Environmental, Social, and Governance (ESG) Framework in Commercial Aviation Growth Opportunities

The Impact of the Top 3 Strategic Imperatives on the Environmental, Social, and Governance

Industry Convergence

Why: Stakeholders in the commercial aviation industry are focusing on sustainability. However, there is an urgent need for common standards for the adoption and benchmarking of sustainable practices.

These standards will need to measure the performance of a company along key parameters like carbon emissions, water utilization, labor practices, etc.

Frost Perspective: State administrators, company executives, and regulators are creating policies to ensure sustainability. However, it is critical to create a standard reporting format that can communicate the benefits of various strategies, areas to focus on, benchmarking of leading companies, etc.

Commercial airlines can publish these reports and look at financing opportunities that reward efficient aircraft operations and other sustainable technologies and processes.

Internal Challenges

Why: Commercial aviation is undertaking several initiatives to decarbonize the industry.

Airlines and airports are facing several challenges in aligning with the sustainability macrotrend, as they involve costly investments that limit profitability.

Frost Perspective: The industry will need to collaborate to develop common standards that are transparent and have a holistic coverage of all ESG parameters.

Financial support and sustainability policies from the government will be critical to drive ESG adaptation in commercial aviation.

Transformative Megatrends

Why: Lenders and financial institutions are offering funds and ESG-aligned products to companies based on their ESG performance.

A company’s performance as per ESG parameters partly guides investors and other stakeholders in determining credit ratings and financial agreements.

Frost Perspective: Currently, there is limited implementation of ESG practices, and there is yet on common consensus among stakeholders on how to document and measure ESG parameters.

It will be critical for investors and credit rating institutions to arrive at templates and standards to incorporate new ESG parameters into their due diligence and credit rating processes.

Growth Drivers

• The Adoption of Sustainable Aviation Fuel (SAF) and Alternate Propulsion Systems by Leading Airlines: Several major commercial airlines have developed internal targets for decarbonizing their operations, including reducing emissions, and have invested in several initiatives like SAF procurement, alternate propulsion methods, etc.
• Regulations and State Policies: The United States and the United Kingdom have established several strategies and policies to achieve their decarbonization goals. SAF is an alternative to jet fuel that has reduced emissions, and several countries have set targets to have a certain portion of SAF blended with jet fuel in regular operations by certain years.
• Improved Offers for ESG Compliant Airlines by Lessors: Global lessors are incorporating parameters like sustainability and other ESG components to improve their credit rating models. This will enable compliant airlines to get better offers in terms of leasing costs than non-compliant airlines.
• Improved Financing for ESG-compliant Airlines: Airlines with higher ESG performance ratings and improved sustainability will gradually be able to gain improved financing options and terms.

Growth Restraints

• Lack of High-level Priority: Not all airlines are prioritizing ESG, and thus, the required global investments are driven by a handful of carriers that are investing in improving their ESG measures.
• Lack of a Singular Vision on Sustainability from All Stakeholders: To achieve improvements in cleaner operations, there need to be sustained efforts and investments from all stakeholders. Even though airlines may have strict internal goals with respect to their operations, a common consensus among regulators and airports is critical to achieving the various goals mentioned in the ESG standards.
• High Prices of Sustainability Compliance: In 2022, the price of a ton of SAF was 2.23 times higher than a ton of jet fuel. This gap has reduced since 2020, when it was 3.87 times higher. This is a significant cost challenge for airlines to overcome, and only full-service carriers with large operations and significant financial strength can invest in SAF operations for their fuel needs. Airlines largely operate on razor-thin margins, and not all airlines will therefore be able to be ESG-compliant.
• Growth of Commercial Aviation: The aviation industry declined in 2020 due to the impact of the pandemic and has still not reached pre-pandemic levels in terms of passenger traffic. However, an increase is anticipated, and airlines are preparing for this by increasing their capacity by ordering large fleets to strengthen their operational network. This growth will have a positive effect on airlines' financial strength, but it will be challenging to control overall emissions, especially when the potentially emissions-reducing technologies are still in their nascent phases.