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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
I N D U S T R Y B R I E F | A I R L I N E S
INTRODUCTION
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
many emerging economies. With this exponential
growth of air travel worldwide, greenhouse gas (GHG)
and other air emissions of airlines at high altitude have
become an acute environmental externality in the
focus of global and local mitigation efforts to combat
climate change. And with intensifying air traffic, the
industry must address increasingly stringent safety
standards to maintain its image of the safest means of
transportation. Moreover, despite a trend towards
privatization, airlines are still directly or indirectly run
by governments in many parts of the world. Fully
privatized airlines struggle to stay profitable with a
highly-unionized workforce, high capital requirements,
and competition from government-sponsored carriers,
and often seek court protection from creditors through
bankruptcy and restructuring. To find economies of
scale, Airlines are in a constant state of consolidation
and increasingly cooperate through alliances, which
limits competition.
Investors would obtain a more holistic and comparable
view of performance with airlines companies reporting
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
both positive and negative externalities, and the non-
financial forms of capital that the industry relies on for
value creation.
Specifically, performance on the following
sustainability issues will drive competitiveness within
the Airlines industry:
• Improving fuel efficiency of aircraft and
reducing direct greenhouse gas (GHG) emissions
and harmful air pollutants;
• Managing labor relations and ensuring fair
employee treatment;
• 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.
In the context of global climate change and rising
economic development in many parts of the world,
regulatory pressure and public expectations will
continue to drive environmental performance,
passenger safety and competitive behavior. Therefore,
management (or mismanagement) of these
sustainability issues has the potential to affect
company valuation through impacts on profits, assets,
liabilities, and cost of capital.
INDUSTRY SUMMARY
The Airlines industry comprises companies that provide
air transportation to passengers for both leisure and
business purposes. This includes commercial full-
service, low-cost, and regional airlines that operate in
the U.S. and internationally. I Most airline companies
also have a cargo segment in their operations from
which they generate two to three percent of revenues
for the U.S.-domiciled airlines. For European, Asian,
and Latin American airlines, nine to 12 percent of
revenue is generated from a cargo segment. Current
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.
Sustainability Disclosure Topics
Environment
• Environmental Footprint of Fuel Use
Human Capital
• Labor Relations
Leadership and Governance
• Competitive Behavior
• Accidents & Safety Management
I N D U S T R Y B R I E F | A I R L I N E S | 1
industry trends indicate that airlines are reducing their
fleet of freighter planes and instead utilizing their
passenger aircraft for cargo transportation. For
example, Air France-KLM transports 72 percent of
freight by passenger planes, which is up from 54
percent in 2007.1
Airline routes and networks are key drivers of
profitability for the industry. Full-service carriers
typically use a hub and spoke model II to design their
routes within the U.S. and internationally. Low-cost
carriers usually offer a smaller number of routes as
well as no-frills service to their customers.2 Regional
carriers typically operate under contract to full-service
carriers, expanding the network of the larger carriers.3
Another tactic used to increase an airline’s network is
the use of alliances. There are three leading alliances:
Star Alliance, Oneworld, and SkyTeam, each with 27,
15, and 20 worldwide members, respectively.
Operating as an alliance allows customers access to
international or otherwise unserved itineraries on
multiple airlines, under one ticket. At the same time,
airlines share some overhead costs and increase their
competitive position in the international market
without having to establish foreign operations.4
The airlines business is global by nature. Four out of
the top five U.S.-domiciled airlines by revenue serve
routes all over the world. Foreign airlines, such as
British Airways and Lufthansa, also operate in the U.S.
Only one of the top five U.S.-domiciled companies,
Southwest Airlines, is a low-cost carrier offering
exclusively domestic travel. Domestic travel relies
heavily on business travelers and demand is driven by
corporate profits and the strength of the business
environment. On the other hand, the majority of
revenue on international flights comes from inbound
international tourism and international trips by U.S.
residents and is driven by consumer discretionary
spending.5
II Using routs from a hub airport to other airports as spokes to connect them via the hub.
The global airlines market is valued at around $615
billion in revenues, with full-service airlines
representing over 80 percent of the revenue. Airline
cargo is the smallest segment with just under $20
billion of global revenue.6 Airline companies listed on
the U.S. exchanges generate over $190 billion in
revenue from the passenger transportation segment. In
2013, the median operating profit margin for U.S.-
listed companies and those primarily traded over-the-
counter (OTC) was 5.2 percent, while the median net
income margin was 2.4 percent. Full-service airlines
tend to have lower margins than their low-cost peers.
Median operating margins of the largest full service
airlines were 2.6 percent and the median net income
margins were 1.3 percent in 2013. In comparison, in
the same year, low-cost carriers were more profitable,
with median margins of 9.8 and 3.7 percent of
operating and net profit margins respectively.7
The industry is mature and concentrated, with the top
four U.S.-domiciled, publicly traded, full-service airlines
(United Continental Holdings, Delta Air Lines,
American Airlines, and Southwest Airlines) holding
more than 75 percent market share in North America
in 2013, up from just under 70 percent in 2012.8
Industry consolidation was one of the main drivers of
the rise in concentration.9 Over the last 12 years six
mergers reduced the number of major carriers from 10
to four to dominate the market. The most recent
mergers and acquisitions include: American Airlines
merging with US Airways in 2013, Southwest
acquiring AirTran Airways in 2011, United merging
with Continental Airlines in 2010, and Delta Air Lines
merging with Northwest Airlines in late 2009. Most of
the companies were overcoming periods of
bankruptcies prior to their mergers.10
The international airlines industry is characterized by
high barriers to entry. This is mostly attributed to strict
government regulations, high capital requirements, as
well as licensing and reporting requirements. There
can be only a limited number of aircraft designated to
operate on each route, determined by airline
agreements involving landing rights. Moreover, volume
I N D U S T R Y B R I E F | A I R L I N E S | 2
quotasIII on international airline services are imposed
on a country-by-country basis, which may give a
competitive advantage to nationalized airlines.11
Competition in the airline industry is dampened in
some regions through limited airport infrastructure
and airport slots, which can act as a cap on supply and
make it very difficult for emerging companies to gain
new slots. An airport slot is critical to an airline’s
operations and gives the slot owner permission to use
the airport infrastructure necessary to arrive or depart.
The International Air Transportation Association (IATA)
provides a global standard for slot management, but
there are variations throughout the world in how and
to what extent they are applied. The IATA categorizes
airports as Level 1, Level 2, or Level 3 based on the
level of congestion. Level 3 airports are the most
congested and are defined as “airports where the
capacity providers have not developed sufficient
infrastructure or where governments have imposed
conditions that make it impossible to meet demand.”12
At Level 3 airports, slots are allocated to airlines using
several principles, including historical precedents,
whereby airlines that had a slot in the previous year
and utilized it 80 percent of the time can retain that
slot.13 Airlines are able to acquire, retain, and
exchange take-off and landing slots. Due to limited
availability, airport slots are very valuable to airlines.
Therefore, U.K. airlines started recognizing their slots
as assets on balance sheets. For example, BMI British
Midland valued its Heathrow airport slots at £770m.14
The price of fuel is a key driver in the profitability of
the industry. Cost of fuel represented about a third of
total operating expenses in recent years, followed by
wages, with 16 to 19 percent.15 Increasing fuel prices
mean higher costs for airlines, and typically, airlines are
not able to pass the full cost increase onto their
passengers. Therefore, increasing oil prices eat directly
into airline profits. Even with oil prices decreasing in
2013, their volatility in the future will play a critical
role in the stability of the airlines industry.16 Major
airlines employ fuel hedging strategies in order to limit
III Measured in number of seats.
their exposure to such volatility, and nine out of the
top 10 U.S.-based, publicly listed airlines use various
financial instruments to hedge the cost of fuel,
including swap contracts, call options, collars, futures
contracts, and forwards contracts.17 Some companies,
but not all, choose to designate this as hedging activity
for accounting purposes.
In 2007 and 2008, fuel prices soared, while the
economy experienced a downturn. The slowing
economy hit both consumer discretionary spending
and corporate profits, leaving airlines with falling
demand and overcapacity. Coupled with the
fluctuating and mostly increasing fuel costs, this shift
in demand created industry losses. Low-cost airlines
fared better through the downturn and in 2010, the
industry stabilized as a result of cost-cutting measures.
Recent trends show low-cost airlines are slowly eating
into the full-service market share. The market is also
characterized by structural changes in the form of
mergers and acquisitions and bankruptcies.18
Passenger safety is another important factor that drives
performance of airlines. As recent tragedies showed,
some risks may go beyond the airline’s control.
Accidents that led to a loss of many lives made the
industry increase its focus on the safety issue.
LEGISLATIVE AND REGULATORY TRENDS IN THE AIRLINES INDUSTRY
Regulation plays a prominent role in the Airlines
industry. Increasing awareness around climate change
shapes regulations for airlines, due to environmental
externalities related to the nature of their business.
Moreover, continuous evolution towards higher safety
standards puts public and regulatory pressure on the
industry. The following section provides a brief
summary of key regulations and legislative efforts
related to this industry that drive material sustainability
issues.IV
IV This section does not purport to contain a comprehensive review of all regulations related to this industry, but is intended
I N D U S T R Y B R I E F | A I R L I N E S | 3
The Federal Aviation Administration (FAA) has
authority to regulate and oversee all aspects of
American civil aviation. The agency is broken into four
lines of business: (1) Airports, (2) Air Traffic Control,
(3) Aviation Safety, and (4) Commercial Space
Transportation. FAA requirements cover, among other
things: retirement of older aircraft, security measures,
collision avoidance systems, airborne wind shear
avoidance systems, noise abatement and other
environmental concerns, aircraft operation and safety,
and increased inspections and maintenance procedures
to be conducted on older aircraft.19 The FAA also
regulates the health and wellbeing of pilots and crew
members as they relate to passenger safety. For
example, the agency has introduced requirements on
the frequency and duration of rest periods compared
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
routinely issues fines or revocations for infractions and
can enact new regulations with positive or negative
cost implications for airlines.22
Another organization whose standards can influence
airline profitability is the United Nations’ International
Civil Aviation Organization (ICAO). The ICAO is
represented by 191 members and develops
international Standards and Recommended Practices
(SARPs) that are further used by member countries to
develop national civil aviation regulations.23 The
ICAO’s Annex 18 sets standards for "Safe Transport of
Dangerous Goods by Air." Air carriers are required to
have inspection and enforcement procedures to ensure
compliance with the Annex 18.24 In addition, in April
2014, the ICAO Dangerous Goods Panel (DGP)
proposed to restrict transportation of lithium metal
batteries to cargo aircraft only. If the proposal is
approved by the ICAO Council, the changes will
become effective starting January 2015.25
The U.S. Department of Transportation (DOT) also
plays an important role in regulating the airline
to highlight some ways in which regulatory trends are impacting the industry.
industry. The DOT is responsible for executing and
enforcing airline consumer rights laws established by
the U.S. Congress. It may also develop regulations
based on more general statutory authority, giving it
broad powers to prescribe regulations, standards, and
procedures related to air travel.26 The DOT is
responsible for the recently enacted Passenger
Protection Rules, which address matters such as
tarmac delays, chronically delayed flights, fee
transparency, and fair treatment of passengers.
Despite efficiency improvements, increasing levels of
GHG emissions due to the growing demand for air
travel have led to a number of environmental
regulations addressing the airline industry’s emissions,
both in the U.S. and internationally.27
In the U.S., the Environmental Protection Agency (EPA)
has oversight of the Airlines industry’s environmental
impacts under both the Clean Air Act and the Clean
Water Act. The Clean Air Act gives the EPA the
authority to determine whether carbon emissions from
aircraft operations endanger society. It also gives the
EPA authority to introduce regulations to address the
issue.28
In 2012, the European Union (E.U.) moved to include
aviation in its emissions trading system (ETS) by
establishing limits on carbon emissions and introducing
allowances and fees on flights to, from, and within the
European Economic Area (EEA). However, resistance
from several countries, including the U.S., caused the
E.U. to postpone the enforcement on international
flights until November 2013 in hopes of creating a
global, market-based solution through the UN’s
ICAO.29 The legislation has since been amended for
the period from 2013 to 2016, and only emissions
from flights within the EEA currently fall under the
E.U.’s ETS. The decision was driven by the ICAO
Assembly agreement in October 2013 to “develop a
global market-based mechanism addressing
international aviation emissions by 2016 and apply it
by 2020.”30
I N D U S T R Y B R I E F | A I R L I N E S | 4
SUSTAINABILITY-RELATED RISKS AND OPPORTUNITIES
Industry drivers and recent regulations suggest that
traditional value drivers will continue to impact
financial performance. However, intangible assets such
as social, human, and environmental capitals, company
leadership and governance, and the company’s ability
to innovate to address these issues are likely to
increasingly contribute to financial and business value.
Broad industry trends and characteristics are driving
the importance of sustainability performance in the
Airlines industry:
• Energy inputs and externalities from fuel-
intensity of operations: As a fuel-intensive
industry with large direct emissions contributing
to climate change, the Airlines industry is
attracting growing attention from U.S. and
international regulators. At the same time,
increasing energy costs are providing incentives
for efficient fuel management.
• High safety standards: Passengers entrust
their lives to airlines; companies must continue
to maintain high safety standards to retain their
license to operate.
• Dependence on public infrastructure: The
industry’s use of common capitals and public
goods, including airports and airspace, drives
both its sustainability impacts and consequently,
impacts on its value through regulations or
public reaction.
• Industry concentration creates competition
concerns: The Airlines industry experiences
frequent merger and acquisition activity, leading
to consolidation and concerns about
competitive behavior. As described above, the
regulatory and legislative environment
surrounding the Airlines industry emphasizes
the importance of sustainability management
and performance. Specifically, recent trends
suggest a regulatory emphasis on reduction of
environmental impacts and high safety
standards, which will serve to align the interests
of society with those of investors.
The following section provides a brief description of
each sustainability issue that is likely to have material
implications for companies in the Airlines industry. This
includes an explanation of how the issue could impact
valuation and evidence of actual financial impact.
Further information on the nature of the value impact,
based on SASB’s research and analysis, is provided in
Appendix IIA and IIB. Appendix IIA also provides a
summary of the evidence of investor interest in the
issues. This is based on a systematic analysis of
companies’ 10-K and 20-F filings, shareholder
resolutions, and other public documents. It also based
on the results of consultation with experts
participating in an industry-working group convened
by SASB.
A summary of the recommended disclosure framework
and accounting metrics appears in Appendix III. The
complete SASB standards for the industry, including
technical protocols, can be downloaded from
www.sasb.org. Finally, Appendix IV provides an
analysis of the quality of current disclosure on these
issues in SEC filings by the leading companies in the
industry.
ENVIRONMENT
The environmental dimension of sustainability includes
corporate impacts on the environment. This could be
through the use of natural resources as inputs to the
factors of production (e.g., water, minerals,
ecosystems, and biodiversity) or environmental
externalities and harmful releases in the environment,
such as air and water pollution, waste disposal, and
GHG emissions.
The Airlines industry faces risks and opportunities
related to environmental factors, particularly increasing
climate regulations. Regulatory costs associated with
I N D U S T R Y B R I E F | A I R L I N E S | 5
GHG emissions are threatening the Airlines industry’s
already thin profit margins. However, optimizing fuel
management through technology innovation offers an
opportunity to control costs.
Environmental Footprint of Fuel Use As a result of heavy reliance on oil, the Airlines
industry generates a significant amount of direct GHG
emissions and is subject to potential compliance costs
and risks associated with climate change mitigation
policies. The main sources of GHG emissions for
airlines companies are aircraft fuel use and emissions,
ground equipment, and facility electricity. Aircraft
emissions are the largest contributor to total emissions
from the industry, and fuel management is a critical
part of reducing emissions.
Fuel management addresses both fuel efficiency and
the use of alternative fuels. It offers an effective way
for airlines to increase profits through reduced fuel
costs, while also limiting exposure to volatile fuel
pricing, future regulatory costs, and other
consequences of GHG emissions. Under the Clean Air
Act, the EPA is currently evaluating whether aircraft
emissions endanger society, the results of which could
lead to regulatory measures.31 In September 2014, the
EPA further began determining whether it will regulate
GHG emissions from airlines. The regulations would
lead to increased air travel costs. There is no timeline
set by the agency on when the rules are to be
released.32
Companies can adopt various strategies to reduce the
environmental footprint of their fuel use. The fuel
efficiency of an airline has several drivers, including
aircraft design, route selection, and load factor. Newer
aircrafts are more fuel-efficient, and one report
estimates that every 10 years, the aircrafts being built
are 10 to 15 percent more efficient.33 However,
existing planes can be retrofitted for efficiency. For
example, adding winglets can increase fuel efficiency
by 1.8 percent,34 and replacing an engine on an
existing aircraft can improve efficiency by 15 percent.35
The dynamic of new technology versus retrofits is
important, given that over a third of the world’s airline
fleet is rented.36 It is not entirely clear that either
leasing or owning is better from a fuel efficiency
perspective, but it is important to acknowledge that
having access to the latest technology does have a
beneficial impact on fleet fuel efficiency.
As one of the strategies to minimize GHG emissions,
airlines can seek alternative fuel options. With looming
climate regulations and volatile fuel prices, the Airline
industry began using biofuels on commercial flights in
2011.37 While biofuel flights do emit carbon dioxide—
unlike fossil fuel—biofuel absorbs carbon dioxide
during the growth of the crop, greatly reducing the
lifecycle carbon dioxide emissions. Given the emissions
captured during the production of biofuels, the overall
reduction in emissions is estimated to be 80 percent
when compared to fossil fuels.38
There are various industry initiatives aimed at reducing
environmental externalities created by airlines’
operations. In 2009, the IATA began taking
commitments from airlines to be carbon neutral in all
growth after 2020 and reduce absolute carbon
emissions by 50 percent by 2050.39 In October 2010,
the International Civil Aviation Organization (ICAO)
established an action plan to identify the most
appropriate measures to reduce CO2 emissions from
international civil aviation.40 The resolution focuses on
technology, operations, and infrastructure measures as
the primary means for addressing emissions.41
Company performance in this area can therefore be
analyzed in a cost-beneficial way, internally and
externally, through the following direct or indirect
performance metrics (see Appendix III for metrics with
their full detail):
• Gross global Scope 1 emissions;
• Long- and short-term strategy to manage Scope
1 emissions;
• Total fuel consumed, percentage from
I N D U S T R Y B R I E F | A I R L I N E S | 6
renewables; and
• Notional amount of fuel hedged, by maturity
date.
Evidence The Airlines industry is a significant contributor to
global GHG emissions, creating regulatory risks for
companies. According to the Carbon Disclosure Project
Transportation Report, the Transportation sector
accounts for 13 percent of global emissions, 13
percent of which come from air transportation.42
Statistics from the Center for Climate and Energy
Solutions (C2ES) indicate similar contribution, with
around 1.5 percent of global GHG coming from
aviation, which includes both passenger airlines and air
freight. U.S. aviation activities account for
approximately 40 percent of these emissions.43 In
absolute values, the Aviation industry in the U.S.
accounted for around 145 Teragrams CO2 equivalent
(Tg CO2e) emissions in 2012, with 114.4 Tg CO2e
coming from commercial aircrafts. Over 99 percent of
these emissions are in the form of carbon dioxide.44
Climate change regulations steadily make it
more costly for airline companies to operate. Even
without U.S. federal regulations or a global treaty on
addressing climate change, there are regulations
specific to certain geographic areas that can impact
the industry, as airlines operate across different
regions globally. In Europe, the Emissions Trading
System (ETS) was launched in 2005 to mitigate climate
change. The ETS covers factories, power stations,
industrial plants, and all flights within the EEA.45
The E.U. came close to including non-European airlines
that serve Europe in the ETS in November 2012—a
move that would reportedly have cost U.S. airlines
$3.1 billion between now and 2020.46 The move was
postponed in the hope that a more agreeable global
market-based solution would come out of the UN
ICAO (see Legislative and Regulatory Trends section).
In response, the ICAO agreed to build a global market-
based mechanism to monitor, report, and verify
aircraft emissions by 2016. However, given that the
UN’s deadline to implement the system is 2020, the
E.U. may not be satisfied and could still require non-
E.U. airlines to comply with their ETS requirements.47
Meanwhile, the IATA, which represents 85 percent of
the world’s airline traffic, is calling for airlines to offset
increased emissions after 2020 by purchasing carbon
credits. In this scenario, it is estimated that the cost to
the industry could be up to 0.5 percent of total
international airline revenue, assuming the cost of
credits to be $4 to $6 per metric ton in 2015.48
In April 2014, Germany fined 61 airlines from several
countries including the U.S. for breaching E.U. ETS
rules and for failing to submit emissions permits to
cover GHG discharges from the flights within the EEA.
The amount of total penalties is close to $3.7 million,
and the fine is the first since aviation was included in
the E.U. carbon market. Under the E.U. law, aircraft
operators failing to surrender the required number of
permits can be fined EUR100 per metric ton of CO2.49
If the E.U. ETS rules extend to flights to and from the
EEA, the financial impact of non-compliance is likely to
increase in the future.
Furthermore, cost of jet fuel is a significant operating
expense for aircraft operators and can put the business
at risk during times of rising or volatile fuel prices. In
2012, the global airline industry spent $207.6 billion
on fuel, which was 31 percent of its operating costs.50
Airlines for America, the largest U.S. airline trade
association, estimates that for every dollar that the
price of jet fuel increases, the U.S. airlines industry
pays an additional $445 million for fuel per year.51
Along with other factors, increasing oil prices led more
than 50 passenger and cargo airlines in the U.S. to file
for bankruptcy between 2000 and 2012.52
To limit their exposure to volatile oil prices, some
companies in the industry use fuel hedging strategies
or even operate their own refineries.53 All of the top
ten U.S.-domiciled companies by revenue acknowledge
in their 2012 annual filings with the SEC that they are
materially impacted by changes in aircraft fuel prices.
I N D U S T R Y B R I E F | A I R L I N E S | 7
Nine of these 10 companies are using financial
instruments to hedge fuel prices, and they disclose
metrics on the percentage of their fuel use that is
hedged in their filings.
In their fiscal year (FY) 2012 Form 10-K, Republic
Airways describes the extent to which fuel price
volatility impacts their cash flow, stating that “a one
dollar change in price per barrel of crude oil will
increase or decrease our fuel expense by $3.8 million.”
In 2012, $3.8 million represented 0.5 percent of
Republic Airways’ aircraft fuel costs for the year and a
meaningful 7.4 percent of profits.54 For Alaska Airlines
“a $1 per barrel increase in the price of oil equates to
approximately $11 million of additional fuel cost
annually.”55 For United Continental, the increase
would be $94 million annually.56
Fuel management in the form of efficiency
improvements or hedging strategies is therefore critical
for the profitability of companies, like Republic
Airways and others in the Airlines industry. It also
enables companies to lower their GHG emissions, and
therefore, regulatory risks discussed earlier.
Another way for the industry to mitigate GHG
emissions is through the use of biofuels. The largest
hurdle in switching to biofuels is cost, not technology.
Airlines already spend 25 to 35 percent of their
operating costs on jet fuel annually, and that number
would rise substantially by switching to biofuels at
current prices. When Alaska Airlines launched its first
commercial biofuel-powered flight in 2011, it paid six
times the cost of traditional jet fuel. Alaska Airlines
used a 20 percent biofuels blend, made from used
cooking oil, which it estimates reduces GHG emissions
by 10 percent.57
Although the use of biofuel blends can be beneficial,
biofuels themselves can generate negative
externalities. Irrigation for corn production means that
currently, biofuels are actually the most water-
intensive fuel source in the U.S. Water consumption
for biofuels is orders of magnitude greater than for
refining crude oil.58 Crop production for biofuels also
has the potential to distort other markets, such as the
food industry.
Advanced biofuels could reduce water consumption
significantly, but these technologies are yet to be
proven on a commercial scale.59 Short-term costs to
find commercially viable technologies can be
significant, and these are lowering investments in
advanced biofuels. However, investments in R&D for
such technologies could serve to advance airline
companies’ long-term profitability.
Despite the high costs of biofuels compared to
traditional jet fuel, airlines are acting to make aviation
biofuels more commercially viable, due to the
importance of reducing GHG emissions for the
industry. In its 10-K Form for FY2012 United
Continental Holdings, Inc. states that “(t)he Company
is taking various actions to reduce its carbon emissions
through fleet renewal, aircraft retrofits, and actions
that are establishing the foundation for the
commercialization of aviation biofuels.”60 As one of
the actions for the commercialization of aviation
advanced biofuels, United Airlines signed a purchase
agreement with AltAir Fuels to buy 15 million gallons
of lower-carbon, renewable jet fuel over a three-year
period. AltAir Fuels will retrofit part of an existing
petroleum refinery to become a 30 million gallon,
advanced biofuel refinery near Los Angeles. The fuel is
expected to help the company achieve a 50 percent
reduction in GHG emissions on a lifecycle basis. 61
The importance of managing the environmental
footprint of Airlines fuel use is reflected in current SEC
filings of the top companies in the industry.
Companies such as United Continental, Delta,
Southwest, and American Airlines, to name a few,
have started reporting on their fuel management
programs and initiatives, examples of which include
fleet renewal plans, aircraft retrofits, use of aviation
biofuels, programs to reduce fuel usage by ground
support operations, use of technology to modernize air
traffic control systems, and reductions in engine idle
I N D U S T R Y B R I E F | A I R L I N E S | 8
times, among others.
Value Impact GHG-intensive operations expose airlines to increasing
risk of chronic regulatory compliance costs, with direct
costs already occurring in some markets. In addition,
management of energy efficiency and energy mix
(including renewables) is key to the profitability and
risk profile of airlines. Compliance—expected or
actual—also leads to additional capital expenditures
(CapEx) to renew or retrofit fleets for energy
efficiency, with a potentially significant impact on
profitability and cash flow. At the same time,
investments in fuel-efficient and alternative fuel
engines will result in lower ongoing fuel expenses in
the medium term, improving profitability. As
international and national efforts continue to advance
regulation to reduce total GHG emissions, including in
the Airlines industry, the probability and magnitude of
these impacts are likely to increase in the near to
medium term. The magnitude of these impacts can be
estimated using companies’ Global Scope 1 emissions,
in absolute terms and relative to their peers, factoring
in regions of operations and mitigation efforts
reflected in concrete emissions-reduction targets.
In addition, while the cost of energy consumption is
already captured in financial results, overall energy
consumption indicates airlines’ exposure to possible
future increases in energy prices, resulting from
internalizing the growing environmental and social
impact of energy consumption. Reliance on specific
types of energy also creates operational risks, which
impact long-term profitability and ultimately the risk
profile of the company and its cost of capital. Lastly,
use of renewable energy indicates airlines’ ability to
mitigate their environmental footprint and exposure to
increases in energy costs driven by sustainability
impacts.
HUMAN CAPITAL
Human capital addresses the management of a
company’s human resources (employees and individual
contractors), as a key asset to delivering long-term
value. It includes factors that affect the productivity of
employees, such as employee engagement, diversity,
and incentives and compensation, as well as the
attraction and retention of employees in highly
competitive or constrained markets for specific talent,
skills, or education. It also addresses the management
of labor relations in industries that rely on economies
of scale and compete on the price of products and
services or in industries with legacy pension liabilities
associated with vast workforces. Lastly, it includes the
management of the health and safety of employees
and the ability to create a safety culture for companies
that operate in dangerous working environments.
In the Airlines industry, human capital issues revolve
around the dependence on a large number of workers
who are covered under collective bargaining
agreements. Even though unionization rates have
generally decreased, union participation in the Airlines
industry remains strong. Therefore, management of,
and communication around, issues such as worker pay
and working conditions is critical to prevent costly
worker strikes. Proper personnel training and ensuring
the health and well-being of crew members is critical
to ensuring safety. The issue is covered in the
“Accidents & Safety Management” section of the
brief.
Labor Relations The Airlines industry employs several types of skilled
workers, including pilots, flight attendants, baggage
handlers, maintenance workers, and ticket agents.
Wages were the largest cost component for airlines
until recent increases in fuel prices replaced labor costs
with fuel costs as the largest cost item. Organized
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
participation. There are several major airline unions
that govern negotiations, including the U.S. Airline
Pilots Association, Air Line Pilots Association,
Association of Flight Attendants, and the Transport
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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 collective-
bargaining 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
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recognizes the risks associated with poor labor
relations in its FY2013 20-F form by disclosing that
strikes, walk-outs, or stoppages by these groups could
“severely disrupt our operations and negatively impact
our operating and financial performance, as well as
how our customers perceive us.”70
Airlines have tried to reduce their labor costs through
bankruptcies and mergers. Without early engagement,
unions may limit the ability of companies to quickly
adjust labor expenses and the size of their workforce
in response to competitive pressures or adverse
economic conditions. After the crisis in early 2000s,
several major U.S. carriers entered bankruptcy. Among
the factors responsible were high labor costs, rising
fuel prices, competition from low cost carriers, and low
demand. U.S. Airways entered bankruptcy in 2002 and
2004, United in 2002, Delta and Northwest in 2005. In
2003, American Airlines was able to avoid bankruptcy
after negotiating concessions with unions.71
In 2012, American Airlines was forced to cancel
hundreds of flights when a large number of pilots
called in sick to protest a contract that would reduce
their pay and benefits at the then-bankrupt carrier.72
The possibility of reductions in pay and benefits can
also lead to worker actions that pose difficulties during
merger proceedings. Recently, the likelihood of a flight
attendants’ strike at Piedmont Airlines threatened the
pending merger of its parent company, U.S. Airways,
with American Airlines. Piedmont flight attendants
formed picket lines in June 2013, looking to share in
the success of U.S. Airways. This came in the midst of
U.S. Airways’ bid for approval from federal regulators
for its proposed merger with American Airlines.73 At
the same time, unions can play an important role in
working with management to resolve difficulties in
operations. As part of the same proposed U.S.
Airways-American Airlines merger, U.S. Airways’ union
leaders met with leaders at the Department of Justice
to register their support for the merger as a means to
preserve jobs.74 This case highlights both the positive
and negative impacts of worker actions related to
wages and working conditions for airlines in their
merger activities and operations generally.
Several examples of strikes and near-strikes highlight
the potential material impacts on airlines of poor labor
relations. On June 12, 2010 Spirit Airlines pilots went
on strike for better wages, grounding flights for
thousands of passengers. 75 The pilots claimed that
they had been “working at below market rates and
work rules for years.”76 The airline refunded
passengers’ tickets and gave them $100 toward future
flights. The strike was resolved and pilots went back to
work on June 18, 2010. The resolution included better
pay, retirement benefits, and performance reviews to
acknowledge leadership initiative. The strike is
reported to have cost Spirit Airlines $19 million;
however, the company reported a loss of $2.8 million
in the first six months of 2010.77 The event highlights
the challenges that can result from employee strikes
related to wages and working conditions, and
emphasizes the importance of management
recognizing and addressing worker concerns in a
timely manner, and maintaining good communication
between management and employees. Likewise, pilot
strikes resulted in 160 canceled Avianca flights in
2013. Pilots of the U.S.-listed Colombian airline
claimed that in 2003 they agreed to increase working
hours from 75 to 90 hours a month under the promise
of benefits that did not materialize.78
Value Impact Labor-intensive industries with well-defined
occupations are prone to high rates of unionization, as
employees with similar skills and compensation have
an incentive to resort to collective bargaining in their
negotiations with management. The bargaining power
that comes with unionization leads to higher wages
and other compensation costs, as well as pension
liabilities. This is likely to be particularly material in the
Airlines industry, where median net income margins
are already at 2.4 percent.79 Unionization can also lead
to labor disputes and service disruptions with short-
term impact on revenue and longer-term impact on
reputation and brand value, and ultimately market
share.
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New entrants or disruptors in highly unionized
industries often have a short-term competitive
advantage from low unionization rates and lack of
pension liabilities. However, these companies incur the
risk of a medium-term shift in cost structure as growth
tapers and cost-cutting initiatives drive employees to
collective bargaining. The number of work stoppages
provides a measure of past performance on labor
practices, while the percentage of employees
unionized provides an indication of companies’
exposure to wage cost increases and possible future
labor disputes.
BUSINESS MODEL AND INNOVATION
This dimension of sustainability is concerned with the
impact of environmental and social factors on
innovation and business models. It addresses the
integration of environmental and social factors in the
value creation process of companies, including
resource efficiency and other innovation in the
production process. It also addresses product
innovation and looking at efficiency and responsibility
in the design, use-phase, and disposal of products. It
includes management of environmental and social
impacts on tangible and financial assets—either a
company’s own or those it manages as the fiduciary
for others.
Airline companies rely on innovation to maintain value.
Innovation that contributes to sustainability outcomes
in this industry centers around fuel management and
alternative fuels, which have been addressed in the
disclosure topic “Environmental Footprint of Fuel Use.”
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
common practice in the industry, and that are also in
potential conflict with the interest of broader
stakeholder groups (government, community,
customers, and employees) Therefore, these issues
create a potential liability, or worse, a limitation or
removal of license to operate. This includes regulatory
compliance, lobbying, and political contributions. In
addition: risk management, safety management,
supply chain and resource management, conflict of
interest, anticompetitive behavior, and corruption and
bribery. It also includes risk of business complicity with
human rights violations.
For the Airlines industry, leadership and governance
issues arise from the need to manage the safety of
highly complex, sensitive, and global operations,
including accident prevention. Accidents and other
safety incidents affect customers and employees, and
can also lead to significant economic losses in the case
of the cargo segment. The safety of passengers and
cargo is a priority for companies in the industry, and
mismanagement of the issue can have a significant
negative impact on company value.
Competitive Behavior
As described in the industry summary, the Airlines
industry is characterized by low profitability due to
high fixed capital and labor costs, as well as
competition with subsidized national carriers in foreign
markets. This pushes airlines to find economies of scale
through alliances or consolidation, which results in a
highly concentrated market with four players capturing
75 percent of the U.S. markets. The industry is also
characterized by high barriers to entry through limited
landing rights and increasing airport congestions.
Together, these factors can result in anticompetitive
practices that result in higher prices for consumers.
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
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and mergers. Any time a business action is held up in
legal limbo, there is a material risk to investors
stemming from legal fees, reputational risk, costs
associated with a delayed transaction, and limit to
growth by acquisition. Moreover, denied mergers may
press companies to declare bankruptcy.
The oldest and largest airline alliance is the Star
Alliance, originally formed between United and
Lufthansa, which has since been expanded to include
27 airlines worldwide. The other major alliances are
Sky Team and Oneworld, with 20 and 15 member
airlines respectively. Alliances can be controversial and
may have both positive and negative effects on
competitiveness and consumer pricing, and are
therefore heavily scrutinized. University of Illinois
economists found mixed effects on consumer pricing
as a result of alliances, claiming that prices to smaller
regional airports decrease due to alliances, while fares
to large gateway airports increase.80
Another industry dynamic that affects competition is
the availability of airport slots. Limited slots at some
airports effectively cap the supply to that region and
create a barrier to entry for new players. Incumbent
airlines have a dominant position because they are
allowed to maintain any slots they use regularly,
leaving little room for new players. The percentage of
slots held by companies is often considered in high-
profile mergers when evaluating anticompetitive
practices.81
Finally, the issue of competitive behavior revolves
around price-fixing practices within the cargo segment
of the industry. High industry consolidation makes it
easy for airlines to collude. There have been several
high-profile cases of price-fixing involving the cargo
segment of airlines. Major airlines were found to have
colluded on fuel surcharges.
Company performance in this area can be analyzed in
a cost-beneficial way internally and externally through
the following direct or indirect performance metrics
(see Appendix III for metrics with their full detail):
• Amount of legal and regulatory fines and
settlements associated with anticompetitive
practices.
Evidence Continuous consolidation of the industry drove the
number of major airlines from eight to four in the last
five years. Several studies show that mergers of airlines
eventually result in higher ticket prices for consumers.
According to The Wall Street Journal dissected data,
flight prices between some big cities increased by 40
to 50 percent after mergers. Particularly, by the third
quarter of 2012, fares between Chicago and Houston
(hubs of United Airlines and Continental Airlines prior
to the merger) increased by 57 over three years. The
average fares of United Airlines increased by only 16
percent over the same period.82
Ancillary fees (baggage fees and on-board food and
services) are a significant portion of revenue for
airlines. In 2013, United Airlines earned $5.7 billion in
ancillary revenue, the most of any airline globally. In
the same year, the total industry ancillary revenue was
$31.5 billion.83 With current consolidation trends and
the increasing share of the ancillary revenue, airlines
will likely increase fees as competition weakens.
Moreover, in the long term, airlines may reduce
benefits of their loyalty programs. Passengers flying
from non-major cities will be left with no choice of a
carrier, therefore, ‘loyalty’ will not be a decisive
factor.84
As mentioned above, merger and acquisition (M&A)
activity in the industry resulted in high market
consolidation. Even though the recent mergers were
approved, the cases had to go through lengthy reviews
and investigation. In 2013, a civil antitrust lawsuit was
filed by the Department of Justice (DOJ) to challenge
the proposed merger between US Airways and
American Airlines. The DOJ was seeking to
permanently block the $11 billion merger. Federal
courts were examining whether the merger would lead
to less competition in the industry and higher prices
for consumers. Prior to the merger, U.S. Airways held
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55 percent of the slots at Reagan National Airport;
post-merger, that would increase to 69 percent.
However, US Airways and American Airlines’ parent
company, AMR Corporation, argues that there are two
other major airports serving the Washington
metropolitan area, and post-merger, they would only
control 25 percent of aircraft seats in the market. The
news of the government’s antitrust suit caused US
Airways’ stock to fall 13 percent, and bonds of AMR
Corporation also dropped. AMR, which filed for
bankruptcy in November 2011, was using the merger
as a means to complete a reorganization and exit court
protection.85 If the merger was not approved, it could
result in American Airlines declaring bankruptcy.
For the merger to be approved, American Airlines had
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
The investigation of competitive behavior is also
affecting other companies in the industry. In 2011, a
$1.4 billion acquisition of AirTran by Southwest was
under the antitrust investigation. In its 10-K filing for
2012, Southwest Airlines stated: “AirTran is currently
subject to pending antitrust litigation, and if judgment
were to be rendered against AirTran in the litigation,
such judgment would adversely affect the Company’s
operating results.” The litigation is a 2009 class action
suit that accused AirTran of colluding with Delta
airlines in 2008 to fix baggage fees.88 The Southwest-
AirTran case was dismissed by a federal judge.89
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 price-
fixing. 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
held accountable for their actions in any country in
which they operate. The penalty comes from the
Australian Competition & Consumer Commission
(ACCC), which imposed a total of $68 million in fines
to Emirates and the other airlines involved in the
cartel.90
In 2010, the European Commission fined 11 air cargo
carriers, including Air France-KLM and British Airways,
a total of almost €800 million for anticompetitive
practices. The Commission alleged the companies of
forming a cartel and rigging surcharges for fuel and
security between May 2004 and February 2006. Air
France-KLM was hit with the largest fine: almost 43
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
30, 2010.91
Value Impact
Perceived and actual anticompetitive practices can lead
to regulatory fines and penalties that increase
extraordinary expenses and contingent liabilities and
negatively affect a company's bottom line. Denial by
federal antitrust authorities to proceed with merger
plans limits the ability of companies to grow by
acquisitions, something of particular importance for
airlines given the maturity of the industry and the
difficulty of growing organically in markets with
incumbents’ landing rights. Market concentration can
lead to increased scrutiny from antitrust authorities
and can impact airlines’ ability to raise prices, with
subsequent impact on revenue. Increased antitrust
oversight can also raise the risk profile of airlines,
raising their cost of capital. Beyond high-publicity
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
Passenger safety is a paramount issue in the Airline
industry, given the nature of air travel and extreme
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situations in which incidents can occur. Although air
travel is one of the safest modes of transport, airlines
are held to very high safety standards, with consumers
expecting completely safe and accident-free
operations. Furthermore, as products transported by
air tend to be high value or perishable goods,
delivering them from point A to point B safely and in a
timely manner is a priority for any carrier. Moreover,
airline accidents may result in significant
environmental and social externalities and require
companies to pay for remediation and compensation
of victims.
Safety incidents or violations of safety regulations can
lead to a chronic impact on reputation. They can also
lead to lower demand from passengers, as well as
cargo shippers. Larger accidents, even if they happen
rarely, can lead to significant and long-term impacts
on reputation and revenue growth.
Proper personnel training, and ensuring the health and
well-being of crew members, is critical to ensuring
safety. Equally, timely and adequate maintenance of
aircrafts can help operators minimize chances of
technical failure and avoid severe regulatory penalties
for non-compliance. The FAA standards for both
aircraft maintenance and pilot scheduling and training
are quite stringent; however, this is a global industry
and airlines that maintain the highest safety standards
throughout their international operations are likely to
experience fewer safety incidents.
The FAA maintains rules regarding pilot scheduling to
ensure pilots have adequate rest when they enter the
cockpit for the duration of their work. The rules cover
the flight duty period,V flight time limitsVI, rest period
minimums, and cumulative fatigue.92 These rules
provide a minimum set of standards, but as the
evidence below suggests, pilot fatigue is a challenging
issue for the industry, with devastating consequences
and requiring careful oversight.
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.
Company performance in this area can be analyzed in
a cost-beneficial way internally and externally through
the following direct or indirect performance metrics
(see Appendix III for metrics with their full detail):
• Description of implementation and outcomes of
Safety Management System;
• Number of accidents; and
• Number of governmental enforcement actions
of aviation safety regulations.
Evidence Cultivating the image of a relatively safe means of
transportation, the aviation industry must constantly
strive to maintain the highest standards to ensure
safety of passengers and cargo. In general, accidents in
the industry are rare. But when they occur, they may
have significant social externalities as well as acute
financial impacts on companies. According to IATA,
there were 36.4 million flights in 2013, with 16 fatal
accidents and 210 fatalities globally—a rate of 0.44
fatal accidents per million flights.93 There are several
factors that contribute to accidents in the industry. The
majority of fatal airline accidents are due to pilot error,
accounting for 51 percent of incidents. The next
highest contributor, mechanical failure, accounts for
20 percent of fatal accidents.94This highlights the
importance of rigorous employee training, fleet
maintenance, operational measures, and ensuring that
the pilot and crew are well rested and alert.
Safety incidents and accidents can create burdensome
costs and liabilities for airlines by requiring further
accident prevention measures, remediating actions,
and compensation of victims. The recent crash of an
Asiana Airlines flight while landing at San Francisco
International Airport took three lives and called into
question pilot flying skills and cockpit teamwork. While
investigations are still pending, Asiana has committed
to increasing crew training, and has brought in third-
party consultants to evaluate their program’s
effectiveness.95 Survivors of the crash are suing both
Asiana and Boeing for poor pilot training and aircraft
design.96 Even in the absence of incidents or accidents,
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evidence suggests that violations of safety regulations
can have acute impacts on value through regulatory
penalties. On July 28, 2014, the FAA imposed a $12
million fine against Southwest Airlines for non-
compliance with safety regulations during their aircraft
repairs.97 In 2009, the company was already fined $7.5
million by the FAA for flying planes without critical
safety checks.98 In 2013, American Airlines and three
of its subsidiaries paid $24.9 million to settle FAA
claims of alleged safety violations between 2007 and
2011.99
Among other things, the new FAA rules, which go into
effect in 2014, require a 10-hour minimum rest period
prior to a pilot’s flight duty period, a two-hour
increase over the old rules. The rules also mandate that
a pilot must have an opportunity for eight hours of
uninterrupted sleep within the 10-hour rest period,
and that pilots will be limited to no more than nine
hours of flight time. Pilots will also be limited to 28
working days in a month and will be required to be
given at least 30 consecutive hours free from duty on a
weekly basis, a 25 percent increase over the old
rules.100
As pilot error is the main contributing factor to fatal
airline accidents, ensuring health and well-being of
pilots is crucial for safety management. In May 2009,
Continental Airlines’ regional carrier Gulfstream
received a $1.3 million civil penalty from the FAA for
overworking pilots and breaking aircraft maintenance
rules.101 In the week following the announcement,
Gulfstream’s stock fell 21 percent and eventually
plummeted 51 percent by the end of the year.102 The
FAA investigation began with a complaint filed by a
Gulfstream pilot and was eventually settled in 2010,
with Gulfstream agreeing to pay $550,000.
The fine for Gulfstream came just after the crash of
Continental Flight 3407, which took place in Buffalo,
NY, when the flight experienced an aerodynamic stall
and crashed into a house. All 49 on board the flight
were killed, as well as one person on the ground. The
National Transportation Safety Board (NTSB) released
documents during the hearing that indicated the pilots
made a series of errors leading up to the crash.
Additional testimony at the hearing suggests that the
pilots may have suffered from fatigue (from
commuting from their homes in Florida and Seattle) to
work out of Newark Liberty International Airport.103
Financial impact from fatal accidents goes beyond
substantial regulatory penalties. Following the two
crashes of Malaysian Airlines, the company
experienced “a sharp decline” in weekly bookings.
Damaged reputation and low demand for services
resulted in net loss $97.4 million in the second quarter
of 2014. The company is likely to experience
difficulties in the long-term to gain market confidence
back and increase sales.104
Usually, the most valuable products are transported by
air, when time and safety matter the most. Even
though goods transported by air account for only 0.5
percent of global trade, they represent over 35 percent
by value, which equals approximately $6.8 trillion
annually.105 The loss of valuable cargo as a result of
accidents can therefore have a significant economic
impact.
Cargo may contain hazardous materials, which
substantially increases the risk of transport. Companies
that fail to comply with safety requirements in
transporting hazardous products may be prone to
incidents that could not only result in a loss of cargo,
but in hull losses in extreme cases. There were 144 air
incidents recorded by the FAA from March 20, 1991 to
May 19, 2014 that involved batteries carried as cargo
or baggage.106 In September 2011, an Asiana Airlines
cargo plane crashed into the East China Sea after a fire
on board. The jet was carrying lithium batteries.
Moreover, on September 3, 2010, a UPS plane carrying
more than 81,000 lithium batteries caught on fire and
crashed at a military base shortly after taking off,
killing both pilots.107
Lastly, airlines with a poor safety record are likely to
experience a long-term negative value impact from
increased insurance premiums. For example, following
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the twin tragedy of Malaysian Airlines flights in 2014,
the insurance industry is likely to lose $2 billion. The
prices for all-risk policies that cover liability claims,
compensation payments to passengers, legal fees, and
physical damage to aircraft (not caused by hostile acts)
are expected to rise, according to a Financial Times
report.108
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:
“[the company] could experience significant claims
from injured passengers, by-standers and surviving
relatives, as well as costs for the repair or replacement
of a damaged aircraft and its consequential temporary
or permanent loss from service. We maintain liability
insurance in amounts and of the type generally
consistent with industry practice, as do our codeshare
partners and CPA carriers. However, the amount of
such coverage may not be adequate to fully cover all
claims and we may be forced to bear substantial
economic losses from an accident. Substantial claims
resulting from an accident in excess of our related
insurance coverage would harm our business and
financial results.”109
Value Impact Major airline accidents in which passengers are injured
are global news events. Whether incidents occur due
to mechanical failure, human error, or unpredictable
circumstances, they can negatively affect the
reputation of a carrier, with acute and long-term
impacts on revenue and market share. Accidents also
lead to extraordinary expenditures and contingent
liabilities related to compensation of victims and
regulatory sanctions, which have an acute impact on
value. Failure to comply with safety standards can
result in chronic impacts on value through fines and
additional capital requirements to remain in
compliance. Poor safety records can also increase the
risk profile of airlines, resulting in higher insurance
premiums and cost of capital. The number of
accidents—defined broadly to include passenger safety
and mechanical failures—indicate trends in safety
records beyond high-publicity events. Safety
Management Systems (SMS), together with
government regulatory actions, provide a sense of how
companies are proactively managing safety above and
beyond regulatory requirements. Increasing oversight
and enforcement of safety standards around pilot
fatigue is likely to increase the magnitude of these
impacts in the near to medium term.
SASB INDUSTRY WATCH LIST
The following section provides a brief description of
sustainability issues that did not meet SASB’s
materiality threshold at present, but could present a
material issue in the future.
Noise & Light Pollution: The human and
environmental impacts of noise and light from
aircrafts, particularly near airports, continues to be a
topic of concern for communities living near airports.
A recent study by researchers at Harvard School of
Public Health and Boston University School of Public
Health have linked exposure to aircraft noise with
higher hospitalizations for cardiovascular disease. This
is likely due to exposure to noise being related to
stress reactions and increased blood pressure, both of
which are risk factors for cardiovascular disease.
Public health concerns for local residents have played a
role in limiting airport expansions. A German court
banned flights landing at Frankfurt between 11 p.m.
and 5 a.m. as a result of residents protesting excessive
noise. Such restrictions are of material concern to
airlines whose landing slots were scheduled during
those hours. In Frankfurt, the ban was estimated to
cost the cargo arm of Lufthansa €40 million. While
plane engines are getting less noisy, the increase in
flight traffic may still lead to exposure to increased
noise levels. This has led to many airports restricting
maximum decibel levels for individual flight landings
and in aggregate. A lesser understood impact of
increased flight traffic is light pollution. While light
pollution from urban centers is brighter but localized,
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
animals that use light sources to direct them. Public
concern regarding noise and light pollution from
aviation may lead to regulations that could have a
material impact on airlines in the future.
Pilot Recruitment & Inclusion: Airlines are facing
three important trends that contribute to talent
shortage: (1) increasing federal requirements for
minimum pilot training, (2) reductions in working
hours to diminish fatigue, and (3) higher-than-normal
retirement rates, driven by an aging population of
pilots. These two issues have a compounding effect on
access to talent for companies in this industry.
The Airlines industry is characterized by significant
gender and racial gaps in workforce representation.
According to the U.S. Bureau of Labor Statistics, in
2012, only four percent of the 129,000 aircraft pilots
and flight engineers in the U.S. were women.110 This
trend has been stagnant for over a decade. The gender
gap can be partially explained by a larger pool of men
with backgrounds in the military, where they receive
training. The racial bias in the industry is also
significant. According to the 2012 annual average data
from the U.S. Bureau of Labor Statistics, 93 percent of
the 129,000 aircraft plots and flight engineers were
white. Meanwhile, only 2.7 percent were black or
African-American, 2.5 percent Asian, and 5 percent of
Hispanic or Latino ethnicity. Women have only been
allowed to become fighter pilots since 1993, and are
able to retire after 20 years with the Air Force. As a
result, the industry may soon benefit from a greater
pool of military-trained female pilots.111 Companies
that are among the first to seize this opportunity may
be better positioned in protecting their pilot pipeline,
avoiding talent shortages, and improving their
reputation.
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 COMPANIESVII
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.
COMPANY NAME (TICKER SYMBOL)
United Continental (UAL)
Delta Airlines (DAL)
American Airlines Group (AAL)
Southwest Airlines (LUV)
China Southern Airlines - ADR (ZNH)
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
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.
Sustainability Disclosure Topics
EVIDENCE OF INTEREST
EVIDENCE OF
FINANCIAL IMPACT
FORWARD-LOOKING IMPACT
HM (1-100)
IWGs EI
Revenues &
Costs
Assets & Liabilities
Cost of Capital
EFI
Probability & Magnitude
Exter- nalities
FLI
% Priority
Environmental Footprint of Fuel Use
97* 100 1 High • • High • • Yes
Labor Relations 60* 86 3 High • • Medium No
Competitive Behavior
80* 91 4 High • • • High No
Accidents & Safety Management
50 73 2 Medium • • • High No
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
MEDIUM IMPACT H IGH IMPACT
Evidence of
Financial Impact
REVENUE & EXPENSES
ASSETS & LIABILITIES
RISK PROFILE
Revenue
Operating Expenses
Non-operating
Expenses
Assets
Liabilities
Cost of Capital
Industry Divestment
Risk
Market Size
New Markets Pricing Power
COGS
R&D
CapEx
Extra- ordinary Expenses
Tangible Assets
Intangible
Assets
Contingent Liabilities & Provisions
Pension & Other
Liabilities
Environmental Footprint of Fuel Use
•
•
•
Labor Relations •
•
•
•
Competitive Behavior • •
•
• •
Accidents & Safety Management
•
•
• • • • •
•
I N D U S T R Y B R I E F | A I R L I N E S | 21
APPENDIX III SUSTAINABILITY ACCOUNTING METRICS – AIRLINES
TOPIC
ACCOUNTING METRIC
CATEGORY
UNIT OF MEASURE
CODE
Environmental Footprint of Fuel Use
Gross global Scope 1 emissions Quantitative
Metric tons CO2-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 Millions of gallons, Year
TR0201-04
Labor Relations Percentage of active workforce covered under collective-bargaining agreements, broken down by U.S. and foreign employees
Quantitative Percentage (%) TR0201-05
Number and duration of strikes and lockoutsviii Quantitative Number, Days TR0201-06
Competitive Behavior
Amount of legal and regulatory fines and settlements associated with anti-competitive practicesix
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
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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