AIRLINES
Research Brief
Sustainable Industry Classification System™ (SICS™) # TR0201
Research Briefing Prepared by the
Sustainability Accounting Standards Board®
www.sasb.org
Copyright 2014
SEPTEMBER 2014
AIRLINES
Research Brief
SASB’s Industry Brief provides evidence for the material sustainability issues in the Road Transportation Industry. The
brief opens with a summary of the industry, including relevant legislative and regulatory trends and sustainability risks
and opportunities. Following this, evidence for each material sustainability issue (in the categories of Environment,
Social Capital, Human Capital, Business Model and Innovation, and Leadership and Governance) is presented. SASB’s
Industry Brief can be used to understand the data underlying SASB Sustainability Accounting Standards. For
accounting metrics and disclosure guidance, please see SASB’s Sustainability Accounting Standards. For information
about the legal basis for SASB and SASB’s standards development process, please see the Conceptual Framework.
SASB identifies the minimum set of sustainability issues likely to be material for companies within a given industry.
However, the final determination of materiality is the onus of the company.
Related Documents
• Airlines Sustainability Accounting Standards
• Industry Working Group Participants
• SASB Conceptual Framework
INDUSTRY LEAD
Nashat Moin
CONTRIBUTORS
Andrew Collins
Henrik Cotran
Anton Gorodniuk
Jerome Lavigne-Delville
Himani Phadke
Arturo Rodriguez
Jean Rogers
Gabriella Vozza
SASB, Sustainability Accounting Standards Board, the SASB logo, SICS, Sustainable Industry Classification System,
Accounting for a Sustainable Future, and Materiality Map are trademarks and service marks of the Sustainability
Accounting Standards Board
INDUSTRY BRIEF|AIRLINES
Sustainability Disclosure Topics
both positive and negative externalities, and the nonfinancial forms of capital that the industry relies on for
Environment
•
value creation.
Environmental Footprint of Fuel Use
Specifically, performance on the following
Human Capital
•
Labor Relations
sustainability issues will drive competitiveness within
the Airlines industry:
•
Leadership and Governance
•
Competitive Behavior
•
Accidents & Safety Management
Improving fuel efficiency of aircraft and
reducing direct greenhouse gas (GHG) emissions
and harmful air pollutants;
•
Managing labor relations and ensuring fair
employee treatment;
INTRODUCTION
•
Ensuring fair competition practices; and
•
Ensuring the highest standards of passenger
and cargo safety by managing the key risk
factors: pilot error and mechanical failure.
Once a symbol of high social and economic status, air
travel has become a basic transportation service in
developed economies and is increasingly common in
In the context of global climate change and rising
many emerging economies. With this exponential
economic development in many parts of the world,
growth of air travel worldwide, greenhouse gas (GHG)
regulatory pressure and public expectations will
and other air emissions of airlines at high altitude have
continue to drive environmental performance,
become an acute environmental externality in the
passenger safety and competitive behavior. Therefore,
focus of global and local mitigation efforts to combat
management (or mismanagement) of these
climate change. And with intensifying air traffic, the
sustainability issues has the potential to affect
industry must address increasingly stringent safety
company valuation through impacts on profits, assets,
standards to maintain its image of the safest means of
liabilities, and cost of capital.
transportation. Moreover, despite a trend towards
privatization, airlines are still directly or indirectly run
by governments in many parts of the world. Fully
INDUSTRY SUMMARY
privatized airlines struggle to stay profitable with a
highly-unionized workforce, high capital requirements,
The Airlines industry comprises companies that provide
and competition from government-sponsored carriers,
air transportation to passengers for both leisure and
and often seek court protection from creditors through
business purposes. This includes commercial full-
bankruptcy and restructuring. To find economies of
service, low-cost, and regional airlines that operate in
scale, Airlines are in a constant state of consolidation
the U.S. and internationally. I Most airline companies
and increasingly cooperate through alliances, which
also have a cargo segment in their operations from
limits competition.
which they generate two to three percent of revenues
Investors would obtain a more holistic and comparable
and Latin American airlines, nine to 12 percent of
view of performance with airlines companies reporting
revenue is generated from a cargo segment. Current
for the U.S.-domiciled airlines. For European, Asian,
metrics on the material sustainability risks and
opportunities that could affect value in the near- and
long-term in their regulatory filings. This would include
I
Industry composition is based on the mapping of the
Sustainable Industry Classification System (SICSTM) to the
Bloomberg Industry Classification System (BICS). A list of
representative companies appears in Appendix I.
INDUSTRY BRIEF|AIRLINES|1
industry trends indicate that airlines are reducing their
The global airlines market is valued at around $615
fleet of freighter planes and instead utilizing their
billion in revenues, with full-service airlines
passenger aircraft for cargo transportation. For
representing over 80 percent of the revenue. Airline
example, Air France-KLM transports 72 percent of
cargo is the smallest segment with just under $20
freight by passenger planes, which is up from 54
billion of global revenue. 6 Airline companies listed on
percent in 2007. 1
the U.S. exchanges generate over $190 billion in
revenue from the passenger transportation segment. In
Airline routes and networks are key drivers of
2013, the median operating profit margin for U.S.-
profitability for the industry. Full-service carriers
listed companies and those primarily traded over-the-
typically use a hub and spoke model II to design their
counter (OTC) was 5.2 percent, while the median net
routes within the U.S. and internationally. Low-cost
income margin was 2.4 percent. Full-service airlines
carriers usually offer a smaller number of routes as
tend to have lower margins than their low-cost peers.
well as no-frills service to their customers. Regional
Median operating margins of the largest full service
2
carriers typically operate under contract to full-service
airlines were 2.6 percent and the median net income
carriers, expanding the network of the larger carriers.
margins were 1.3 percent in 2013. In comparison, in
3
Another tactic used to increase an airline’s network is
the same year, low-cost carriers were more profitable,
the use of alliances. There are three leading alliances:
with median margins of 9.8 and 3.7 percent of
Star Alliance, Oneworld, and SkyTeam, each with 27,
operating and net profit margins respectively. 7
15, and 20 worldwide members, respectively.
Operating as an alliance allows customers access to
The industry is mature and concentrated, with the top
international or otherwise unserved itineraries on
four U.S.-domiciled, publicly traded, full-service airlines
multiple airlines, under one ticket. At the same time,
(United Continental Holdings, Delta Air Lines,
airlines share some overhead costs and increase their
American Airlines, and Southwest Airlines) holding
competitive position in the international market
more than 75 percent market share in North America
without having to establish foreign operations.
in 2013, up from just under 70 percent in 2012. 8
4
Industry consolidation was one of the main drivers of
The airlines business is global by nature. Four out of
the rise in concentration. 9 Over the last 12 years six
the top five U.S.-domiciled airlines by revenue serve
mergers reduced the number of major carriers from 10
routes all over the world. Foreign airlines, such as
to four to dominate the market. The most recent
British Airways and Lufthansa, also operate in the U.S.
mergers and acquisitions include: American Airlines
Only one of the top five U.S.-domiciled companies,
merging with US Airways in 2013, Southwest
Southwest Airlines, is a low-cost carrier offering
acquiring AirTran Airways in 2011, United merging
exclusively domestic travel. Domestic travel relies
with Continental Airlines in 2010, and Delta Air Lines
heavily on business travelers and demand is driven by
merging with Northwest Airlines in late 2009. Most of
corporate profits and the strength of the business
the companies were overcoming periods of
environment. On the other hand, the majority of
bankruptcies prior to their mergers. 10
revenue on international flights comes from inbound
international tourism and international trips by U.S.
The international airlines industry is characterized by
residents and is driven by consumer discretionary
high barriers to entry. This is mostly attributed to strict
spending.
government regulations, high capital requirements, as
5
well as licensing and reporting requirements. There
can be only a limited number of aircraft designated to
operate on each route, determined by airline
II
Using routs from a hub airport to other airports as spokes to
connect them via the hub.
agreements involving landing rights. Moreover, volume
INDUSTRY BRIEF|AIRLINES|2
quotas III on international airline services are imposed
their exposure to such volatility, and nine out of the
on a country-by-country basis, which may give a
top 10 U.S.-based, publicly listed airlines use various
competitive advantage to nationalized airlines.
financial instruments to hedge the cost of fuel,
11
including swap contracts, call options, collars, futures
Competition in the airline industry is dampened in
contracts, and forwards contracts. 17 Some companies,
some regions through limited airport infrastructure
but not all, choose to designate this as hedging activity
and airport slots, which can act as a cap on supply and
for accounting purposes.
make it very difficult for emerging companies to gain
new slots. An airport slot is critical to an airline’s
In 2007 and 2008, fuel prices soared, while the
operations and gives the slot owner permission to use
economy experienced a downturn. The slowing
the airport infrastructure necessary to arrive or depart.
economy hit both consumer discretionary spending
The International Air Transportation Association (IATA)
and corporate profits, leaving airlines with falling
provides a global standard for slot management, but
demand and overcapacity. Coupled with the
there are variations throughout the world in how and
fluctuating and mostly increasing fuel costs, this shift
to what extent they are applied. The IATA categorizes
in demand created industry losses. Low-cost airlines
airports as Level 1, Level 2, or Level 3 based on the
fared better through the downturn and in 2010, the
level of congestion. Level 3 airports are the most
industry stabilized as a result of cost-cutting measures.
congested and are defined as “airports where the
Recent trends show low-cost airlines are slowly eating
capacity providers have not developed sufficient
into the full-service market share. The market is also
characterized by structural changes in the form of
infrastructure or where governments have imposed
conditions that make it impossible to meet demand.”
12
mergers and acquisitions and bankruptcies. 18
At Level 3 airports, slots are allocated to airlines using
several principles, including historical precedents,
Passenger safety is another important factor that drives
whereby airlines that had a slot in the previous year
performance of airlines. As recent tragedies showed,
and utilized it 80 percent of the time can retain that
some risks may go beyond the airline’s control.
slot. 13 Airlines are able to acquire, retain, and
Accidents that led to a loss of many lives made the
exchange take-off and landing slots. Due to limited
industry increase its focus on the safety issue.
availability, airport slots are very valuable to airlines.
Therefore, U.K. airlines started recognizing their slots
Midland valued its Heathrow airport slots at £770m. 14
LEGISLATIVE AND REGULATORY
TRENDS IN THE AIRLINES INDUSTRY
The price of fuel is a key driver in the profitability of
Regulation plays a prominent role in the Airlines
the industry. Cost of fuel represented about a third of
industry. Increasing awareness around climate change
total operating expenses in recent years, followed by
shapes regulations for airlines, due to environmental
as assets on balance sheets. For example, BMI British
wages, with 16 to 19 percent.
15
Increasing fuel prices
externalities related to the nature of their business.
mean higher costs for airlines, and typically, airlines are
Moreover, continuous evolution towards higher safety
not able to pass the full cost increase onto their
standards puts public and regulatory pressure on the
passengers. Therefore, increasing oil prices eat directly
industry. The following section provides a brief
into airline profits. Even with oil prices decreasing in
summary of key regulations and legislative efforts
2013, their volatility in the future will play a critical
related to this industry that drive material sustainability
role in the stability of the airlines industry. 16 Major
issues. IV
airlines employ fuel hedging strategies in order to limit
IV
III
Measured in number of seats.
This section does not purport to contain a comprehensive
review of all regulations related to this industry, but is intended
INDUSTRY BRIEF|AIRLINES|3
The Federal Aviation Administration (FAA) has
industry. The DOT is responsible for executing and
authority to regulate and oversee all aspects of
enforcing airline consumer rights laws established by
American civil aviation. The agency is broken into four
the U.S. Congress. It may also develop regulations
lines of business: (1) Airports, (2) Air Traffic Control,
based on more general statutory authority, giving it
(3) Aviation Safety, and (4) Commercial Space
broad powers to prescribe regulations, standards, and
Transportation. FAA requirements cover, among other
procedures related to air travel. 26 The DOT is
things: retirement of older aircraft, security measures,
responsible for the recently enacted Passenger
collision avoidance systems, airborne wind shear
Protection Rules, which address matters such as
avoidance systems, noise abatement and other
tarmac delays, chronically delayed flights, fee
environmental concerns, aircraft operation and safety,
transparency, and fair treatment of passengers.
and increased inspections and maintenance procedures
to be conducted on older aircraft. 19 The FAA also
Despite efficiency improvements, increasing levels of
regulates the health and wellbeing of pilots and crew
GHG emissions due to the growing demand for air
members as they relate to passenger safety. For
travel have led to a number of environmental
example, the agency has introduced requirements on
regulations addressing the airline industry’s emissions,
the frequency and duration of rest periods compared
both in the U.S. and internationally. 27
to flight time for pilots. 20 In December 2011, new pilot
fatigue requirements were introduced to significantly
reduce the number of hours on duty.
21
The FAA
In the U.S., the Environmental Protection Agency (EPA)
has oversight of the Airlines industry’s environmental
routinely issues fines or revocations for infractions and
impacts under both the Clean Air Act and the Clean
can enact new regulations with positive or negative
Water Act. The Clean Air Act gives the EPA the
cost implications for airlines. 22
authority to determine whether carbon emissions from
aircraft operations endanger society. It also gives the
Another organization whose standards can influence
EPA authority to introduce regulations to address the
airline profitability is the United Nations’ International
issue. 28
Civil Aviation Organization (ICAO). The ICAO is
represented by 191 members and develops
In 2012, the European Union (E.U.) moved to include
international Standards and Recommended Practices
aviation in its emissions trading system (ETS) by
(SARPs) that are further used by member countries to
establishing limits on carbon emissions and introducing
develop national civil aviation regulations. 23 The
allowances and fees on flights to, from, and within the
ICAO’s Annex 18 sets standards for "Safe Transport of
European Economic Area (EEA). However, resistance
Dangerous Goods by Air." Air carriers are required to
from several countries, including the U.S., caused the
have inspection and enforcement procedures to ensure
E.U. to postpone the enforcement on international
compliance with the Annex 18. 24 In addition, in April
flights until November 2013 in hopes of creating a
2014, the ICAO Dangerous Goods Panel (DGP)
global, market-based solution through the UN’s
proposed to restrict transportation of lithium metal
ICAO. 29 The legislation has since been amended for
batteries to cargo aircraft only. If the proposal is
the period from 2013 to 2016, and only emissions
approved by the ICAO Council, the changes will
from flights within the EEA currently fall under the
become effective starting January 2015.
E.U.’s ETS. The decision was driven by the ICAO
25
Assembly agreement in October 2013 to “develop a
The U.S. Department of Transportation (DOT) also
global market-based mechanism addressing
plays an important role in regulating the airline
international aviation emissions by 2016 and apply it
by 2020.” 30
to highlight some ways in which regulatory trends are impacting
the industry.
INDUSTRY BRIEF|AIRLINES|4
environmental impacts and high safety
standards, which will serve to align the interests
SUSTAINABILITY-RELATED RISKS
AND OPPORTUNITIES
of society with those of investors.
The following section provides a brief description of
Industry drivers and recent regulations suggest that
each sustainability issue that is likely to have material
traditional value drivers will continue to impact
implications for companies in the Airlines industry. This
financial performance. However, intangible assets such
includes an explanation of how the issue could impact
as social, human, and environmental capitals, company
valuation and evidence of actual financial impact.
leadership and governance, and the company’s ability
Further information on the nature of the value impact,
to innovate to address these issues are likely to
based on SASB’s research and analysis, is provided in
increasingly contribute to financial and business value.
Appendix IIA and IIB. Appendix IIA also provides a
summary of the evidence of investor interest in the
Broad industry trends and characteristics are driving
issues. This is based on a systematic analysis of
the importance of sustainability performance in the
companies’ 10-K and 20-F filings, shareholder
Airlines industry:
resolutions, and other public documents. It also based
•
Energy inputs and externalities from fuel-
on the results of consultation with experts
intensity of operations: As a fuel-intensive
participating in an industry-working group convened
industry with large direct emissions contributing
by SASB.
to climate change, the Airlines industry is
attracting growing attention from U.S. and
•
•
A summary of the recommended disclosure framework
international regulators. At the same time,
and accounting metrics appears in Appendix III. The
increasing energy costs are providing incentives
complete SASB standards for the industry, including
for efficient fuel management.
technical protocols, can be downloaded from
High safety standards: Passengers entrust
www.sasb.org. Finally, Appendix IV provides an
their lives to airlines; companies must continue
analysis of the quality of current disclosure on these
to maintain high safety standards to retain their
issues in SEC filings by the leading companies in the
license to operate.
industry.
Dependence on public infrastructure: The
industry’s use of common capitals and public
goods, including airports and airspace, drives
ENVIRONMENT
both its sustainability impacts and consequently,
•
impacts on its value through regulations or
The environmental dimension of sustainability includes
public reaction.
corporate impacts on the environment. This could be
Industry concentration creates competition
through the use of natural resources as inputs to the
concerns: The Airlines industry experiences
factors of production (e.g., water, minerals,
frequent merger and acquisition activity, leading
ecosystems, and biodiversity) or environmental
to consolidation and concerns about
externalities and harmful releases in the environment,
competitive behavior. As described above, the
such as air and water pollution, waste disposal, and
regulatory and legislative environment
GHG emissions.
surrounding the Airlines industry emphasizes
the importance of sustainability management
The Airlines industry faces risks and opportunities
and performance. Specifically, recent trends
related to environmental factors, particularly increasing
suggest a regulatory emphasis on reduction of
climate regulations. Regulatory costs associated with
INDUSTRY BRIEF|AIRLINES|5
GHG emissions are threatening the Airlines industry’s
existing aircraft can improve efficiency by 15 percent. 35
already thin profit margins. However, optimizing fuel
The dynamic of new technology versus retrofits is
management through technology innovation offers an
important, given that over a third of the world’s airline
opportunity to control costs.
fleet is rented. 36 It is not entirely clear that either
leasing or owning is better from a fuel efficiency
Environmental Footprint of
Fuel Use
perspective, but it is important to acknowledge that
having access to the latest technology does have a
beneficial impact on fleet fuel efficiency.
As a result of heavy reliance on oil, the Airlines
industry generates a significant amount of direct GHG
As one of the strategies to minimize GHG emissions,
emissions and is subject to potential compliance costs
airlines can seek alternative fuel options. With looming
and risks associated with climate change mitigation
climate regulations and volatile fuel prices, the Airline
policies. The main sources of GHG emissions for
industry began using biofuels on commercial flights in
airlines companies are aircraft fuel use and emissions,
2011. 37 While biofuel flights do emit carbon dioxide—
ground equipment, and facility electricity. Aircraft
unlike fossil fuel—biofuel absorbs carbon dioxide
emissions are the largest contributor to total emissions
during the growth of the crop, greatly reducing the
from the industry, and fuel management is a critical
lifecycle carbon dioxide emissions. Given the emissions
part of reducing emissions.
captured during the production of biofuels, the overall
reduction in emissions is estimated to be 80 percent
Fuel management addresses both fuel efficiency and
when compared to fossil fuels. 38
the use of alternative fuels. It offers an effective way
for airlines to increase profits through reduced fuel
There are various industry initiatives aimed at reducing
costs, while also limiting exposure to volatile fuel
environmental externalities created by airlines’
pricing, future regulatory costs, and other
operations. In 2009, the IATA began taking
consequences of GHG emissions. Under the Clean Air
commitments from airlines to be carbon neutral in all
Act, the EPA is currently evaluating whether aircraft
growth after 2020 and reduce absolute carbon
emissions endanger society, the results of which could
emissions by 50 percent by 2050. 39 In October 2010,
lead to regulatory measures. 31 In September 2014, the
the International Civil Aviation Organization (ICAO)
EPA further began determining whether it will regulate
established an action plan to identify the most
GHG emissions from airlines. The regulations would
appropriate measures to reduce CO 2 emissions from
lead to increased air travel costs. There is no timeline
international civil aviation. 40 The resolution focuses on
set by the agency on when the rules are to be
technology, operations, and infrastructure measures as
released.
the primary means for addressing emissions. 41
32
Companies can adopt various strategies to reduce the
Company performance in this area can therefore be
environmental footprint of their fuel use. The fuel
analyzed in a cost-beneficial way, internally and
efficiency of an airline has several drivers, including
externally, through the following direct or indirect
aircraft design, route selection, and load factor. Newer
performance metrics (see Appendix III for metrics with
aircrafts are more fuel-efficient, and one report
their full detail):
estimates that every 10 years, the aircrafts being built
are 10 to 15 percent more efficient. 33 However,
•
Gross global Scope 1 emissions;
existing planes can be retrofitted for efficiency. For
•
Long- and short-term strategy to manage Scope
example, adding winglets can increase fuel efficiency
by 1.8 percent,
34
and replacing an engine on an
1 emissions;
•
Total fuel consumed, percentage from
INDUSTRY BRIEF|AIRLINES|6
renewables; and
UN’s deadline to implement the system is 2020, the
Notional amount of fuel hedged, by maturity
E.U. may not be satisfied and could still require non-
date.
E.U. airlines to comply with their ETS requirements. 47
Evidence
Meanwhile, the IATA, which represents 85 percent of
The Airlines industry is a significant contributor to
the world’s airline traffic, is calling for airlines to offset
global GHG emissions, creating regulatory risks for
increased emissions after 2020 by purchasing carbon
companies. According to the Carbon Disclosure Project
credits. In this scenario, it is estimated that the cost to
Transportation Report, the Transportation sector
the industry could be up to 0.5 percent of total
accounts for 13 percent of global emissions, 13
international airline revenue, assuming the cost of
percent of which come from air transportation.
credits to be $4 to $6 per metric ton in 2015. 48
•
42
Statistics from the Center for Climate and Energy
Solutions (C2ES) indicate similar contribution, with
In April 2014, Germany fined 61 airlines from several
around 1.5 percent of global GHG coming from
countries including the U.S. for breaching E.U. ETS
aviation, which includes both passenger airlines and air
rules and for failing to submit emissions permits to
freight. U.S. aviation activities account for
cover GHG discharges from the flights within the EEA.
approximately 40 percent of these emissions.
In
43
The amount of total penalties is close to $3.7 million,
absolute values, the Aviation industry in the U.S.
and the fine is the first since aviation was included in
accounted for around 145 Teragrams CO 2 equivalent
the E.U. carbon market. Under the E.U. law, aircraft
(Tg CO 2 e) emissions in 2012, with 114.4 Tg CO 2 e
operators failing to surrender the required number of
coming from commercial aircrafts. Over 99 percent of
permits can be fined EUR100 per metric ton of CO 2 . 49
these emissions are in the form of carbon dioxide. 44
If the E.U. ETS rules extend to flights to and from the
EEA, the financial impact of non-compliance is likely to
Climate change regulations steadily make it
increase in the future.
more costly for airline companies to operate. Even
without U.S. federal regulations or a global treaty on
Furthermore, cost of jet fuel is a significant operating
addressing climate change, there are regulations
expense for aircraft operators and can put the business
specific to certain geographic areas that can impact
at risk during times of rising or volatile fuel prices. In
the industry, as airlines operate across different
2012, the global airline industry spent $207.6 billion
regions globally. In Europe, the Emissions Trading
on fuel, which was 31 percent of its operating costs. 50
System (ETS) was launched in 2005 to mitigate climate
Airlines for America, the largest U.S. airline trade
change. The ETS covers factories, power stations,
association, estimates that for every dollar that the
industrial plants, and all flights within the EEA.
price of jet fuel increases, the U.S. airlines industry
45
pays an additional $445 million for fuel per year. 51
The E.U. came close to including non-European airlines
Along with other factors, increasing oil prices led more
that serve Europe in the ETS in November 2012—a
than 50 passenger and cargo airlines in the U.S. to file
move that would reportedly have cost U.S. airlines
for bankruptcy between 2000 and 2012. 52
$3.1 billion between now and 2020. 46 The move was
postponed in the hope that a more agreeable global
To limit their exposure to volatile oil prices, some
market-based solution would come out of the UN
companies in the industry use fuel hedging strategies
ICAO (see Legislative and Regulatory Trends section).
or even operate their own refineries. 53 All of the top
In response, the ICAO agreed to build a global market-
ten U.S.-domiciled companies by revenue acknowledge
based mechanism to monitor, report, and verify
in their 2012 annual filings with the SEC that they are
aircraft emissions by 2016. However, given that the
materially impacted by changes in aircraft fuel prices.
INDUSTRY BRIEF|AIRLINES|7
Nine of these 10 companies are using financial
refining crude oil. 58 Crop production for biofuels also
instruments to hedge fuel prices, and they disclose
has the potential to distort other markets, such as the
metrics on the percentage of their fuel use that is
food industry.
hedged in their filings.
Advanced biofuels could reduce water consumption
In their fiscal year (FY) 2012 Form 10-K, Republic
significantly, but these technologies are yet to be
Airways describes the extent to which fuel price
proven on a commercial scale. 59 Short-term costs to
volatility impacts their cash flow, stating that “a one
find commercially viable technologies can be
dollar change in price per barrel of crude oil will
significant, and these are lowering investments in
increase or decrease our fuel expense by $3.8 million.”
advanced biofuels. However, investments in R&D for
In 2012, $3.8 million represented 0.5 percent of
such technologies could serve to advance airline
Republic Airways’ aircraft fuel costs for the year and a
companies’ long-term profitability.
meaningful 7.4 percent of profits.
54
For Alaska Airlines
“a $1 per barrel increase in the price of oil equates to
Despite the high costs of biofuels compared to
approximately $11 million of additional fuel cost
traditional jet fuel, airlines are acting to make aviation
annually.”
55
For United Continental, the increase
would be $94 million annually.
56
biofuels more commercially viable, due to the
importance of reducing GHG emissions for the
industry. In its 10-K Form for FY2012 United
Fuel management in the form of efficiency
Continental Holdings, Inc. states that “(t)he Company
improvements or hedging strategies is therefore critical
is taking various actions to reduce its carbon emissions
for the profitability of companies, like Republic
through fleet renewal, aircraft retrofits, and actions
Airways and others in the Airlines industry. It also
that are establishing the foundation for the
enables companies to lower their GHG emissions, and
commercialization of aviation biofuels.” 60 As one of
therefore, regulatory risks discussed earlier.
the actions for the commercialization of aviation
advanced biofuels, United Airlines signed a purchase
Another way for the industry to mitigate GHG
agreement with AltAir Fuels to buy 15 million gallons
emissions is through the use of biofuels. The largest
of lower-carbon, renewable jet fuel over a three-year
hurdle in switching to biofuels is cost, not technology.
period. AltAir Fuels will retrofit part of an existing
Airlines already spend 25 to 35 percent of their
petroleum refinery to become a 30 million gallon,
operating costs on jet fuel annually, and that number
advanced biofuel refinery near Los Angeles. The fuel is
would rise substantially by switching to biofuels at
expected to help the company achieve a 50 percent
current prices. When Alaska Airlines launched its first
reduction in GHG emissions on a lifecycle basis.
61
commercial biofuel-powered flight in 2011, it paid six
times the cost of traditional jet fuel. Alaska Airlines
The importance of managing the environmental
used a 20 percent biofuels blend, made from used
footprint of Airlines fuel use is reflected in current SEC
cooking oil, which it estimates reduces GHG emissions
filings of the top companies in the industry.
by 10 percent.
Companies such as United Continental, Delta,
57
Southwest, and American Airlines, to name a few,
Although the use of biofuel blends can be beneficial,
have started reporting on their fuel management
biofuels themselves can generate negative
programs and initiatives, examples of which include
externalities. Irrigation for corn production means that
fleet renewal plans, aircraft retrofits, use of aviation
currently, biofuels are actually the most water-
biofuels, programs to reduce fuel usage by ground
intensive fuel source in the U.S. Water consumption
support operations, use of technology to modernize air
for biofuels is orders of magnitude greater than for
traffic control systems, and reductions in engine idle
INDUSTRY BRIEF|AIRLINES|8
times, among others.
contractors), as a key asset to delivering long-term
Value Impact
value. It includes factors that affect the productivity of
GHG-intensive operations expose airlines to increasing
employees, such as employee engagement, diversity,
risk of chronic regulatory compliance costs, with direct
and incentives and compensation, as well as the
costs already occurring in some markets. In addition,
attraction and retention of employees in highly
management of energy efficiency and energy mix
competitive or constrained markets for specific talent,
(including renewables) is key to the profitability and
skills, or education. It also addresses the management
risk profile of airlines. Compliance—expected or
of labor relations in industries that rely on economies
actual—also leads to additional capital expenditures
of scale and compete on the price of products and
(CapEx) to renew or retrofit fleets for energy
services or in industries with legacy pension liabilities
efficiency, with a potentially significant impact on
associated with vast workforces. Lastly, it includes the
profitability and cash flow. At the same time,
management of the health and safety of employees
investments in fuel-efficient and alternative fuel
and the ability to create a safety culture for companies
engines will result in lower ongoing fuel expenses in
that operate in dangerous working environments.
the medium term, improving profitability. As
international and national efforts continue to advance
In the Airlines industry, human capital issues revolve
regulation to reduce total GHG emissions, including in
around the dependence on a large number of workers
the Airlines industry, the probability and magnitude of
who are covered under collective bargaining
these impacts are likely to increase in the near to
agreements. Even though unionization rates have
medium term. The magnitude of these impacts can be
generally decreased, union participation in the Airlines
estimated using companies’ Global Scope 1 emissions,
industry remains strong. Therefore, management of,
in absolute terms and relative to their peers, factoring
and communication around, issues such as worker pay
in regions of operations and mitigation efforts
and working conditions is critical to prevent costly
reflected in concrete emissions-reduction targets.
worker strikes. Proper personnel training and ensuring
the health and well-being of crew members is critical
In addition, while the cost of energy consumption is
to ensuring safety. The issue is covered in the
already captured in financial results, overall energy
“Accidents & Safety Management” section of the
consumption indicates airlines’ exposure to possible
brief.
future increases in energy prices, resulting from
internalizing the growing environmental and social
impact of energy consumption. Reliance on specific
Labor Relations
types of energy also creates operational risks, which
The Airlines industry employs several types of skilled
impact long-term profitability and ultimately the risk
workers, including pilots, flight attendants, baggage
profile of the company and its cost of capital. Lastly,
handlers, maintenance workers, and ticket agents.
use of renewable energy indicates airlines’ ability to
Wages were the largest cost component for airlines
mitigate their environmental footprint and exposure to
until recent increases in fuel prices replaced labor costs
increases in energy costs driven by sustainability
with fuel costs as the largest cost item. Organized
impacts.
labor plays an important role in the industry as there
are high levels of unionization—some U.S.-listed
airlines have as much as 97 percent union
HUMAN CAPITAL
participation. There are several major airline unions
that govern negotiations, including the U.S. Airline
Human capital addresses the management of a
Pilots Association, Air Line Pilots Association,
company’s human resources (employees and individual
Association of Flight Attendants, and the Transport
INDUSTRY BRIEF|AIRLINES|9
Workers Union. 62
Unions can protect worker rights and negotiate wages
due to their bargaining power. In countries with strong
labor laws or in industries with union representation,
wages tend to be higher than in the absence of strong
worker laws and enforcement, representing to an
extent better protection of worker rights. Unionization
of key personnel leaves airlines vulnerable to service
shutdowns resulting from strikes if management is
unable to address worker demands, which reduces
industry revenue and disrupts economic activity.
Additionally, collective bargaining may result in higher
labor costs via wage or benefits increases. Some older
U.S. airlines also face larger burdens from legacy
pensions compared with their younger counterparts,
and bankruptcies are a means to reduce these
liabilities. This creates a risk for labor rights if worker
pay or benefits are significantly reduced as a result.
Proper management of, and communication around,
issues such as worker pay and working conditions can
prevent conflicts with workers that could lead to
strikes that can severely impact revenue and create
reputational risk.
Airlines with newer operations in the U.S. have lower
unionization rates or pension liabilities. For companies
with low unionization rates in an industry
characterized by otherwise high union participation, a
short-term view on worker compensation, contract
terms, and working conditions could create a potential
for disruption as workers begin to demand better
standards through increasing unionization or other
actions.
Proper management of, and communication around,
issues such as worker pay and working conditions can
prevent conflicts with workers that could lead to
extended periods of strikes, which can slow or shut
down operations and create reputational risk. Airlines
need a long term perspective on managing workers,
including their pay and benefits, in a way that protects
worker rights and enhances their productivity while
ensuring the financial sustainability of a company’s
operations.
Company performance in this area can therefore be
analyzed, internally and externally, through the
following direct or indirect performance metrics (see
Appendix III for metrics with their full detail):
•
Percentage of workers covered by collectivebargaining agreements; and
•
Number and duration of strikes and lockouts.
Evidence
Labor unions play a critical role in the global Airlines
industry. Over one-third of all workers in the U.S. air
transportation industry are unionized: in 2013, 37.1
percent of workers were union members and 38.6
percent were covered by collective bargaining
agreements. 63 Some airlines, such as China Eastern,
LATAM, Alaska, and Southwest Airlines, report higher
rates of unionization, with rates of between 31 and 97
percent. 64 Most major carriers are highly unionized,
while national and regional carriers include a mix of
union and nonunion workplaces. 65 In contrast, only 7.5
percent of all U.S. private sector workers were covered
by unions in 2013. In durable goods manufacturing, a
traditional union stronghold, union density fell from
32.1 in 1983 to 10.9 percent in 2013. 66
Wages at U.S.-domiciled international and domestic
airlines are estimated to represent 22.1 and 10 percent
of revenue for 2013, respectively. 67 Costs are also high
for non-U.S. international airlines. For example, Latin
American airline LATAM reported labor costs as 20
percent of total operating expenses in its FY2013 20-F
filing. 68 It is estimated that airline workers covered by
collective bargaining agreements enjoy a wage
premium. Across all airline workers, between 1995 and
2000, union members had a wage premium of about
15 to 25 percent, 69 which may account for the
significance of labor costs.
Heavy union participation in the Airlines industry
presents considerable operating risk, if relations
between labor and management are strained. Many of
LATAM’s pilots, flight attendants, mechanics, and
airport personnel are unionized. The company
I N D U S T R Y B R I E F | A I R L I N E S | 10
recognizes the risks associated with poor labor
merger activities and operations generally.
relations in its FY2013 20-F form by disclosing that
Several examples of strikes and near-strikes highlight
strikes, walk-outs, or stoppages by these groups could
the potential material impacts on airlines of poor labor
“severely disrupt our operations and negatively impact
relations. On June 12, 2010 Spirit Airlines pilots went
our operating and financial performance, as well as
on strike for better wages, grounding flights for
how our customers perceive us.” 70
thousands of passengers. 75 The pilots claimed that
they had been “working at below market rates and
Airlines have tried to reduce their labor costs through
work rules for years.” 76 The airline refunded
bankruptcies and mergers. Without early engagement,
passengers’ tickets and gave them $100 toward future
unions may limit the ability of companies to quickly
flights. The strike was resolved and pilots went back to
adjust labor expenses and the size of their workforce
work on June 18, 2010. The resolution included better
in response to competitive pressures or adverse
pay, retirement benefits, and performance reviews to
economic conditions. After the crisis in early 2000s,
acknowledge leadership initiative. The strike is
several major U.S. carriers entered bankruptcy. Among
reported to have cost Spirit Airlines $19 million;
the factors responsible were high labor costs, rising
however, the company reported a loss of $2.8 million
fuel prices, competition from low cost carriers, and low
in the first six months of 2010. 77 The event highlights
demand. U.S. Airways entered bankruptcy in 2002 and
the challenges that can result from employee strikes
2004, United in 2002, Delta and Northwest in 2005. In
related to wages and working conditions, and
2003, American Airlines was able to avoid bankruptcy
emphasizes the importance of management
after negotiating concessions with unions.
recognizing and addressing worker concerns in a
71
timely manner, and maintaining good communication
In 2012, American Airlines was forced to cancel
between management and employees. Likewise, pilot
hundreds of flights when a large number of pilots
strikes resulted in 160 canceled Avianca flights in
called in sick to protest a contract that would reduce
2013. Pilots of the U.S.-listed Colombian airline
their pay and benefits at the then-bankrupt carrier.
claimed that in 2003 they agreed to increase working
72
The possibility of reductions in pay and benefits can
hours from 75 to 90 hours a month under the promise
also lead to worker actions that pose difficulties during
of benefits that did not materialize. 78
merger proceedings. Recently, the likelihood of a flight
attendants’ strike at Piedmont Airlines threatened the
Value Impact
pending merger of its parent company, U.S. Airways,
Labor-intensive industries with well-defined
with American Airlines. Piedmont flight attendants
occupations are prone to high rates of unionization, as
formed picket lines in June 2013, looking to share in
employees with similar skills and compensation have
the success of U.S. Airways. This came in the midst of
an incentive to resort to collective bargaining in their
U.S. Airways’ bid for approval from federal regulators
negotiations with management. The bargaining power
for its proposed merger with American Airlines.
73
At
that comes with unionization leads to higher wages
the same time, unions can play an important role in
and other compensation costs, as well as pension
working with management to resolve difficulties in
liabilities. This is likely to be particularly material in the
operations. As part of the same proposed U.S.
Airlines industry, where median net income margins
Airways-American Airlines merger, U.S. Airways’ union
are already at 2.4 percent. 79 Unionization can also lead
leaders met with leaders at the Department of Justice
to labor disputes and service disruptions with short-
to register their support for the merger as a means to
term impact on revenue and longer-term impact on
preserve jobs. 74 This case highlights both the positive
reputation and brand value, and ultimately market
and negative impacts of worker actions related to
share.
wages and working conditions for airlines in their
I N D U S T R Y B R I E F | A I R L I N E S | 11
common practice in the industry, and that are also in
New entrants or disruptors in highly unionized
potential conflict with the interest of broader
industries often have a short-term competitive
stakeholder groups (government, community,
advantage from low unionization rates and lack of
customers, and employees) Therefore, these issues
pension liabilities. However, these companies incur the
create a potential liability, or worse, a limitation or
risk of a medium-term shift in cost structure as growth
removal of license to operate. This includes regulatory
tapers and cost-cutting initiatives drive employees to
compliance, lobbying, and political contributions. In
collective bargaining. The number of work stoppages
addition: risk management, safety management,
provides a measure of past performance on labor
supply chain and resource management, conflict of
practices, while the percentage of employees
interest, anticompetitive behavior, and corruption and
unionized provides an indication of companies’
bribery. It also includes risk of business complicity with
exposure to wage cost increases and possible future
human rights violations.
labor disputes.
For the Airlines industry, leadership and governance
issues arise from the need to manage the safety of
BUSINESS MODEL AND
INNOVATION
highly complex, sensitive, and global operations,
including accident prevention. Accidents and other
safety incidents affect customers and employees, and
This dimension of sustainability is concerned with the
can also lead to significant economic losses in the case
impact of environmental and social factors on
of the cargo segment. The safety of passengers and
innovation and business models. It addresses the
cargo is a priority for companies in the industry, and
integration of environmental and social factors in the
mismanagement of the issue can have a significant
value creation process of companies, including
negative impact on company value.
resource efficiency and other innovation in the
production process. It also addresses product
innovation and looking at efficiency and responsibility
Competitive Behavior
in the design, use-phase, and disposal of products. It
As described in the industry summary, the Airlines
includes management of environmental and social
industry is characterized by low profitability due to
impacts on tangible and financial assets—either a
high fixed capital and labor costs, as well as
company’s own or those it manages as the fiduciary
competition with subsidized national carriers in foreign
for others.
markets. This pushes airlines to find economies of scale
through alliances or consolidation, which results in a
Airline companies rely on innovation to maintain value.
highly concentrated market with four players capturing
Innovation that contributes to sustainability outcomes
75 percent of the U.S. markets. The industry is also
in this industry centers around fuel management and
characterized by high barriers to entry through limited
alternative fuels, which have been addressed in the
landing rights and increasing airport congestions.
disclosure topic “Environmental Footprint of Fuel Use.”
Together, these factors can result in anticompetitive
practices that result in higher prices for consumers.
LEADERSHIP AND GOVERNANCE
As applied to sustainability, governance involves the
management of issues that are inherent to the
business model. It also involves issues that are
As a result, certain airline industry practices have been
scrutinized by antitrust authorities. These practices
include market concentration, airport slot
management, predatory pricing, and the
anticompetitive effects resulting from airline alliances
I N D U S T R Y B R I E F | A I R L I N E S | 12
and mergers. Any time a business action is held up in
•
Amount of legal and regulatory fines and
legal limbo, there is a material risk to investors
settlements associated with anticompetitive
stemming from legal fees, reputational risk, costs
practices.
associated with a delayed transaction, and limit to
growth by acquisition. Moreover, denied mergers may
Evidence
press companies to declare bankruptcy.
Continuous consolidation of the industry drove the
number of major airlines from eight to four in the last
The oldest and largest airline alliance is the Star
five years. Several studies show that mergers of airlines
Alliance, originally formed between United and
eventually result in higher ticket prices for consumers.
Lufthansa, which has since been expanded to include
According to The Wall Street Journal dissected data,
27 airlines worldwide. The other major alliances are
flight prices between some big cities increased by 40
Sky Team and Oneworld, with 20 and 15 member
to 50 percent after mergers. Particularly, by the third
airlines respectively. Alliances can be controversial and
quarter of 2012, fares between Chicago and Houston
may have both positive and negative effects on
(hubs of United Airlines and Continental Airlines prior
competitiveness and consumer pricing, and are
to the merger) increased by 57 over three years. The
therefore heavily scrutinized. University of Illinois
average fares of United Airlines increased by only 16
economists found mixed effects on consumer pricing
percent over the same period. 82
as a result of alliances, claiming that prices to smaller
regional airports decrease due to alliances, while fares
Ancillary fees (baggage fees and on-board food and
to large gateway airports increase.
services) are a significant portion of revenue for
80
airlines. In 2013, United Airlines earned $5.7 billion in
Another industry dynamic that affects competition is
ancillary revenue, the most of any airline globally. In
the availability of airport slots. Limited slots at some
the same year, the total industry ancillary revenue was
airports effectively cap the supply to that region and
$31.5 billion. 83 With current consolidation trends and
create a barrier to entry for new players. Incumbent
the increasing share of the ancillary revenue, airlines
airlines have a dominant position because they are
will likely increase fees as competition weakens.
allowed to maintain any slots they use regularly,
Moreover, in the long term, airlines may reduce
leaving little room for new players. The percentage of
benefits of their loyalty programs. Passengers flying
slots held by companies is often considered in high-
from non-major cities will be left with no choice of a
profile mergers when evaluating anticompetitive
carrier, therefore, ‘loyalty’ will not be a decisive
practices.
factor. 84
81
Finally, the issue of competitive behavior revolves
As mentioned above, merger and acquisition (M&A)
around price-fixing practices within the cargo segment
activity in the industry resulted in high market
of the industry. High industry consolidation makes it
consolidation. Even though the recent mergers were
easy for airlines to collude. There have been several
approved, the cases had to go through lengthy reviews
high-profile cases of price-fixing involving the cargo
and investigation. In 2013, a civil antitrust lawsuit was
segment of airlines. Major airlines were found to have
filed by the Department of Justice (DOJ) to challenge
colluded on fuel surcharges.
the proposed merger between US Airways and
American Airlines. The DOJ was seeking to
Company performance in this area can be analyzed in
permanently block the $11 billion merger. Federal
a cost-beneficial way internally and externally through
courts were examining whether the merger would lead
the following direct or indirect performance metrics
to less competition in the industry and higher prices
(see Appendix III for metrics with their full detail):
for consumers. Prior to the merger, U.S. Airways held
I N D U S T R Y B R I E F | A I R L I N E S | 13
55 percent of the slots at Reagan National Airport;
Australian Competition & Consumer Commission
post-merger, that would increase to 69 percent.
(ACCC), which imposed a total of $68 million in fines
However, US Airways and American Airlines’ parent
to Emirates and the other airlines involved in the
company, AMR Corporation, argues that there are two
cartel. 90
other major airports serving the Washington
metropolitan area, and post-merger, they would only
In 2010, the European Commission fined 11 air cargo
control 25 percent of aircraft seats in the market. The
carriers, including Air France-KLM and British Airways,
news of the government’s antitrust suit caused US
a total of almost €800 million for anticompetitive
Airways’ stock to fall 13 percent, and bonds of AMR
practices. The Commission alleged the companies of
Corporation also dropped. AMR, which filed for
forming a cartel and rigging surcharges for fuel and
bankruptcy in November 2011, was using the merger
security between May 2004 and February 2006. Air
as a means to complete a reorganization and exit court
France-KLM was hit with the largest fine: almost 43
protection.
85
If the merger was not approved, it could
result in American Airlines declaring bankruptcy.
percent of the total amount, €339.6 million, which
represented €0.91 per fully diluted share. It also
represented 7.3 percent of gross cash reserves on June
For the merger to be approved, American Airlines had
30, 2010. 91
to give up 52 round-trip slots at Washington Reagan
Airport and 17 round-trip slots at New York LaGuardia
Airport.
86
Subsequently, Southwest Airlines and JetBlue
Airways won most of the slots that became available.
87
Value Impact
Perceived and actual anticompetitive practices can lead
to regulatory fines and penalties that increase
extraordinary expenses and contingent liabilities and
The investigation of competitive behavior is also
negatively affect a company's bottom line. Denial by
affecting other companies in the industry. In 2011, a
federal antitrust authorities to proceed with merger
$1.4 billion acquisition of AirTran by Southwest was
plans limits the ability of companies to grow by
under the antitrust investigation. In its 10-K filing for
acquisitions, something of particular importance for
2012, Southwest Airlines stated: “AirTran is currently
airlines given the maturity of the industry and the
subject to pending antitrust litigation, and if judgment
difficulty of growing organically in markets with
were to be rendered against AirTran in the litigation,
incumbents’ landing rights. Market concentration can
such judgment would adversely affect the Company’s
lead to increased scrutiny from antitrust authorities
operating results.” The litigation is a 2009 class action
and can impact airlines’ ability to raise prices, with
suit that accused AirTran of colluding with Delta
subsequent impact on revenue. Increased antitrust
airlines in 2008 to fix baggage fees. 88 The Southwest-
oversight can also raise the risk profile of airlines,
AirTran case was dismissed by a federal judge. 89
raising their cost of capital. Beyond high-publicity
Regulatory scrutiny of anticompetitive practices
extends beyond the U.S. and affects airlines’ global
operations. A federal court in Australia fined Emirates,
the UAE based airline, $10.2 million in 2012 for pricefixing. The court found that the airline had engaged in
cartel conduct with other carriers by fixing prices
associated with fuel and other surcharges in its routes
to Australia. This example exposes that U.S.-listed
airlines are engaged in a global business and can be
antitrust actions during mergers or otherwise, ongoing
legal and regulatory fines associated with
anticompetitive practices indicate airlines’ ability to
maximize profit while managing a sensitive competitive
environment.
Accidents & Safety
Management
held accountable for their actions in any country in
Passenger safety is a paramount issue in the Airline
which they operate. The penalty comes from the
industry, given the nature of air travel and extreme
I N D U S T R Y B R I E F | A I R L I N E S | 14
situations in which incidents can occur. Although air
travel is one of the safest modes of transport, airlines
Company performance in this area can be analyzed in
are held to very high safety standards, with consumers
a cost-beneficial way internally and externally through
expecting completely safe and accident-free
the following direct or indirect performance metrics
operations. Furthermore, as products transported by
(see Appendix III for metrics with their full detail):
air tend to be high value or perishable goods,
•
delivering them from point A to point B safely and in a
Description of implementation and outcomes of
Safety Management System;
timely manner is a priority for any carrier. Moreover,
•
Number of accidents; and
airline accidents may result in significant
•
Number of governmental enforcement actions
environmental and social externalities and require
of aviation safety regulations.
companies to pay for remediation and compensation
Evidence
of victims.
Cultivating the image of a relatively safe means of
Safety incidents or violations of safety regulations can
transportation, the aviation industry must constantly
lead to a chronic impact on reputation. They can also
strive to maintain the highest standards to ensure
lead to lower demand from passengers, as well as
safety of passengers and cargo. In general, accidents in
cargo shippers. Larger accidents, even if they happen
the industry are rare. But when they occur, they may
rarely, can lead to significant and long-term impacts
have significant social externalities as well as acute
on reputation and revenue growth.
financial impacts on companies. According to IATA,
there were 36.4 million flights in 2013, with 16 fatal
Proper personnel training, and ensuring the health and
accidents and 210 fatalities globally—a rate of 0.44
well-being of crew members, is critical to ensuring
fatal accidents per million flights. 93 There are several
safety. Equally, timely and adequate maintenance of
factors that contribute to accidents in the industry. The
aircrafts can help operators minimize chances of
majority of fatal airline accidents are due to pilot error,
technical failure and avoid severe regulatory penalties
accounting for 51 percent of incidents. The next
for non-compliance. The FAA standards for both
highest contributor, mechanical failure, accounts for
aircraft maintenance and pilot scheduling and training
20 percent of fatal accidents. 94This highlights the
are quite stringent; however, this is a global industry
importance of rigorous employee training, fleet
and airlines that maintain the highest safety standards
maintenance, operational measures, and ensuring that
throughout their international operations are likely to
the pilot and crew are well rested and alert.
experience fewer safety incidents.
Safety incidents and accidents can create burdensome
The FAA maintains rules regarding pilot scheduling to
costs and liabilities for airlines by requiring further
ensure pilots have adequate rest when they enter the
accident prevention measures, remediating actions,
cockpit for the duration of their work. The rules cover
and compensation of victims. The recent crash of an
the flight duty period, flight time limits , rest period
Asiana Airlines flight while landing at San Francisco
V
minimums, and cumulative fatigue.
VI
92
These rules
International Airport took three lives and called into
provide a minimum set of standards, but as the
question pilot flying skills and cockpit teamwork. While
evidence below suggests, pilot fatigue is a challenging
investigations are still pending, Asiana has committed
issue for the industry, with devastating consequences
to increasing crew training, and has brought in third-
and requiring careful oversight.
party consultants to evaluate their program’s
effectiveness. 95 Survivors of the crash are suing both
V
A period that starts when a pilot reports for duty and ends
when he or she reaches the gate at the end of his or her flight.
VI
The actual time spent operating the aircraft.
Asiana and Boeing for poor pilot training and aircraft
design. 96 Even in the absence of incidents or accidents,
I N D U S T R Y B R I E F | A I R L I N E S | 15
evidence suggests that violations of safety regulations
documents during the hearing that indicated the pilots
can have acute impacts on value through regulatory
made a series of errors leading up to the crash.
penalties. On July 28, 2014, the FAA imposed a $12
Additional testimony at the hearing suggests that the
million fine against Southwest Airlines for non-
pilots may have suffered from fatigue (from
compliance with safety regulations during their aircraft
commuting from their homes in Florida and Seattle) to
repairs. 97 In 2009, the company was already fined $7.5
work out of Newark Liberty International Airport. 103
million by the FAA for flying planes without critical
Financial impact from fatal accidents goes beyond
safety checks.
98
In 2013, American Airlines and three
substantial regulatory penalties. Following the two
of its subsidiaries paid $24.9 million to settle FAA
crashes of Malaysian Airlines, the company
claims of alleged safety violations between 2007 and
experienced “a sharp decline” in weekly bookings.
2011.
Damaged reputation and low demand for services
99
resulted in net loss $97.4 million in the second quarter
Among other things, the new FAA rules, which go into
of 2014. The company is likely to experience
effect in 2014, require a 10-hour minimum rest period
difficulties in the long-term to gain market confidence
prior to a pilot’s flight duty period, a two-hour
back and increase sales. 104
increase over the old rules. The rules also mandate that
a pilot must have an opportunity for eight hours of
Usually, the most valuable products are transported by
uninterrupted sleep within the 10-hour rest period,
air, when time and safety matter the most. Even
and that pilots will be limited to no more than nine
though goods transported by air account for only 0.5
hours of flight time. Pilots will also be limited to 28
percent of global trade, they represent over 35 percent
working days in a month and will be required to be
by value, which equals approximately $6.8 trillion
given at least 30 consecutive hours free from duty on a
annually. 105 The loss of valuable cargo as a result of
weekly basis, a 25 percent increase over the old
accidents can therefore have a significant economic
rules.
impact.
100
As pilot error is the main contributing factor to fatal
Cargo may contain hazardous materials, which
airline accidents, ensuring health and well-being of
substantially increases the risk of transport. Companies
pilots is crucial for safety management. In May 2009,
that fail to comply with safety requirements in
Continental Airlines’ regional carrier Gulfstream
transporting hazardous products may be prone to
received a $1.3 million civil penalty from the FAA for
incidents that could not only result in a loss of cargo,
overworking pilots and breaking aircraft maintenance
but in hull losses in extreme cases. There were 144 air
rules.
101
In the week following the announcement,
incidents recorded by the FAA from March 20, 1991 to
Gulfstream’s stock fell 21 percent and eventually
May 19, 2014 that involved batteries carried as cargo
plummeted 51 percent by the end of the year. 102 The
or baggage. 106 In September 2011, an Asiana Airlines
FAA investigation began with a complaint filed by a
cargo plane crashed into the East China Sea after a fire
Gulfstream pilot and was eventually settled in 2010,
on board. The jet was carrying lithium batteries.
with Gulfstream agreeing to pay $550,000.
Moreover, on September 3, 2010, a UPS plane carrying
more than 81,000 lithium batteries caught on fire and
The fine for Gulfstream came just after the crash of
crashed at a military base shortly after taking off,
Continental Flight 3407, which took place in Buffalo,
killing both pilots. 107
NY, when the flight experienced an aerodynamic stall
and crashed into a house. All 49 on board the flight
Lastly, airlines with a poor safety record are likely to
were killed, as well as one person on the ground. The
experience a long-term negative value impact from
National Transportation Safety Board (NTSB) released
increased insurance premiums. For example, following
I N D U S T R Y B R I E F | A I R L I N E S | 16
the twin tragedy of Malaysian Airlines flights in 2014,
records beyond high-publicity events. Safety
the insurance industry is likely to lose $2 billion. The
Management Systems (SMS), together with
prices for all-risk policies that cover liability claims,
government regulatory actions, provide a sense of how
compensation payments to passengers, legal fees, and
companies are proactively managing safety above and
physical damage to aircraft (not caused by hostile acts)
beyond regulatory requirements. Increasing oversight
are expected to rise, according to a Financial Times
and enforcement of safety standards around pilot
report.
fatigue is likely to increase the magnitude of these
108
impacts in the near to medium term.
In their SEC filings, airlines recognize the extent of
various material impacts that may follow accidents. For
example, in its Form 10-K, Alaska Air Group states:
SASB INDUSTRY WATCH LIST
“[the company] could experience significant claims
from injured passengers, by-standers and surviving
The following section provides a brief description of
relatives, as well as costs for the repair or replacement
sustainability issues that did not meet SASB’s
of a damaged aircraft and its consequential temporary
materiality threshold at present, but could present a
or permanent loss from service. We maintain liability
material issue in the future.
insurance in amounts and of the type generally
consistent with industry practice, as do our codeshare
Noise & Light Pollution: The human and
partners and CPA carriers. However, the amount of
environmental impacts of noise and light from
such coverage may not be adequate to fully cover all
aircrafts, particularly near airports, continues to be a
claims and we may be forced to bear substantial
topic of concern for communities living near airports.
economic losses from an accident. Substantial claims
A recent study by researchers at Harvard School of
resulting from an accident in excess of our related
Public Health and Boston University School of Public
insurance coverage would harm our business and
Health have linked exposure to aircraft noise with
financial results.”
higher hospitalizations for cardiovascular disease. This
109
is likely due to exposure to noise being related to
Value Impact
stress reactions and increased blood pressure, both of
Major airline accidents in which passengers are injured
which are risk factors for cardiovascular disease.
are global news events. Whether incidents occur due
Public health concerns for local residents have played a
to mechanical failure, human error, or unpredictable
role in limiting airport expansions. A German court
circumstances, they can negatively affect the
banned flights landing at Frankfurt between 11 p.m.
reputation of a carrier, with acute and long-term
and 5 a.m. as a result of residents protesting excessive
impacts on revenue and market share. Accidents also
noise. Such restrictions are of material concern to
lead to extraordinary expenditures and contingent
airlines whose landing slots were scheduled during
liabilities related to compensation of victims and
those hours. In Frankfurt, the ban was estimated to
regulatory sanctions, which have an acute impact on
cost the cargo arm of Lufthansa €40 million. While
value. Failure to comply with safety standards can
plane engines are getting less noisy, the increase in
result in chronic impacts on value through fines and
flight traffic may still lead to exposure to increased
additional capital requirements to remain in
noise levels. This has led to many airports restricting
compliance. Poor safety records can also increase the
maximum decibel levels for individual flight landings
risk profile of airlines, resulting in higher insurance
and in aggregate. A lesser understood impact of
premiums and cost of capital. The number of
increased flight traffic is light pollution. While light
accidents—defined broadly to include passenger safety
pollution from urban centers is brighter but localized,
and mechanical failures—indicate trends in safety
light from flights can span larger distances. Artificial
I N D U S T R Y B R I E F | A I R L I N E S | 17
light has an effect on the ecosystem and migratory
trend has been stagnant for over a decade. The gender
animals that use light sources to direct them. Public
gap can be partially explained by a larger pool of men
concern regarding noise and light pollution from
with backgrounds in the military, where they receive
aviation may lead to regulations that could have a
training. The racial bias in the industry is also
material impact on airlines in the future.
significant. According to the 2012 annual average data
from the U.S. Bureau of Labor Statistics, 93 percent of
Pilot Recruitment & Inclusion: Airlines are facing
the 129,000 aircraft plots and flight engineers were
three important trends that contribute to talent
white. Meanwhile, only 2.7 percent were black or
shortage: (1) increasing federal requirements for
African-American, 2.5 percent Asian, and 5 percent of
minimum pilot training, (2) reductions in working
Hispanic or Latino ethnicity. Women have only been
hours to diminish fatigue, and (3) higher-than-normal
allowed to become fighter pilots since 1993, and are
retirement rates, driven by an aging population of
able to retire after 20 years with the Air Force. As a
pilots. These two issues have a compounding effect on
result, the industry may soon benefit from a greater
access to talent for companies in this industry.
pool of military-trained female pilots. 111 Companies
The Airlines industry is characterized by significant
that are among the first to seize this opportunity may
gender and racial gaps in workforce representation.
be better positioned in protecting their pilot pipeline,
According to the U.S. Bureau of Labor Statistics, in
avoiding talent shortages, and improving their
2012, only four percent of the 129,000 aircraft pilots
reputation.
and flight engineers in the U.S. were women. 110 This
I N D U S T R Y B R I E F | A I R L I N E S | 18
APPENDIX I
FIVE REPRESENTATIVE AIRLINES COMPANIES VII
COMPANY NAME (TICKER SYMBOL)
United Continental (UAL)
Delta Airlines (DAL)
American Airlines Group (AAL)
Southwest Airlines (LUV)
China Southern Airlines - ADR (ZNH)
VII
This list includes five companies representative of the Airlines industry and its activities. This includes only companies for which the Airlines
industry is the primary industry, companies that are U.S.-listed but are not primarily traded Over-the-Counter, and for which at least 20
percent of revenue is generated by activities in this industry, according to the latest information available on Bloomberg Professional Services.
Retrieved on July 10, 2014.
I N D U S T R Y B R I E F | A I R L I N E S | 19
APPENDIX IIA
EVIDENCE FOR SUSTAINABILITY DISCLOSURE TOPICS
Sustainability
Disclosure
Topics
EVIDENCE OF
FINANCIAL IMPACT
EVIDENCE OF INTEREST
HM
(1-100)
IWGs
%
Priority
EI
Revenues &
Costs
Assets &
Liabilities
Environmental
Footprint of Fuel
Use
97*
100
1
High
•
Labor Relations
60*
86
3
High
•
•
Competitive
Behavior
80*
91
4
High
•
•
Accidents &
Safety
Management
50
73
2
Medi
um
•
•
FORWARD-LOOKING IMPACT
Cost of
Capital
EFI
Probability &
Magnitude
Externalities
FLI
•
High
•
•
Yes
Medium
No
•
High
No
•
High
No
HM: Heat Map, a score out of 100 indicating the relative importance of the topic among SASB’s initial list of 43 generic sustainability issues; asterisks
indicate “top issues.” The score is based on the frequency of relevant keywords in documents (i.e., 10-Ks, shareholder resolutions, legal news, news articles,
and corporate sustainability reports) that are available on the Bloomberg terminal for the industry’s publicly-listed companies; issues for which keyword
frequency is in the top quartile are “top issues.”
IWGs: SASB Industry Working Groups
%: The percentage of IWG participants that found the disclosure topic to likely constitute material information for companies in the industry. (-)
denotes that the issue was added after the IWG was convened.
Priority: Average ranking of the issue in terms of importance. One denotes the most important issue. (-) denotes that the issue was added after the
IWG was convened.
EI: Evidence of Interest, a subjective assessment based on quantitative and qualitative findings.
EFI: Evidence of Financial Impact, a subjective assessment based on quantitative and qualitative findings.
FLI: Forward Looking Impact, a subjective assessment on the presence of a material forward-looking impact.
I N D U S T R Y B R I E F | A I R L I N E S | 20
APPENDIX IIB
EVIDENCE OF FINANCIAL IMPACT FOR SUSTAINABILITY DISCLOSURE TOPICS
REVENUE & EXPENSES
ASSETS & LIABILITIES
Evidence of
Revenue
Financial Impact
Operating Expenses
Market Size New Markets Pricing Power
Environmental
Footprint of Fuel
Use
COGS
•
Labor Relations
•
Competitive
Behavior
•
Accidents &
Safety
Management
•
ME DI UM IM PACT
R&D
Non-operating
Expenses
CapEx
Extraordinary
Expenses
Assets
Tangible
Assets
Liabilities
Intangible
Assets
Contingent
Liabilities &
Provisions
Pension
& Other
Liabilities
•
•
•
•
•
Cost of
Capital
•
•
•
RISK PROFILE
•
•
•
•
•
•
•
•
H IG H IM PACT
I N D U S T R Y B R I E F | A I R L I N E S | 21
Industry
Divestment
Risk
APPENDIX III
SUSTAINABILITY ACCOUNTING METRICS – AIRLINES
TOPIC
UNIT OF
MEASURE
ACCOUNTING METRIC
CATEGORY
Gross global Scope 1 emissions
Quantitative
Metric tons
CO 2 -e
TR0201-01
Description of long-term and short-term strategy or plan to
manage Scope 1 emissions, emissions reduction targets, and
an analysis of performance against those targets
Discussion and
Analysis
n/a
TR0201-02
Total fuel consumed, percentage renewable
Quantitative
Gigajoules,
Percentage (%)
TR0201-03
Notional amount of fuel hedged, by maturity date
Quantitative
TR0201-04
Percentage of active workforce covered under collectivebargaining agreements, broken down by U.S. and foreign
employees
Quantitative
Millions of
gallons, Year
Percentage (%)
Number and duration of strikes and lockouts viii
Quantitative
Number, Days
TR0201-06
Competitive
Behavior
Amount of legal and regulatory fines and settlements
associated with anti-competitive practices ix
Quantitative
U.S. Dollars ($)
TR0201-07
Accidents &
Safety
Management
Description of implementation and outcomes of Safety
Management System
Discussion and
Analysis
n/a
TR0201-08
Number of accidents
Quantitative
Number
TR0201-09
Number of governmental enforcement actions of aviation safety
regulations
Quantitative
Number
TR0201-10
Environmental
Footprint of Fuel
Use
Labor Relations
CODE
TR0201-05
viii
Note to TR0201-06 - Disclosure shall include a description of the root cause of the stoppage, impact on operations, and corrective actions
taken.
ix
Note to TR0201-04 - Disclosure shall include a description of fines and settlements and corrective actions implemented in response to
events.
I N D U S T R Y B R I E F | A I R L I N E S | 22
APPENDIX IV: Analysis of SEC Disclosures
Airlines
The following graph demonstrates an aggregate assessment of how the top ten U.S.-listed Airline companies by revenue are
currently reporting on sustainability topics in the SEC Disclosures.
I N D U S T R Y B R I E F | A I R L I N E S | 23
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