Airlines' Common Future
A few economic principles that could help build aviation’s sustainability framework
Way back in the year 2000, students at the London School of Economics were treated to many delights.
There was Friday night CRUSH – loud music, cheap beer and lots of people in a surprisingly small space until 2am. Then there was union politics – throwing newspaper at hacks from the balcony. Societies and clubs too – joined at the fabulous freshers’ fayre. And there were even some lectures.
Your favourite airline revenue economist took an economics degree from the LSE. Yet his first lecture back in the year 2000 was not in economics or even maths. It was an “outside option” course from the geography department called Environment, Economy and Society, course code GY100.
The end of year exam result is perhaps best forgotten. But the course covered interesting material and was well named – environment, economy and society are the “three pillars” of sustainability.
And while sustainability is the buzzword of the moment in aviation, a consistent framework based on economic principles seems to be lacking. This article sets down some points that may be helpful.
Sustainability is not just about the environment
The so-called “Environmental Kuznets Curve” (EKC, pictured below) is a simplistic way of correlating economic growth, or if you like airline industry development, with environmental damage. It suggests that as the world and the industry develops the environment gets more and more damaged. Then at some point things change and people magically make the environment better instead.
Applied to aviation, the EKC can be seen as a model of early planes belching out smoke and grime before being replaced with better, more fuel efficient aircraft and, eventually, sustainable aviation fuels and the rest.
At first, although planes might be cleaner than ever before there are too many of them rolling off the production lines at Airbus and Boeing. This is the stage we are in now. Only after a while do the aircraft get so much more efficient that things get cleaner as a whole, and this time if it ever comes is in the future.
EKC-type models seem to be the focus of much discussion about sustainability in aviation today. Everyone is talking about the impact of flying on the environment, especially Carbon emissions. But remember that aircraft engines emit other unsavoury gases too and sustainability has three pillars – environment, economy and society. Airlines, manufacturers and OEMs need to consider all pollutants and all three pillars together.
So what is sustainability?
As every GY100 student could have told you, sustainable development was defined by the Brundtland Report, also called Our Common Future and referenced in the title of this article (Airlines’ Common Future - geddit!), as:
“Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
There are different ways that we can expand on this so it is relevant to aviation. The simplest way is to think about it from an industry-level perspective:
“Sustainable airlines meet the needs of today’s travellers without compromising the ability of future travellers to have their own needs met.”
Truly sustainable airlines need to support current travel demand and keep on making their fantastic contribution to global growth. Curtailing travel and all of it’s benefits is unlikely to be desirable. At the same time they need to avoid degrading, and ideally improve, the environment.
Aviation’s costs & benefits are often felt by other people
Looking at things just at the industry level ignores important costs and benefits of airline services that fall on other people, not just airline shareholders, staff and passengers.
These costs and benefits, known by economists as externalities, must be considered in any sensible assessment of aviation’s impact on environment, economy and society.
Externalities can be good, or positive – flights help generate jobs, income, products and services enjoyed by people who do not fly themselves, plus of course tax revenue that governments can invest in public services. They can be bad too, or negative – think pollution, climate change or consumption of scarce minerals like the rare element Palladium used in engines that could be used for other things.
Because of aviation’s positive externalities it is important to recognise that sustainable aviation must preserve these benefits. Excessive taxation, regulation or restrictions will offer environmental benefits but ultimately hurt non-travellers and non-travel businesses, that is economy and society, too.
On the other hand, aviation’s negative externalities will tend to grow out of control unless they are constrained.
This is known by economists as the “tragedy of the commons”. Any one airline can keep pumping noxious gasses into the atmosphere as their own impact is small. But eventually the air will be so polluted that life becomes difficult.
Taxation and regulation can help by increasing the price of air travel to reflect it’s true cost to the wider economy.
This leads to a broader but similar definition of what a sustainable airline might be:
“Sustainable airlines meet the travel needs of today’s economies and societies without compromising the ability of future economies and societies to have their own travel needs met.”
Sustainable airline initiatives are, in the opinion of this blog, best framed by the government in broad terms and implemented through market-based incentives. Aircraft manufacturers and OEMs who use innovative materials or airlines who do smart procurement should be rewarded by both markets and governments for their efforts.
It is intuitive to think that sustainability in aviation is all about the cost side of the business – less weight, less fuel, less waste, less procurement and so on. But the revenue side is important too. To see why, consider the two different types of sustainability that economists have identified.
Weak vs strong models
A key concept in the economics of sustainability is the difference between sustainability that is called “weak” and sustainability that is called “strong”.
Formally speaking, proponents of weak sustainability argue that it is sustainable to substitute one form of capital for equally valuable alternative capital. So environmental capital can be safely depleted as long as in so doing an appropriate amount of social or economic capital is created to substitute for that lost.
Here the Environmental Kuznets Curve loses it’s shape.
Likewise it would be acceptable under weak sustainability to deplete economic or social capital in exchange for creating new environmental capital. In this model the EKC may or may not keep it’s shape.
Now we can define a new type of sustainable aviation:
“A weakly sustainable airline invests part of it’s revenue growth and cost savings (as identified in specific accounting) in the right ways to fully offset it’s negative externalities and enhance it’s positive externalities.”
Surprisingly, this means that initiatives like IATA’s NDC (a communications standard developed to turn airlines into retailers) can have a sustainability impact. There are three ways that this is so:
1. Everything an airline does to raise revenue generates income that can be set aside to invest in social and economic projects offsetting the environmental cost
2. Building a deeper understanding of an airline’s customers with retailing models will help indicate precisely where positive externalities are occurring, which can potentially be reinforced with increasing returns to scale through targeted investment
3. Airlines can offer products and services specifically aligned with local sustainability and development goals at each destination, such as through promoting local ecological tours or small businesses being built through micro-finance.
As a nice little bonus, airlines who integrate sustainability focused products and services into their travel marketplace should experience a boost to passenger satisfaction in some market segments, leading to repeat business, recommendations and higher revenue.
Can airlines support strong sustainability?
Operating flights is necessarily destructive. Fuel is burnt and noxious gases are emitted. Even if aircraft were 100% clean there would still be food wasted, equipment worn out and other inefficiencies necessary to support a complex operation.
According to firm believers in the strong model, environmental, economic and social capital are not substitutes but complements. Degrading one limits the usefulness of the others too. Under strong sustainability models the damage caused by aviation must be put right by restoring or replacing the environmental capital it depleted.
This is unlikely to be feasible in the short term. The laws of thermodynamics are against us. No matter how many trees an airline plants that will not compensate for the use of rare elements like Palladium in engines.
The long term however offers more promise. This blogger is confident that when airlines recognise externalities and re-enforce the positive ones, eventually enough innovation will be done in the wider world that new technologies (unimaginable today) will replace the environmental and other capital degraded by aviation in the past.
It is not the job of airlines to change the world. But it is their job to provide the travel services that the people who do need to make those changes happen. This will always be airlines’ main contribution to sustainability, no matter how many trees they plant.
To make all this a reality there is nothing better that airlines can do than cover all the bases of offering a reliable, wide-reaching, high quality and profitable service that people are willing to pay for.
That is what will generate the revenue to invest in airline sustainability. And that is what will generate the revenue required for airlines to stay in business and serve their passengers for long enough that new technologies to help the environment become a reality.
You cannot have sustainable development without sustainable travel. So in the end, perhaps the best definition of a sustainable airline could be this:
“Sustainable airlines provide all the travel needed to support sustainable development and they do so profitably.”
oliver AT ransonpricing DOT com