Who pays for aviation’s decarbonisation?

Chris Brown, Partner, Aviation Strategy at KPMG, asks the hard question no one dares to ask as the drive to be net zero increases.

Photo credit: stock.adobe.com/tanaonte

Aviation continues to face increasing pressure over its environmental impact – a trend that will continue for the foreseeable future as the rush to net zero accelerates.

However, meeting its self-imposed emissions reduction targets will be a huge challenge, demanding a complex mix of technologies – many of which remain immature – to tackle aviation’s many sources of emissions, each contributing according to its own timeline.

Conquering this complexity will inevitably come at a significant cost to airlines which they will naturally seek to share across the value chain, which begs a key question for a sector with historically modest profitability: who should pay?

Aviation emissions: a complex picture
There is no silver bullet technology for aviation decarbonisation. No combination of fuel or powertrain technology will be sufficient to fulfil net-zero ambitions, even on its most optimistic projections – which may or may not materialise.

Electric and hydrogen craft will need to be supplemented by investments in quality offsetting and carbon capture technologies as well as other incremental gains realised through evolved engine design, air space usage, taxiing practices and non-CO2 emissions reductions (particularly adjusting flight plans to mitigate formation of persistent contrails) – as well as, in the short-to-medium term, the simpler drop-in option of sustainable aviation fuels (SAF).

And that’s just for the aircraft, but  you can see from this graphic – the first influence of ground handlers and airports is relatively modest and initiatives around GSE – except where you’re solving for engine taxiing – is relatively modest.

SAF: huge potential, huge challenges
Besides the relative ease of mitigating contrails, SAF offers the next greatest potential for the coming 30+ years of aviation’s decarbonisation journey. Voluntary demand for SAF from airlines is increasing rapidly, with many already seeking to secure supplies over multi-year periods, and demand set to escalate as national and supra-national mandates come into effect during the mid to late 2020s. However, SAF also faces a real supply scaling challenge, the net result of which is that it will incur a price premium over fossil fuels today and for the foreseeable future.

How much of aviation’s decarbonisation can SAF accomplish? According to our analysis of Ishka’s SAF database, the announced SAF production pipeline to 2028 barely provides for 2% of jet fuel needed globally by 2030 – a fact starkly at odds with industry and government ambition statements often declaring SAF targets of around 10% of aviation fuel by the same year.

In addition, most SAF projects in the pipeline globally still involve technologies that face serious constraints on scaling past the 2030s.
With demand set to far outstrip supply, airlines face the challenge of securing SAF without depressing profitability, at a moment when the sector is still recovering from the loss of decades’ worth of profit through pandemic restrictions and related indebtedness.

The price spiral: where is the limit?
Ultimately, net zero cannot be achieved without additional cost to the aviation supply chain, whether that happens through additional carbon taxes, SAF price premiums, mandatory offsets, or other measures.

Whether consumers will stomach such increases is pivotal to the sector’s ability to continue to invest in emissions reduction technologies, and thus to its net zero pathway. For an alternative lens on this question, KPMG surveyed 950 frequent flyers (across flight purposes, cabins and geographies) and interviewed over a dozen influencers of corporate travel policy. Among other findings, we learned that:

  • Only some 2% of passenger respondents considered carbon emissions to be a priority when booking a flight.
  • Only 3% of respondents currently mitigate the impact of their flying with offsets.
  • Only 19% of respondents believe that customers should have to pay the premium required to produce SAF. A far larger proportion (43%) believe that airlines should be responsible for this cost.
  • Fewer than 20% of respondents think that airlines are ‘doing enough’ to mitigate the environmental impact of flying.
  • Across the US, China, South East Asia and Europe, more than 20% of respondents who are interested in mitigating the climate impact of flying claim to be already replacing plane travel with rail or other transport options.
  • In South East Asia, 28% of respondents who are interested in mitigating the climate impact of flying are already considering flying in a lower class of travel, while the figure in the US is 11% and in Europe 6%.

On the other hand, when asked about what ticket price increase would be fair to cover the cost of aviation’s decarbonisation, respondents generally agreed that increases equivalent to ~USD50 for short haul and ~USD150 for long haul would not impact their frequency of flying, suggesting a degree of flexibility on ticket price.

However, this varies significantly across different passenger cohorts. Our survey suggests that low-frequency travellers are much more relaxed about incremental decarbonisation costs than high-frequency ones, while attitudes also vary across cabin classes.
A more detailed analysis of our survey results will appear this Autumn in our www.kpmg.com/aviation2030 series.       

Conclusion: tough choices loom
Aviation sector leaders have a hard job: balance decarbonisation goals with the need to sustain growth and investment levels, as well as – for certain jurisdictions (e.g. Ireland and Australia) – protect industries of national strategic importance. There are a huge range of instruments available, each with its own pros and cons to balance.

A clear majority of these measures see the burden fall ultimately on taxpayers, which raises questions of fairness, given the relative affluence of frequent flyers.

Ultimately, answering the question of who pays for aviation’s decarbonization is likely to be a fraught process. The willingness of passengers themselves to pay is far from proven; the case for governments to do so is disputed; and the ability of airlines to do so is in doubt. Navigating this uncertainty is arguably the number one strategic priority for the industry.

In our view, SAF represents its best short-term potential, but only if suitable measures are enacted to radically scale supply – measures which are largely still absent and for which aviation needs allies in energy and finance in order to be heard. In the long term, the industry must hope and work for an attitudinal sea change from customers on the importance of decarbonisation, whilst ensuring this does not translate to radically depressed volumes. 

If we conclude with some specific implications for the readership:

Airports and fuel distribution

  • Ensure your supply chain can accommodate SAF blends and facilitate traceability and reporting initiatives.
  • A book and claim approach is key, with the exact SAF blend in any particular flight less important than system-wide SAF usage. For all but a limited number of niche use cases (e.g. 100% SAF on commercial supersonic flight), seeking flight-specific blends adds onerous complexity and may invite accusations of greenwashing given the additional supply chain requirements.
  • Partnerships with international airport federations and airport groups (e.g. ACI, Aena, Vinci, Groupe ADP) could scale the opportunity for airport decarbonisation services. We envision a suite of related services that can be selected per specific airport needs, or packaged as an end-to-end solution taking an airport from initial baseline to minimised emissions (and net zero with quality offsets).
  • Anticipate infrastructure needed for GH agents to decarbonise. Major relevant infrastructure upgrades (e.g. electrification of airport GSE) could be packaged into a multi-year financial product to reduce customer hesitancy.
  • Whilst on-site renewable production is viable for some larger airports, it will only cover a small proportion of overall demand. Electricity solutions will realistically be grid-based with some viable onsite / behind-the-metre renewable projects.

Ground handlers

  • With ground operations responsible for nearly a quarter of aviation emissions, ground handlers have a key role to play in decarbonisation. Partly this will occur via facilitating emissions reductions for airlines and airports, and partly through decarbonising their own operations.
  • Taxiing and APU solutions offer much of the airport emissions reduction opportunity and should be the first priority for your airport partners. Proactively discuss with the potential GHA how to facilitate reductions here, supported by appropriate airport investment decisions.
  • GHA should also evaluate opportunities for fleet decarbonisation via biodiesel, electric, or H2 vehicles, as well as biodegradable or highly recyclable de-icing propositions. Plan for GSE electrification via retrofitting, natural cycle renewal, and lease. Conduct full lifecycle carbon footprint analysis to inform decisions on when to retire assets. If this isn’t yet part of the criteria required to win and retain your airline contract, it will be soon.For more information email brown@kpmg.ie

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