Policy Pulse - George Anjaparidze - 2 April 2020
Governments plan to inject over $5 trillion into the global economy to counteract the social, economic and financial impacts of the coronavirus pandemic. This intervention is on an unprecedented scale.
In the United States, actions through the CARES Act represent a stimulus package of about $2.2 trillion, which amounts to over 10% of US GDP, multiples larger than the US government stimulus during the Global Financial Crisis. As part of this package, the US aviation sector is expected to receive a combination of grants and potential loans of about $60 billion.
Other countries have also enacted specific relief measures with targeted support for aviation. Singapore announced S$750 million in support of aviation, as have others, including Australia, China, Colombia, New Zealand, and Norway. As the impacts of COVID-19 rise, the list of governments channeling direct financial support is likely to grow.
Airline pleas for public finance have been echoed by efforts to link rescue packages to climate targets. In the US, eight Senate Democrats wanted to impose carbon emission requirements on companies benefiting from the rescue package. While this is an interesting idea, imposing company specific requirements is not appropriate in aviation when dealing with the climate challenge. An industry-wide approach is essential for ensuring financial sustainability of climate action.
In general, the airline industry is highly competitive. If one airline has a higher cost structure, all else equal, it will not be able to effectively compete against rivals. Therefore, imposing requirements that result in additional costs for an individual airline, will likely lead to financial ruin. Due to the competitive pressures from its rivals, the airline will struggle to pass on the higher cost to consumers and instead be forced to operate with a lower profit margin, which will eventual likely lead to market exit.[i]
In contrast, if the increase in cost is industry-wide, there will be no adverse impact on operating profit margin per passenger. If airlines are informed well in advance of the introduction of a policy change, they will be able to incorporate this consideration into their fleet planning and capacity deployment practices. For example, the airline industry could adopt the Delta Air Lines target of going fully net carbon neutral but with implementation starting in 2025. As illustrated in Table 1 and Table 2 below, this will not adversely impact operating profit margin per passenger. There will, however, be a small negative impact on air travel demand.
If industry fails to further scale-up global climate action, it will face a backlash of unprecedented proportions. Even before the outbreak of COVID-19, a paradigm shift in consumer sentiment could be observed. As government bailouts come under public scrutiny, there will be renewed pressure to take climate action against aviation.
A wave of new green taxes, operating restrictions and other local and national initiatives will again threaten to impose a patchwork of overlapping environmental measures on the sector. A proactive industry-wide approach to scaling-up climate action, can put at bay environmental activists without compromising financial sustainability.
__________________
[i] Airline specific price elasticity is widely recognized to be more sensitive to changes in price compared to market level elasticities as well as national, supra-national and global elasticities. Market level (also referred to as route level) elasticities are those where price changes impact all carriers serving a route. As evidenced by the IATA Air Travel Demand study, market level price elasticities range between -1.3 and -2 within and across major aviation regions of Asia, Europe, North America and South America. The airline specific price elasticities are considerably higher compared to market level price elasticities. Meaning that if an airline tried to pass on the higher carrier specific costs, it would lead to a significant drop in passengers.
About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.
