could dampen the need and justification to purchase new aircraft. Furthermore, it has also been noticed that the recent rise in airline purchases has been fuelled by expansion projects from carriers in the Middle East and Asia, while European airlines seen less reluctant to purchase than previously as profitability has waned. Given this, the risk is that in the long-term, order may decline, which would impact on carriers ability to further reduce emissions. For example, British Airways (2013) are targeting efficiency of 83g/CO2 per passenger kilometre by 2025, which will require the support of capital expenditure. Given the current reduction in the carriers profitability over the year, continued weakness may make current expenditure plans un-obtainable.
Figure 2 also highlights the potential for low-carbon fuels to support the four pillars. Both BA and Cathay Pacific (2013) among other have highlighted development into biofuels as a future growth area.
The process involves inputting commercial/ residential organic waste into a boiler, where extremely high pressure plasma breaks down the waste into gases. These gases are then cooled and cleaned, before the Fischer-Tropsch process re-forms the gas into low-carbon jet fuel, (British Airways, 2013). BA is currently involved in a UK-based project with Solena Fuels Corporation to construct a waste-to-fuel plant, which at its peak will convert 500,000 tonnes of water into 50,000 tonnes of jet fuel each year, (British Airways, 2013). Cathay Pacific (2013) also remained optimistic on biofuels, implementing a number of projects itself. While development will be buoyed by social/ political acceptance of biofuels in the future and the green-credentials it provides, there are also factors, such as the costs involved and its competitiveness with current kerosene supplies.
Another driver to mention will be the potential for demand. Figure 2 highlights that in the long-term, BA see a reduction in demand as one support for lower emissions; however this may not be the same for carriers such as Emirates, or others in Asia, Africa. Emirates recently reported a 4.5% in aircraft movements given new routes and higher demand, (Emirates, 2013). Given this, the need for a streamline of global initiatives is needed as emerging airlines increase slights to meet increased demand.
Another driver identified is the purchase of emission reductions, or ‘carbon offsets’, with the money invested into initiatives to reduce emissions in other areas, which could be seen to offset the emissions from carrier operations. For example, Cathay Pacific (2013) has used money raised to invest in hydropower/ wind power projects in China. These programmes are now run by over 35 airlines, however require voluntary donations from passengers, IATA (2014) [Online]. The main risk is that the projects rely on the social responsibility of customers; an over reliance on these programmes to reduce emissions could back-fire if customers do not share the view; PriceWaterhouseCoopers (2013) suggests that carriers may need to purchase an extra ˆ1.1Billion of carbon offsets annually by 2030 to reach targets.
PriceWaterhouseCoopers, hereafter PWC, (2013) backs up the above in its latest report. After mentioning the halving on aviation emissions by 2050, PWC shows its scepticism, saying that reaching the target will not be easy and would require improvements in carbon intensity of 5.1% every year. Ultimately, advances in fuel efficiency would need to be accelerated along with adoption of biofuels. To add, the report mentioned that a global consensus on sustainable aviation was needed before acceleration in improvements can be seen. The fear is that any improvement from airlines operating in advanced economies could be offset on a global scale by less-efficient emerging airlines from China and India etc., who may not have the financial means to invest heavily in the newest aircraft.
As mentioned in the Four Pillars, efficiency in ground operations will also support a reduction in emissions. Easyjet (2013) [Online] mentioned that they avoid ‘congested hubs’, such as Heathrow and Frankfurt, to help reduce taxiing and holding patterns, which will use less fuel and so emit less carbon. Furthermore, low-cost airlines have also been known for quick turnaround, allowing for greater efficiency from their current fleet, (Barrett, 2009).
The report chose to focus on operational management as a tool to reduce emissions, focusing on fuel efficiency, new aircraft, and route optimisation. The report found that fuel efficiency, driven by new aircraft models has become a high priority; while the decision will have been impacted by a move to reduce emissions, there is also the thought that the trend of high-oil prices, coupled with lower earnings over the economic crisis would have pushed a number of carriers to seek cost-reductions and efficiency drives.
Given this, past improvements in efficiency have been strong; however, strong growth in demand from emerging economies has led to a marketable rise in flights, pushing overall emissions higher. For example, Emirates, seen as one of the fastest growing carriers could be used as a barometer. While the carrier has reported improvements in fuel efficiency, due to new aircraft and routes, the carrier reported a 15.9% increase in overall CO2 emissions to 22.4Million tonnes, (Emirates, 2013).
Looking ahead into the future, the report has highlighted a number of factors for improvement; being higher adoption of new aircraft, increased adoption of biofuels and purchase of emission reductions. Carriers will continue to place attention on new aircraft/ biofuels as focus remain firmly on cost-reductions; however, the level of long-term success will depend upon profitability, which will impact directly on future capital expenditure plans. To add, not all carriers may share the same plans as emerging carriers may focus on growth and profitability over the environment. To combat this, PWC (2013) identified that a global consensus is needed; currently regulation in the USA/ Europe is much higher than seen in Asia/ Middle East/ Africa, creating unfavourable discrepancy to airlines, such as BA. Carbon offsetting was also identified as a major growth initiative, however as mentioned this currently relies on customer donations; as so both social and political attention on the effects of emissions need to be heightened to encourage offsetting by the public.
Operational measures provide great opportunities to further reduce emissions; however, carriers need to ensure they have the funds available for capital expenditure, and the public support/ donations to move ahead with carbon offsetting plans.
Finally, it is important to mention that while fuel efficiency will continue to improve, strong increases in demand may lead to overall emissions increases as flight numbers/routes are increased by emerging airlines. This has been seen with data from Emirates; under these circumstances carriers would need to accelerate all initiatives in a bid to meet targets that would seem ambitious. All four pillars will need a global consensus to support target achievement.
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Wall, R (2013) [Online]: Emirates orders additional 50 airbus 1380’s to expand fleet, Available at http://www.bloomberg.com/news/2013-11-16/emirates-said-in-talks-to-order-50-airbus-a380-superjumbos-1-.html, Accessed 22/03/2014.