Airlines, COVID-19, climate change and risk reporting

Professor Carol Adams, Professor in Accounting examines how airlines have been reporting risk, how global pandemics like COVID-19 fit into this and how this may affect their futures.

COVID-19 highlights the cracks in corporate risk reporting and head-in-sand corporate governance practices.

The experience with SARS demonstrated how vulnerable airlines are to viral outbreaks, whether pandemics or not. And recent negative coverage of Royals on private jets demonstrates public awareness of the contribution of air travel to climate change. But airlines are not acknowledging these risks to their operations.

American Airlines’ submission to the US Securities and Exchange Commission identifies its risk factors as economic downturns; the competitive and dynamic nature of the industry; data security issues; financial conditions such as their high level of debt, pension obligations and financial capital requirements; trade union disputes; and other issues. The risk factors are largely portrayed as out of their control – things done to them. For example, in discussing the risk of union disputes, they say wages are competitive and yet note that 84% of employees are represented by unions, a sign perhaps that they don’t agree. Climate change gets a mention towards the end of a long list, but with a focus on ‘stringent’ regulations and ‘increasing operating costs’, for example as a result of carbon offsetting. Pandemics don’t get mentioned at all. The bulk of the 250-page document focusses on historical financial data – already irrelevant to most stakeholders.

On the other hand, Qantas CEO Alan Joyce has committed to halving emissions by 2050 based on 2005 levels. Joyce demonstrates how important an issue he considers climate change to be by its inclusion in his two-page statement in the 2019 annual report. Climate change is one of five key risks listed in the Qantas annual report and, in contrast to American Airlines, the focus is on long-term climate-related physical and transition risks and how they are managed, including through scenario analysis and the Taskforce on Climate-related Financial Disclosure (TCFD) Recommendations.

The International Airlines Group (which includes British Airways, Iberia and Aer Lingus) has committed to net zero carbon dioxide emissions by 2050 through carbon offsets, carbon capture and investment in sustainable aviation fuels ($400m). Like Qantas they follow the TCFD Recommendations. COVID-19 is portrayed as an opportunity by the CEO: “When production returns to normal there will be many looking to move cargo quickly, and airfreight will play a central role in that.” Whilst IAG does state that a “multi-year global economic downturn impacting all regions… was considered to be the most impactful scenario that could threaten the Group”, it did not appear to have connected that possibility with a health scare such as COVID-19.

The Air France KLM Group’s Sustainability Report focuses on its contribution to the UN Sustainable Development Goals and other achievements. This is likely intended to mitigate reputation risk, but sustainable development risks are not explicitly addressed. KLM aims to reduce its carbon dioxide emissions per passenger by 20% in 2020, compared to 2011 levels, through a more fuel-efficient fleet and investment in sustainable biofuel. But like other airlines, its annual report does not address the risks of global warming.

This all points to the imbalance of corporate resources on monitoring financial versus non-financial risks, opportunities and value. Boards need to skill up on sustainability risk identification. Those airlines that survive COVID-19, likely through government bailouts, will be those already thinking about what the world might look like when it’s all over. How many airlines will be left with the resources to return to pre-COVID-19 flight routes and numbers? How will the balance of global demographics and household income be changed? Will people be less inclined to travel internationally for business have adapted to technological means of communicating? Now that we have had a taste for them, will governments adopt extreme measures to fight climate change, and what would that mean for airlines? One thing is for sure – financials will not be the key determinant of an airline’s future. Climate change and other global events pose a much bigger risk. None of these airlines acknowledged a health crisis or pandemic as a key risk and climate change tends to be seen as ‘cost’ or a potential reputation risk, rather than a risk in itself.

Airlines must acknowledge identification and reporting of risks and risk mitigation strategies need to improve. This will lead to better governance oversight.

/Durham University Public Release. View in full here.