The Ethical Investor: REX goes under, but here’s why ESG investors may want to look at aviation stocks

Ethical investors have had mixed feelings about aviation, but recently, the ESG appeal of  airline stocks has taken off - for several reasons.

For ethical investors, the aviation industry has been a source of conflicting feelings. Picture Getty

• For ethical investors, the aviation industry has been a source of conflicting feelings

• Lately however, ESG investors have become increasingly interested in airline stocks

• Many airlines now focus on sustainable tech, including fuel-efficient aircraft and alternative fuels

Regional Express (ASX:REX), Australia's third-largest airline, stunned investors with the news on Tuesday that it had entered voluntary administration.

The move followed a weekend report in The Australian, which revealed that REX had brought in a “turnaround team” from one of the Big Four accounting firms.

On the back of that article, REX’s shares were put on a trading halt at the start of Monday’s session.

More than 600 jobs are now at risk, all flights between major airports have been canceled, and the airline's Boeing 737 fleet is grounded.

To help passengers affected by the cancellations, Virgin Australia is apparently stepping in.

Virgin is offering to transfer tickets free of charge to their own flights for anyone with a canceled Rex booking on one of the 13 Virgin Australia routes that overlap.

The blow came just weeks after REX’s former executive chairman and shareholder, Lim Kim Hai, made a bold attempt to oust the airline’s board, following John Sharp's appointment as chairman and Neville Howell taking over as the new CEO of Rex.

Should ethical investors buy aviation stocks?

For ethical investors, the aviation industry has been a source of conflicting feelings.

Aviation is one of the fastest-growing sources of greenhouse gas emissions (GHG). Currently, air travel accounts for around 2.5% of all carbon emissions, and 12% of all transportation-related emissions.

Aviation affects the climate not just through carbon dioxide (CO2), but also by releasing other substances like nitrogen oxides, water vapour, and tiny particles of sulfate and soot at high altitudes.

A study done by the European Aviation Safety Agency (EASA) looked into these effects, and found that these non-CO2 impacts from aviation are just as important as the effects of CO2 alone.

Lately however, ESG investors have become increasingly interested in airline stocks for various reasons.

For one, many airlines are now starting to focus heavily on sustainable technologies, including fuel-efficient aircraft, alternative fuels, and carbon offset programs.

Some are also engaging in various social initiatives, such as community support, disaster relief efforts, and promoting diversity within their workforce.

These actions have appealed to ESG investors who focus on environmental and social impact.

Sustainable fuel a way forward

A great deal of research has been conducted on sustainable aviation fuel (SAF).

SAF is designed to reduce the carbon footprint of aviation compared to conventional jet fuels.

It is mainly produced from sustainable feedstocks.

Some typical feedstocks used are cooking oil and non-palm waste oils from animals or plants; solid waste from homes and businesses, such as packaging, paper, textiles, and food scraps that would otherwise go to landfill.

Other potential sources include forestry waste, such as waste wood, and energy crops, including fast growing plants and algae.

Research says SAF could reduce up to 80% in carbon emissions over the lifecycle of the fuel, compared to traditional jet fuel it replaces. But this depends on the sustainable feedstock used, production method and the supply chain to the airport.

In Australia, the Sustainable Aviation Fuel Roadmap builds consensus on developing the local SAF industry, identifying opportunities to scale production using Australian feedstocks.

According to the Roadmap, Australia is well-positioned to lead in SAF production and scaling due to its existing biofuel feedstock exports, but there are still major obstacles to overcome.

“The transition will require large quantities of green hydrogen both to process biomass feedstocks, and as a feedstock itself in the longer term," said a report from the CSIRO.

"This will in turn require large amounts of supporting renewable energy."

Fuel-efficient aircraft in vogue

Alongside SAF, fuel-efficient aircraft are also now being developed to consume less fuel than older models, thereby lowering both operating costs and environmental impact.

A fuel-efficient aircraft’s streamlined designs minimise drag, allowing the aircraft to glide through the air more smoothly.

These newer planes are equipped with advanced engines that burn fuel more completely and produce less waste.

Additionally, they use lightweight, high-strength materials like carbon fibre, which reduce the overall weight of the aircraft, so the engines require less power to maintain flight.

Experts frequently compare the fuel efficiency of aircraft from Boeing and Airbus.

In one study, the Boeing 787-9 was found to be more fuel-efficient compared to the Airbus A350-900.

The 787-9 has a fuel consumption rate of 2.31 liters per 100 kilometres per passenger, while the A350-900 uses 2.39 liters per 100 kilometres per passenger.

This higher efficiency of the Boeing 787-9 is primarily due to its lighter weight and optimised design.

It also benefits from being a more efficient aircraft per seat, despite having a slightly lower seating capacity and range compared to the A350-900.

The A350-900, while close in performance, slightly lags behind in fuel efficiency due to its heavier build and larger fuel capacity.

But do carbon offsets actually work?

Almost every major airline now has a carbon offsets-based program.

These programs let passengers pay to counterbalance the carbon emissions from their flights by supporting environmental projects.

For example at Qantas, passengers can choose to offset carbon emissions on their bookings.

“Qantas will be able to support more conservation and environmental projects in Australia and around the world,” the airlines said.

“Over the years, these projects have included protecting the Great Barrier Reef and working with indigenous communities to reduce wildfires in Western Australia.”

At face value, the programs sound appealing, as they offer a way to mitigate travel's impact on the climate.

However, there are significant concerns. Many experts believe that the actual emission reductions promised by these offsets are often exaggerated.

This skepticism is supported by the low uptake of offsets among passengers, with only 1 to 3 percent participating.

Experts say that airlines rely on third parties to purchase offsets, but these third parties lack the expertise to verify the true impact of these programs.

Critics also argue that offsetting can sometimes be a way for airlines to appear environmentally friendly without making substantial changes to their operations.

“Offsetting effectively offers a company a licence to pollute, and provided the cost of doing so is less than the cost of not doing so, they will continue to pollute,” said a report from Business Traveller.

“For an offset to be truly that – and offset -it needs to be proved that it would have been unlikely to happen otherwise – in other words, it is ‘additional’ offset as a result of the intervention of the carbon market.”

Airlines related stocks on the ASX

Code	Name	Price	1-mth % Change	6-mth % Change	12-mth % Change	Market Cap
QAN	Qantas Airways	6.32	8%	14%	-3%	$10,526,317,905
AIZ	Air New Zealand	0.54	11%	-11%	-21%	$1,802,128,409
REX	Regional Express	0.57	-3%	-38%	-50%	$63,967,233
AQZ	Alliance Aviation	3.15	2%	-6%	-4%	$509,528,989
FLT	Flight Centre Travel	21.85	8%	3%	-7%	$4,909,105,906
WEB	Webjet Limited	8.81	-2%	18%	12%	$3,485,167,929

Originally published as The Ethical Investor: REX goes under, but here’s why ESG investors may want to look at aviation stocks