How the leading Latin American airline affects and is affected by climate change
The aviation industry contributed to 2% of manmade CO2 emissions in 2016. LATAM Airlines, the leading Latin American airline company, plays a key role and should have significant responsability on how this situation could evolve.
The aviation industry produced 815 million tons of CO2 in 2016, contributing to 2% of manmade CO2 emissions – greenhouse gases emissions – worldwide1. This percentage is not expected to increase to more than 3% by 2050, but since it is driven mainly by growing passenger demand, emerging markets play a key role in this trend1.
LATAM Airlines is Latin America’s leading airline, present in six domestic markets in the region and flying to 140 destinations in 25 countries2. The company employs 43.000 people worldwide and operates 1.200 flights per day with its 322-aircraft fleet2. How would you think the growing concern of the climate change produced by the aviation industry CO2 emissions affects such a large company?
Industry regulations, social responsibility, and the fact that CO2 emissions are directly linked to fuel consumption – fuel is the most important element in the company’s supply chain (see Exhibit) -, among others, are things that must be in all annual board meetings and affect short and long-term investment decisions of LATAM Airlines.
Exhibit: LATAM Airlines purchases in 20164.
As seen in the company’s annual report for 2016 and its Sustainability Report for the same year, several actions either have already been taken or are planned to address the described impact of climate change3 4.
- Implementation of “Lean” and “Smart Fuel” fuel efficiency programs. Consisting of at least 20 initiatives, these programs include investments in fleet renewal, efficiency gains in routes and flight times thanks to the use of new satellite navigational technologies, use of platform for partial disembarkation, control of air conditioning, and optimization of the cargo capacity of passenger and cargo services5. The initiatives allowed fuel savings of more than 41 million gallons in 2016, that consequently meant ceasing to emit 440 thousand tons of CO2. The target for the company is a 1.5% annual increase in fuel efficiency by 2020.
- Public commitment to align with Carbon Neutral Growth 2020, initiative led by the International Air Transport Association (IATA). By doing this the company committed to offset all flight operation emissions above the 2018-2020 average from 2020. The target is to achieve carbon neutral growth by 2020 and to halve carbon footprint by 2050 against base-year 2005.
- Participation and support in the design, implementation and certification of the IATA Environmental Assessment6. This program is a voluntary environmental management and evaluation system designed to independently assess and improve the environmental performance of an airline. The company is the first in Latin America and the third worldwide to obtain the certification – for its Chilean operations.
- Implementation of ground operations initiatives, including fuel efficiency programs and offsetting ground operation emissions in Peru and Colombia through local reforestation actions. Between 2012 and 2016 the company has already reduced its on-land emissions by 27%.
These actions among others allowed LATAM Airlines to be acknowledged as Climate Strategy leader in the Dow Jones Sustainability Index3.
In spite of the above described clearly strong efforts towards the climate change cause, there are still possible steps for the company to take in order to replicate industry leaders’ actions.
- Direct investment on alternative fuels development. Given that according to IATA sustainable alternative fuels will be the only real energy solution to mitigate the emissions growth of the industry, the company should take a proactive action in the matter and follow airlines like KLM that has partnered with biojet fuel suppliers, airports, and the Dutch government to start a regular supply of biofuel in the coming years7.
- Increasing investments on fleet renewal. The average age of the fleet of an airline correlates to a certain extent to how efficient its fuel consumption can be. Currently the average age of the company’s fleet is 7 years, a number that even though is relatively good compared to other companies, still falls behind major world airlines such as Emirates, Etihad, and Qatar Airways for example4 8.
- Additional in-flight measures that can reduce aircraft weight and consequently CO2 emissions – for 10kg weight reduction, about 4 tons of CO2 can be avoided in one year9. There are still possible simple improvements that some airlines have already implemented and could be useful for the company’s CO2 reductions targets, such as replacing paper manuals with tablets and using lightweight trolleys9.
We have seen how LATAM Airlines affects and is affected by climate change, with several steps already taken by the company and some additional that could be addressed in the upcoming years. The question to ask ourselves now is, would the company be willing to invest substantial money in improving its CO2 emissions if it did not gain in fuel consumption efficiencies?
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Citations:
- IATA; “Fact Sheet Climate Change & CORSIA”; http://www.iata.org/pressroom/facts_figures/fact_sheets/Documents/fact-sheet-climate-change.pdf
- LATAM Airlines Group; Company Information; http://www.latamairlinesgroup.net/phoenix.zhtml?c=81136&p=irol-homeProfile2
- LATAM Airlines Group; Annual Report; http://memoria2016.marketinglatam.net/sostenibilidad/cambio-climatico/?lang=en
- LATAM Airlines Group; “Sustainability Report 2016”; https://www.latam.com/content/dam/LATAM/latam-marca-unica/footer/sostenibilidad/LATAM-Sustainability-report-2016-EN.pdf
- LATAM Airlines Group; “Sustainability Report 2014”; http://memoria2014.marketinglatam.net/english/mobile/sostenibilidad.php
- IATA; “Environmental Assessment”; http://www.iata.org/whatwedo/environment/Pages/environmental-assessment.aspx
- IATA; “Fact Sheet Alternative Fuels”; https://www.iata.org/pressroom/facts_figures/fact_sheets/Documents/fact-sheet-alternative-fuels.pdf
- Traveller Newsletter; “Major airlines with the oldest fleet: Are older planes less reliable to fly?”; http://www.traveller.com.au/major-airlines-with-the-oldest-fleet-are-older-planes-less-reliable-to-fly-gxnsmn
- IATA; “Climate change”; http://www.iata.org/policy/environment/Pages/climate-change.aspx
Great essay – really interesting read with a very relevant geographical focus. From my perspective, it seems that LATAM Airlines has already done a lot to reduce its emission. For example, the fleet age of around seven years would place them in the second spot of all American carriers, only beaten by the new incumbent Spirit Airlines (https://www.fool.com/investing/2017/07/03/average-fleet-age-of-the-10-major-us-airlines.aspx). Consequently, I believe that there is little room for improvement for now and LATAM should in turn rather focus on other parts of the business.
Moreover, I see the investment in alternative fuel developments very critical. From my perspective, alternative fuel sources, especially biofuel, have faced some recent backlash as the production causes several negative externalities and side effects. First and foremost, production of biofuel could lead to increased pressure on food production as it takes farming land and yield away from areas that could also be used for growing wheat or corn (https://www.conserve-energy-future.com/advantages-and-disadvantages-of-biofuels.php)
Nevertheless, in general, the aviation industry should be at the forefront of innovation to further limit its contribution to global warming and especially the in-flight measures offer some additional potential for CO2 savings.
As shown in Exhibit 1, fuel cost is the largest category of purchases for LATAM Airlines, so I believe it will be willing to invest quite a bit to decrease usage. However, without some type of carbon tax or cap and trade system, it seems quite unlikely that they will make investments to reduce their CO2 emissions if it doesn’t additionally reduce their cost base in some way without detracting from the customer experience. However, there are improvements, such as replacing heavy in-seat entertainment systems with lightweight tablets, which can significantly improve the customer experience while additionally improving the fuel efficiency of the aircraft through weight reduction.[1]
One area that would be interesting to explore is whether it is actually better for greenhouse gas emissions to upgrade LATAM’s fleet more often. While there are certainly fuel efficiency gains, I wonder whether the high upfront cost of building a new plane is offset by these gains.
One additional idea to reduce LATAM’s carbon footprint is to educate its consumers about the massive carbon footprint of flying, and offer carbon offsets at a small fee. A number of USA-based airlines, such as JetBlue [2], offer this service to their customers and have had some success, at zero cost to themselves.
[1] Engadget. (2017). Why your brand-new plane doesn’t have a seat-back TV. [online] Available at: https://www.engadget.com/2014/08/05/future-of-ife/ [Accessed 26 Nov. 2017].
[2] Jetblue.com. (2017). JetBlue | Sustainability | Offsetting CO2? We’re on it. [online] Available at: https://www.jetblue.com/green/offsetting/ [Accessed 26 Nov. 2017].
Great essay! What I found most interesting about many of the measures you mentioned that LATAM has taken or should consider taking is that they not only decrease CO2 emissions, but also reduce costs. Finding ways to be more fuel efficient, take more direct routes, use more fuel efficient fleets and take in-flight measures to reduce weight would all lead to lower operating costs for flights and ground operations.
While climate change is issue enough to drive these changes, the cost-savings that come along with them are attractive as well. LATAM could be tempted to take advantage of these cost savings to increase net profit. I am skeptical when businesses potentially mask what is actually an exercise in cost-saving as a climate change initiative. For this reason, LATAM should be transparent about their realized savings from efficiency initiatives and use those to combat climate change in other ways, such as funding alternative fuel development.
Great topic, especially because if aviation were a country, it would be the world’s seventh largest carbon emitter, ranking above South Korea and below Germany [1].
Certainly, LATAM must keep contributing to its reduction in carbon emissions as the underlying effects of not doing so would impact the industry’s performance. According to the National Geographic, climate change and shifting weather conditions can affect the aviation industry. For example, rising temperatures affect the durability of the asphalt in airport runways and increasing flooding can affect airport operations, especially in coastal and floodplain areas in which heavy rainfall can affect runways. This could potentially lead to flight cancellations. Surprisingly, 2014 proved to have the highest number of cancelled flights in 25 years due to storms. In addition, the impact of Hurricane Sandy in 2012 was massive for the airline industry. Damage in navigation systems and infrastructure got to $29 million, translating in an enormous cost for airlines of around $190 million in earnings.
While the effect on fuel efficiencies may not be immediate, airlines must certainly keep working on producing less carbon emissions as the impact in their operations due to shifting climate trends may be disastrous if taken for granted.
[1]. Urban Expeditions series. “5 Advances That Will Change Air Travel”. https://www.nationalgeographic.com/environment/urban-expeditions/transportation/green-aviation1/; Accessed on November 30th, 2017.
Very interesting read! LATAM appears to be thinking creatively about potential solutions to reduce emissions of which other airlines should take advantage. One potential advancement you mentioned was the installation of lighter instruments in the plane. I am curious whether LATAM would be willing to take on the expenses associated with implementing those changes on existing planes or demand the improvement on its next fleet of newly purchased planes. My expectation is the latter, as many of their improvements to date do not include significant capital investment.
I also agree that the investment in alternative fuel technologies is essential due to the majority of emissions resulting from fuel consumption. One alternative that is in nascent development, is a battery powered plane. Providing financial support to research the development of these large batteries could accelerate development and have the most drastic reduction in emissions. Given that this technology will likely take many more years to develop and will require new planes for its application, I think diversifying investments to include other alternative fuels is essential as well.
Thank you for sharing! This topic is really interesting! LATAM certainly took many initiatives to reduce CO2 emissions, however I am quite skeptical that the company would have heavily invested in it if it didn’t imply in cost reductions. It’s important to bear in mind the challenging context of the airline industry in Latin America. There is not enough demand for differentiation in value proposition among airlines, i.e. there is no clear premium vs low-cost segment. Therefore, all airlines are competing mostly in tickets prices, which has a significant impact in profit margins.
Given this context, I would recommend LATAM to keep aligning the reduction in CO2 emission with the decrease in fuel costs. One interesting initiative adopted by its main competitor in Brazil (GOL) was to align the cabin crew compensation with fuel savings (http://www.valor.com.br/empresas/3087398/gol-dara-bonus-tripulantes-que-ajudarem-economizar-combustivel). Pilots can optimize fuel consumption by controlling the aircraft’s speed and optimizing the flight routes to the extent possible. Additionally, LATAM should certainly consider using biofuels. The Brazilian government is incentivizing the production of biodiesel. Due to tax benefits, soy companies such as Bunge, Cargill and Dreyfus are investing in the market, significantly decreasing price (http://www.valor.com.br/empresas/3788396/receita-regulamenta-incentivos-fiscais-ao-setor-de-biodiesel).
Very informative article! I loved how you started out by quantifying the impact the aviation industry has on the global CO2 emissions.
I am curious how LATAM airlines, and the aviation airline in general, is weighing the tradeoffs between shifting towards bio-fuels and food security for the poor. If the aviation industry has a whole moves further towards bio-fuels, does it risk causing a spike, particularly in the less developed parts of the world, in food prices? Given how climate change is already threatening food security for poor countries of the world, would the shift towards more bio-fuels only serve to exacerbate the issue?
Thanks for a very interesting analysis on a market that is certainly impacted by climate pressures. I think the other dimension I would add is contextualizing LATAM’s response within those of its competitors. Ultimately its decisions will impact its cost and competitive positioning in both the short and long-term. Investing in renewable resources may yield benefits over time but there is a notable lag time associated. If LATAM is confident in its ability to maintain its dominant competitive positioning in the short-term, this may be a way to cement its positioning in the long-term, particularly as smaller players are unlikely to make similar investments.
The investment in a new fleet should carry a similar consideration. LATAM will need to place an order for new planes with OEMs with several years of advance notice. They will need to assess both how efficiency gains from more fuel-efficient aircraft will correspond with changing prices of oil and other energy sources over the production period. LATAM should be well aware of how its competitors (both smaller regional airlines and dominant inter-regional players) are responding to the threats of climate change. Their perspective on how the competitive set will evolve in the short and long-term should impact the duration of the investment alternative they choose to pursue.
Very interesting read. LATAM Airlines is clearly taking various steps to address the impact of climate change.
One other opportunity I see for LATAM Airlines is to explore the willingness of consumers to flight on slower planes and thereby reduce the emissions, or to pay a higher fee to invest in alternative fuels.
Secondly, I believe LATAM Airlines could address the climate change by focusing not only on in-flight operations, but also by improving infrastructure and smoothing airport operations. http://to70.com/aviation-and-climate-change-impact-and-initiatives/
While I commend LATAM Airlines on steps they have already taken, I agree with the author that this is just the start. I think for there to be a major step changes, the airline should focus on alternative fuel sources. I would partner with the companies you are leasing the engines from to make sure you are on the list of companies trying to be innovative when it comes to jet engine solutions.
I also find it compelling that LATAM is partnering with ground operations in Colombia and Peru. I think this is an initiative which the company should replicate across the region.
Great article, David! I acknowledge that LATAM has achieved great fuel consumption reduction, which make it 8.3% more fuel efficient than the industry average (1). However, this is very aligned with the company’s own strategic interest: fuel represents ~34% of its operating cost structure (2), which means that this gap in fuel consumption vs. the industry alone represents a 2.8% cost advantage. The expectation for the airline industry is to achieve carbon neutral growth by 2020. Given that the airline industry generates 2% of manmade CO2 emissions, and considering the serious consequences of climate change that we are well aware of, I strongly believe that regulation should set the bar higher for this industry. Critics might argue that asking the airlines to further subsidize their carbon footprint with measures like reforestation or shifting to alternative fuels is unrealistic. However, I think it’s worth pointing out that LATAM has achieved carbon neutrality in Peru and Colombia through reforestation programs (3), which is far beyond what is expected from the industry. This shows real commitment to environmental sustainability, and sets a good example of where regulation should ask companies in this sector to head towards in the future.
(1) Latam Airlines Sustainability Report 2016. file:///C:/Users/MBAUser/AppData/Local/Microsoft/Windows/INetCache/IE/88FSJTQ4/LATAM-Sustainability-report-2016-EN.pdf
(2) Latam Airlines Annual Report 2016. file:///C:/Users/MBAUser/AppData/Local/Microsoft/Windows/INetCache/IE/O3XH075B/38-Estados-Financieros-ESP.pdf
(3) Latam Climate Change Policy. https://www.latam.com/es_ar/conocenos/sostenibilidad/cambio-climatico/