articles Ratings /ratings/en/research/articles/191121-european-airlines-prepare-for-take-off-on-climate-change-11237832 content esgSubNav
In This List

European Airlines Prepare For Take-Off On Climate Change


Weak Cash Flow Pressures Ratings For North American Speculative-Grade Health Care Issuers


Instant Insights: Key Takeaways From Our Research


Emerging Markets Real Estate Issuers Stand Their Ground


Leveraged Finance: Creative Structuring Helps Trinseo PLC, Comes With Lowered Recovery Prospects And Higher Costs

European Airlines Prepare For Take-Off On Climate Change

Under growing environmental, regulatory, and social pressures, Europe's airlines are stepping up their efforts to offset or limit the impact of their emissions and communicate their efforts to the public. However, they don't face an easy task. Commercial flying remains a heavily carbon-intensive mode of transport (see chart 1), accounting for about 2.5% of global carbon dioxide (CO2) emissions. Although aviation produces just a small slice of global transport emissions (see chart 2), and transport as a whole emits only half the CO2 produced by the global power sector, aviation emissions are difficult to cut. Some experts expect aviation's share will rise as other sectors cut emissions, for example through electrification of ground transport, and as air traffic continues to expand at a faster rate than overall economic growth.


Global flights produced 895 million tonnes of CO2 in 2018, out of a total 42 billion tonnes of CO2 produced by humans. The U.S. (24% of the global total), the E.U. (19%), and China (13%) together are responsible for a large part of this, emitting over one-half of aviation CO2 emissions in combination (see chart 3). What's more, flying at high altitudes means that CO2 and other emissions, such as sulfur dioxide, nitrogen dioxide, and carbon monoxide, remain in the atmosphere for longer and have a potentially more damaging environmental impact.

Chart 2


Chart 3


In response to this challenge, the International Air Transport Association (IATA), representing 290 airlines and over 80% of total air traffic, has agreed global targets to mitigate CO2 emissions from air transportation. These include a cap on net aviation CO2 emissions from 2020 to achieve carbon-neutral growth, and a reduction in net aviation CO2 emissions of 50% by 2050 relative to 2005 levels. The industry's ultimate challenge in order to be able to achieve carbon-neutral growth is to improve operating--primarily fuel--efficiency at a quicker rate than air traffic growth to prevent overall fuel consumption and emissions continuing to rise. The International Civil Aviation Organization (ICAO), a U.N. agency, currently forecasts that the expected rise in global traffic of about 5% per year will likely surpass expected annual improvements in aircraft fuel efficiency of around 1%-2%.

The increase of the middle class (via both economic and population growth) particularly in Asia and a generational trend towards more spending on travel are significant global contributors to air traffic growth. In Europe, low-cost airlines continue to make air travel affordable and accessible. However, prevailing macroeconomic and political headwinds across Europe and the trade conflict between the U.S. and China translate to a downside risk to traffic growth, as do flight-shaming campaigns.

Environmental regulations currently center on market-based measures, primarily via the EU Emissions Trading Scheme and the Carbon-Offsetting and Reduction Scheme for International Aviation (CORSIA). Regulations to offset emissions via these market-based measures remain the most efficient way for airlines to mitigate the net environmental impact of airline pollution at present. Yet, they have significant inherent limitations depending on the type of offset. easyJet has recently announced it will offset the carbon emissions from the fuel used for every flight (at a cost of £25 million for its 2020 financial year), by investing in projects that include tree planting and protection against deforestation. The company recognizes that carbon offsetting is only an interim measure while new technologies are being developed. International Consolidated Airlines Group (IAG) estimates that market-based emissions schemes will drive almost 60% of its targeted 20% drop in net CO2 emissions by 2030. It expects a more efficient fleet and operations to account for almost 40%, and sustainable fuels below 5%.

A Potential Credit Impact For Airlines

Over the longer term, European airlines face direct risks from rising costs to meet environmental regulations, both those already in place today and those likely to arise from increased pressure for more forceful actions from governments. They will have to bear increasing financial liabilities associated with their carbon emissions. We believe that carbon costs will be more marginal over the short to medium term, compared with existing volatile fuel expenses, aircraft lease payments, and depreciation charges. However, any further cost pressure in the highly competitive, highly cyclical, capital-intensive European airline market will add to pressures and may further differentiate aircraft operators.

New processes to collect data on CO2 emissions could lead to further variations in landing charges at airports based on environmental factors. For example, Heathrow and Schiphol Airports differentiate the level of aeronautical charges to promote quieter and less-polluting aircraft. Some airports are investigating using environmental key performance indicators for slot allocation. European air carriers are now required to report their CO2 emissions on an annual basis, and this has increased public scrutiny on emissions.

Changes to fuel taxation are another potential risk. Currently, aviation kerosene is exempt from tax in Europe, unlike road fuel, which is charged a heavy excise duty. The imposition of a duty on flights would introduce complexities. For example, to avoid paying tax, airlines would likely fill up outside the taxation area. Some politicians favor an EU-wide aviation tax and many countries are considering additional environmental taxes. However, airlines are already subject to other taxes. For example, air passenger duty represents a significant tax in the U.K. IAG airlines paid €885 million in 2018. Some industry players are calling for the public finance tax to be renamed a "green tax" to be spent on environmental projects (indeed, initially it was introduced as a green tax). The national air traffic tax in Germany will go up significantly next year. Any such increase in taxes or costs would make smaller airlines even more vulnerable and could reduce the cost advantage for low-cost carriers and hence affect credit quality and ratings.

Airlines typically have been successful in passing on rising costs to customers via higher ticket prices. But their revenue gains have lagged fuel price movements, and higher prices will be more difficult to push through if the economy weakens. We believe that higher ticket prices could temper air traffic growth over the next decade.

Airlines also face some indirect risks from environmental pressures. Increased environmental reporting and public consciousness surrounding flying could further temper air traffic growth. Flight-shaming campaigns, such as "Flygskam" in Scandinavia, have led to a notable reduction in Swedish air traffic, and an increase in demand for rail services. In the past, Sweden's long winters and its high GDP per capita meant that long-haul air travel was popular. It is uncertain how this may translate to airlines in other countries. But some industry experts are shaving 1%-2% per year off their global air traffic growth projections as a result.

Airlines Take Action To Lower Emissions

Taking the necessary actions to lower emissions continues to be extremely challenging for the airline industry due to its heavy reliance on burning fossil fuels and the substantial costs of sustainable alternative fuels and technological innovation. Aircraft and aircraft engine manufacturers have already been steadily improving the fuel efficiency of their products for decades, making further significant improvements increasingly difficult. Still, sizable airline investments in new more fuel-efficient and quieter planes, and improved operating efficiency and air traffic management measures, continue to reduce fuel consumption and, in turn, emissions per passenger.

Clear economic incentives

In the highly competitive European airline industry, the incentive to reduce fuel is clear: fuel is typically an airline's largest or second-largest cost component, depending on labor structures, representing around one-quarter to one-third of operating costs, and fuel prices can be highly volatile. European airlines tend to be well hedged against movements in jet fuel prices and typically have a good track-record of passing rising costs through to customers via higher ticket prices. In recent years, airlines have made significant investments in new, more fuel-efficient and quieter planes, such as the A320neo and B737 MAX. These promise fuel reductions in excess of 15% (although the latter currently remains grounded by regulators). Swedish airline operator SAS estimates that the delivery of new and more fuel-efficient aircraft from Airbus will help it reduce its emissions by up to 18% on short-haul and up to 30% on long-haul flights. Deutsche Lufthansa AG (Lufthansa) will invest over €3 billion in fleet modernization this year, and estimates that its new aircraft reduce CO2 emissions by up to 25%. New technology is also aiding fuel efficiency: easyJet reports that the introduction of sharklet wing tips on its aircraft since 2013 has led to a 4% saving in fuel consumption.

When considering an airline's environmental exposure, we take into account the following factors:

An airline's average fleet age.  The newer the plane, the more fuel-efficient it typically is. The global average fleet is around 10-11 years, but for some low-cost carriers is currently around six years. When fuel prices are low, airlines tend to keep older planes flying for longer, as fuel efficiency is relatively less crucial to profit margins.

Global load factors.  The percentage of seats filled on a trip are currently at record highs at about 85% on average, and higher than 90% for some low-cost carriers. This reduces per-passenger fuel costs and therefore emissions-intensity statistics. Adjusting cabin interiors to pack in more passengers can also help.

Flight duration and percentage of premium passengers.  Flying long haul and first class is believed to be typically less environmentally friendly than short haul economy class. Legacy carriers lag behind low-cost carriers in this regard: first class long-haul flights are about four times more harmful than economy long haul per passenger per kilometer. However, premium passenger volumes remain very small (at about 5% of global revenue passenger kilometers). Another countervailing factor, is that taking off uses more fuel than cruising, so shorter flights or longer connecting journeys also tend to be more environmentally damaging. Also, low-cost carriers make money by fitting in more flights per day, and tend to drive high levels of air traffic growth. Given that a significant proportion of fuel is burned on take-off, we understand that non-stop, long-haul routes are relatively more fuel-efficient than the same mileage covered by the same aircraft and payload on two or more short-haul routes.

Type of aircraft.  When full, widebody aircraft are more fuel-efficient and therefore less environmentally damaging on a per-passenger basis due to their size. Nevertheless, technology has allowed for longer range narrowbody aircraft to become increasingly popular for long-haul flights.

Route plans.  Better route planning and a reduction in route restrictions can reduce fuel needs, both in the air and on the ground. Air Baltic Corporation implemented its E-GEN project in 2019, which uses commercial aviation technology (satellite-based navigation procedures) to improve operating and thereby fuel efficiency. Airlines have long pressed for more efficient and coordinated operations by Eurocontrol (the European air traffic controller organization), to minimize flight distances and duration.

Sustainable aviation fuels hold promise—but only in the long term

Despite hope that alternative fuels will offer the primary long-term solution to reducing airline emissions, progress to date has been limited. Kerosene-based jet fuel, an oil derivative, will likely remain the primary viable fuel source at least over the next decade. Aviation kerosene generates high energy per weight, making it suitable for flying, and presenting a challenge to replace. Aviation biofuel produced from bio-based feedstocks, such as agricultural and household waste, plants, and hydrogenated fats and oils, are already being produced and used in commercial flights. Yet, volumes are currently low, and prices are high--typically three to four times higher than conventional jet fuel--and infrastructure is limited. Only a handful of airports have regular biofuel distribution today. A key technological challenge of alternative fuels is that the energy density of airline fuel needs to be much higher than for ground transport.

Take-up of alternative fuels is very slow, but airlines are starting to invest in such projects. IAG will invest $400 million in sustainable aviation fuel over the next 20 years. British Airways is partnering with specialist Velocys to build Europe's first plant that will turn household waste destined for landfill into sustainable fuel, which produces 70% less CO2 emissions than fossil fuel. Lufthansa is also supporting the development of alternative fuels. The airline sees them as critical to achieving CO2-neutral flying in the long term, and calls for more funds to be channeled into sustainable fuel development.

However, IATA forecasts that, even if all options to increase production of alternative fuels are explored, usage could increase to only about 2% of total jet fuel demand by 2025 (from currently less than 1%). What's more, scaling up this production would also face serious land constraints. We understand that limiting global warming to below 2 degrees Celsius from pre-industrial levels, as per the Paris Agreement target, would require so much biofuel that it would take land approximately the size of Australia to produce the feedstock. Indeed, some critics argue that some biofuels actually result in more emissions than fossil fuels (for example, palm oil as a likely feedstock) and that land use should not be diverted from other important use (such as food).

The possible use of electrofuels--renewable electricity to produce hydrogen from water by electrolysis with carbon--have also sparked interest. However, they have not progressed much due to their high cost. They are three to six times more expensive than jet fuel.

The industry does not anticipate disruptive technological improvements to aircraft, such as electric aircraft and hybrid battery-fuel designs, in at least the next decade, even though airlines are working with manufacturers on research projects. SAS is engaged in a joint research project with Airbus related to the electrification of aircraft for large-scale commercial use. easyJet has a partnership with Wright Electric to develop an electric aircraft, with the hope that it will be viable for short-haul routes in Europe by 2030. The Israeli start-up Eviation unveiled an electric aircraft taxi called "Alice" in June 2019 that can carry nine passengers with a range of 1,000-2,000 kilometers.

However, large electric aircraft are unlikely to be available in the near future. The heavy batteries required mean that they will not be suitable for long-haul flights, and they require hours of charging so prevent a quick turnaround. Unlike jet fuel, the weight of the batteries does not decline as power is used up during a flight. The European Union Aviation Safety Agency (EASA) estimates that alternative clean propulsion technologies, such as electric-powered aircraft--are under development but are unlikely to be commercially ready before 2030. Others think it will take several decades.

Industry experts warn that transformative developments in technology, such as supersonic and urban mobility aircraft, will need to be carefully integrated into the aviation system to ensure they do not undermine environmental progress (supersonic aircraft can have between five and seven times more carbon intensity than traditional aircraft).

Market-Based Mechanisms Drive Lower Emissions

European airlines are at long-term risk of rising costs to meet environmental regulations and will have to bear increasing financial liabilities associated with their carbon emissions. Although we believe that the additional cost burden on airlines will be relatively marginal over the medium term, further cost pressure will likely ramp up, and may differentiate aircraft operators over time. We expect such cost pressures will also have an increasing impact on an airline's strategy and operations, such as fleet-purchasing decisions going forward.

In the longer term, we think an aircraft operator's ability to pass on additional carbon costs will be a key differentiator, and that this is likely to vary between operators. The degree to which an individual airline is able to pass on this cost will in our view be influenced by the efficiency of its route network, its market pricing point, and market dynamics. Furthermore, we think airlines with a higher proportion of premium revenues may find it easier to pass on carbon costs to passengers. This is because these costs will be a proportionately lower percentage of the ticket price than for low-cost and economy passengers.

Carbon-offsetting schemes can be an economical method for airlines to encourage passengers to travel in a more environmentally friendly way. However, from a climate perspective, many argue that such schemes are not a long-term solution. There are a variety of "offsets" available, but they do not remove CO2 and other pollutants from the atmosphere. However, airlines generally agree that these schemes are better than imposing further environmental taxes already in place or under consideration in many countries. This is because these funds, typically, are not spent on environmental improvements but contribute towards general public finances.

EU emissions trading scheme (EU ETS) – cap and trade

This is a market-based mechanism managed by the European Commission to curb growth in emissions across the aviation, power, and industrial sectors. The system covers about 45% of the EU's greenhouse gas emissions. Following its launch in 2005, aviation was included in the scheme in its third phase (2013-2020). The cap-and-trade scheme applies to intra-EU flights only and aims to offer an economically efficient method of constraining airlines' CO2 emissions while allowing them to grow within an overall emissions target. It sets a limit on the number of emissions allowances issued, which reduces each year, and thereby constrains the total amount of emissions of the sectors covered by the system. The scheme also offers credits when sustainable fuels are used. Any emissions permitted but not used can be sold (known as carbon trading). Hence, companies can either cut their own emissions or fund emissions reductions elsewhere.

With the industry continuing to grow at a faster rate than it can improve operating (fuel) efficiency, the result is that airlines will have to buy permits from other sectors to cover their emissions liabilities. Therefore, the cost to the industry is likely to increase substantially over time in line with emissions growth and the rising price of carbon, which is uncertain, and a reduction in allowances over time (by 2.2% per year from 2021). With some industry experts forecasting that EU carbon prices will increase to €40-€60 per tonne of CO2e (CO2 equivalent) over the next five years, this could be an unwelcome increase in costs for airlines over the medium to longer term.

EASA estimates that between 2013 and 2020 the EU ETS will achieve an estimated net saving of 193.4 million tonnes of CO2--twice Belgium's annual emissions--through funding of emissions reduction in other sectors. It estimates that the purchase of EU allowances represented about 0.3% of operating costs for airlines within the scope of the EU ETS in 2017, but this is increasing.

Under the EU ETS, airlines operating in Europe are now required to monitor and report their CO2 emissions annually, which brings further public attention to emissions.

CORSIA - international offsetting scheme

The International Civil Aviation Organization (ICAO), a U.N.-sponsored body, agreed a global market-based mechanism, the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) in 2016, which starts in 2021. Full details are still being finalized. With 191 member states, this agreement covers most international routes, representing about 60% of global CO2 emissions, but excludes domestic journeys. It aims to stabilize net emissions from aviation at 2020 levels. The calculation of offsetting requirements will tighten over time (see text box). The scheme also allows targets to be met by using sustainable alternative fuels. It allows for emissions reductions that cannot be achieved in the aviation sector to be compensated through emission reductions in other sectors where the potential for quicker reductions is greater and the associated costs are lower, such as forestry projects. Airlines can purchase carbon credits from designated environmental projects around the world if their emissions exceed agreed targets. The eligibility of environmental projects will be decided by the ICAO Council, and will be important to CORSIA's credibility, alongside how the scheme is regulated. For example, in the annual climate negotiations, governments are still debating the accounting rules for global offset markets to prevent both buyer and seller claiming the emission reductions. Until the rules have been agreed, there is a risk that the offsets sold are also being claimed by both sides of the trade.

CORSIA will begin its voluntary phase between 2021 and 2026, covering more than 75% of global international aviation emissions. All EU countries have agreed to join. Russia and India have not signed up and there is some uncertainty as to whether China will join the voluntary phase, which could deter other countries. The scheme is meant to be fully operational by 2027, and will eventually include all ICAO members and cover more than 90% of emissions.

In a downside scenario, the ICAO estimates that CORSIA could add up to 5% to fuel costs by 2035 (see text box). We don't expect the requirements to materially affect credit quality until at least 2025, but clearly the extra cost will be unwelcome, particularly for weaker airlines already struggling to make profits. We expect that stronger airlines will be able to pass on most of the extra costs via higher ticket prices. However, as the details of CORSIA have yet to be finalized and will be subject to review, uncertainty remains as to how the scheme will develop.

The EU may decide to withdraw the airline sector from the EU ETS if CORSIA is successful (which was the original plan). This would reduce costs for those airlines exposed to both schemes, but we understand that the schemes are likely to run in parallel for at least the next few years.

Airlines are communicating more on offsetting schemes and efforts. Ryanair Holdings' customers can offset the carbon cost of their flight by making a voluntary donation to its climate charity partners during the booking process. However, we note only a 2% uptake, perhaps signaling that consumers are less willing to pay for environmental efforts when they are footing the bill or uncertainty on how their fees will be spent. British Airways has announced that it will offset carbon emissions for all of its U.K. domestic flights from 2020 by investing in verified carbon reduction projects. These examples show that improvements are being made. Yet, whether there will be enough material improvements to meet the industry's goal carbon-neutral growth goal remains in the air.

Related Research

  • Industry Top Trends 2020: Transportation, Nov. 18, 2020
  • IMO 2020: The Coming Storm, Oct. 7, 2019
  • ESG Industry Report Card: Transportation, Aerospace, And Defense, May 13, 2019
  • Why The Transportation Sector Is On A Fast Track To Get Greener, May 10, 2019

This report does not constitute a rating action.

Primary Credit Analyst:Rachel J Gerrish, CA, London (44) 20-7176-6680;
Secondary Contacts:Beata Sperling-Tyler, London (44) 20-7176-3687;
Philip A Baggaley, CFA, New York (1) 212-438-7683;
Izabela Listowska, Frankfurt (49) 69-33-999-127;
Stuart M Clements, London (44) 20-7176-7012;
Karl Nietvelt, Paris (33) 1-4420-6751;
Michael Wilkins, London (44) 20-7176-3528;
Beth Burks, London (44) 20-7176-9829;

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to:

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back