The critical financial factors helping to build sustainable airport operations

Around 250 delegates from WTW’s Airport Risk Community (ARC) and beyond were treated to candid discussions on the pandemic, climate change and aviation’s carbon challenge.

Led by Javier Echave, the CFO of Heathrow Airport Holdings and hosted by the head of WTW’s Climate Resilience Hub, Rowan Douglas CBE, webinar delegates were told that the two-year COVID-19 pandemic was continuing to wreak havoc on global aviation; but in every crisis there is opportunity.

“The last two years have been absolutely catastrophic for aviation, but it has been a great opportunity to really test our strategic agendas,” Echave told delegates. As an example, he cited Heathrow’s commitment to paying the London Living Wage to all its employees, as part of Heathrow 2.0, the sustainability strategy the airport launched in 2017.

At the height of the pandemic, with Heathrow’s organisational losses stubbornly holding at about £5 million a day, it would have been tempting to let such strategic commitments fall by the wayside.

“Actually, I saw it as an opportunity to really test our commitments. The last two years has been about protecting the business,” Echave said. “They were a strategic part of a much longer plan, which involves winning the recovery, building back better and making sure that we continue on the path to building the airport that we want by the end of this decade.”

For Heathrow, that transformation necessarily includes playing a leading role in the industry’s transition to more sustainable business practices. And that, according to Echave, involves facing some of the ‘uncomfortable truths’ that were again laid bare at COP26 in Glasgow, including aviation’s contribution to climate change.

“In our case, 21 million tonnes of CO₂ emissions, across Scope 1, 2 and 3 emissions, was caused by a company called Heathrow Airport and the ecosystem around it, including airlines,” he said. “That's an uncomfortable truth, but it is the truth. And it is important that we take responsibility for that truth.”

Despite its present carbon short-comings, Echave remains steadfast in his passion for aviation which, he described as “the force that connects cultures and countries, and the force that enables many of the United Nations’ 17 Sustainable Development Goals”.

“The best way to reconcile these two realities is by recognising that aviation is not the enemy. Carbon is the enemy; we have chosen to declare a war on carbon. It’s important that, collectively, we declare war on carbon, and all the threats to nature, to biodiversity, and all those things that impair the creation of a much stronger circular economy.”

To address the complex carbon-reduction challenge faced by Heathrow and its ecosystem partners, Echave compartmentalises it into two distinct carbon origins: carbon produced in the air and carbon produced on the ground. While ground-origin carbon represents just 5% of the local ecosystem’s output each year, Heathrow is committed to reducing that by 45% by 2030.

Echave sees achieving that goal in four parts, lowering the footprints for: passenger access, the supply chain, Heathrow’s on-site vehicles, as well as its buildings and infrastructure.

For him, lowering the carbon output in the first two areas is about creating incentives. The company is establishing incentives to tempt a greater proportion of the airport’s users onto public transport; management is also investigating how to create a framework of commercial incentives that will compel supply chain partners to invest in ‘greener’ technologies.

“The temptation here is to use the proverbial stick. But I personally believe that using ‘commercial carrots’ is a much more effective way to create a pull effect, rather than a push effect,” Echave told delegates. “It’s critical that we work with our supply chain to make that happen.”

The company has converted its sub-2.4 tonne fleet of service vehicles to electric and is building the on-site infrastructure (charging stations, etc.) to support the conversion of larger vehicles (and half of its heavy goods vehicles) to electric power by 2030.

The final step will be getting its buildings and infrastructure to zero carbon emissions. There, they have experience to rely on. In 2014, Terminal 2 became the first airport terminal in the world to be 100% powered by renewable energy.

“[Achieving the last step] is about continuing to use our investment capability to either accelerate change or, when [asset] lifecycles reach their expiration dates, injecting technology to achieve that,” Echave said.

Meeting those four goals will significantly reduce Heathrow’s ‘carbon on the ground’. While that will be an achievement in and of itself, Echave knows that it will also almost as importantly build the company’s industry credentials as a climate leader.

“[Achieving the ‘ground’ goals] is absolutely critical to earning a licence to have the conversation about bigger things, like carbon in the air,” he said.

The total ‘carbon in the air’ created by Heathrow’s ecosystem reached 20 million tonnes of CO₂ emissions in 2019, mostly from aircraft engines burning fossil-based kerosene. Management is committed to leading a ‘coalition of the willing’ to collectively reduce air-based emissions by 15% by 2030.

Echave has distilled that massive challenge into focusing on four more manageable parts; modernising airspace; improving engine efficiency; using a greater proportion of sustainable aviation fuels (SAFs); and an overall industry transition zero carbon aircraft.

He said talks with the UK Government and industry partners are ongoing to modernise the country’s dated air-traffic control system, which he describes as the UK’s ‘motorways of the sky’. The current system was designed in the 1960s and is no longer fit for purpose given the significant increase in air traffic and leaps in aircraft technology.

“They were designed with a very old technology,” Echave told ARC delegates. “We are working with many partners, including NATS [National Air Traffic Service] and the DfT [Department for Transport] to modernise the airspace, so we can have significantly more efficient motorways and [strategies] for landing and taking off aircraft, which will consume less combustibles.”

To some extent, improving engine and aircraft designs is a matter of waiting for technological developments to catch up with social demand; future fuels such as electricity and hydrogen hold leading promises, but their use at scale appears distant at present.

It is in the transition of the present aviation fuel mix to lower carbon SAFs that Echave sees real potential for some critical early progress on the industry’s journey to lower carbon consumption.

“This is a very exciting area. The good thing is that the technology exists today; it’s not a fantasy technology,” he said. “This is about resolving a very clear economic problem: the present production of SAFs is not big enough, and the price versus traditional kerosene is five to six times more expensive.” 

The UK government, in consultation with its aviation sector, recently committed to enabling airlines to use a minimum of 10% SAF by 2030¹. Aside from legislating a de facto small reduction in the amount carbon emitted in British airspace, the regulation also potentially addresses supply-side challenges and gives a wider impetus for the transition to cleaner fuels, Echave said.

“[The regulation] is creating the business case that will attract private investment and encourage the production of SAFs across the UK,” he said.

A few years ago, the discussion about climate change was mainly framed as an ethical debate, a matter of organisational ‘values’; for some organisations, it may have been seen as a potential threat to the brand. But the scientific community has consistently proven the causality between carbon output and global warming, so the debate has changed.

Combatting global warming is now seen as “simply probably good business”, according to Rowan Douglas. That fact and growing societal pressure has changed the debate.

In 2019, the UK made a legal commitment to deliver net zero greenhouse gas emissions across the country and industry by 2050. This is seen as having implications for finance executives such as Echave, who manages a debt portfolio of £15 billion on behalf of his company.

“[Achieving net zero] is no longer a pledge; it’s a legal mandate,” Echave said. “My last bond matures in 2051, which means that that bond has to be compliant with the legislation at the time, and that legislation will include net zero.”

Organisations such as Heathrow will need to demonstrate that they are compliant and a going concern, making the contribution of finance professionals to the climate debate even more critical.

In that light, boardroom discussions about climate change are no longer about organisational ‘values’; they are now about creating initiatives such as carbon-reduction strategies that create organisational value.

In closing, what both Echave and Douglas made clear is that aviation’s decarbonisation drive cannot be driven by one executive, one government official, one airport or even a single country.

Industries such as aviation that depend on connectivity and multinational co-operation, often require a collective response to problem solving.

“We are really keen to see how we can support a collective process amongst our Airport Risk Community and our airline clients about some of these practical technical questions and implementation issues,” Rowan Douglas said as the session wound down.

Echave agreed.

“We have an opportunity to really collaborate, to share and, rather than each of us reinventing the wheel in isolation, we can use powerful platforms like WTW to really push those things that serve ways of collectively achieving a single goal,” he said. “It is really important that we use our power to connect to inspire sustainable change.”

¹ https://www.transportenvironment.org/discover/start-uk-roll-out-of-zero-emission-jets-this-decade-says-green-think-tank/