Green Aviation

The EU ETS was introduced in 2008 and extended to include aviation in 2012. It was originally intended to apply to all airlines operating to, from or within the European Economic Area (EEA) whether they are EEA-based airlines or otherwise, but countries including China, India, Russia and the United States reacted adversely. In 2012, the United States enacted the European Union Emissions Trading Scheme Prohibition Act of 2011 which prohibited United States carriers from participating in the EU ETS. Similarly, China threatened to withhold US$60bn in outstanding orders from Airbus, which in turn led to pressure on the European Union in relation to the application of EU ETS.

Following such actions, and further to the introduction by ICAO of the implementation of a global carbon offsetting scheme for aviation emissions, the EU agreed to limit the EU ETS’s application to intra-EEA flights and defer any further application until 2024 pending a review of the operation of the Carbon Offsetting and Reduction Scheme for International Aviation. The EU is currently reviewing the EU ETS to implement CORSIA in a way that is consistent with the EU 2030 climate objectives.

CORSIA is the global market-based measure adopted in October 2016 by the countries of the ICAO with the aim of limiting the net carbon emissions of international flights between participating countries for the years 2021-2035.

CORSIA seeks to establish a system whereby operators will be required to purchase ‘emission units’ to offset any growth in carbon emissions from benchmark performance in 2019 (note this is changed from an average of 2019 and 2020 levels following the impact of the Covid-19 pandemic to air traffic in 2020). States may volunteer for the pilot (2021 to 2023) and the first phase (2024 to 2026), but the second phase (2027 to 2035) will include all ICAO states, subject to certain exemptions. Once the offsetting requirements are set in a given year, the requirements are distributed among aircraft operators participating in the scheme.

To facilitate compliance with emission targets both the Aviation Working Group (AWG) and the aviation data and advisory company IBA both launched carbon emission calculators in March 2021.

The AWG carbon calculator uses original equipment manufacturer source data provided by Airbus, ATR, Boeing and Embraer to generate and compare carbon emissions, with the source data being determined by and provided for operational aircraft models under consistent standards, assumptions and methodology, ensuring that it is both accurate and directly comparable. Whilst the IBA carbon calculator integrates proprietary fuel-burn assessments with real-world flights and fleets data from its InsightIQ intelligence platform to calculate and compare carbon emissions.

Until recently green aviation and environmental, social and governance (ESG) factors may have been background considerations for credit committees in the aviation sector. However, attitudes seem to be shifting as there was a number of green or sustainability-linked financings involving airlines, lessors and airports prior to the COVID-19 pandemic.

Some recent green financings include:

• October 2018 – Ana Holdings, became the first airline in the world to issue green bonds worth approximately US$88m to build a training centre based in Tokyo.
• May 2019 – Sydney airport closed a syndicated sustainability-linked loan raising a total of A$1.4bn.
• December 2019 – Deutsche Bank closed the first ever green loan for commercial aircraft financing of three low-carbon emission ATR 72-600 with Singapore based lessor, Avation.
• December 2019 – Etihad closed €100m green loan linked to the UN's Sustainable Development Goals to support expansion of a sustainable apartment complex for the airline’s cabin crew.
• February 2020 – US airliner JetBlue has signed a US$550m, sustainability-linked revolving credit facility.

This trend seems set to continue in 2021, with Kroll Bond Rating Agency (KBRA) now identifying and integrating credit-relevant ESG considerations into their credit ratings analysis and ABS credit reports in respect of auto loans and now aircraft, specifically the KBRA credit report for the inaugural Falko Regional Aircraft Limited ABS which priced on 16 April 2021.

Whilst KBRA fall short of including ESG scoring in their credit reports, other rating agencies such as Fitch ratings have started including ESG ratings in their credit reports across the wider structured finance space and it is likely these will be factored into future aircraft ABS transactions.

We have identified certain key drivers of growth in green aviation going forward:

• increased governmental and regulatory pressure – the development of ESG initiatives will be linked to increased regulation of environmental issues through multilateral legal frameworks such as CORSIA, in conjunction with existing schemes such as the EU ETS.
• reputational considerations – this may become increasingly important as stakeholders and consumers alike become more aware of a company’s rating or performance relative to its peers.
• pricing benefits for borrowers – whilst these appear to be marginal for the time being, this could change in the future as the market develops.
• access to a wider pool of investors– although this is currently fairly limited in the context of aviation finance, aviation has attracted a growing number of institutional investors in recent years who are more likely to place greater emphasis on ESG than traditional aviation lenders or lessors.