Rising awareness of the impact of flights on the environment has important implications for investors in the aviation industry.
Flygskam. This wonderfully evocative word has emerged in Sweden to express the shame some people can feel about the toll their flights are taking on the environment.
Yet it is not just in Scandinavia that such concern about the impact of aviation is rising, as the recent Extinction Rebellion protests at airports have made clear. There were even proposals in October to ban air miles, on the basis that they may incentivise excessive flights.
Businesses are taking note of these trends. Skyscanner now highlights the flights with the lowest emissions when users are searching for air fares, while sites like myclimate.org allow consumers to calculate the emissions from their flights and mitigate that impact by investing in CO2 offsetting projects.
Let’s put this in context: global air-passenger growth has averaged 5% annually over the past 40 years, according to the International Civil Aviation Organization and World Bank, and Oxford Economics forecasts passenger growth – driven by the Asia Pacific region – will climb by another 3.6% a year until 2037.
This matters because aviation is a stubborn source of particularly problematic emissions. They are stubborn insofar as they are among the most difficult emissions to eliminate: battery technology is decades away from being powerful enough to enable long-haul flights, while a paper in the Journal of Air Transport Management indicated that fuel-efficiency improvements for aircraft engines of only around 1.5% per annum are plausible.
This is aggravated by the nature of planes’ emissions. Their engines deposit more than just carbon dioxide in the atmosphere; they also release nitrous oxide, water vapour and soot, among other substances. At flying altitudes, these emissions produce a range of climatic effects, multiplying aviation’s environmental impact.
Experts quantify this ‘aviation multiplier’ at around two: in other words, they believe that the total impact of a plane is approximately twice as high as its CO2 emissions.
These twin trends of rising global demand for flights and greater awareness of aviation’s environmental impact are having consequences beyond etymology, beyond stirring activists, and beyond behavioural nudges.
Fight our flight
The weight of public opinion is now beginning to shape policy: in May this year, a YouGov poll found that the environment had overtaken crime and the economy to become one of the top three issues facing the UK.
A leaked European Commission report earlier in 2019 concluded that European aviation is ‘significantly under-taxed’: most EU member states do not tax international aviation, despite the absence of any legal barriers to doing so, while four member states have no aviation taxation whatsoever – no VAT on flights and nothing on passengers or fuel.
So the aviation industry faces a squeeze from both the top as political scrutiny becomes tighter, and from the bottom as consumers focus more on the environmental impact of their flights.
Developments such as the mandatory disclosure of all consumer goods’ carbon footprint and apps that track personal CO2 budgets – think of a MyCarbonPal next to MyFitnessPal on your phone – could make emissions an increasingly important part of consumers’ spending decisions.
For the aviation sector, this could mean that consumers:
• Switch to travel options with lower emission levels, such as trains.
• Choose the airline operators with the lowest emissions (there is a 63% difference in fuel usage per passenger between the best and worst transatlantic flights, according to the International Council on Clean Transport).
• Prefer not to fly first class (which can create up to seven times more emissions).
• Limit their number of flight transfers and/or favour one longer holiday over two shorter holidays.
• Become more likely to offset their carbon impact (for example by buying emission-reduction certificates issued by renewable energy projects; Dallas airport’s decarbonisation project was achieved mainly through the use of such emission-reduction certificates).
Business travel is also likely to be affected by obligations on companies to disclose their carbon footprint and the need to control costs if flying becomes more expensive – not to mention by the rise of remote working and telecommuting.
As investors, we need to think about this direction of travel and the associated risks for incumbent business models. We must be aware that these trends could lead passenger growth to fall short of expectations for investment horizons beyond 10 years, for example, with developed-market airports that are heavily reliant on outbound and discretionary travel at higher risk.
We need not avoid aviation entirely, however. We can be supportive of investment strategies that reduce emissions – such as fleet modernisation – while remaining wary of operators with older and more polluting aircraft.
It would indeed be a flying shame if we didn’t act now to make aviation more sustainable for the future.