Clipped Wings

Corporate social and environmental responsibility in the airline industry

Deborah Ancell

• Publisher: Routledge
• Year: 2016
• Print ISBN:
  9781472477736
• eBook ISBN:
  9781317165033
• Topic: Business
• Subtopic: Business General
• Index: Business

Within the developed world, airlines have responded to the advice of advocates for corporate social and environmental responsibility (CSER) to use the intertwined dimensions of economics, society and environment to guide their business activities. However, disingenuously, the advocates and regulators frequently pay insufficient attention to the economics which are critical to airlines' sustainability and profits. This omission pushes airlines into the unprofitable domain of CSERplus.

The author identifies alleged market inefficiencies and failures, examines CSERplus impacts on international competition and assesses the unintended consequences of the regulations. She also provides innovative ideas for future-proofing airlines.

Clipped Wings is a treatise for business professionals featuring academic research as well as industry anecdotes. It is written for airlines (including their owners, employees, passengers and suppliers), airports, trade associations, policy makers, educators, students, consultants, CSERplus specialists and anyone who is concerned about the future of competitive airlines.

Part I
Sustainability economics

The first of the intertwined dimensions of airline sustainability is economics – the social science which is concerned with the production, distribution and consumption of services and products.

Chapter 1: Introduction to economic airline sustainability outlines the economic challenges which are prevalent in sustainable airlines. It introduces the indicators of market inefficiencies or failures which could be either triggered or solved by interventions from legislators and regulators. These inefficiencies include lack of competition, development of missing markets, assignment of property rights to negative externalities, presence of imperfect knowledge, activation of the principal-agent problem, government provision replacing the private market, subsidised consumption inequalities, free riders taking advantage and frequent manifestations of the principles of moral hazard and moral panic. However, legislating politicians frequently omit preliminary economic impact analyses and post-implementation assessments in order to pursue their social and environmental political aims. This leads to unresolved conflicts involving airlines and the non-governmental organisations (NGOs) which promote corporate social and environmental responsibility (CSER) over and above what is economically justified (i.e. CSERplus). CSERplus is a confluence of ideas based around the dimensions of society and the environment which frequently ignores the economics of efficient resource allocation. Economics should be the basis of sustainability-thinking, decision-making and future-proofing. It provides the context with which to identify the benefits of using sustainability-thinking including reputational risk protection, resilience against volatility in markets, prediction of future government interventions and improved market intelligence. It also provides a lens through which to identify previously unidentified (and therefore unacknowledged) subsidies given by the airline industry in return for market liberalisation.

1 Introduction to economic airline sustainability

1.1 THE AIRLINE INDUSTRY IN CONTEXT

Introduction

The earliest airline entrepreneurs could not have foreseen just how successful their idea would become. The oldest airline (KLM Royal Dutch Airlines, The Netherlands) was established in the northern hemisphere in 1919; the second oldest (Qantas, Australia) was established in the southern hemisphere in 1920. Flying between The Netherlands and Australia could take weeks – changing planes, hopping over vast continents, landing and taking off from one hewn airstrip to another. In those early decades, flying was a luxury and an aspiration. Since then, technology has progressed so that the same journey can be completed in a little over 24 hours with one stop in between, and what was once the preserve of the adventurous, famous and rich has now become the travel of the masses. Democratised air travel has arrived.

The aviation industry is now integral to the world’s economies and requires the construction, equipping and maintenance of aircraft and infrastructure in order to provide its services. Airlines and their airports are big business integrated by economics, i.e. the social science concerned with production, consumption and distribution of scarce resources, goods and services. At its core is the optimal allocation of resources to satisfy customers’ wants and needs and the concept of the market where suppliers and buyers meet and are able and willing to transact. Markets, using price as the mechanism for coordinating suppliers’ and buyers’ actions, have a spontaneity which evolves over time and any interference, such as that from governments, can distort their efficient operation. However, markets are also dependent on the protection of the legal system for contract enforcement and non-confiscation of private property, both of which are in the power of governments. Economists believe that the value of goods and services ‘depends crucially on the “bundle of legal rights” transferred with them’ (Veljanovski, 2006: 34–35). ‘Today there is a greater awareness of the benefits of private property rights and markets, and the disadvantages and inefficiency of bureaucracy and regulation as means of coordinating the economy’ (Veljanovski, 2006: 21). Furthermore, because markets are the outcomes of decisions made by human beings, they do not always operate as theory would suggest, which frequently provides governments with justification for interventions to correct the market inefficiencies or ‘failings’.

Markets aim for productive efficiency with many competing sellers producing at lowest cost, which enables buyers to transact at market-clearing prices. If airlines’ prices are too high, passengers could boycott, leaving seats and freight space unsold, both of which are inefficient outcomes. These would force airlines to reduce capacity so that resources (including aircraft and employees) could be redeployed more efficiently elsewhere. Airlines use many resources, including people, time and assets such as aircraft, ground equipment and buildings. In 2012, worldwide, the airline industry supported 56.6 million jobs, was responsible for $US2.2 trillion of global expenditure, spent $US140bn on fuel, carried 35% of world trade by value and handled 48 million tonnes of freight according to its trade body, the International Air Transport Association (IATA) (IATA, 2012). IATA (2013a) predicted passenger numbers could rise to 3.91 billion by 2017.

Airlines are, however, constrained by external geopolitical and regulatory, macro-economic factors, which are beyond their control, and micro-economic human, natural, social, financial and manufactured resources, over which they have only limited sway. However, while the ‘rest of the air transport value chain continues to make money’ (IATA, 2013b: 41) with fuel suppliers as the major beneficiaries, airline investors’ rewards for the financial risks are proving harder to obtain with net profit per passenger of only $US2.56 (IATA, 2013b). This is despite rising demand from advancing nations, i.e. countries which are either developing (illustrated by a low standard of living) or emerging (increasing their industrialisation). The next most profitable part of the value chain is distribution, with customer reservations systems (CRS) and data suppliers averaging a return of 20% and freight forwarders 15% (IATA, 2013b). In contrast, the airlines currently yield 1–2%. This affects the economic sustainability of the entire airline industry, including its supply chain. Airlines have many costs to cover before they can show a return on assets, including paying interest on debt and surplus profit as dividends to the owners (the shareholders). Although airlines have significantly improved their efficiency over the last 50 years and halved the costs of air transport in real terms, these gains have only lowered transport costs and fares rather than increased shareholders’ returns or employees’ rewards. In fact, some privately owned airlines stopped paying dividends to preserve cash when the industry took one of its many downturns. In other words, the customers and suppliers have benefitted but investors – on whom airlines rely for capital – have not. Airlines do, however, make many other industries profitable.

Since 2000, major United Kingdom (UK) carriers have had some lean years (Figure 1.1) which mirrored significant world events, including economic recessions and threats such as those posed by terrorism, wars and health epidemics. The UK industry upswing began around 2002 and continued until the banking crisis of 2008 combined with high fuel prices caused a sharp downturn in recovering profits. This was followed by dramatic improvement in 2012 when volatile jet fuel prices (approximately 2004 to 2008) were decreasing.

Figure 1.1 Major UK airlines profit and loss account summary 2006–2013 (adapted from Civil Aviation Authority, 2014)

Figure 1.2 All USA carriers (all regions) net income ($USm) 2000–2014 (adapted from United States Department of Transportation, 2015)

American carriers had a similar financial profile, and although the statistics are not directly comparable their industry suffered more volatility (Figure 1.2) starting with the dramatic jump in jet fuel prices in January 2000 which ‘led to a drop in operating profits, although net profits were maintained largely due to the sale of aircraft and non-core investments such as holdings in IT and communications companies’ (Morrell, 2013: 5). Similarly, the volatile fuel prices of 2004 to 2008 are also reflected in total net income. During these periods, several USA carriers entered into (and some emerged from) Chapter 11 bankruptcy protection, which affords affected companies a buffer from creditors while they reorganise their businesses (The Economist, 2015).

CSER and CSERplus

Airlines exhibit corporate social and environmental responsibility (CSER) and are under greater scrutiny than ever because of challenges from CSER advocates concerned about rogue enterprises ruthlessly exploiting societies and environmental resources in their pursuit of profit. However, although airlines are not of that ilk, they have been swept into the CSER movement which now urges legislators, regulators and industries to go beyond CSER to pursue welfare or environmental policies which are often the remit of the State. In doing so they are invoking CSERplus (both terms will be used throughout this book). The interventions of CSERplus’ advocates in the airline market have provided challenges and produced unexpected consequences because they were usually based on incomplete or zero cost-benefit data and information. This meant that regulators ultimately relied on advocacy and opinions. CSERplus’ advocates often claim that their involvement in any industry (and not just aviation) leads to innovation, improved costs and social and environmental benefits. However, the aviation industry has always pursued innovation, lowered costs, increased safety, improved productivity, widened markets and enhanced environmental performance in the course of responsible and efficient business management intent on creating shareholder value. The spur was competition in the marketplace. Airlines know that displeasing regulators will incur fines, dissatisfied customers will travel with rivals, unsafe practices could ground the fleet and careless financial management could close the business. The industry did not need CSERplus interventions unsupported by economic analyses to remind them of good business practices.

Definition of sustainability

Full sustainability is bigger than the environmental or social issues to which CSER is often ascribed. It is also greater than philanthropy, charity, corporate community investment (CCI), corporate responsibility, community relations, corporate citizenship or any of the other socially aligned terms by which it is often inappropriately labelled. Over the past 20 years sustainability has also ‘often been compartmentalized as an environmental issue’ (Drexhage and Murphy, 2010: 2). The role of economics as the integrating force has been largely ignored and yet ‘Most of the aspects that are labelled “environmental” or “social” are economic issues for which economic analysis and criteria offer a means to integration’ (Henderson, 2004: 98). In the airline industry, the three best-known CSER dimensions are never independent. For example, low fares enabling democratised consumption (a social issue) are supported by sales of inflight catering (an economic issue). If the catering is too expensive, passengers might not purchase and it becomes food waste with high disposal costs (an economic-environmental issue). Consequently, reduced inflight catering sales might lead to increased seat prices. Airfares which incorporate any government’s air tax are an economic, social and environmental issue.

‘Sustainability’ with its economic basis should not be confused with ‘sustainable development’ with which many CSER researchers and advocates muddle it. Sustainable development – defined as ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’ (UN World Commission on Environment and Development (UNWCED), 1987: 16) – tends to give weight to social and environmental issues and not the integrating economics. The focus for this text – and without implying endorsement of the CSER ideology – will be on economics as the integrating factor for social and environmental issues. The ‘triumvirate’ of economics, society and environment will be used as a framework with governance (as the decision-making process) wrapping the three dimensions together (see Figure 7.2 in Chapter 7). Economic sustainability in this text will be broader than just financial sustainability, and because it concerns resource allocation, it will concern the responsible stewardship of the shareholders’ assets to maintain all types of capital. This includes natural (renewable and non-renewable), social (including intellectual and cultural capital), human (such as labour and education) and manufactured (e.g. buildings and aeroplanes) as well as the financial capital. The sustainability intention is to live off the ‘interest’ rather than dip into the various capital bases. Shortages have different meanings in the natural world from the manufactured world. A shortage in natural world products often means increased exploitation without replacement so living off the ‘interest’ is sometimes not possible. In the manufactured world shortages could trigger increased product...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Preface
• Acknowledgements
• List of abbreviations
• Part I Sustainability economics
• Part II Society
• Part III Environment
• Part IV Governance, ethics and economics
• Appendix
• Index