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Is a carbon-free aviation industry really possible?

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

James Bowers, Chief editor at Polytechnique Insights
On February 2nd, 2021 |
3 min reading time
Venetia Baden-Powell
Venetia Baden-Powell
Equity research associate at Goldman Sachs
Key takeaways
  • Goldman Sachs recently published a report regarding the EU aviation industry, “The decarbonisation toolkit and what it will mean for airlines.”
  • In it, they say that the aviation industry has been hit hard by the Covid-19 pandemic, with a ~70% drop in European air traffic, receiving over ~$160 billion in aid and 10-30% layoffs of employees.
  • Pre-pandemic aviation was responsible for 4% of CO2 emissions in Europe, which fell to 2% in 2020.
  • Some bailouts will have green conditions attached, such as Air France who have been imposed a reduction of 50% emissions per passenger per km by 2030.
  • With investment from the EU, the team expects to see a 15% transfer of air traffic to rail.

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. 

Left: Air­lines’ share of CO2 emis­sions in Europe has increased by over twice since 1990. Right: Even though air­craft effi­cien­cy has improved since 1990, the increased traf­fic has dri­ven high­er emis­sions. © Gold­man Sachs Invest­ment Research

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. 

New air­craft are 15% more effi­cient than old­er gen­er­a­tions. © Gold­man Sachs Invest­ment Research

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.

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