Author:

Rune Hansen
Exam number:
302512
Supervisor:
Frederic Michel Patrick Warzynski
Characters:
99831 (incl. figures)

An Empirical Assessment of the Relationship

between Environmental Performance and
Profitability in the Context of the U.S. Airline
Industry

Aarhus University
School of Business and Social Sciences
Department of Business Administration

Aarhus University

May 2014

Abstract
The airline industry represents one of the fastest growing sources of greenhouse gas emissions
due to its substantial fuel consumption. For that reason, the industry has committed itself to an
ambitious plan that will offset future growth from emissions. A major component of the plan,
believed to sufficiently incentivize the airlines, is the proposed win-win situation because less
fuel consumption will be environmentally and financially beneficial.
The aim of this thesis is to investigate whether a positive relationship exists between
environmental performance and profitability in the airline industry, with the ultimate purpose
of evaluating the substance of the win-win proposition.
11 sampled U.S. carriers, network and low-cost, are analysed according to environmental
performance (ASM/gallon) and financial performance (profit margin) and finally compared to
establish whether a correlation exists. To support the analysis, it furthermore explores the
importance of fuel and conducts a review of existing literature to identify motives for
environmental management practices in an airline context.
The findings of this thesis suggest that some degree of correlation exists with a relatively
positive relationship between ASM/gallon and profit margins, most evident from the scores of
Spirit Airlines and Alaska Airlines. However, it also reveals two entirely asymmetric scores
for Virgin America and Allegiant Air.
The results indicate that fuel is an important attribute in profitability, but also that the effect of
either superb or poor environmental performance can be offset by other significant industry
factors. These findings could suggest that, under the current market conditions with no
regulatory intervention, the win-win proposition holds truth but also that a lose-win
relationship between environmental performance and profitability exists, exemplified by
Allegiant Air.

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Contents
1

INTRODUCTION & PROBLEM STATEMENT..............................................................6

1.1.

Problem background....................................................................................................6

1.2.

Problem statement........................................................................................................7

1.3.

Delimitation..................................................................................................................7

1.4.

Methodology................................................................................................................8

1.4.1.

1.5.
2

Environmental & Financial performance defined........................................................9

ENVIRONMENTAL IMPACTS OF AIR TRANSPORT.................................................10

2.1.

Air Transportation & Greenhouse Gases...................................................................10

2.2.

The Race to Shrink the World....................................................................................11

2.3.

Attention shifts to the environment............................................................................12

2.4.

Aircraft Efficiency vs. Traffic Growth.......................................................................13

2.5.

Industry Commitment................................................................................................13

2.5.1.

Technology...................................................................................................................................14

2.5.2.

Operations & Infrastructure..........................................................................................................15

2.5.3.

Economic Measures......................................................................................................................15

2.6.
3

Summary....................................................................................................................16

ENVIRONMENTAL MANAGEMENT..........................................................................17
3.1.

Motivations.................................................................................................................17

3.1.1.

General Literature.........................................................................................................................17

3.1.2.

Industry-Specific Literature..........................................................................................................19

3.2.
4

Sources............................................................................................................................................8

Summary....................................................................................................................20

FUEL.................................................................................................................................22
4.1.

Rising fuel prices........................................................................................................22

4.2.

Fuel cost reductions....................................................................................................24

4.2.1.

Fuel hedging.................................................................................................................................25

4.2.2

Delta Airlines oil refinery.............................................................................................................25

4.3.

Fleet renewal..............................................................................................................27

4.4.

Summary....................................................................................................................29

ENVIRONMENTAL PERFORMANCE..........................................................................30
5.1.

Methodology..............................................................................................................30

5.2.

Business models.........................................................................................................32

5.2.1.

Network carriers...........................................................................................................................32

5.2.2.

Low-cost carriers..........................................................................................................................33

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5.2.3.

Sample airlines..............................................................................................................................33

5.3.

Historical fuel efficiency........................................................................................34

5.4.

Fuel efficiency scores.................................................................................................35

5.5.

LCC vs. NWC............................................................................................................37

5.6.

Summary....................................................................................................................38

FINANCIAL PERFORMANCE.......................................................................................39
6.1.

ASM/gallon & profit margin......................................................................................39

6.2.

Fuel costs per ASM....................................................................................................41

6.3.

Virgin America & Allegiant Air.................................................................................42

6.3.1.

Virgin America..............................................................................................................................42

6.3.2.

Allegiant Air.................................................................................................................................42

6.4.
7

May 2014

Summary....................................................................................................................43

PERSPECTIVE & CONCLUSION..................................................................................44

7.1.

Research method........................................................................................................44

7.2.

The win-win proposition............................................................................................44

7.3.

Conclusion..................................................................................................................45

BIBLIOGRAPHY.............................................................................................................46

APPENDICES..................................................................................................................51

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Figures

FIGURE 1: CO2 emissions reduction roadmap, (IATA 2013, P. 8)...........................................14

FIGURE 2: Turbulent years for U.S Commercial Aviation, (MIT 2014).................................22
FIGURE 3: Fuel gaining importance in airline cost structures, (MIT 2014)............................23
FIGURE 4: Crude oil and jet fuel forecast 2012-2040, (EIA 2014).........................................24
FIGURE 5: Boeing orders & Jet fuel prices, 1977-2013, (MIT 2014, Boeing 2014)..............28
FIGURE 6: Fuel efficiency achievements, 1960-2012 (DOT 2014)........................................34
FIGURE 7: Fuel efficiency & fleet age, (DOT 2014, Airfleets 2014)......................................35
FIGURE 8: Fuel efficiency & profitability, (DOT 2014, MIT 2014).......................................39
FIGURE 9: Fuel cost per ASM, (DOT 2014, MIT 2014).........................................................41

Tables
TABLE 1: Environmental and Financial performance, (Irrgang 2011)......................................9
TABLE 2: Accumulated Research on EMS drivers..................................................................20
TABLE 3: Oil refinery impact on Delta Airlines, (Delta quarter reports)................................26
TABLE 4: Sample of airlines....................................................................................................34
TABLE 5: ASM/gallon, LF and fleet by individual airline and by group................................36
TABLE 6: Summary of performance indicators, (DOT 2014, MIT 2014)...............................40

Appendices
Appendix 1: ICCT fuel efficiency ranking 2010
Appendix 2: Spreadsheet with ASM/gallon scores

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1 INTRODUCTION & PROBLEM STATEMENT

1.1.

Problem background

Civil aviation affects us all. The engine keeps the aircraft above the ground; but it also
generates economic, social and cultural development. Aviation shrinks the world, bringing
people, markets, friends and families together, and provides connectivity to the most remote
and inaccessible corners of the world. Despite many exogenous demands shocks and crises in
the past, the industry can appropriately be said to have experienced constant growth since its
early days.
But its impacts are not only positive; the industry is literally fuelled by a depletable resource
which contaminates the atmosphere when being burned. The combustion of jet fuel accounts
for some 2% of all human induced carbon emissions (CO 2) making the industry one of the
fastest growing sources of greenhouse gas emissions (GHG) on the planet (OECD 2012).
The environmental implications are not the only issues facing the industry. New times have
brought new challenges along, and possibly the most serious challenge facing the industry is
the lack of profitability. One of the explanations behind this can be found in the accelerated
oil prices, which has erased profits and left the airlines behind in a desperate struggle for
survival. But April showers bring May flowers. This situation with aircraft fuel as the source
of GHG emissions and the cause of massive financial losses in the industry can be turned
upside down, experts and industry organizations claim. In other words, by burning less fuel
the industry can improve its profitability and moderate its environmental footprint.
As a consequence of its environmental impact, the industry has committed itself to carbonneutral growth from 2020, and a 50% reduction in carbon emissions by 2050 compared to
2005. The win-win proposition is widely embraced by the industry as being the primary
driver in resolving the environmental and financial problems facing the industry. The industry
acknowledges that a marked-based offset mechanism will be needed to curb emissions in the
short-run. But in the same vein insist that a regulatory intervention is not needed, despite
pressure from EU and the UN, because the prospect of economic benefits along with ethical
considerations will sufficiently incentivize the airlines to reduce emissions (ATAG 2014).
Environmental management has been practiced now for many years, and some airlines are
making more effort than others to reduce their environmental footprint. This will allow us to
examine if those airlines are benefitting from greater environmental performance and
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ultimately to evaluate the substance of the win-win proposition under the current market
conditions with no regulatory intervention.
1.2.

Problem statement

In theory, airlines that use fuel more efficiently than their competitors will achieve a cost
advantage and ultimately have higher profits because savings drive earnings. On the basis of
that assumption, the following question has been derived:

Does greater environmental performance lead to superior financial performance?

This thesis will answer the above stated question through a brick by brick approach by
repeatedly building up the findings and knowledge possessed in the preceding sections. For
that purpose, the remaining part of the thesis will have the following structure:
Section 2 will describe exactly how the airline industry affects our environment. The industry
will also be studied in the light of its history and commitment to mitigating its environmental
impact. The next section will examine existing literature to identify motives for environmental
management in the airline industry. Section 4 will then investigate the importance of fuel and
analyse how the airlines have reacted to soaring fuel prices. It will additionally provide the
reader with conceptual knowledge on how fuel is linking environmental and financial
performance as preparation for the forthcoming sections.
Section 5 will analyse a sample of airlines according to environmental performance whereby
this sample in the subsequent section will be analysed according to financial performance to
establish whether a relationship exists. The findings will be put into perspective, and
concluding remarks will be made in section 7.
1.3.

Delimitation

The issue of the airline industry as a major and growing source of pollution contributing to
global warming is not limited by political borders its a global issue demanding global
solutions. This thesis intends to explore the issue from a business perspective hence the
analysed carriers should operate at equal market conditions. This makes it necessary to limit
the geographical scope and for that purpose the U.S airline industry has been chosen.

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The U.S airline industry consists of a diversified range of carriers representing very opposing
business models in an intense and enigmatic business environment.
The author also explored the possibility of analysing a sample of European carriers, but did
not choose that for two reasons. Firstly, databases with relevant profiles only exist on national
levels, and the Eurostat database having only two industry-metrics available can easily be
characterized as being incomprehensive. Secondly, sampling a similar diversified range of
carriers would imply research within a vast number of European countries that the author
considered unrealistic within the time and resource constraints of this project. The lack of
standardisation of the metrics would further complicate the matter. For these reasons, the U.S
airline industry provides a considerably better basis for an empirical assessment.
Due to the substantial size of the U.S airline industry, 11 airlines have been sampled. In 2012,
these airlines represented 87,1% of the passenger capacity (ASM).
1.4.

Methodology

This empirical thesis intends to answer the previously stated question by means of
quantitative research. More specifically, a correlational approach will be used to assess
whether greater environmental performance lead to superior financial performance. Multiple
metrics will moreover be analysed from a longitudinal perspective.
1.4.1. Sources
The thesis is based on a variety of sources which can be categorized as follows:
Statistical data
The majority of the statistical data has been extracted from the U.S Department of
Transportation (DOT) and the Airline Data Project at MIT. The latter is a project compiling
data about U.S civil aviation. Other databases include the U.S. Environmental Protection
Agency (EPA) and the Federal Aviation Administration (FAA). All of which are primary data
sources.
Articles and reports
This study has used articles from a great number of journals, of which the most frequently
used include the Journal of Air Transport Management and the Journal of Sustainable
Tourism. The journals have usually been within the fields of transportation or environmental
management. The reports cited in this thesis are primarily developed by the International Air
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Transport Association (IATA), Air Transport Action Group (ATAG), International Civil
Aviation Organization (ICAO) and International Council on Clean Transportation (ICCT).
Other sources include annual and quarter reports from airlines and finally newspaper articles.
1.5.

Environmental & Financial performance defined

A number of concepts regarding environmental and financial performance of airlines will be

used consistently throughout this thesis. Though it seems like these concepts are fairly
simplistic in its nature, a definition of the concepts is needed in order to avoid any
unnecessary mistakes. Table 1 illustrates the relationship between CO 2, fuel and the bottomline within the airline industry. Note how fuel is linking environmental and financial
performance.
TABLE 1: Environmental and Financial performance, (Irrgang 2011)

Environmental performance
How to

Carbon emissions

Fuel

Financial performance
Money

enhance

Fuel savings

Efficiency gains

Fuel savings

performanc

Alternative fuels

Weight reduction

Non-environmental measures
Reducing CO2

In this thesis, environmental performance will in its broadest meaning refer to the level of
carbon emissions. However fuel is the source of emissions and will also be considered an
indication of environmental performance. Carbon can be saved by reducing fuel consumption;
but also by using alternative non-petroleum fuels which will only briefly be discussed in this
thesis.
Greater financial performance can be caused by lower fuel consumption or reducing the price
of the fuel input with various non-environmental measures, for instance fuel hedging. A
global scheme making airlines accountable for carbon emissions does not exist, but the
implementation of such a scheme will make CO2 emissions a profitability-factor for the
individual airline, as well.

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2 ENVIRONMENTAL IMPACTS OF AIR TRANSPORT

This chapter will address the issue the growing impact imposed by the airline industry on our
environment. The engine attached on the aircraft is the primary driver of the negative
externalities created by aviation. When burning aircraft fuel, the engine emits greenhouse
gases (GHG) and creates noise pollution that affects the communities in close proximity to
airports. The emissions of greenhouse gases contribute to climate change and are widely
considered the most serious of the various environmental impacts imposed by the industry.
Thus, the greenhouse gas emissions and its implications will be the primary focus of this
section.
2.1.

Air Transportation & Greenhouse Gases

Some greenhouse gases are the outcome of human activities, but the majority of are naturally
occurring and are vital in order to maintain an atmospheric temperature that supports human
life, due to their ability to trap heat (IPCC 2014). The main gases in relation to aviation
include:
Carbon dioxide (CO2) accounts for around 70% of total emissions from aviation. It
accumulates in the atmosphere when being released from the aircraft engines. Global aviation
accounts for some 2% of all CO2 emissions deriving from human activities, and approximately
80% of that are emitted from flights of more than 1.500 kilometres where alternative modes
of transportation are considered impractical (ATAG 2010).
Water vapour (H20) can create formation of condensation trails on the sky. The effect of the
contrails is subject to scientific dispute, and no consensus can be established whether it has a
cooling or heating effect to the climate, only that its effect are not to be overlooked (ATAG
2010). Water vapour accounts for around 30% of total emissions from aviation.
Oxides of nitrogen (NOx), accounts for less than one percent of total emissions from aviation
(The World Bank 2012). It is emitted due to the extreme temperatures and pressure. The NO x
gases are estimated to be more than 300 times better at trapping the heat than CO 2, thus
making it very harmful with respect to global warming (EPA 2013).
Aviation is furthermore different from surface transportation with regards to its climate
impact, because it varies significantly according to the flying altitude. The effect of CO 2
emissions is the same regardless of altitude, whereas NOx and H20 and other less significant
greenhouse gases have different impacts according to altitude. This makes it very difficult to
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assess the overall climate impact of aviation, which partially, along with conflicting interests,
can explain why reports on the topic arrive at such different conclusions. When measuring the
total climate impact, the variation according to altitude is represented by the RFI 1 multiplier,
which ranges between 1,9% and 3%. Critics of the industry claim that the RFI is too low, and
suggest that it should be raised to include ethical considerations, similar to the discount rates
used in cost-benefit analyses (CORE 2011). The IPCC 2 estimates that aviation is responsible
for around 3% of total manmade climate impact (IPCC 2007).
2.2.

The Race to Shrink the World

To fully get a comprehension of how the industry has ended up with such substantial
environmental impacts, one must understand the industry in its historical context. The
appearance of the aviation industry as an emerging source of GHG emissions is a relatively
new trend, seen in the light of the traditional industries that contribute to climate change. The
Wright Brothers made the first controlled flight in 1903 (Verhovek 2010), and KLM was
founded in 1919 as the oldest still operating airline in the world (KLM 2014). After the
Second World War and up until the 1970s, civil air transportation was still relatively unknown
and financially inaccessible for other than members of the social elite. Also, aircraft engineers
primarily focused on speed when designing new aircraft, but this changed when the first
Boeing 747 was put into service. Capable of carrying almost 500 passengers and reaching
destinations some 9,600 kilometres away (Sutter 2009), the Jumbo Jet became the symbol of a
new era in aviation characterized by efficiency and expansion of capacity (Verhovek 2010).
Although the aircraft were still fast, they could now carry significantly more people at lower
costs than previously, which the airfares also reflected. But the evolution of this rapidly
changing industry did not stop with the introduction of larger airliners.
In 1978, the American President Jimmy Carter signed the Airline Deregulation Act which
should later become an industry game-changer. The bill was passed with the purpose of
providing greatest possible benefits to travellers and shippers with the notion that
maximum consumer benefits can best be achieved through the preservation and extension of
competition between airlines in a fair market place.(Doganis 2005, P. 52). The U.S carriers
were free to compete and the first low-cost carrier in the world, Texas based Southwest
Airlines began expanding (Breyer 2011). Almost two decades should pass before the
1 Radiative Forcing Index
2 Intergovernmental Panel on Climate Change
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European Union passed the last of three bills to liberalize European aviation, which was
known to be heavily restricted by bilateral agreements. Inspired by the successful story of
Southwest Airlines in America the European low-cost carriers emerged across the continent
(Miller, Dawley et al. 1997). The liberalization process that swept across the two continents
must be seen separately, yet it had the same effect on both sides of the Atlantic it
transformed and democratized air travel from being a toy of the rich, to a tool of the poor
(Dierikx 2008).
2.3.

Attention shifts to the environment

The earliest evidence of any attention given to the environmental impacts of aviation can be
traced back to the early 1960s when concerns about noise and local air quality were raised;
especially by people living below the flight paths of busy airports.
The issue of certain atmospheric effects of aviation was first illuminated in the late 1960s,
when American and British scientists became aware that supersonic aircraft could damage the
stratospheric environment by causing ozone depletion. Increasing focus was given the
environmental impacts of aviation, atmospheric effects in particular, from the 1970s and
onwards which officially culminated in 1999 (Lee, Pitari et al. 2010).
Roughly 1,56 billion people travelled by air in 1999 equivalent to of the worlds total
population (The World Bank 2014). Civil aviation had in fact grown 9% annually 3 or some
2,4 times faster than the global economy4 since 1960 (Penner et al. 1999). The numbers were
indisputable; global aviation had become an essential part of the modern world, and the
economic impact of the industry could not be taken too lightly. But the time was up to make
an assessment of the environmental impacts of the industry. At the request of ICAO 5 the
report Aviation and the Global Atmosphere became a reality. The making of this milestone
within the field was justified with the words In the absence of policy intervention, the growth
[in air traffic] is likely to continue. It is therefore relevant to consider the current and
possible effects of aircraft engine emissions on the atmosphere (Penner et al. 1999, P. vii).
The report acknowledged the previous four decades of remarkable efficiency gains in aircraft
3 Expressed in RPK (Revenue Passenger Kilometres)
4 Expressed in GWP (Gross World Product)
5 International Civil Aviation Organization, a specialized UN agency
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technology, but made it very clear that the industry needed additional measures, to offset the
environmental effect of the anticipated growth in air traffic. In other words, efficiency gains
needed to surpass air traffic growth.
2.4.

Aircraft Efficiency vs. Traffic Growth

When studying the industrys development over the course of 4-5 decades, one can see why
the IPCC report stated the importance of offsetting future growth in air traffic, from GHG
emissions. Several studies have dealt with the topic of efficiency in aircraft technology in the
past, and the conclusions are not surprisingly different. The fuel efficiency gains for similar
timescales spanning from 1960 to 1997 have been estimated to be 70% (Penner et al. 1999),
64% (Lee 2000) and 55% (Peeters, Middel et al. 2005) The most recent comprehensive study
conducted by the ICCT6 provides a different version of the technological achievements.
The authors point out two central flaws in the three preceding papers. Firstly, the papers did
not consider the sales figures of each aircraft model, meaning that no weighted averages were
included. The studies also failed to include a broad range of aircraft by mostly putting
emphasis on long-haul aircraft. With these variables in mind, the ICCT finds that fuel
efficiency of new aircraft has been improved by 51% from 1960 to 2008. Finally, the authors
contradict with industry statements that technological improvements have remained constant
over time, by arguing that considerable improvements have only been achieved in the 1960s
and 1980s with annual developments of 2,3% and 3,5% respectively (Rutherford, Zeinali
2009).
The industry has experienced substantial technological improvements over the last 40-50
years, irrespective of the different findings. But this technological improvement should be
seen in the perspective of the industry growth. By computing an average fuel efficiency
improvement of the four studies7 from 1960 to 1997, we end up with 59%. Dividing this by
38 years we get annual improvements of 1,5%, which in comparison to the average annual
traffic growth of 9% gives a 7,5%8 annual net increase in fuel consumption and a
corresponding increase in GHG emissions. This very basic computation of the gap between
6 International Council on Clean Transportation
7 ICCT estimates a 47% improvement from 1960 to 1997
8 Al studies are based on aircraft capability upon market introduction, not actual fuel
consumption
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efficiency and growth should be considered indicative rather than exhaustive. Nevertheless, it
still provides an illustration of an industry that cannot be considered sustainable in its current
state, and will never be unless steps are being taken to alter the industry as we know it today.
2.5.

Industry Commitment

Prior to the 2009 UN Climate Conference held in Copenhagen, a broad range of industry
representatives including airlines, manufacturers, airports and providers of navigation services
agreed upon a set of goals for the future. With an ambitious, and voluntary, plan for 2050, the
industry wanted to take the environmental pledge (IATA 2013).

FIGURE 1: CO2 emissions reduction roadmap, (IATA 2013, P. 8)

The plan for mitigation of GHG emissions consists of three objectives: (IATA 2013)
1,5% average annual development in fuel efficiency from 2009 to 2020
Carbon-neutral growth from 2020, implying a cap on net emissions from 2020
50% reduction in net CO2 emissions by 2050 compared to 2005
Figure 1 displays the roadmap for reducing the environmental impact. Despite the fuel
efficiency target, net emissions are expected to increase up until 2020, whereby improvements
in technology, operations, infrastructure along with economic measures should start forcing
down the curve (ATAG 2010). In order for this ambitious plan to prevail, several critical
measures have been identified, which in combination with each other will make the emissions
curve descend (ATAG 2014).

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2.5.1. Technology
Technology is the core of the plan and has a twofold meaning in this context. Existing
technology and technology that are yet to be invented, with the latter being the major
emission reduction driver. Known technology will particularly be useful in achieving 1,5%
fuel efficiency p/a until 2020. In reaching this objective, 12,000 new aircraft will be supplied
between 2009 and 2020 of which 5,000 will be procured for fleet renewal, and 7,000 will
accommodate forecasted growth, especially in developing markets, at a total estimated cost of
$1,3 trillion. Retrofitting aircraft with best available technologies such as winglets will
furthermore reduce fuel burn (ATAG 2014).
Jet fuel is the source of GHG emissions, having that in mind two main practices of emission
mitigations can be identified. One revolves around reducing fuel burn, the other one more
radically focussing on changing the emission source itself. The green area in Figure 1
represents both of these mitigation practices, and together makes up the greatest potential for
emission reduction. CO2 emissions can potentially be cut some 80% by converting from
conventional jet fuel to sustainable biofuels, but these fuels are yet to be commercialized and
supplied on a scale demanded by the industry (ATAG 2014). Emissions will decline further by
introducing new generations of aircraft, but the effects of sustainable biofuels and new
generations of aircraft are expected to be material in the long-run.
2.5.2. Operations & Infrastructure
Making operations more efficient is another way of reducing fuel burn, and hence emissions.
A better use of the secondary on-board power source, the Auxiliary Power Unit (APU) along
with efficient flight procedures and weight management is projected to give a 3% emission
reduction by 2020 (ATAG 2014).
Infrastructure was expected to be 12% inefficient in 1999 (Penner et al. 1999) with 4%
efficiency improvements since then, infrastructure is still an area with room for significant
improvements. By implementing more intelligent ATM (Air Traffic Management) systems
alongside better airport infrastructure, congestion in the skies and airports can be prevented
and thus reduce fuel burn. Aviation is probably one of the most regulated of deregulated
industries, which the infrastructure is a sign of. Due to the national sovereignty of airspaces,
flights are often forced to zig-zag to their destinations instead of flying the shortest route
possible. With future airspaces designed for traffic, not political borders, significant efficiency
gains can be achieved. Examples hereof include the Single European Sky and the American
NextGen programmes (ATAG 2010).
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2.5.3. Economic Measures

As mentioned previously, a global framework addressing GHG emissions deriving from the
industry is yet to be seen, however many attempts have been made on a national and regional
level. The most extensive to date is the decision to include aviation under the EU ETS
scheme. This plan intended to include intra-EU flights and all flights coming in and out of the
European Union, with non-EU airlines included. This was heavily opposed, especially by the
U.S, China and India, and after major political and legal protesting, EU decided to exempt
non-EU carriers from the scheme. This exemption, known as stop the clock, has been
extended until 2016 in an agreement with ICAO and IATA. The latter representing
approximately 85% of the industry has been given until time 2016 to develop and present a
global framework along with ICAO, which is scheduled to be effective from 2020 (OECD
2012).
IATA wants a global framework that harmonizes with its already existing plan as illustrated in
Figure 1. This entails that economic measures should only be deployed for any emissions
exceeding the 2020 level. These measures can take various forms depending on the situation
in 2020, but any excess emissions will be forced down with offset-mechanisms. IATA does
not consider this as a viable option, but acknowledges that improvements in technology,
operations and infrastructure might not be sufficient to curb emissions in the very short-run.
IATA believes that regulatory intervention besides impermanent offset-mechanisms is not
needed due to the incentive that lower fuel costs present to the airlines (IATA 2009, OECD
2012)
2.6.

Summary

The global airline industry has experienced substantial growth within the last 50 years. The
introduction of larger jets and the liberalization processes was some of the important events
that changed the industry permanently and democratized air travel. More attention has been
given to the environmental impacts, especially carbon emissions, caused by the industry.
This environmental footprint has increased year to year despite the technological quantum
leaps of the industry, and its operations will leave an even bigger footprint unless measures
are being taken to redirect the industry onto a more sustainable path. As a consequence of this,
the industry has made a commitment to reduce its impact significantly with an ambitious plan
until 2050. Having announced this plan, the industry has to show now that actions speak
louder than words.
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3 ENVIRONMENTAL MANAGEMENT
No progression in environmental performance can be made without the airlines themselves.
The debate about air transportation and its environmental impacts is often discussed from a
socio-economic standpoint. But understanding the airlines from the inside is critical in this
context.
This section will discuss and investigate the motivations for adopting environmental
management systems (EMS) within the airline industry. An EMS is a framework indented to
identify, measure and reduce an organization's impacts on the environment in a systematic
way and to continually improve environmental performance (Turner 2008, P. 82). EMS as a
concept will be applied throughout this section, but should be seen as an umbrella term
covering other types of environmental programmes or policies implemented with the purpose
of improving the environmental performance, as previously defined.
Airlines have never been subject to legal and regulatory frameworks such as a polluter pays
principle on a global scale, and will not be before 2020 either (Hedegaard 2012), yet
environmental management practices are not unknown by the industry. British Airways
pioneered the industry by publishing the first separate environmental report in 1992, since
then; many environmental management systems have been implemented in airlines worldwide
(ICAO 2012) of which many are now in compliance with ISO standards or similar schemes
(PwC 2011). These environmental management initiatives are essential in accomplishing the
ambitious goals for the future; hence a deeper understanding of motives for implementation is
needed for further research.
3.1.

Motivations

An extensive range of research has been made on the drivers behind corporate environmental
management throughout the years. The vast majority of this research has been conducted from
the perspective of traditional manufacturing industries (Cowper-Smith, de Grosbois 2011).
However upon closer inspection of the available publications, a small number of studies
dealing with airlines and related businesses has been identified. The research and literature
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will be discussed separately according to industry-context and eventually summed up in a

discussion that will allow for further investigation.
3.1.1. General Literature
A substantial body of literature regarding corporations and the environment has emerged
within the last two decades. Early work on the topic from the 1960s revolved around
sustainability in business as a matter of complying with laws and regulations. This
traditionalist view slowly evolved throughout the next decades, and a notion that
environmental protection and business strategies could be harmonised gathered momentum in
the 1990s (Giunipero, Hooker et al. 2012). This was especially marked with studies like
(Porter, Linde 1995) and (Hart 1995) both arguing that various forms of competitive
advantages could be achieved by perceiving environmental protection an opportunity instead
of a threat. Thus, the studies were trying to falsify the conventional premise that superb
environmental performance is only attainable at the expense of lower returns for investors.
The work of (Porter, Linde 1995) commonly known as The Porter Hypothesis, suggest that
pollution such as emissions are often the outcome of inefficient use of resources. The
introduction of environmental standards for such inefficiencies will trigger innovation and
encourage environmentally responsible behaviour. The additional costs of regulatory
compliance will partially, or more than fully, be offset by the progress in innovation, the
authors argue. Industries that are subject to environmental standards will eventually gain a
competitive edge over its competitors that are not subject to standards, because of superior
knowledge and technology (Porter, Linde 1995, Ambec, Cohen et al. 2013). As opposed to
focusing on industries or even nations, (Hart 1995) takes a slightly more narrow approach
(Berchicci, King 2007) by suggesting that individual firms can achieve competitive advantage
by embracing the natural resource-based view of the firm. That entails three interconnected
strategies; pollution prevention, product stewardship and sustainable development. The two
studies, despite differences, both identify a set of essential motivators for environmental
commitment by firms; they should react to the constraints of the natural environment. By
considering the natural constraints, firms can potentially reduce costs and gain competitive
advantage, which should further motivate firms to act responsibly. They also both agree that
government regulation can be a tool to trigger above-average environmental performance.
Research such as (Khanna, Anton 2002, Luken, Van Rompaey 2008, Khanna, Koss et al.
2007, Quazi, Khoo et al. 2001) supports this view.

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(Kiernan 2001) and (Albertini 2013) both examines environmental performance from a
financial perspective. (Kiernan 2001) finds that the financial community can trigger
environmental management since an increasing number of both private and institutional
investors consider CSR upon investing and also the second study finds a relationship between
EMS adoption and financial performances.
Further research suggesting cost-minimizing/profit-maximizing motives include (Takahashi,
Nakamura 2010) and (Giunipero, Hooker et al. 2012)
Not all studies acknowledge the potential economic benefits as a major driver, (RiveraCamino 2012) argue that decision-making regarding environmental issues is conditioned by
the organizational context, such as norms and customs. (Quazi, Khoo et al. 2001) similarly
found little evidence that potential cost savings could encourage ISO certification in a
Singapore study and further suggested that the prospect of economic benefits should be
significantly better promoted to managers. In addition, (Quazi, Khoo et al. 2001) finds that the
top management is the primary initiator of ISO certification, which corresponds to the
findings of (Giunipero, Hooker et al. 2012) also identifying top management initiatives as
being the primary driver. Finally, the notion that adoption of EMS will improve the image is
gaining acceptance among, with research such as (Zutshi, Sohal 2004, Morrow, Rondinelli
2002).
3.1.2. Industry-Specific Literature
(Lynes, Dredge 2006) conducted 27 semi-structured interviews with management employees
at Scandinavian Airlines and identified five primary drivers of environmental management;
financial cost-benefits, active and/or responsive approach towards regulation, the desire to be
a good corporate citizen, airline image and finally the pressure from various stakeholders.
These five drivers are influenced by four subsystems, namely the markets, scientific
communities, political/institutional and social systems. In addition (Miller 2001) suggested
five factors that potentially could shape the degree of social responsibility by tour operators in
the UK an industry characterised by oligopolistic structures and with each of the main
operators having their own airline. (Miller 2001) suggested industry structures, legal
requirements, negative PR/market advantage, cost savings and moral obligations as potential
influencers of socially responsible behaviour. Surprisingly the study found little evidence of
tour operators improving environmental performance due to prospects of cost savings, with
only one major tour operator embracing this view. Finally, when being asked which
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stakeholder will primarily drive any future change, two-third of the tour operators responded
consumers and the remainder replied a unified group of stakeholders. Not one single tour
operator perceived governments as being the primary driver of future change, which
contradicts with the findings of (Chen 2012) who carried out a study on environmental
management within the Taiwanese airline industry. The study found that executives
experienced most pressure from governments and environmental groups and at the other end
of the scale only slightly pressured from consumers.
(Chen 2012) moreover discovers that improving the image, reducing environmental footprint
and fulfilling the corporate social responsibility are all significant motivators for
environmental management, similarly to the findings of (Lynes, Dredge 2006). But their
findings seem somewhat disparate with respect to the significance of cost savings as a
motivator. (Chen 2012) identifies reducing long-term costs as the most insignificant driver
for environmental management, which is in sharp contrast with the findings from (Lynes,
Dredge 2006) well illustrated in the following statement by an Environment Coordinator at
Scandinavian Airlines: In the end I believe that if you have a good environmental policy and
play by those rules youll end up saving money (Lynes, Dredge 2006, P. 129)
The idea that EMS implementation will enhance airline image seems reasonable when
relating to (Mayer, Ryley et al. 2012). The study found evidence that customers perceive
airlines differently according to environmental friendliness, and finally suggesting airlines to
use this as a point of difference in a marketing context.
3.2.

Summary

Upon an assessment of literature concerning motives for EMS implementation inside and
outside an airline context, the research can now be categorized. Table 1 exhibits the five most
frequently identified motives in the research. These drivers are interrelated; meaning that a
combination of these factors can explain why firms engage in EMS implementation or
practice environmental management.
TABLE 2: Accumulated Research on EMS drivers

Drivers

Research
(Khanna, Anton 2002, Luken, Van Rompaey 2008, Khanna,

Legal and regulatory compliance

Koss et al. 2007, Quazi, Khoo et al. 2001, Chen 2012, Miller

Economic and financial opportunities

2001, Porter, Linde 1995, Hart 1995)

(Lynes, Dredge 2006, Takahashi, Nakamura 2010,
Giunipero, Hooker et al. 2012, Albertini 2013, Kiernan 2001,

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Improving image
Competitive advantage
Internal drive

May 2014
Miller 2001, Porter, Linde 1995, Hart 1995)
(Morrow, Rondinelli 2002, Mayer, Ryley et al. 2012, Zutshi,
Sohal 2004)
(Hart 1995, Porter, Linde 1995, Lynes, Dredge 2006)
(Rivera-Camino 2012, Lynes, Dredge 2006, Quazi, Khoo et
al. 2001, Giunipero, Hooker et al. 2012)

Regulatory compliance and economic opportunities were the most acknowledged drivers,
with image, competitive advantage and internal drivers such as employee and top
management initiatives, being marginally less acknowledged. Nevertheless the question
remains whether the considerations involving EMS implementation are similar across
industries and similar across airline. For instance, (Chen 2012) study Taiwanese carriers and
(Lynes, Dredge 2006) study one specific carrier in Scandinavia. These studies are made in
two areas with vast differences in cultural and management practices even Scandinavian
Airlines might have a unique culture compared to other carriers in the region, or Taiwanese
different to other East Asian carriers. Moreover, implementing an EMS can be very
challenging due to the global and complex setting of the airline industry and consequently
influence the decision-making (IATA 2014).
Despite great variation in the studies, a significant reason for implementing EMS still appear
to be the economic and financial benefits, according to the research. This view seems
particularly rational seen in the context of airlines and its environmental implications,
exemplified by this ATAG9 statement Aviation has been improving its environmental
performance consistently for the last 50 years. Partly that is because greater [fuel] efficiency
directly benefits the profitability of our businesses as well as the environment (ATAG 2014).
This could suggest that the industry consider its operations in line with the The Porter
Hypothesis with fuel and emissions being the resource and waste respectively.
With this causal relationship between fuel burn and emissions influencing the environment
and bottom lines (Table 1), the industry will have a hard time finding a better driver behind
implementation of environmental management initiatives. Therefore, with fuel being the
source of the problem and the corresponding solution, further research into the importance of
fuel in an airline context is inevitable.
9 Air Transport Action Group, a coalition of industry organizations including IATA that
promotes a sustainable development of the industry
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4 FUEL
The importance of fuel for commercial aviation cannot be underestimated. This essential
resource of which airlines have virtually no control over, have proven to be fatal for airlines in
times with major price spikes, and forced the industry to come up with creative solutions to
mitigate the risk it poses to the business. Adding its feature of contaminating the atmosphere
and contributing to global warming when being burned and you have a management
nightmare. Nevertheless, fuel may end up being the equilibrium solution to the financial and
environmental problems facing the industry.
This section will describe and analyse how fuel has become increasingly important in an
airline context and what the airlines have done to overcome this substantial threat that fuel is
posing.
4.1.

Rising fuel prices

Traffic and Fuel Price Development, 1995-2012

1,200,000

$3.5

1,000,000

$3.0
$2.5

800,000
ASM & RPM (Million Miles)

$2.0

600,000

$1.5

400,000

$1.0

200,000

$0.5

ASM

RPM

USD / Gallon ($2012)

$-

USD per Gallon

FIGURE 2: Turbulent years for U.S Commercial Aviation, (MIT 2014)

Figure 2 exhibits the historical situation for the U.S commercial aviation industry between
1995 and 2012 measured in production (RPM)10, capacity (ASM)11 and fuel price paid. The 18
years displayed in the figure above have certainly been turbulent for the industry. The late
10 Revenue Passenger Miles
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1990s were generally characterised by optimism among the carriers, with years of increasing
traffic figures and 24 consecutive quarters of profit behind them times were good (Blunk,
Clark et al. 2006). The early 2000s recession marked the beginning of the end, of the
profitability streak. However, the impact of this recession was a drop in the ocean compared
to those of the 9/11 terrorist attack in New York. Demand for air travel dropped excessively in
the chaotic aftermath, in fact, all aircraft were grounded for more than 24 hours and it took the
industry some three years to reach the same traffic level again (Ito, Lee 2005).
Despite recovering on the traffic level, the 9/11 attacks opened a Pandoras Box full of issues
for the industry to confront. As furthermore evident from Figure 2, the price of jet fuel only
shortly stabilized after the attacks before it began climbing towards the golden 3$/gallon
mark. This major fuel price ascent came at a very inconvenient time for the carriers, already
operating in a tough competitive environment with overcapacity, as illustrated by the gap
between ASM and RPM in Figure 2. The carriers in America were unable to pass the
additional fuel bill on to their passengers due to fierce competition and high price sensitivity
among the customer segments. As a matter of fact, the average domestic airfare in the U.S.
fell by 14% from 2000 to 2013, and when comparing this to the stunning 328% surge in fuel
prices for the same period (DOT 2014, MIT 2014), one can see why industry profits vanished
by the blink of an eye. The airlines simply had to incur the costs of skyrocketing fuel prices
all by themselves.

Breakdown of Operating Expenses

22.3%
38.9%
13.7%
11.5%

Other
Maintenance

28.6%

Labour
Fuel

38.1%
35.4%
11.5%
1995

2012

FIGURE 3: Fuel gaining importance in airline cost structures, (MIT 2014)

11 Available Seat Miles

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Figure 3 displays how the cost structures of U.S. carriers have changed significantly due to
the historical development of jet fuel prices. Labour has traditionally been the single biggest
cost item for the average airline, but has been exceeded by fuel which has had a two-pronged
effect on the two major airline cost centres.
Firstly, the industry turned its focus towards non-fuel expenses in an attempt to cushion the
impact, and did not surprisingly choose to trim labour costs. Despite 6,1% capacity growth
since 2001, the U.S. carriers now employ roughly 152.000 people less than in 2001,
corresponding to a 28,6% reduction in the workforce12 (DOT 2014). This, in addition to the
relative effect of the fuel price surge, has made labour a smaller part of the airline cost picture.
Secondly, the airlines have initiated a wide selection of measures, spanning from advanced
financial instruments to a rethinking of the traditional supply-chain, in order to manage the
risk of rapid movements in fuel prices (IATA 2012).

Crude Oil & Jet Fuel Forecast, 2012-2040

USD / Barrel ($2012)

$160
$140
$120
$100
$80
$60
$40
$20
$-

$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$-

Crude Oil (Brent & WTI)

USD / Gallon ($2012)

Jet Fuel

FIGURE 4: Crude oil and jet fuel forecast 2012-2040, (EIA 2014)

In spite of the last 13 years upward trend in fuel prices, nothing indicates that fuel will play a
less significant role on the future industry agenda. The most recent forecast by the U.S.
Energy Information Administration is illustrated in Figure 4. The price of the two most
common crude types and jet fuel is expected to drop until the end of this decade, whereby
EIA expects it to begin a steady climb again. Jet fuel is the distilled end-product of crude oil
which explains the almost unison relationship between them. Any non-parallel development
12 Full Time Equivalent (FTE)
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between the price of crude oil and jet fuel happens because of variations in the refinery
margin, what is simply known as the Crack spread.
4.2.

Fuel cost reductions

Besides trimming labour and other cost centres, the airlines obviously attempted to control
fuel costs with various measures, of which hedging has been a very common practice. In
addition, Delta Airlines have revolutionized the industry supply-chain structure by acquiring
an oil refinery, which also deserves attention from this particular perspective.
4.2.1. Fuel hedging
Fuel hedging is a very common practice that protects the fuel price against any rapid upturns
or volatility in general. It refers specifically to a contractual agreement, involving the
purchase of a fixed amount of jet fuel, for a fixed price, at a specific time in the future. The
price agreed upon in the contract is essentially a price-cap that keeps the price at, or below,
the stated price. With this cash bet, the airlines can either prevent themselves from being
exposed the risk of skyrocketing fuel prices, or they can miss out on savings from decreasing
fuel prices. The contract itself can take many forms and degrees of complexity; however the
purpose behind fuel hedging can essentially be shortened down to one word; stability. The
fact that fuel represents a massive share of operating expenses, compounded with the extreme
volatility of the market, makes it uncomfortable for airline managers not being able to control
such a significant part of their business. Typically airlines hedge between one and two-thirds
of their fuel costs and look some six months into the future when doing so. Fuel hedging
provides that stability needed in an otherwise chaotic industry. It stabilizes costs and
profitability which is particularly important for the financial stakeholders (Morrell, Swan
2006).
Despite its ability to stabilize costs and minimizing risk, it remains uncertain whether the
industry as whole benefits from fuel hedging. What is known is that some airlines have had
great success doing it (Southwest Airlines) while others have experienced massive losses by
doing it (Delta Airlines). Southwest Airlines managed to cope with the climbing oil prices in
2008 and gained some $1,8 billion the following year, by hedging a great share of its fuel
costs. Delta Airlines, on the other hand had little success predicting the events in 2008. They
hedged fuel costs vigorously in 2008 before the spike and had to incur around $1,4 billion in
losses the following year, due to the major price plunge immediately after (Lim, Hong 2014).

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4.2.2Delta Airlines oil refinery

The crack spread for the previous three years has been roughly 25% (EIA 2014) and reducing
fuel costs by that amount, is a dream scenario for all airlines. While most airlines accept the
crack spread as a fact of life, one airline has dared to challenge this by integrating its business
vertically. The practice of vertical integration in the airline industry is not a new one. Airlines
have run hotels, travel agencies and car rentals for many years in an attempt to minimize
transaction costs and gain more control over the supply chain. Many industry experts had to
look twice, when Delta Airlines announced its deal with a holding company, to acquire an oil
refinery near Philadelphia in 2012.
This financially doomed oil refinery had a price tag of $180 million; however the state of
Pennsylvania subsidized $30 million to keep the jobs that otherwise would have been lost,
had it not been for Delta. The net investment sum of $150 million is comparable to the list
price of a new widebody aircraft. Delta furthermore announced their intention to invest
additional $100 million to upgrade the facility and make it ready for maximizing the jet fuel
output. More tangibly this means increasing the share of jet fuel from 14% to 32% (Delta
2012).
Through its subsidiary Monroe Energy, the old American airline now wanted to satisfy some
80% of its own jet fuel demand and at a lower price, by making oil distillation an in-house
activity. Delta was met with raised eyebrows from industry officials and experts upon the
announcement, who suggested that Delta should stick to their core expertise air
transportation. They furthermore argued that Delta under no circumstances could refine oil
more cost-efficiently than other refineries on the East Coast, which had already proven to be a
challenging business for them. Finally, experts argued that running an oil refinery will
considerably outweigh the risks of hedging fuel costs, because it includes the risk of
expensive equipment failure, substantial fines due to environmental regulation, union strikes
and even explosions (Ordonez, Carey et al. 2012).

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TABLE 3: Oil refinery impact on Delta Airlines, (Delta quarter reports)

This interesting acquisition has been operational for approximately 1 year now, and the
results for the first five quarters are ready to be examined. Table 2 illustrates the impact on the
fuel cost structure and the effect of hedging activities also included for comparison. Finally,
the results of each quarter have been included.
The new refinery has not surprisingly had a rough economic start with losses in 4 out of 5
quarters, with aggregate losses of $179 million. However the market seemed enthusiastic
about the first realized profit in third quarter 2013 and met Delta with less scepticism upon
observing the post-refinery fuel costs. At that point, the average fuel price paid by the Delta
had declined more than the market price, an indication that the refinery could be a beneficial
possession already.
It becomes obvious that the overall decline in fuel price paid has been caused by hedging, by
digging deeper into the quarter reports. The incurred losses from the refinery have added 4,2
cents/gallon on average each quarter, while hedging have reduced costs by 5,75 cents/gallon
each quarter, which then explains the lower fuel price. The third quarter profit can
furthermore be explained by higher margins on the other distillation products, especially
heating oil (Delta 2014).
Much can be said about this pioneering way of opposing rising fuel prices. Despite the losses,
Delta can still, as the only airline in the world, somewhat control its own fuel input, which can
still turn out as a clear advantage. One thing is certain; the industry will closely follow the
Delta acquisition in the future, to see whether this risky investment will be industry
trendsetting or an innovation case gone wrong.
4.3.

Fleet renewal

Another way of reacting to the rising fuel costs is simply to conduct the operations more
efficiently. This can be realized using a variety of measures, but modernizing the aircraft fleet

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by acquiring more fuel efficient airliners can be seen in the fuel consumption figures from day
one.
The demand for air transportation depends on numerous interrelated factors which can
influence demand positively and negatively. The most commonly acknowledged include
economic growth and development, infrastructure, market regulation/liberalization,
alternative transportation modes and business models (particularly low-cost) and finally
environmental regulation. As described earlier in this section, events such as 9/11 or the
SARS epidemic can also constitute exogenous demand shocks (Cento 2008). At first glance,
the aircraft demand could indirectly seem determined by the same factors, but there are other
considerations to make from the perspective of aircraft manufacturers.

Boeing Orders & Jet Fuel Prices, 1977-2013

600

$3.5

500

$3.0
$2.5

400
# of annual aircraft orders

$2.0

300

$1.5

200

USD / Gallon

$1.0

100

$0.5

$-

Boeing orders

Jet fuel price

FIGURE 5: Boeing orders & Jet fuel prices, 1977-2013, (MIT 2014, Boeing 2014)

Figure 5 exhibits the historical trend in Boeing orders within the U.S market and the fuel price
paid within the last 36 years. While the global market for aircraft production is oligopolistic,
or more precisely duopolistic with Airbus and Boeing almost splitting the market almost
evenly, the American market with regards to aircraft production is different with Boeing
holding an 83% market share (Clark 2012). Boeing orders can therefore generally be
representative for U.S. aircraft orders in general.
As evident from Figure 5, there has been little correlation between aircraft orders and jet fuel
price up until the beginning of the new millennium, whereby the rising fuel price seems to
have triggered a sudden urge by airlines to initiate a fleet modernization.
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One can fairly say the last 13 years have been very turmoil for the U.S carriers, which have
been subject to major changes coming from the macro and micro environments, in which they
operate. Because of this, and the complex set of interconnected factors influencing aircraft
demand, one need to dig deeper to assess whether the soaring oil prices partly, or fully, have
triggered a fleet renewal among U.S carriers.
Replacing the aircraft fleet is an ongoing and complex process for airlines, but nevertheless a
process which have changed throughout the years due to the technological progress, making
each new aircraft generation more durable than the preceding. Air Transportation in North
America is maturing and the U.S carriers operate aging aircraft fleets, in fact, so old that the
Federal Aviation Administration conducts aircraft and engine checks more frequently now
(PWC 2013). This has been an issue for the industry for some years, but judging from Figure
5, this process has been hastened, especially up until the peak year of 2011 with U.S. carriers
assigning 563 orders.
On one hand, despite the turbulent years between 2000 and 2013, the carriers have still
produced some 20% more RPMs, so perhaps order increase could be explained by the airlines
adjusting the capacity to accommodate traffic growth as they air commonly known to do
during good times. But this somewhat contradicts with the increasing load factor illustrated
by the narrowing gap between RPM and ASM in Figure 2. The load factor has more precisely
increased by 12 percentage points from 71% to 83% (MIT 2014).
The correlation between rising jet fuel prices and the order-frenzy at Boeing is yet another
indication that the U.S carriers have reacted to the soaring fuel prices (PWC 2013). This
aircraft replacement, or intention expressed in orders, has furthermore put pressure on the
supply chain at the mighty aircraft manufacturer Boeing, currently having 1.625 backlogged
orders (Boeing 2014).
4.4.

Summary

Aircraft fuel has always been an important cost factor for airlines. But the importance has
changed significantly as a consequence of its larger share in the airline cost structures. It has
brought airlines financially to their knees, and massive losses have been incurred amongst
U.S carriers because of the valuable liquid. The share of fuel itself in operating expenses does
not represent the greatest threat with respect to fuel the instability and uncertainty
characterising the market in which fuel is traded, is the most serious threat.

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Not being able to control more than one third of your business is unpleasant for everyone and
airlines are no exception. This is why fuel hedging, although it has existed for many years, has
become increasingly popular, and an airline like Delta is suddenly making oil distillation an
in-house activity. It can furthermore explain why the order book at Boeing is thick with orders
assigned from U.S carriers that seem to have reacted to the soaring fuel prices.

5 ENVIRONMENTAL PERFORMANCE
As established in the preceding section, airlines have been forced to react to soaring fuel
prices. The responses can broadly be categorized into two approaches; effectiveness and
efficiency. The airlines have with various measures either attempted to reduce the price of its
fuel input, hence enhancing the cost-effectiveness of the operations, or attempted to consume
the valuable liquid more efficiently. Both approaches can drive earnings through savings, but
only greater fuel efficiency leads to better environmental performance which will be the focus
of this section.
The most comprehensive research within the field of environmental performance of airlines
until now has been done by the ICCT. Published in September 2013, the study U.S.
Domestic Airline Fuel Efficiency Ranking 2010 examines the fuel efficiency performance of
U.S. carriers in 2010 and includes an extensive range of factors influencing such performance,
for instance meteorological conditions in close proximity to airports. This study of fuel
efficiency is inspired by the ICCT methodology, but the full range of scientific methods
applied in the ICCT study are beyond the scope of this economic review. The ICCT research
had a socio-economic perspective and only momentarily addressed profitability and found no
correlation between environmental and market performance. The findings of this section will
unlike the other study, be analysed from a business perspective in the following section. A
table with results from the ICCT 2010 study can be seen in the appendix section.
5.1.

Methodology

As described in section 2, the combustion of jet fuel leads to emission of greenhouse gases
(GHG), of which carbon (CO2) is the most significant and the one of which we possess the
most comprehensive knowledge. With this in mind, it seems logical to analyse the CO 2

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emissions of airlines to assess environmental performance, but this is complicated for a

number of reasons.
Research conducted by PwC in 2011 found that only 60% of the worlds 46 biggest airlines
actually reported its emissions. With increasing pressure from community groups and
environmentalists this reporting practice is most likely more common today. However, even if
all airlines had thorough reporting of carbon emissions available, the data should be
considered with scepticism and will in many cases not allow for any cross-airline
comparisons. This lack of data-comparability has been caused by the absence of industry
standards and sometimes operators can have different interpretations and assumptions
regarding key indicators and units crucial differences that are sometimes not made clear to
the reader of an annual/CSR report. Finally, airlines have been known to modify reporting
customs which can also complicate a longitudinal study. Until industry standards are fully
implemented (currently developed by ICAO) another indicator of environmental performance
must be assessed (PwC 2011). For that purpose, the relationship between fuel combustion and
carbon emissions is very convenient.
The relationship between fuel burn and carbon emissions is completely proportional with 1
tonne of fuel releasing approximately 3,15 tonnes of carbon into the atmosphere (ATAG
2010). As a consequence of its proportional relationship with carbon emissions and the
accessibility of the data, fuel is inevitable with respect to an assessment of environmental
performance which ultimately reflects the carbon emissions.
Upon computing the fuel efficiency of airlines, a measurement of activity needs to be
included. ASM and RPM are the most frequently used, but a clear distinction between those
two concepts is necessary. RPM is a measure of production, but it only takes into account the
miles that generate revenues. ASM is better in this context because it furthermore includes the
empty seats not generating revenue. The empty seats are equally important, because the
capacity is constant regardless of passengers; meaning that fuel is also burned for empty seats.
However with the difference being that a filled aircraft13 will consume more fuel due to the
additional weight of passengers, baggage, etc. ASM is an essential metric within the airline
industry and can therefore be found in all financial reports.

13 RPM = ASM = 100% Load Factor

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The performance indicator will consist of the two metrics, ASM and gallons of fuel. However,
the indicator ASM/gallon will not be able to stand alone, since it has a delimitation that needs
to be addressed. ASM is a basic measure of capacity but it does not take into account the
relationship between empty and filled seats, which is exactly what the load factor is an
indication of. This means that the ASM/gallon ratio theoretically can show that Airline X is
the most fuel efficient airline without having flown a single passenger. Despite small
variations in load factors across airlines, the Load Factor needs to be considered when
evaluating the airlines, but the overall assessment of the environmental performance will not
be adjusted, unless a substantial variation from the average industry load factor exists.
5.2.Business models
The very service provided by airlines may seem indistinguishable from the perspective of the
casual observer. But an airline is not just an airline. And all airlines are not just transporting
people and goods from point A to point B the same way even the transportation model
differs. While these variances strongly influence cost and revenue drivers and ultimately
profitability (Cento 2008), the business models can mutually influence the environmental
performance. The airlines will be analysed according to their individual ASM/gallon score but
will also be analysed according to business model, to investigate if any relationship exist
between business models and environmental performance. For that purpose the airlines will
be categorized according to two well-known business models, namely network and low-cost
carriers.
Especially the emerging LCCs have been the target for much criticism regarding aviation and
the environment. This has triggered a debate revolving around two central standpoints; the
relative and the absolute environmental effect of the LCCs entry into the airline industry.
Some argue that LCCs are more fuel efficient than NWCs (Starmer-Smith 2010) while others
blame the LCCs for aggressive pricing and making it almost too attractive to fly (Vidal 2007).
The latter is essentially a question of democratization of air travel, which this analysis will not
address, but instead address the LCCs performance relative to the NWCs.
5.2.1. Network carriers
The definition of a network carrier (NWC) can easily be blurred according to whom you ask
and in which country. NWCs are also known under the names legacy/full-service/flag carriers.
But a distinction is necessary to make, especially with the concept of a flag carrier. American
flag carriers have been certified under the Fly American Act which means they are favoured
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with respect to government and federal contracting (Doganis 2006). Flag carriers in Europe,
on the other hand, refer to the traditional state-owned airlines that dominated the continent
before the liberalization process began. With the list of U.S Flag Carriers including airlines
fitting the description of low-cost carriers (LCCs) the name becomes invalid in this context.
An American NWC generally fits the following description with some sporadic exemptions:
The airline was founded some 60-80 years ago, and its core business is passenger
transportation, but it also provides cargo transportation and aircraft maintenance. It operates
widely in America as well as connecting it to virtually every continent which implies having a
diversified aircraft fleet, ranging from small regional jets to large widebody jets. Its
destinations are connected via one or two main hubs which it feeds with traffic. Its
differentiation lies in the product it offers with a focus on in-flight and ground services. It
attempts to retain its customers with a frequent flyer programme, and it is furthermore a
member of one of the three airline alliances.14
5.2.2.Low-cost carriers
The typical American LCC was founded after the Airline Deregulation Act was passed in
1978, with the exception of Southwest Airlines. The core business is passenger transportation
but generates a great share of its revenues from ancillary services. The LCC primarily
operates domestic flights but will most likely offer international flights to Latin America and
the Caribbean Islands in addition.
It operates on a point-to-point basis, unlike the hub-and-spoke network model applied by
NWCs, which means flying the passengers directly to their end destination often secondary
airports outside of major cities. The aircraft fleet consists of medium-range narrowbody jets,
typically B737s with maximized capacity utilization with respect to block hours and seat
configuration. As implied by the name, LCCs have lower cost structures than their
competitors which accommodate for correspondingly lower fares. Where NWCs offer
comfort and convenience, LCCs offer lower fares.
5.2.3. Sample airlines
Airline
American Airlines
Delta Airlines
US Airways

Type

Notes
NWC
NWC
NWC

Including America West from 2008

14 Star Alliance, SkyTeam and Oneworld

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United Airlines
Hawaiian Airlines
Alaska Airlines
Southwest Airlines
JetBlue Airways
Allegiant Air
Spirit Airlines
Virgin America

NWC
NWC
NWC
LCC
LCC
LCC
LCC
LCC

Frontier Airlines

LCC

Including Continental Airlines from 2011

Operates mainly in the Pacific region
Including AirTran Airways from 2012

Founded 2006
Excluded from the sample due to
abnormal and unrealistic values of the
data reported (see appendix)

TABLE 4: Sample of airlines

The 11 sampled airlines can roughly be said to represent two business models fundamentally
different from each other. These airlines, along with their affiliated carriers, produced 87,1%
of all ASMs in 2012 (DOT 2014) making the sample representative for the industry as such.
5.3.

Historical fuel efficiency

To provide some perspective on the scores for the 11 sampled airlines, an overview of the
accomplishments within practical fuel efficiency in a historical context is necessary.

Fuel Efficiency Improvements by decade, 1960-2012

6%
5%
4%
3%
2%
1%
0%

0.1%
1960-1970

1970-1980
5.3%

1980-1990
1.6%

1990-2000
0.3%

2000-2012
2.0%

Average Annual % Improvement

FIGURE 6: Fuel efficiency achievements, 1960-2012 (DOT 2014)

Figure 6 illustrates the average annual percentage improvements in the ASM/gallon ratio for
U.S carriers. It is based on historical fuel consumption and ASM statistics, not capabilities of
newly designed aircraft series, which is often the case with fuel efficiency analyses. The
figure represents the total system, meaning all domestic and international ASMs produced
from 1960 to 2012.
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Starting from left to right the 1960s was a decade with virtually no progress made in fuel
efficiency simply because oil and hence jet fuel was a cheap and abundant resource, of which
airlines gave little consideration to the consumption. This came to an end in the 1970s, so far
the decade with most significant improvements with ASM/gallon going from 26 to 40, a
staggering 53% development. This can mainly be explained by the new generation of
widebody aircraft, with models such as the Boeing 747, McDonnell Douglas DC-10 and
Airbus 300, exploring the physical boundaries of air traffic capacity. The remarkable
improvements can furthermore be explained by the very low ASM/gallon ratio from the early
1970, which could indicate that the industry has picked the low-hanging fruits with respect
to technology and aircraft utilization. The improvements continued in the 1980s and 1990s
but at very different rates, with 16% and 3% ten-year improvements respectively. Finally as
evident from Figure 6, the efficiency takes an upturn in the first decade of the new
millennium. An indication like many other that fuel efficiency has become more important on
the management agenda.
5.4.

Fuel efficiency scores

Fuel efficiency & fleet age

1. Spirit Airlines
2. Alaska Airlines
3. Virgin America
4. Hawaiian Airlines

77.8

5.2

76.7

5.02

average
7. US Airways
8. Delta Airlines

73.0

10

5. Southwest Airlines
6. JetBlue Airways

76.9

9.6

71.7

11.7

71.2

7.4

69.7

11.56

66.8

12.1

65.0

16.9

9. United Airlines

13.6

10. American Airlines

13.6

11. Allegiant Air

64.3
62.7
60.3

22
ASM/gallon 3 year average

Average fleet age

FIGURE 7: Fuel efficiency & fleet age, (DOT 2014, Airfleets 2014)

Upon computing the ASM/gallon score for the 11 airlines, a ranking of the airlines based on a
three year average score have now been produced. From the figure above, a number of
interesting observations can be made.
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Spirit holds the first place with its average three year score of 77,8 with Alaska and Virgin as
close runners-up. The first interesting observation is the size of the above-average performing
airlines. In fact, the first four airlines from the top and down are relatively small carriers with
a combined capacity share of 6,75%. One has to look towards number five on the list to find a
carrier with a significant capacity share, Southwest with roughly 11%. Also worth noticing is
the cluster of enormous airlines, such as American, United, Delta and US Airways. Previously
known as the Big Five now one less due to the United-Continental merger. The Big four
represented some 65% of the total system ASMs in 2012.
With its correlation between fleet age and fuel efficiency score, the ranking supports the rather
rational assumption that a younger fleet leads to better environmental performance. This is
especially obvious by the position of Allegiant Air as the absolute lowest ranking airline in the
sample with its 22 year old fleet, double the average fleet age. It also comes to sight in the
other end of the rank, with Spirit and Virgin both operating relatively young fleets and placed
first and third respectively. Alaska proves by its second place that aircraft age does not fully
determine the score with its fleet being almost double the age compared to those of Spirit and
Virgin.
And last but not least, the distribution between the two business models on the ranking also
presents an interesting outcome. The lower half of the ranking only consists of network
carriers with Allegiant Air with its matured fleet being the only exception. The low-cost
carriers, on the other hand, seem to have superior environmental performance by dominating
the upper half, with the exception of Alaska and Hawaiian, the two network-carriers with
more regional identities.

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TABLE 5: ASM/gallon, LF and fleet by individual airline and by group

Table 5 summarizes the findings but with the load factors and aggregate scores according to
business model included, which will allow for comparisons. As expected, the deviations
occurring in load factors are somewhat insignificant but with a few outliers. Virgin America
has a high score, but presents a load factor three percentage points lower than the average.
Allegiant in the other end has an impressive load factor, which the airline should be
acknowledged for, however this does not change the fact that it ranks as the least fuel efficient
airline on the list.
A wide variety of factors influences the fuel efficiency of which some can be controlled by
airlines and some cannot be controlled. The constant development in aircraft technology
makes the average fleet age a significant factor in fuel efficiency, which can be seen from the
strong correlation between young fleets and high ASM to fuel ratios. However having an old
fleet does not necessarily result in a low score, which Alaska Airlines exemplifies with its
second place. The airline has undergone a process of retrofitting its fleet with best available
technologies such as wingtip devices (Airfleets 2014), which could suggest why it is more
fuel efficient than the age would normally justify.
5.5.

LCC vs. NWC

The majority of network carriers are clustered in the very bottom of the ranking, unlike the
low-cost carriers which are all performing above average, with Allegiant being the only
exception. This tendency of LCCs outperforming NWCs with 3 ASMs more per gallon can be
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caused by a number of reasons. The following presents some of the most plausible reasons
why such a trend exists between the two contradictory business models.
The first reason has to do with the aircraft fleet, which is a significant point of difference
between the two business models. By looking at the average fleet age one can already observe
a difference of 2,3 years which can explain some of the difference. NWCs normally have two
or three travel classes15 while LCCs operate with a single class system. By having only one
travel class, the space separating them can be eliminated and only standard-sized seats can be
installed. Together with reducing galley space and seat pitches, it can create a denser seat
configuration from traditional multiple class cabins. In fact, Southwest Airlines managed to
offer 10-13 more seats on a Boeing 737-300 than the four biggest NWCs in 2003 (Doganis
2006).
Installing more seats means utilizing capacity, which can ultimately increase the ASM/gallon
score. This difference could have been outweighed by the load factor, but since no significant
difference exists in the load factors, this has also contributed to the performance gap.
Weight equals fuel burn, is a well-known lesson within the industry. Despite implementation
of weight management programmes in many airlines, there are still some fundamental
variations in weight between the two models. LCCs are sometimes referred to as no frills
meaning that they offer only the essential service air transportation. By charging additional
fees for the ancillary services, such as meals and beverage, the flights will be less catered
compared to those of NWCs, with full in-flight service. This is further reinforced by the
smaller baggage allowance, which sometimes make passengers only bringing one piece of
hand luggage.
Of all the disparities between LCCs and NWCs, the transportation network model is what
truly separates them. LCCs operate on a point-to-point basis and the latter on a hub-and-spoke
network. LCCs often connect to remotely positioned airports, while NWCs are often
connected to busy airports with congested airspaces. As a result, aircraft are queuing up by
circling around the airspace, waiting for landing permissions. Every single mile going beyond
those of the optimum route are considered unproductive (ICCT 2013) and NWCs are more
likely to incur such inefficiencies. Knowing that, the airlines fuel the aircraft more, which
makes it even heavier and compounds the negative effect of the idle time.
15 Economy, Business and First Class
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5.6.Summary
Some airlines disclose carbon emissions deriving from the operational activities in the
financial reports, but the lack of industry standards makes the figures unfeasible for
comparison. Instead, the score ASM/gallon ratio have been used to evaluate the
environmental performance of 11 sampled airlines. Applying that ratio for the total system
shows that significant developments have been made in fuel efficiency in the 1970s whereby
it slowly weakens in the 80s and 90s but seems to have reinvigorated again in the new
millennium.
A similar computation for the 11 sampled airlines display a significant performance gap
between airlines and also a strong correlation between fleet age and performance. The scores
were furthermore compared to load factors but with no significant variations that could justify
any reassessments. Finally, the scores according to business model were gathered which
presented superior performance in favour of the LCCs. This is partially due to the younger
fleet, but can to a greater extent be dedicated to fundamental differences in the two business
models.

6 FINANCIAL PERFORMANCE
With the two last chapters having established the importance of fuel and ranked the sampled
airlines according to fuel efficiency, the proposition of a so-called win-win relationship,
between environmental and financial performance, can now be investigated.

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6.1.

May 2014

ASM/gallon & profit margin

Fuel efficiency & Profitability

80

10%

75

8%

70

6%

65

4%

60ASM/gallon
ASM / gallon

Profit margin
2%

55

0%

50

-2%

45

-4%

40

-6%

Profit Margin %

FIGURE 8: Fuel efficiency & profitability, (DOT 2014, MIT 2014)

The above figure exhibits the ASM/gallon scores from the previous section, along with three
year average profit margins from the sampled airlines. The often cited, and well
acknowledged assumption that superior environmental performance will lead to superior
financial performance within the airline industry can somewhat appear to hold truth. This can
be seen with some degree of correlation, but still with such significant deviation that the result
can more appropriately be considered ambiguous as it presents itself in the above figure.
The fuel efficiency leader Spirit Airlines have had average profit margins for the last three
years of roughly 5,5% annually, making the airline the third best financially performing
amongst the sample. Alaska Airlines as the followers have been better performing in the three
years, with average profit margins of 6,6%. The results of those two airlines could suggest
that the win-win relationship between fuel consumption and profit can hold. Virgin America
has been unable to capitalize on the excellent fuel efficiency and is one of two airlines with a
negative profit score for the three years, and the only airline of which the bottom line does not
reflect the excellent environmental performance. The reasons for this will be discussed later.
In spite of the variations, the trend from number four to 10 seems to be that diminishing fuel
efficiency is followed by diminishing profits. This trend is brought to a halt with the case of

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Allegiant Air which paradoxically is the most profitable, which was also the findings of the
ICCT study from 2010.
TABLE 6: Summary of performance indicators, (DOT 2014, MIT 2014)

The LCCs are not only superior with respect to fuel efficiency; also the three year profit
margins for LCCs are exceeding those of the NWCs as evident from Table 6. Having said
that, a profit gap between the two business models has existed for many years and
environmental performance cannot be said to represent the greatest cause of that gap.
Airlines are undoubtedly operating in an intense environment, constantly exposed to factors
from the micro and macro environment strongly influencing profitability. With some instances
of exceptionally conflicting scores in the ASM/gallon ratio and profit margins, further
investigation is needed, especially to understand why Virgin America is the second worst
profit-making airline despite its young fleet, and third place on the fuel efficiency ranking.
And last but not least, how can Allegiant Air harmonize the oldest fleet and the worst fuel
efficiency score with a profit streak lasting for almost a decade now (MIT 2014).

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6.2.

May 2014

Fuel costs per ASM

Perhaps the most basic measure of cost per unit is the CASM, 16 which is often expressed
including and excluding fuel, due to the instability of fuel prices. Nevertheless by subtracting
the two, one can find the fuel cost per ASM. The fuel cost per ASM is influenced by the fuel
price paid and the operational fuel efficiency. As described in section 4, airlines make use of
hedging in an attempt to control the price of its fuel input, and if done successfully, this can
reduce the input price, relative to the airlines not practicing hedging, or less successful at it.
An airline can theoretically offset the losses from inefficient operations by fuel hedging,
thereby not suffering the economic consequences of its operational inefficiencies. On the
contrary, a given airline can be outstanding in its operational fuel efficiency, only to find that
the gains have been eliminated by its premium price of the fuel input.

Fuel costs, cents/ASM

6

5
4.06
4

3.65

3.72

3.78

3
Cents / ASM
2

FIGURE 9: Fuel cost per ASM, (DOT 2014, MIT 2014)

16 Cost per ASM

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3.79

4.13

4.19

4.34

4.40

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Figure 9 illustrates the fuel cost (in cents) per ASM for the sampled airlines. This measure is
particularly interesting to observe for the two airlines not fitting the win-win proposition,
namely Virgin America and Allegiant Air. Note that the airlines in Figure 9, have been
reshuffled according to the fuel cost per ASM, but with its ranking from the ASM/gallon still
remaining. This figure presents an interesting outcome, because Virgin as the least profitable
airline in the sample, has the lowest fuel cost per ASM, and Allegiant as the most profitable,
having the highest fuel cost per ASM. The fact that the remaining airlines have hardly
changed position from Figure 9 to Figure 8, with some exceptions, is an indication that fuel
has a great importance in airline profitability and that the degree of efficiency has had an
impact, on the final fuel price per ASM.
6.3.

Virgin America & Allegiant Air

Still remaining is the question of how the compared scores of Virgin America and Allegiant
Air can turn out so surprisingly. The following will present some of the possible reasons why
those two carriers are financially unaffected by their environmental performance.
6.3.1. Virgin America
Founded in 2006 and airborne the following year, Virgin America has already accumulated
losses of some $700 million (MIT 2014). Despite its rough financial introduction, it has
already been widely acknowledged for its services by winning awards such as best cabin
staff and best overall passenger experience but the airline is yet to capitalize on the good
reputation. In exchange for the good in-flight service, the airline has offered fares often for
premium prices in a market characterized by a high degree of price sensitivity. With this price
margin between Virgin and their competitors, the airline has been deselected despite its
already noble reputation in the marketplace. Virgin furthermore attempts to attract business
travellers, but its route network is still relatively undeveloped, which is an obstacle for
attracting that specific kind of travellers (Tuttle 2012). Its lack of competitiveness has led to
low load factors (Table 5) and ultimately to losses, that the young fleet, and above-average
environmental performance has been unable to compensate for.
6.3.2. Allegiant Air
The story of Allegiant Air is the story of an airline, often not giving any consideration to
industry norms. It has a unique business model that essentially can be described as connecting
small American cities to holiday destinations, such as Las Vegas and Florida, with low
frequencies. The small cities, in which Allegiant operates from, are often so unattractive for
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other airlines, that travellers sometimes have no practical alternative than to fly with
Allegiant. This gives the airline a high degree of pricing power over its customers (ICCT
2013). As evident from the previous section, it operates a 22 year old fleet (Table 5) mainly
consisting of MD-80s an inexpensive and reliable airliner. Allegiant prefer operating a
somewhat older and fuel inefficient fleet, rather than acquiring a younger fleet for an
additional price, which cannot be offset by the fuel cost savings.
This notion is particularly interesting, because it conflicts with the whole idea that fuel is
supposed to be the primary driver, and that going green is economic reasoning.
While Allegiant Air has great success with its business model, it also acknowledges that this
particular standpoint may not be viable in the future. This is exemplified by a note in the
annual report regarding future risks in the airline industry, with particular reference to the
processing of climate change legislation, in the U.S. Congress:
These developments and any additional legislation or regulations addressing climate change
are likely to increase our cost of doing business in the future and the increases could be
material (...) In respect to our aging aircraft () climate change, taxation and other matters
affecting the airline industry, whether the source of new requirements is legislative or
regulatory, increased costs will adversely affect our profitability if we are unable to pass the
costs on to our customers. (Allegiant Air 2013, P. 16)
6.4.

Summary

Summarizing the findings so far, some degree of correlation between environmental and
financial performances seems to exist. The rank does not change significantly from measuring
ASM/gallon to measuring fuel cost per ASM. That is an indication of the airlines feeling the
economic benefits springing from operational fuel efficiency, but also suffering from the
consequences of using the resource inefficiently. But this only applies in a fuel-costing
context, since it does not seem to have any consequences for Virgin America and Allegiant
Air.
Especially Allegiant Air proving the industry with high margins and almost 10 years of
consecutive profits that going green does not necessarily lead to economic benefits. Having
said that, the scores for both Alaska Airlines and Spirit airlines could indicate that going
green can still lead to economic benefits, and the overall findings can therefore be considered

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both for and against a correlation and a positive relationship between environmental
performance and profitability.

7 PERSPECTIVE & CONCLUSION

This section will put the research methods along with the stated problem into perspective and
discuss it, whereby the findings will be summarized and a conclusion will be reached.
7.1.

Research method

This thesis applies two central industry-metrics, ASM and fuel consumption per gallon to
evaluate the fuel efficiency of the sampled carriers. To improve the applicability of this
metric, it was compared to the load factor, before the scores were analysed with respect to
profitability. The applied metrics are based entirely on actual consumption and activity and
does not incorporate any approximations into the analysis. Additionally all data has been
extracted from primary data sources making it highly reliable.
As mentioned, the ICCT study is the most comprehensive work to date that study and
quantifies fuel efficiency in the airline industry. The scientific framework developed in that
study is the result of accumulated experiences and attempts, including strengths and
weaknesses from those attempts. By considering factors such as access for the travellers, it
conducts the study from a viewpoint that ultimately will help consumers making their choice
of airline on a more informed basis. This thesis does not intend to label airlines, or raise
awareness among consumers it intends to explore the interactions between the physical
environment, and the business environment, in which airlines operate.
7.2.

The win-win proposition

The question about the win-win proposition is essentially about moral behaviour among
firms in the current marketplace. IATA argues that airlines are reducing emissions because of
social integrity, but most importantly that the prospect of fuel cost savings is a strong and
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viable incentive, in fact, so strong that no regulatory intervention, besides carbon offset in the
short run, is desirable. By holding that opinion, the organization essentially implies that its
member airlines are profit-maximizing firms by nature. In other words, what is morally right
is profitable.
The findings of this study can speak in favour of the previously stated sentence and can
certainly also speak against it. On one hand, airlines like Spirit and Alaska show us that good
environmental performance can pay off, by ranking first and second on the ASM/gallon ratio
and third and second with regards to profitability, respectively. Allegiant Air, on the other
hand, is the worst environmentally performing and the most profitable.
So what can be inferred from this? Spirit, Alaska and Allegiant are all operating in the same
market and are subject the same market conditions. The only thing that essentially separates
them is the level of social integrity, because the results indicate that acting in a morally
wrong way can actually be at least as profitable as acting in a moral way.
7.3.

Conclusion

This thesis has investigated if a positive relationship exists between environmental

performance and financial performance in the context of the U.S airline industry.
It has found that the rising fuel prices have influenced the airline cost structures to a great
extent, forcing them to take various measures to mitigate the risk of further oil spikes. By
evaluating a sample of 11 airlines according to fuel efficiency, a significant performance gap
has been identified. The findings have furthermore shown that low-cost carriers are superior
to network carriers with respect to fuel efficiency.
Comparing the 11 sampled airlines according to financial performance, it found that under the
current market conditions (no regulatory intervention) greater environmental performance can
lead to superior financial performance with some degree of correlation between them. But the
findings could moreover suggest that the incentives for emission reduction, social integrity
and fuel cost savings, appear to be too weak, because the airlines are not yet held responsible
for their emissions on a global scale. By economically considering the emissions as a waste
product, with an associated cost of disposal, the incentive for mitigation of the environmental
impacts will be significantly stronger. If this incentive is stronger, the link between
environmental and financial performance will be correspondingly stronger.

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This thesis has explored the industry and its environmental implications from a cost
perspective. Although a few studies suggest that airlines can use its corporate greening no
research has actually investigated the effect of environmental performance from a marketing
perspective. Analysing the industry and its environmental implications from the revenue
perspective presents an interesting and important area for further research.

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9 APPENDICES
Appendix 1: ICCT fuel efficiency ranking 2010, (ICCT 2013)

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Appendix 2: Spreadsheet with ASM/gallon scores

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50,3

49,7
57,2

Hawaiian Airlines

Alaska Airlines
54,5

60,7

59,9

73,5

60,5

58,0

58,2

54,2

2002

62,6

62,0

69,2

69,9

59,1

59,7

55,9

2003

62,3

62,8

70,5

61,7

59,9

61,1

57,7

2004

Page 54 of 54
77,3

JetBlue(F1999)

Frontier (excluded)

77,2

66,4

174,2

62,1

68,4

65,9

70,4

65,3

66,8

66,3

61,2

67,2

67,3

66,9

59,8

75,8

66,8

2006

74,7

58,5

72,5

66,9

2007

69,8

70,3

67,1

56,7

59,4

78,4

66,3

2005

65,0

68,3

72,2

62,1

62,5

65,0

60,0

2007

Low-Cost

63,2

61,6

78,7

64,1

2004

64,5

65,7

72,1

62,5

61,7

64,8

60,4

2006

78,9

59,8

Spirit

58,6

79,1

62,9

2003

64,5

64,4

77,0

61,8

61,0

62,9

59,7

2005

Virgin America (F2006)

48,9

77,9

61,8

2002

Allegiant (F1998)

68,8

60,4

75,0

2001

2000

Southwest (+
2012AirTran
5
)9,1

LOW-COSTCARRIERS(LCCs)

52,2

58,4

United(+
2012Continenta5
l)
6,6

NWC

55,3

USAirways(+
2008West)42,9

53,4

56,7

53,7

Delta Airlines

53,0

52,9

2001

American Airlines

2000

NETWORKCARRIERS(NWCs)

Fuel intensity (ASM/gallon)

71,2

69,3

75,4

75,0

57,7

69,9

68,5

2008

66,7

72,6

73,7

62,8

64,9

65,7

60,7

2008

71,6

70,1

75,0

77,2

58,3

71,2

68,8

2009

67,0

75,9

70,5

63,3

66,2

65,5

60,7

2009

56,1

70,0

75,4

75,7

58,9

71,5

68,5

2010

67,4

76,3

72,0

62,9

66,7

64,9

61,8

2010

77,9

70,9

76,7

78,6

59,1

71,0

68,9

2011

68,1

77,8

73,4

63,2

66,3

64,9

63,1

2011

Average

76,7

73,8

78,0

79,0

63,0

71,2

77,7

71,5 10,3

76,7 5,0

77,8 5,2

60,3 22,0

71,2 7,4

71,7 11,7

2012 average
flet age

Average

68,1 12,6

76,9 9,6

73,0 10,0

64,3 13,6

66,8 12,1

65,0 16,9

62,7 13,6

3year

68,8

76,6

73,7

66,8

67,4

65,2

63,4

2012 average
flet age

3year

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