Towards climate solvency for airlines

It’s an extraordinarily difficult time for airlines. The COVID-19 pandemic, with more than 6 million tracked infections and 372,000 deaths worldwide as of this writing, has wreaked havoc on public health and the global economy.

The coronavirus pandemic has also taught us new lessons about the vulnerability of airlines to disruption. With scheduled flights falling 65 percent year over year, many airlines are struggling to survive.

Governments throughout the world are mobilizing to rescue their airlines. The U.S. CARES act directed $50 billion to keep U.S. carriers afloat through September 2020. The UK government has extended support to employers, including airlines, for furloughs of employees covering 80 percent of monthly salaries up to £2500. France recently announced a 7 billion euro bailout of Air France with some environmental conditions; Lufthansa is reportedly losing 1 million euros per hour and is negotiating terms for a 10 billion euro bailout with the German government. Civil society is also starting to mobilize and track the bailouts.

In order for these bailouts to work, they should set the aviation industry on the right path by addressing the twin challenges of COVID-19 and global climate change.

COVID-19 and climate change threaten the sustainability of aviation on different time scales. Economists distinguish between a liquidity crisis, which occurs when a company has underlying value but is facing a short-term cash crunch, and a solvency problem, which occurs when a company is permanently unprofitable because its core business model is broken.

A short-term loan can resolve a liquidity crisis but a return to solvency requires fundamental change. Today, airlines face a short-term liquidity crisis triggered by coronavirus and a long-term solvency challenge from climate change. To succeed, public bailouts need to address both.

The longer-term climate deficit of airlines is easy to demonstrate. According to the International Air Transport Association (IATA), from 2010 to 2019 the total net profit for airlines globally was $220 billion. Over that period of time, they emitted 7.8 billion tonnes of carbon dioxide. Multiplied by a conservative carbon price of $40, the implied social costs of aviation carbon dioxide emissions over that period was $310 billion.

This means that over the past decade — a historically profitable one — airlines ran a social deficit of $90 billion. This calculation doesn’t take into account the climate impact of other air pollutants from aviation, which are estimated to be roughly similar in order of magnitude to carbon dioxide.

This calculation, while simple, highlights that aviation has a long-term climate solvency challenge. It also confirms the results of a recent survey of global policymakers, summarized in this paper by a team of researchers including Sir Nicholas Stern and Nobel Prize winning economist Joseph Stiglitz, judging unconditional bailouts of airlines as the least beneficial recovery measure on economic and environmental grounds by a large margin.

Given that, what kinds of environmental conditions help address airlines long-term climate insolvency? I envision four key strategies. First, fuel efficiency standards and/or scrappage incentives could help accelerate the retirement of excess, carbon intensive aircraft that are no longer needed today. Second, “Apollo style” research and development programs could catalyze new investments in advanced aircraft and engines, truly sustainable biofuels and synthetic jet fuels generated from renewable electricity.

Funding for R&D could come from emissions trading, a carbon tax on airlines, and an air miles levy or frequent flyer levy. This latter proposal in particular could generate funds for R&D from the most frequent fliers and also provide public health benefits by curbing excessive, high frequency flights that increase the risk of global pandemics.

Third, governments need to hold airlines accountable for delivering net zero emissions.

Airlines have already agreed to offset most of the growth in international carbon dioxide from 2020; this could be expanded to include domestic aviation and to transition away from offsets, which are incompatible with long-term decarbonization, in favor of in-sector reductions.

Finally, we should empower consumers to vote with their dollars to support lower emitting airlines. Most people aren’t aware that the carbon intensity of flights linking the same city-city pair can vary by more than 80 percent. Mandatory disclosure of emissions by flight at the time of booking would help provide market pull for new low carbon technologies.

Success is by no means guaranteed, and a rush to define terms can lead to unintended consequences. For example, under the U.S. CARES act airlines are operating large numbers of “ghost flights” in part due to requirements that they maintain minimum air service levels to underserved airports. But, like it or not, COVID-19 is forcing a reassessment of the sustainability of airlines. Let’s make sure that public bailouts address both the short and long-term challenges to their business model.

This piece, originally titled Reassessing the sustainability of airlines, was published by The Hill on June 1, 2020, and can be found here.