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![Airlines face near insurmountable net-zero challenge, entailing regulatory and carbon-tax risk](https://scopegroup.com/dam/jcr:844dbd2c-a116-4f20-a2d2-b58c82476545/img.jpg)
Airlines face near insurmountable net-zero challenge, entailing regulatory and carbon-tax risk
No replacement fuel of sufficient quantity or quality exists to keep today’s fleets of commercial aircraft in the air or is likely to become available for years, if not decades, short of an unexpected technological breakthrough. Yet the aviation sector accounts for 2.4% of global carbon emissions and is continuing to grow to meet public demand for air travel.
Airlines have few near-term decarbonisation options
“Many airlines have adopted net-zero policy by 2050 and interim targets that seek substantial reductions in CO2 emissions,” says Azza Chammem, senior analyst at Scope Ratings and author of Scope’s latest sectoral analysis looking at the environmental, social and governance considerations for corporate credit ratings. Social issues – notably labour relations - are also important for such a safety-focused and cyclical sector.
“Aviation remains one of the most difficult industries to decarbonise because most of the industry’s emissions are tied to jet fuel combustion and aircraft age – also known as scope-1 or direct emissions -- and the sourcing of kerosene, so called scope-3 or indirect, upstream emissions,” Chammem says.
Airlines are heavily dependent on others – energy companies, aircraft makers and engine manufacturers – to provide the necessary technology to reduce emissions.
“The danger is that sector – the least profitable segment in the aviation value chain - struggles to make more than incremental progress, exposing it to higher regulatory costs and heftier environmental taxation,” she says.
Figure 1: IATA net zero plan
Source: IATA, Scope
Sustainable aviation fuel plays marginal role for now
Airlines are banking heavily on alternative sustainable aviation fuel to meet their commitments but the impact of SAF on the industry’s emissions will be marginal in the near to medium term even as regulatory pressure mounts to shift to sustainable fuels. Suppliers of aviation fuel in the EU will have to ensure 2% is from sustainable sources from 2025.
IATA estimates that SAF could contribute around 65% of the reduction in emissions needed by aviation to reach net-zero in 2050. This will require an exponential increase in production to annual capacity of 449 billion litres to meet demand. For now, investments are in place to expand annual SAF production to just 5 billion by 2025 from the current 125 million litres. With effective government incentives, production might reach 30 billion litres by 2030.
SAF is compatible with existing aircraft engines and easy to transport and store but it is expensive, currently costing more than twice normal jet fuel which already constitutes the biggest share of airline operating expenses alongside staff costs. It remains to be seen if SAF supply will keep up with long-term demand.
Airlines will instead have to rely on carbon offsets and operating improvements – principally flying more efficient aircraft in more efficient ways – before advanced technologies such as hydrogen-fuelled and/or electrically powered aircraft come into play, probably not before 2040 and possibly only for short-haul flights. Around 80% of the aviation CO2 emissions are emitted from flights of over 1,500 kilometres for which there is no practical alternative mode of transport without significantly longer travel times.
Further reading:
ESG considerations for pharmaceutical companies’ credit ratings March 2022
ESG considerations for credit ratings of consumer goods companies November 2021
ESG considerations for the credit ratings of retail corporates November 2021
ESG considerations for the credit ratings of real estate corporates April 2021
ESG considerations for the credit ratings of utilities April 2021
ESG considerations for the metals & mining industry April 2021