By Yonatan Avivi and Kenneth Kou
In August 2009, while the US was deep in recession, The Harvard Business Review (HBR) asked its readers “will business conferencing kill business class travel?”1. Back then, in a tight economy where companies were historically not spending much on IT, tech giants like Cisco and HP pitched customers on the benefits of their advanced video conferencing systems. A report published later that year claimed that video conferencing is ““one of the few technologies that has benefited from the downturn, growing 30% from last year as businesses look to reduce travel expenses”. The pitch made by video conference developers was convincing; you will save money and also reduce your environmental footprint through reduced travel. The transition towards more video conferencing and less travel was supposed to allow companies to cash in on the need to get lean while also appealing to the desire to get green.
A few months after this HBR article was published, the global economy had started to recover. The quality of video conferencing had continued to increase; however, the desire for in-person meetings persisted and business travel volumes picked up again. With the urge to cut costs a thing of the past, companies returned to their old ways of globe-trotting to client meetings despite installing fancy video conferencing equipment throughout their offices. In 2015, spend on business travel topped $1.2 trillion, a new record, and is expected to reach $1.6 trillion in 20202. The perceived importance of the interpersonal aspect of business has trumped technology, common sense and any business obligation to go greener. The business community has proven that it needs more than a great reason to abandon its travel fanaticism.
What does this all mean from an environmental perspective? The civil aviation industry has not presented any significant technological innovation since the launch of the Boeing 747 in 1969, a wide-body airliner capable of dramatically increasing passenger loads without proportional increases in fuel-burn. Over the last half-century, fuel-burn per passenger-kilometer has reduced further by 70% against a backdrop of progressively tightening regulations for noise and NOx emissions. Nowadays, the main initiative towards sustainable industry is the IATA (International Air Transport Association) sustainable aviation fuel roadmap. IATA’s roadmap, launched in 2009 in cooperation with McKinsey & Company, is aiming to achieve fuel efficiency gains of 1.5% per year until 2020, after which the industry would keep to carbon neutral growth, aiming at a long term target reduction of net CO2 emission by 2050 to 50 percent of 2005 levels3.
In spite of these ambitious efforts, the underlying demand to air travel continues to rise, placing upward pressure on emissions.
Efficiency vs effectiveness; IATA and the current aviation industry’s self-regulation targets
Aviation is a global industry by definition. With the large majority of transactions crossing international borders, coordination of regulation and incentive alignment are challenging. IATA, an association with 274 member airlines, is aiming to be ahead of the regulation curve with ambitious, self-regulated sustainability and emission targets. IATA’s sustainability targets, ambitious and genuine as they might be, are founded on one underlying assumption: air travel volumes will continue to grow at deterministic rate. In other words, IATA’s focuses on efficiency (how to reduce emissions per unit of travel) rather than effectiveness (how to reduce units of travel without affecting consumer welfare).
One of the most observable examples of this focus around efficiency is the reverse correlation between travel distance and price. To demonstrate this phenomenon, we searched for a round-trip ticket from Singapore to Paris, on July 5th (just in time for graduation) and return on July 9th, 1 adult in economy class. A non-stop flight with Air France costs $1365 for 21,464 kilometers of flight ($6.4 per 100 kilometer). However, if you are willing to endure one transfer, the price drops to $814 on Qatar Airways. In this case you will travel 22,382 kilometers, for just $3.6 per 100 kilometers (a 44% discount). For an additional stop on the way back (in Abu Dhabi) you can further save $16 and further reduce your price per kilometer by couple of percentage points. Current economics of the aviation industry push consumers to purchase longer journeys that impose greater emission impact on the environment in order to save hundreds of dollars. Airlines with deep pockets, often subsidized by oil-rich governments, are operating non-economical routes in the name of quasi-strategic reasons, leading to increased volume and distance per traveler. For example, Emirates, the Dubai-based airline was ranked 4th among airlines in 2015 by scheduled passenger kilometers flown. Emirates Airlines, representing a country with less than 3 million in population, flew 50-80% more than established airlines such as Air France, Lufthansa and British Airways.
We would like to suggest that the aviation sustainability discourse should be expanded beyond the efficiency focus on emission reduction per unit traveled. Enhanced global policy and cooperation, economic incentives, and operational strategies (such as pooling) can have a substantial contribution in the short term. Efficiency initiatives are vital, however, the slow pace of technological innovation in the aviation industry combined with growing underlying demand are calling for a different approach. We believe that industry players should address the demand problem and cooperate to reduce inefficiencies and waste.
Three pillars towards increased efficiency
At first glance, the civil aviation industry seems like a highly competitive and efficient market, as prices are set according to consumer demand and preference. A more careful view would reveal underlying interests, many of which are related to political ambitions. The use of airlines as a means to a wider global interest (few examples are Turkish Airlines, Qatar Airways and Emirates Airlines) cause market inefficiencies and externalities, and call for tighter coordination around regulation and policies. We would like to offer three action pillars that could fix some of these inefficiencies and improve the effectiveness of the industry as a whole:
- Enhanced global regulation in assignation of landing rights: Tighter global regulation on airlines can increase efficiency by encouraging local travelers to choose shorter routes. One direction would be through the reallocation of landing rights. Landing rights are granted by an airport owner allowing the slot holder to schedule a landing or departure during a specific time period. In most cases landing rights are traded between airlines and can often have tremendous value4. As a result, “rich” airlines are over represented in big hubs (relative to their origin country population), thus pushing travelers to choose inefficient, longer routes. As governments usually own airports they can control landing rights allocation and set guidelines that can enhance effectiveness.
- Economic incentives through mileage taxes and reduced tax deductions: As mentioned above, economic and environmental incentives are currently misaligned. Introduction of relevant taxes, both at the airline and consumer level, can enhance incentive alignment. The most direct and obvious tax (and thus the most challenging to implement) is a mileage tax that would impose a fee on excess mileage over the standard route distance. For example, if a direct from Singapore to Paris travels 5,500 km, while a similar flight with a stopover in Doha requires 6,300 km, the delta of 800 km would be subject to taxation. This taxation system should be designed and coordinated by IATA with an objective to decrease the economic attractiveness of long, non-direct routes to curb carbon outputs. Another group of economic incentives is tax benefits. Government can amend their tax codes to encourage or discourage certain behaviors. In this context, one option is to decrease deductions for travel expenses, making these travels more expensive for companies. Another tax benefit can address travel substitutes; accelerated depreciation for video conference equipment or government grants to purchase video conference equipment for example.
- Resource pooling in airline bookings: Airlines had figured out quite early the benefits of pooling, a discovery that pushed the formation of alliances and codeshare agreements. However, real cooperation in a meaningful way that can increase aircraft utilization is still far away. There is a clear trade-off between competitiveness and utilization in the airline industry. Airlines’ reluctance to pool their reservation system into one pool of travel capacity is natural and expected. However, the potential impact from optimization at the industry level is huge and requires a deep investigation. As full pooling seems naïve at this point, further consolidation to aggregate booking systems and expanded codeshare agreements can further push aircraft utilization. Another initiative that can support this effort is phasing-out loyalty schemes. Loyalty schemes have a double negative impact on improving travel efficiencies: first, they have a stickiness effect that ties people to a specific airline, most of the time in the cost of a stop-over and a longer route. Second, loyalty programs provide incentives for business people to travel more, even at times when there is no necessity, as the accumulated mileage can be used for personal ends.
Setting sustainability targets for the industry
Based on the three pillars above, we outlined few high-level targets for the aviation industry, focused on increased effectiveness – reduce volume of travel units with no impact on travelers’ welfare:
- Reduce travel distance: The industry should aim to reduce the average distance traveled per given route. This goal can be achieved by incentivizing travelers to purchase direct itineraries, and pushing airports to incentivize airlines to minimize their tendency to stopover in multiple locations.
- Increase aircraft utilization: Increased aircraft utilization could lead, given a decent level of cooperation, to reduced air traffic. Capacity pooling and enhanced codeshare agreements can support this target with minimal economic damage for airlines.
- Phase out loyalty schemes. Loyalty schemes are among the key drivers for business travel and route inefficiency. Once loyalty schemes will be phased out, people will have lower incentive to fly for business travel and higher incentive to choose to shortest route to their destination.
We believe that the targets outlined above should be pursued in parallel to the sustainable aviation fuel roadmap by IATA. Only a combination of efficiency and effectiveness efforts can lead to a substantial change in the global aviation industry environmental footprint.
While these goals will be difficult to attain, as they require shifting consumer behavior and challenging the status quo, this can result in a meaningful decrease in global emissions. The aviation industry has left a tremendous carbon footprint on the world, and taking the above measures will help to reduce and stabilize their societal impact. This will require broad cooperation and coordination, but needs to be addressed before it is too late.
Sources:
- 1 https://hbr.org/2009/08/will-videoconferencing-kill-business-class.html
- 2 http://www.gbta.org/foundation/pressreleases/Pages/rls_0711162.aspx
- 3 https://www.iata.org/whatwedo/environment/Documents/safr-1-2015.pdf
- 4 https://www.ft.com/content/b6a47274-e955-11dc-8365-0000779fd2ac
@kenjesus: I think the somewhat sarcastic “common sense” comment in your article is a bit misplaced.
“The perceived importance of the interpersonal aspect of business has trumped technology, common sense and any business obligation to go greener.”
As we’ve seen from multiple OB classes, there are legitimate business reasons for face-to-face meetings. Common sense could be to prioritize business meetings that require face-to-face interaction and making companies set internal guidelines so that they don’t wastefully spend money on air travel for their employees. The growth in the business travel spend (1.2 trillion to 1.6 trillion) over six years is just a 6% y-o-y CAGR. While the data isn’t in the blog post, I’m guessing most of that growth is attributable to rising prices, not necessarily higher volumes of travelers. 6% growth doesn’t seem out of line with “common sense” in my mind.
To your point about taxation for routes with a stop-over – relying on taxation would obviously be near-politically impossible (and couldn’t people get around it by booking two separate legs?), but it would also be interesting to see if the emissions are higher for two separate flights versus a much longer flight, which has to carry way more fuel. I’m sure there are studies out there, but it would be interesting to see.
The blog doesn’t really answer the question in the title…but I have a hunch. Business travelers love Emirates for the bar in business class 🙂
Slander!
“The growth in the business travel spend (1.2 trillion to 1.6 trillion) over six years is just a 6% y-o-y CAGR. While the data isn’t in the blog post, I’m guessing most of that growth is attributable to rising prices~
Disagree: airfares have not risen – if anything, they’ve declined given the drop in fuel prices.
” (and couldn’t people get around it by booking two separate legs?)”
Pricing inefficiencies exist, yes. Though often, the discount is provided BECAUSE you book an inefficient route.
“The blog doesn’t really answer the question in the title”
Get out.
Business travel includes more than just business class airfare. Also, airfares have dropped for economy flights but not so sure for business class seats. Whoa let’s geek out on airlines. #formerconsultants #futureconsultant #why
Loved the subject matter and the concept of prioritizing the environment over economic benefit – in line with the idea of stakeholders over shareholder in tomorrow’s business arena. However – two practical questions/comments. With regards to your first point of taxing indirect routes, this would bump air travel prices back up. Air travel is inherently expensive but costs have dropped dramatically in recent years, in part thanks to indirect routes. How would you avoid air travel becoming an activity for only the rich? The world has been opened up to so many who previously could not afford to travel – taxing indirect routes might take that gift away.
Yes, in isolation, it would create a rise in prices, which is often required to improve environmental outcomes. Consider any tax/fee that’s imposed for environmental purposes.
However, we expect that this change would result in flights that are more full. Often, direct flights are flown at half-capacity, simply because people don’t want to pay the additional fees associated with it. With higher capacity flights, airlines could then charge less per passenger which would result in time savings for the passenger (at a similar cost as before), revenue neutral/gains for the airline, and environmental gains for all!
This is an interesting take on aviation.
I find a lot of the proposals will push the industry towards a situation where the consumer is disadvantaged, ultimately damaging the industry.
I agree the gulf carriers are governmental tools of development – but this actually has the opposite effect of driving inefficiencies. The support they receive effectively subsidizes consumers from out of their market, driving costs down despite fantastic product and service. This is turn forces other airlines to be more competitive, improving their customer facing proposition and increasing elements such as utilisation.
The idea of pooling resources sounds great in theory but also a bit like a global publicly owned system – governments at the moment can’t even cope with managing air space effectively – and air traffic control management would be the first step to reduce efficiencies.
Lastly, I personally think carbon composite planes flying is a huge technological advancement. They are 60% quieter and 75% more fuel efficient than early jets.