“Pandemic: extra time to reduce CO2 emissions of aviation sector”

The glob­al pan­dem­ic has had a sig­ni­fic­ant impact on the avi­ation industry. To date, IATA estim­ates that the industry has received ~$110 bil­lion in dir­ect aid, and an addi­tion­al ~$60 bil­lion in wages, taxes and sub­sidies. So, does that mean less invest­ment for car­bon-effi­cient tech? A team of research­ers from Gold­man Sachs recently pub­lished a report “The decar­bon­isa­tion toolkit and what it will mean for air­lines.” They con­clude that decar­bon­isa­tion of the sec­tor will remain a focus for air­lines and poli­cy­makers alike post-cov­id and assess the poten­tial impact on air­line growth and financials. 

How has the pan­dem­ic impacted the sector?

Vene­tia Baden-Pow­ell. Cov­id-19 has res­ul­ted in the deep­est civil avi­ation traffic reces­sion in his­tory. We fore­cas­ted a ~70% drop in air traffic in Europe in 2020, mul­tiple times worse than in 1991, 2001 or 2009. The knock-on effect for employ­ment in the sec­tor has also been size­able, with air­lines announ­cing lay­offs equal to 10–30% of their work­forces. At these traffic levels, air­lines burn sig­ni­fic­ant cash flow: across five of the largest air­lines in Europe, we fore­cast ~€14 bil­lion cash burn in 2020. Fin­an­cial stress has required air­lines to raise cap­it­al, either gov­ern­ment-backed (e.g. Air France, Lufthansa) or via the equity mar­ket (e.g. IAG, easyJet, Ryanair). In Europe, dir­ect aid provided or pledged across air­lines was ~€30 billion. 

How car­bon intens­ive is the sec­tor and is a low-car­bon future a real­ist­ic pro­spect for air­lines fol­low­ing the pandemic?

The answer to this is nuanced, which we explore in depth in our report. Pre-pan­dem­ic, avi­ation accoun­ted for 4% of EU green­house gas emis­sions, up from 2% in 1990, driv­en by sig­ni­fic­ant traffic growth (2x GDP his­tor­ic­ally). While the increase in emis­sions has been mit­ig­ated by improve­ments in air­craft effi­ciency, the sec­tor remains one of the most CO₂ intens­ive and has lagged oth­er indus­tries in redu­cing its intens­ity. This explains why poli­cy­makers are focused on the sec­tor from a car­bon per­spect­ive, in par­tic­u­lar in the wake of large-scale gov­ern­ment fin­an­cial sup­port for the industry. 

That said, fol­low­ing the traffic drop we fore­cast in 2020 (~70%), aviation’s share of emis­sions could fall to 1–2%, all else equal. Giv­en we don’t expect a return to 2019 traffic levels until the mid-2020s, this means poli­cy­makers no longer need to curb abso­lute activ­ity levels for the sec­tor, but rather refo­cus on incentiv­ising effi­ciency gains and sus­tain­able growth. Indeed, some announced res­cue pack­ages for the sec­tor have “green” con­di­tions, such as Air France. These include the reduc­tion of CO₂ emissions/passenger km by 50% by 2030 (vs. 2005 levels), in part to be driv­en by mod­al shift to rail on domest­ic routes and increas­ing bio­fuel use. 

A sim­il­ar response can be seen in Aus­tria fol­low­ing Aus­tri­an Air­lines’ sup­port pack­age, where the gov­ern­ment plans to increase taxes on short-haul flights, intro­duce a price floor of €40 on any air tick­et and invest more in rail. These policies are likely to be com­ple­men­ted by struc­tur­al shifts in con­sumer and cor­por­ate demand. Over­all how­ever, new tech­no­lo­gies to drive low or ultra-low car­bon avi­ation won’t be avail­able until post-2030. These include new propul­sion tech­no­logy such as hydro­gen and engine hybridisation/electrification. 

What impact could the decar­bon­isa­tion levers avail­able to poli­cy­makers & air­lines have as the sec­tor recovers?

The main levers being dis­cussed are incre­ment­al tax­a­tion, rail pro­mo­tion and fleet renew­al. Announced pas­sen­ger taxes on EU short-haul could increase low cost car­ri­er fares by ~15%, which we estim­ate could trans­late into a mid-single digit % hit to demand and there­fore emis­sion. These will be imple­men­ted along­side great­er rail invest­ment. For example, a €40bn “Renais­sance of Rail Invest­ment” pack­age is being con­sidered under the EU’s Green Deal. We estim­ate that up to 15% of EU air traffic net­works are at risk from rail substitution. 

Finally, a more organ­ic way for the sec­tor to reduce its car­bon foot­print near-term would be through fleet renew­al. Full adop­tion of new gen­er­a­tion air­craft could reduce emis­sions by nearly 20%, all else equal. While cov­id has lowered the sector’s near-term invest­ment capa­city to buy new, effi­cient planes, we believe medi­um-term fleet renew­al plans are unlikely to change. This reflects the import­ance of fleet renew­al in main­tain­ing an airline’s com­pet­it­ive pos­i­tion, par­tic­u­larly in a sub­dued demand and fare envir­on­ment. In fact, cov­id has gen­er­ally served as a cata­lyst to retire inef­fi­cient air­craft with many air­lines expect­ing to run smal­ler, more effi­cient fleets medium-term.