ATA conference call on airlines’ environmental performance

Since fuel consumption and greenhouse gas emissions correlate nearly exactly, U.S. airlines have a financial incentive to improve their environmental performance. According to officials at the Air Transport Association, the national trade group for commercial airlines, environmental performance continues to improve and other initiatives are on deck.

Speaking in a conference call with several aviation bloggers, ATA vice president for environmental affairs Nancy Young identified environmental performance, improving the nation’s air traffic control infrastructure, and energy policy as the airlines’ top policy priorities. The desire for fuel efficiency leads to greenhouse gas emissions reduction, she said: “We couldn’t be more motivated to do the right thing there.” Among these initiatives are alternative, environmentally and food-supply friendly fuels. Young said that it is much harder to develop this kind of fuel for air-based engine units. A 50/50 synthetic blend is currently being tested, she said, with the aim of having 50 percent of the jet fuel supply in alternatives by 2025.

ATA has also adopted an industry-wide goal of improving fuel efficiency by 30 percent by 2025. This can be done, she said, by upgrading fleets, investing in new aircraft (e.g., replacing American Airlines’ MD-80s with B-737s) and enhancing current aircraft (such as fitting them with winglets). John Heimlich, ATA’s chief economist, added that more efficient air traffic control navigation — such as optimal flight paths, continuous descent, and the like — would improve both operational and environmental performance. Heimlich also defended the recent spate of baggage fees as an environmental initative: “When the customer is imposing a fuel penalty on us, as with baggage, we pass that cost on to them.” The airlines are cutting down on fuel use by modifying passenger behavior.

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Airline to cut carbon emissions! . . . by doing what it was already doing anyway

An interesting item in the Commercial Appeal of Memphis, my hometown newspaper:

FedEx issued its first Global Citizenship Report Wednesday, touting plans for big cuts in pollution by jets and delivery trucks. . . . On the environmental front, the company aims to cut carbon dioxide emissions by FedEx Express jets by 20 percent within less than 12 years.

The article continues:

FedEx fuel consumption of about 1.5 billion gallons last year ranked behind the largest passenger airlines, which put more flights in the air. Fuel was 12.1 percent of the company’s total operating costs in fiscal 2008.

“We’re a large user of fuel, but we’re not the largest,” [sustainability director Mitch] Jackson said.

No, but according to an interview with CEO Fred Smith in the Wall Street Journal, it’s the second-largest user of energy in the world — after the U.S. military. See comment below.

To curb the appetite for oil, FedEx Express in 2005 set goals of a 20 percent reduction in carbon dioxide emissions by its jets and a 20 percent increase in fuel mileage for delivery vehicles.

The report showed that jet emissions have been reduced 3.7 percent on a pounds-per- available-ton-mile basis in three years, while vehicle fuel economy is already up 13.7 percent.

This article might lead you to think: “Good for FedEx. Look at the way they care about the environment. What an upright corporate citizen.” It’s good for the reader that at least one outlet has gotten the rest of the story. According to ATW Daily News:

Key to the increased efficiency will be the replacement of its 90 727Fs with at least 87 757-200 converted freighters by 2016. The 757s will reduce “fuel consumption up to 36% while providing 20% more payload capacity,” it said.

FedEx has been planning this fleet transition for years (with a focus on fuel and labor savings and increased medium haul capacity). How great for FedEx — they get environmental plaudits while doing exactly what they were doing all along. Unfortunately, this kind of reporting is par for the course at the CA, which years ago — through a series of redesigns and changes in editorial leadership — shifted away from serious reporting into local cheerleading, soft and fluffy features, and barely edited press releases.

In other news: FedEx has a blog! Welcome to the aviation blogosphere!

FedEx will do its part for cleaner environment [Commercial Appeal]
FedEx sets target to lower aircraft CO2 emissions by 20% by 2020 [ATW Daily News]

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Southwest comments on Stop Oil Speculation Now

DALLAS — During the summer, the Air Transport Association and its member airlines launched a campaign to “Stop Oil Speculation Now.” I (and the rest of the aviation blogosphere) commented on it, arguing that limiting “speculation” on oil futures wouldn’t bring down the price of oil. Mark Ashley added that he was surprised about the campaign: “One surprise: Southwest signed the letter. By the logic of the letter, Southwest is one of the ‘speculators,’ and in fact it’s a major reason Southwest has been eating everyone else’s lunch. Yet they signed the letter decrying their own business practices. Huh.”

Southwest has, as is commonly known, aggressively hedged its fuel costs. According to Laura Wright, Southwest’s CFO, hedging is part of Southwest’s conservative financial strategy, controlling fluctuation in costs. She said that Southwest is 80 percent hedged in the third and fourth quarters, and 86 percent of its hedges are backed up by cash collateral and thus minimally exposed to counterparty risk.

I caught up with Wright to ask about the apparent inconsistency with calling for an end to “oil speculation” and engaging in risk-management practices that involve speculation about the future price of oil (i.e., hedging). Isn’t hedging the same sort of financial operation as speculation on oil futures? Wright said that the ATA’s proposal to stop oil speculation is aimed at “players [in the market] that aren’t end users” of oil products.

Wright said that Southwest doesn’t hedge for financial gain as much as it does for financial stability. The fact that Southwest is paying as little as $51 per barrel is a financial benefit not to be sneezed at, but its benefit is primarily in terms of being able to predict what costs will be and being insulated from fast-moving fluctuations in the price of jet fuel. Hedging permits Southwest to “have costs predictable within a range.”

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“Stop Oil Speculation Now” won’t make oil cheaper

I’m going to resist the airline lobby’s link bait for their Stop Oil Speculation Now website (google it if you care), but the airline CEOs’ letter calling for passengers to lobby Congress for tighter regulation of oil futures “speculation” deserves some attention. The aviation blogosphere sees through this as the bad proposal it is (see Elliott, Snyder, PlaneBuzz, Upgrade, TJI). Indeed, economists from across the ideological spectrum — from Paul Krugman to WSJ op-ed writers — don’t blame “speculation” for the rapid run-up in oil prices. While some of the run-up looks bubblicious, for the most part, oil futures prices reflect estimates of existing and projected demand and existing and projected supply. As Craig Pirrong writes, “Futures and swap markets facilitate the efficient management of price risks, and speculators are an important part of that process. For instance, a producer of oil may want to lock in the price at which he sells his oil in the coming months in order to hedge against fluctuations in its price.” Another economist whose work I follow recently wrote, “Financial markets are driving today’s prices to match expectations of tomorrow’s values.” Speculators are doing the work of price discovery.

And for crying out loud, what is with the airlines’ complaint about “speculators who trade oil on paper with no intention of ever taking delivery”? Do they really want only those who will personally use oil to buy it? What if I’m a sharp, entrepreneurial guy who can make money buying and selling oil? (I’m not.) Why should the government limit my ability to “truck and barter” in a commodity that’s otherwise freely traded? Instead of making oil cheaper, it would restrict the full measure of price information a functioning market can provide.

The challenge of leadership is running a business in hard times as well as good. As Brookings Institution economist Clifford Winston told me recently, airline profitably depends more on the handling of “shocks” than on wringing out efficiencies. The airlines’ proposal is a Band-Aid, a substitute for actually handling the shock of rising costs.

The airline CEOs call the oil market “over-heated.” What’s really over-heated is the rhetoric and reasoning of their proposal.

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