Evaluating the impact of the new environmental regulations on airlines’ business results

Abstract

Purpose

In a highly competitive scenario, such as today’s airline business, changes in the regulatory framework may produce important variations in the airlines’ results. An example is the introduction of Sustainable Aviation Fuel (SAF) mandates to help air transport decarbonization. The airlines’ break–even curve provides a useful tool to evaluate the competitive position among airlines and to assess and address the cost impact due to the new regulatory environment. The purpose of this paper is to evaluate the impact of new environmental regulations on airlines’ business results to achieve air transport decarbonization.

Design/methodology/approach

Based on the break–even curve and the relationship between fuel cost increment and fuel cost related to the airlines’ operating expenses, the unit cost increment due to SAF introduction is obtained for several scenarios of SAF prices and different airlines.

Findings

In many cases, we find that using 100% SAF with prices beyond 1.5 times the present fuel price generates losses: it is not feasible if it is not possible to transfer SAF price to passenger fares due to demand elasticity.

Originality/value

The novelty of this approach is the application of a rationale method to accurately determine the impact of several scenarios of SAF prices on airlines’ business results. This approach also provides a sound and compelling basis to argue before Environmental Regulation Authorities based on facts and figures. This paper is of use and value to airlines, the International Civil Aviation Organization (ICAO), the International Air Transport Association (IATA), practitioners and academics.

Citation

Jaume, J., Alonso, G. and Benito, A. (2024), "Evaluating the impact of the new environmental regulations on airlines’ business results", Aircraft Engineering and Aerospace Technology, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/AEAT-04-2024-0101

Introduction and some literature review

Climate change is a huge concern worldwide to preserve the planet. Air transport industry stakeholders are fully aware of this fact and aim to reduce emissions that affect atmospheric warming. Technology investment is a priority in the airline industry, affecting state-of-the-art airplanes, engines and systems. All aviation stakeholders are committed to reducing carbon emissions for environmental and economic reasons.

The International Civil Aviation Organization (ICAO) began to regulate emissions in 1980 (Annex 16, Vol. II), focusing initially on the air quality. After the 1997 Kyoto Protocol, the ICAO assumed the responsibility of controlling the impact of international civil aviation on climate change. Carbon dioxide (CO₂) is the main greenhouse gas emitted by jet engines, although others, such as nitrogen oxides (NO_x), water vapor and particles, also have some warming effects.

As scientific certainty about CO₂ behavior is much better than for other climatic effects, such as cirrus cloud formation (contrail) or NO_x atmospheric distribution, Aviation Regulatory Authorities have decided (for the time being) to focus on CO₂, implementing measures with the target of obtaining results in the short-medium term.

Stoichiometric (perfect) combustion of 1 kg of kerosene (aviation fuel) produces 3.16 kg. of CO₂. The original ICAO target analysis was to minimize the fuel burned by considering the actions of the three main stakeholders:

• Manufacturers to produce more efficient airplanes, engines and systems. This affect to airplane lift, drag, weight, thrust (propulsion), speed, systems and design. Some examples are better aerodynamic interaction among fuselage, wings and engine nacelles and pylons; turbulence simulation (large eddy/direct numerical simulation LES/DNS); full laminar boundary layer; lightweight metals and composite materials; improved on-board navigation systems (required navigation precision); advanced flight management systems (FMS) for a continued optimum flight; propfan development and advanced ducted propeller (ADP); new airplane designs: lifting fuselage, flying wings, wing geometry; drop-in SAF (Pereira et al., 2022).

• Airlines to improve operating procedures and to optimize fleet utilization. Some examples are at regulatory level, the continuous update of the original ICAO Circular 303 Operational opportunities to minimize fuel use and reduce emissions until its present version (ICAO, 2014) and the operators’ best practices collected by International Air Transport Association (IATA [IATA, 2023]).

• Infrastructure suppliers: airports to provide capacity enough to avoid congestions and air traffic control (ATC) for optimum air traffic management (ATM). Two examples are advanced ATC systems (NextGen) ATM program (FAA, 2024) in the US and single sky program (SESAR, 2024) in Europe.

According to IATA experience, these three action lines of ICAO produce a fuel efficiency improvement between 1.5% and 2% per year (Benito and Alonso, 2018), which is not enough to compensate for the international traffic growth of approximately 3–4% per year (ICAO, 2024). With the agreement of the main aviation stakeholders to solve this gap, the ICAO added a new action to the three technical ones, introducing economic mechanisms and market incentives to achieve established targets: market-based measures (MBM). The whole set is known as “The Four Pillars.” The MBMs applied so far and updated to March 2024 are voluntary agreements, taxes, charges, emissions trading system (ETS) and offsetting (Carbon Offsetting and Reduction Scheme for International Aviation –CORSIA). Their application is up to each State or group of States (the European Union uses ETS for internal flights), except CORSIA, which was approved by the ICAO in October 2016 and started in 2021 on a voluntary basis, to become mandatory for most ICAO members in 2027. In addition, Sustainable Aviation Fuel (SAF) has become an important fifth element of the decarbonization process (Watson et al., 2024).

Some examples of existing literature on the topic include the MBM effect on airline costs and their impact on fares, considering the possible falls of demand (Pagoni and Psaraki-Kalouptsidi, 2016), as a game theory approach. Decarbonization as a major challenge and concern for airlines, particularly the SAF price (Watson et al., 2024). The possible uncertainty about SAF production, price, timing and regulations (McKinsey, 2023) since there is no well-defined pathway for implementation yet (IATA, 2024). A flexible approach to decarbonization is recommended in any case.

About SAF

SAF is a replacement for traditional fossil-based fuel to reduce CO₂ emissions. Differing from biofuels that can be obtained from unsustainable production (sugarcane and palm oil), SAF is made only from sustainable feedstocks (waste oil and fats, municipal waste, among others), providing a net reduction in CO₂ emissions. The air transport industry is committed to use only fuels that meet strong sustainability requirements. ICAO defines SAF as “a renewable or waste-derived aviation fuel that meets the ICAO CORSIA sustainability criteria.” The properties of traditional fuel (kerosene) do not change by blending SAF. Airports, airplanes and engines do not require any adaptation to SAF, which is called drop-in fuel (ATAG, 2023).

Different types of drop-in products were successfully tested, and their results showed a 60%–80% CO₂ savings, based on life cycle analysis calculations. With this new tool in mind, the ICAO approved in 2022 a long-term target of achieving net zero CO₂ emissions by 2050 (ICAO, 2022a, 2022b), as shown in Figure 1.

Target approval was not linked to a timing program for adoption on the needed measures. ICAO created a technical group to develop a general schedule to be reviewed periodically as a practical tool for the selection of the best pathways to achieve the intended target on time (ICAO, 2022a, 2022b).

The European Union (EU) SAF mandatory blending

There is a consensus on the introduction of SAF as the main factor to eliminate carbon emissions in the short and medium terms (IATA et al., 2024). The EU’s “Fit for 55” (EU, 2023a, 2023b, 2023c) climate package (first announced on July 14th, 2021) included a proposal of minimum mandatory blending of SAF to fuel suppliers at EU airports and was approved in September 2023. The obligation also includes a minimum percentage of e-kerosene (the aviation category of e-fuels). This package involves aviation fuel suppliers, airlines and airports. The proposal considers SAF to have the highest potential for decarbonization and, hence, to push SAF introduction into the market. The plan to accomplish this with a minimum blend of SAF and e-kerosene is (EU, 2023a, 2023b, 2023c):

• 2% from 2025;

• 6% from 2030, with a minimum of 0.7% e-kerosene;

• 20% from 2035, with a minimum of 5% e-kerosene;

• 34% from 2040, with a minimum of 8% e-kerosene;

• 42% by 2045, with a minimum of 11% e-kerosene; and

• 70% by 2050, with a minimum of 28% e-kerosene.

After a successful Virgin Atlantic Boeing 747/400 first commercial flight with a mix of 80% of conventional kerosene and a 20% first-generation biofuel, more than 40 airlines have tested different aviation biofuels with satisfactory results. The properties of kerosene were not changed by blending it with biofuel, which is known as drop-in fuel. The US American Society for Testing and Materials (ASTM International) approved a biofuel specification (July, 2011), and most of today in-service engines are certified to operate up to a mix of 50% of SAF in the standard kerosene. The EU accepted the challenge of promoting SAF in air transport, and such methods were established in the Strategic Energy Technology Plan.

The present technology can provide SAF with reduced carbon emissions, measured on a CO₂ life cycle basis, to substitute standard kerosene. What is not so clear is whether it can be done in a cost-effective way, here lies the real challenge. According to EU estimation, SAF might cost more than 2,000€/ton vs 700€/ton of standard kerosene at today’s prices (around three times the average) (EASA, 2022), which may be unaffordable for the air transport industry. However, the price is expected to decrease as the learning curve improves and production scales increase.

Position of the air transport industry

In a press release on July 14th, 2021, related to the EU’s “Fit for 55 package”, IATA stated that SAF is the most practical solution but is concerned about its cost. The aviation industry is committed to decarbonization but opposed to taxes as a solution for change. To reduce emissions, the IATA claims a constructive policy that focuses on production incentives for SAF and delivering a single European sky. The IATA proposed a more ambitious target, with net zero carbon emissions by 2050. The 41st ICAO Assembly (September/October 2022) also agreed with the goal of net zero carbon emissions for international aviation by 2050 in support of the UNFCCC Paris Agreement (Figure 1). Airlines cooperate with industrial plants and research centers to multiply SAF production. As an example, on July 25th, 2023, the International Airlines Group (IAG) announced investment in Nova Pangaea Technologies (IAG, 2023a) to drive UK–sourced SAF toward industry decarbonization.

The break-even curve concept and tool

The concept of break–even curves provides a useful tool to manage airlines in a highly competitive environment (Jaume and Alonso, 2023). The break–even curve describes the business performance of an airline and is derived from its results equation, that is:

(1) RASK=y⋅LF−c

where:

R: Results.

• ASK: Available seat kilometer.

• y: Yield, revenue per passenger kilometer, RPK (unit revenue), in cents of €.

• LF: Load factor (LF), relationship between RPK and ASK (RPK/ASK), in %.

• c: unit cost per ASK (CASK), in cents of €.

Equation (1) relates the economic results R of an airline with its three fundamental business variables y, LF, c and the production of ASKs. These variables describe the business behavior of airlines. In addition, equation (1) provides information on the economic performance of the airline per unit of production in ASKs. Figure 2 shows the graphic representation of equation (1). Any variation in c moves the surface back and forth. It is a gentle doubly ruled surface, with a smooth forward slope (to increase results, yield, LF or both must increase).

The red line represents the locus of the surface with the results R = 0. The black lines are the locus of the surface with constant results, either positive or negative. To draw the surface, we have used c = 9 cts/ASK as a sample (it will be explained below).

To manage an airline, it is useful to consider the case in which R = 0. This allows us to know which combination of variables achieves the break–even of the business and facilitates the visualization (Figure 3) of the basic reference from which to obtain positive results: R > 0 (Jaume and Alonso, 2023).

From equation (1), the condition for R = 0 is:

(2) y⋅LF=c

Figure 3 shows the graphic representation of equation (2), corresponding to the red line on the surface of the results (c = 9 cts/ASK).

The unit cost c = 9 cts/ASK has been taken from a CASK average among the Network airlines Air France-KLM, Delta and Lufthansa Group in 2019 (see Table 1).

Equation (2) is called break–even equation, and Figure 3 shows the break–even curve. For each yield value on the curve, the break-even load factor (LF_be) is obtained and vice versa. Yield and LF values on the curve produce zero results: R = 0. For pairs of yield and LF values above the curve, positive results are obtained (R > 0); and for yield and LF values below the curve, negative results are obtained (R < 0). The break–even curve is not only a useful tool for competition among airlines but also to assess and address the cost impact due to new boundary conditions, such as new environmental regulations.

The basic scope of this research is the air transport industry in the USA and Europe, but its results and conclusions are applicable to the management of airlines worldwide. Most of the data are up to and including the year 2019 (a good year for well-managed airlines) to avoid the singularity of the Covid 19 pandemic effect. In 2022, the air transport industry experienced a recovery, with global figures up to 87% of 2019 figures (IATA, 2022). For the whole of 2023, approximately 95% of 2019 pre-pandemic passenger air traffic levels have been achieved. In some cases, mainly in North America and Europe, the 2023 air traffic level surpassed that of 2019. Airlines’ 2023 total operating profits are in line with the 2019 levels (ICAO, 2024). We also include some preliminary figures for 2023.

In the last 10 years, up to and including 2019, scheduled passenger traffic worldwide maintained a sustained and significant level of growth, with an average above 6% per year in terms of Revenue Passenger Kilometer (RPKs) (ICAO, 2019).

Table 1 is a set of business data of Network airlines and point-to-point LCCs corresponding to 2019 (source: Annual Reports of each airline, currency in Euros, €). Table 1 includes airlines that successfully survived after the highly competitive market created by the new competition rules from air transport liberalization in the USA (ICAO, 2016; Moir, 2018) and the EU (Debyser, 2023; EU, 2023a, 2023b, 2023c). These airlines have made an important effort to improve efficiency at the leading edge of competitiveness.

where:

ASK = Available seat kilometer;

RPK = Revenue passenger kilometer;

Yield = Revenue per passenger kilometer (unit revenue);

Cost/ask = unit cost per ASK = CASK;

LF = Load factor, relationship between rpk and ask (RPK/ASK), in %;

LF_be = Load factor of break–even (when revenues equal costs, so results are zero); and

ΔLF (pp) = difference between LF and LF_be in percentage points.

In 1977, the average industry LF of scheduled legacy carriers was about 62%, with a LF_be around 60% (James, 1982). Nowadays, the LF averages between 82% and above 90% (see Table 1). This is a big LF leap compared to those prior to liberalization. These much higher LFs represent a better use of capacity, better efficiency of air transport and lower fuel consumption per passenger (i.e. a lower carbon emission per passenger).

The average unit cost (CASK) of legacy carriers in 1977, in real terms of 2019, was 6.62 cts/ASK (James, 1982) which is similar to the present ones. This means that the unit cost over the years has remained nearly constant in current terms, which means that it is much lower in real terms. Airlines make a permanent effort to keep or even lower their unit cost over the years.

Methodology

Evaluation of airlines’ business cost impact due to new environmental regulations

New environmental regulations will be implemented in the coming years, most likely with a fuel cost increase due to SAF. In this case, the break–even curve concept (Jaume and Alonso, 2023) described in the Introduction is a framework that provides and substantiates information to indicate the SAF cost impact on CASK, that is, on airlines’ business performance.

The break–even curve shows the profits margin of CASK increase up to reaching zero results (R = 0) without increasing fares (yields) (Figure 4).

Any airline with profits (see Table 1 as a sample) operates with yield and LF above its corresponding blue break–even curve. Its margin for increasing CASK while maintaining profits is up to its red break–even curve (R = 0). The red curve is the limit not to surpass to maintain profitability, and hence to guarantee service continuity. This provides a sound basis before Environmental Regulation Authorities showing that the effect of fuel cost increase has a limit when it comes to keeping the airline alive. Continuity is a must and the present break–even curve for profits is the bottom-line airlines have achieved by keeping CASK under control and nearly constant in current terms over the years in a highly competitive environment. Beyond the break–even curve limit (red curve) there is no way to preserve service continuity.

Among other data, Table 2 shows the 2019 airlines fuel cost percentage related to the operating expenses (OEs), the CASK that provides zero results (R = 0) and the CASK margin increase related to present CASK until reaching R = 0. Such a CASK for zero results comes from the break–even equation (R = 0), that is:

(2) y⋅LF=CASK

For example, in the case of IAG, the CASK for R = 0 is (from Table 2):

8.93⋅0.846=7.55=CASK for R=0

That is, the CASK increment until reaching R = 0 from actual CASK of 6.58 for profits up to 7.55 (R = 0) provides a margin of 14.74% (see Table 2).

The fuel cost related to OEs ranges between 18% (Lufthansa Group) and 26.3% (IAG) for Network airlines and between 22% (Southwest) and 37.49% (Ryanair) for LCCs. The effect of fuel cost for LCCs is usually higher in relation to the network costs because of their lower level of service, and hence, lower OEs. For the same fuel cost increase, since its effect on Network airlines is lower than that of LCCs, it may provide some “competitive advantage” to Network airlines over LCCs.

Fuel cost impact on airlines due to SAF

Let us consider several scenarios of the SAF price (P) related to the present standard kerosene price (p), considering SAF only in-plane.

Considering the OEs of an airline, let A be the OEs except fuel cost (F); that is:

A+F=OEs

Dividing that expression by ASK, results:

AASK+FASK=OEsASK=CASK

Considering unit operating costs per ASK, it can be defined:

a=AASK       f=FASK

That is:

a+f=CASK

Now:

Let x be the percentage of the unit fuel cost (f) increment due to SAF.

Let y be the percentage of the unit fuel cost (f) related to CASK. That is: f = y·CASK

Let z be the percentage of the CASK increase due to the unit fuel cost increment (x).

After the fuel cost increment, the new costs (f₁, CASK₁) will be:

Fuel: f₁ = f(1 + x)

CASK:CASK1=CASK(1+z)

a: constant (invariant)

In consequence:

          a+f1=CASK1    a+f(1+x)=CASK(1+z)a+f+f⋅x=CASK+z⋅CASK

Since a + f = CASK, then:

f⋅x=z⋅CASK

Considering that f = y · CASK and substituting, it results:

y·CASK·x=z·CASK

That is:

x·y=z

From this equation it follows that for a given fuel cost increment (x), the greater the percentage cost related to OEs (y), the greater the CASK increment (z). The above equation will be used to calculate the fuel cost increment impact due to SAF.

Considering the EU estimation, the SAF price can be about three times the present price of standard kerosene (EASA, 2022). Let be P the SAF price and p be the price of standard kerosene. Let us consider four scenarios for new fuel prices due to SAF. That is:

P1=3⋅p   P2=2⋅p    P3=1.5⋅p    P4=1.2⋅p

Results

Based on the break–even curve concept described and applied in the Methodology, in conjunction with the airline business indicators (see Tables 1 and 2) and the formulation of fuel cost impact on airlines due to SAF developed above, we may consider the three following cases:

1. Case of 100% SAF (SAF only in plane)

There are different possibilities for introducing SAF in the air transport industry, changing its timing and amounts (Grimme, 2023). The extreme case would be to replace the totality of kerosene by SAF. Technically would be feasible because, although present engines are certified to operate up to a maximum of 50% SAF, this figure is expected to increase up to 100% in the next few years.

Let us consider the SAF price is three times the initial fuel price of the standard kerosene. This represents an increment of 200% over the standard kerosene price. That is:

P1=3⋅p=(1+2)p that is : x=2(200% increment)

Let us consider the percentage intervals of fuel cost related to OEs (y) for the Network and LCCs, as listed in Table 2.

a). Network airlines interval: y = [18% – 26.3%] = [0.18 – 0.263]

a.1)

y=0.18    z=x⋅y=2⋅0.18=0.36=36%    →  ΔCASK=36%

a.2)

y=0.263    z=x⋅y=2⋅0.263=0.53=52.6%    → ΔCASK=52.6%

b). LCCs interval: y = [22% – 37.49%] = [0.22 – 0.3749]

b.1)

y=0.22    z=x⋅y=2⋅0.22=0.44=44%  → ΔCASK=44%

b.2)

y=0.3749    z=x·y=2·0.3749=0.75=75%  →  ΔCASK=75%

Proceeding the same way for the other SAF prices scenarios, as indicated:

P2=2·p=(1+1)p that is : x=1 (+100%)P3=1.5⋅p=(1+0.5)p that is:x=0.5 (+50%)P4=1.2⋅p=(1+0.2)p that is : x=0.2 (+20%)

Table 3 is obtained:

Table 3 is a first glance of the SAF price impact on CASK increments (%). It shows the CASK increment (%) for different SAF prices, considering Network airlines and LCCs, according to the intervals of fuel cost (%) related to the OEs of each. The green figures show the CASK increments that mostly fall within the airlines’ CASK increment margins (except AF-KLM and LH Group in some cases) between the present CASK and those for R = 0 (see Table 2). The red figures show the CASK increments due to the fuel price increment that causes the airline to enter losses, SAF prices of 3p and 2p are unaffordable. SAF prices of 1.5p and 1.2p reduce profits but still positive results (R > 0) except for LCCs in the extreme percentage of fuel cost related to OEs (37.49%); LCCs only accept full SAF prices of 1.2p. This is because of the higher contribution of LCCs fuel costs to their OEs.

More specifically, considering the examples of IAG (Network) and Ryanair (LCC), we can take their respective break–even curves (2019) to show the effect of the SAF price and their CASK margin increase. In the IAG case, CASK increases above 7.55 (ΔCASK > 14.74%, R = 0, Table 2) generating losses (Figure 5).

In the Ryanair case (Figure 6), any CASK increases above 3.86 (ΔCASK > 14.5%, R = 0, Table 2) generates losses. In both cases, any CASK increase above their respective margins (red lines) is unaffordable to maintain profitability. All this can be observed and demonstrated from the break–even curves. Each airline can do its demo before Environment Regulatory Authorities.

We may remember that any increase in the SAF price should fall within such a margin before reaching R = 0. The break–even curve is the bottom line that airlines calculate to keep track of profitable performance and continuity:

Considering the set of airlines in Table 2, and just considering fuel price scenarios of:

P3=1.5⋅p=(1+0.5)p that is : x=0.5 (+50%)P4=1.2⋅p=(1+0.2)p that is : x=0.2 (+20%)

We can obtain the CASK increment for the different airlines and compare it with the CASK increment margin to maintain profits. Taking the Lufthansa Group as an example:

Lufthansa Group: y = 18.09% (Table 2) → y = 0.1809

P3=1.5⋅p    x=0.5    z=x⋅y=0.5⋅0.1809=0.0905→9.05%>4.5% (Table II)→R<0P4=1.2⋅p    x=0.2    z=x·y=0.2⋅0.1809=0.0362 →3.62%<4.5% (Table II)→R>0

Proceeding the same way for the rest of the airlines, Table 4 is obtained. It shows the effect on the CASK increment (%) of full SAF in plane for SAF prices of 1.5p and 1.2p. In the case of 1.2p, the results for all the airlines considered are decreasing but still positive (blue figures). For SAF price of 1.5p, Air France – KLM, Lufthansa (both Network), Ryanair and easyJet (LCCs) would enter losses (red figures).

For more details, we consider bar charts of the cost increment impact using the examples of IAG and Ryanair.

Figure 7 shows bar charts for IAG and Ryanair. The CASK margin for profits is within the green area, ranging from the actual (2019) CASK to the CASK for R = 0.

In the case of IAG, it admits SAF prices of 1.5p, with still some profits from the blue line (+13.15%) up to 14.74% CASK increase for R = 0. SAF of 2p is unaffordable, out of profits (red line CASK = 8.31, +26.3%).

In the case of Ryanair, the profit margin within the green area, ranging from the actual (2019) CASK to the CASK for R = 0 (+14.5% CASK), does not admit SAF prices of 1.5p, which is already unaffordable. In the case of SAF price of 1.2p, Ryanair’s profits are smaller but still positive.

2. Cost impact of EU SAF mandate, according to blending calendar implementation

Within the global impact of EU climate policies on air transport (Oesingmann, 2023), the EU SAF mandate seems to be the most relevant, as it is already approved and will start producing results in 2025.

Let be P the SAF price (including e–kerosene) and let p be the price of standard kerosene. In the case of 2% SAF blending (as of, 2025), considering SAF price is three times the standard kerosene price (P₁ = 3·p, as previously), the final blending price would be:

Blending price=0.98⋅p+0.02⋅P1

That is:

Blending price=0.98⋅p+0.02⋅3⋅p=0.98⋅p+0.06⋅p=(1+0.04)p→x=+4%

That is, the final fuel cost increase (x) would be +4% for blending 2% of SAF.

Proceeding the same way for the different scenarios of SAF price and the EU SAF blending mandate calendar, Table 5 is obtained:

Table 5 shows the fuel cost increments (%) due to the EU SAF mandate, according to the blending proportions calendar for different SAF prices. The green figures show the fuel prices increment that most airlines (2019) could assume without entering losses but that they are close to in some cases. The red figures show unaffordable fuel price increments for airlines to maintain positive results (2019).

Considering the set of airlines in Table 2, and just considering fuel prices scenarios of:

P3=1.5⋅p=(1+0.5)p that is : x=0.5 (+50%)P4=1.2⋅p=(1+0.2)p that is : x=0.2 (+20%)

We can obtain the CASK increment for the different airlines considering the top of 70% blended SAF. Taking the Air France–KLM as an example:

Air France – KLM: y = 21.16% (Table 2) → y = 0.2116

Blending 70% at 1.5p : 0.3⋅p+0.7⋅1.5⋅p=(0.3+1.05)p=(1+0.35)p→x=0.35=35%Blending 70% at 1.2p : 0.3⋅p+0.7⋅1.2⋅p=(0.3+0.84)p=(1+0.14)p→x=0.14=14%

The cost impact on Air France– KLM would be:

P3=1.5·px=0.35z=x·y=0.35·0.2116=0.0741 →7.41%>4.49% (Table II) →R<0P4=1.2·px=0.14z=x·y=0.14·0.2116=0.0296 →2.96%<4.49% (Table II) →R>0

Proceeding the same way for the rest of airlines, Table 6 is obtained.

The red figures indicate the CASK increments that cause the airline to enter losses. For more details, we consider bar charts of the cost increment impact using the examples of IAG and Ryanair.

Figure 8 shows bar charts for both IAG and Ryanair, considering the EU mandate of blending SAF of 70%. In this case, IAG does not accept the SAF price of 2p, nor Ryanair. In both cases, SAF price of 1.5p is admitted but the remaining CASK increment margin for profits of IAG (from +9.21% to +14.74%) is larger than that of Ryanair (from 13.12% to +14.5%). The red lines show the unaffordable SAF prices (2p and 3p). In all cases, the effect of SAF price increments of Network airlines on CASK is smaller than that of LCCs, as can be seen in the bar charts of Figures 7 and 8.

3. Preliminary information of 2023

Table 7 shows business figures of 2023 (partial and preliminary) vs 2019 for IAG (IAG, 2019, 2023b) and Ryanair (Ryanair, 2020; Ryanair, 2023a, 2023b), including the fuel cost related to OEs.

In the case of IAG, the passengers carried in full 2023 reached 98% of 2019 level, with strong demand for leisure travel. Yield increased 19.6%, lower than the CASK increase (22.04%), mainly due to fuel cost increase. For this reason, the fuel cost related to OEs rose 10.76%, up to 29.13%.

In the case of Ryanair, booked passengers have increased 13% in 2023 vs 2019. Yield increased 11.08%, that is, 2.8pp over the CASK increase (8.31%), which indicates improved efficiency. The fuel cost related to the OEs jumped to 45.53% (+21.45%).

Table 8 shows some business indicators to evaluate how preliminary figures of 2023, in conjunction with those reflected in Table 7, can change the calculations of CASK increments made before in relation to different SAF prices, considering full SAF in airplane. For this purpose, we will consider SAF prices of P₃ and P₄. That is,

P3=1.5⋅ p=(1+0.5)p that is : x=0.5 (+50%)P4=1.2⋅ p=(1+0.2 )p that is : x=0.2(+20%)

Case of IAG (z = x·y):

P3=1.5⋅p   x=0.5   z=x⋅y=0.5⋅0.2913=0.15→+14.57 %>13.5 % (Table VIII) →R<0P4=1.2⋅p   x=0.2   z=x⋅y=0.2⋅0.2913=0.06→+5.83 %<13.5 % (Table VIII) →R>0

Case of Ryanair (z = x·y):

P3=1.5⋅p   x=0.5   z=x⋅y=0.5⋅0.4553=0.23→+22.77%>16.15 % (Table VIII) →R<0P4=1.2⋅p   x=0.2   z=x⋅y=0.2⋅0.4553=0.09 →+9.11%<16.15 % (Table VIII) →R>0

In the case of IAG, the margin to increase CASK is slightly below the 2019 one (+13.5% vs 14.7%). This means that with figures of 2023, an SAF price of 1.5 times the present kerosene price would generate losses for IAG, different from the 2019 case (see Figure 7). This is mainly because of the fuel cost increment related to the OEs of 2023 vs 2019. SAF price of 1.2 times admits profits.

In the case of Ryanair, the margin to increase CASK is slightly above the 2019 margin (+16.15% vs 14.5%). However, as previously shown in the 2019 figures, SAF price of 1.5 times the present fuel price is unaffordable; only a price of 1.2 is admitted (see Figure 7).

In short, the preliminary figures of 2023, even with improved results, show a similar or worse scenario than those of 2019 related to the SAF prices considered.

Discussion

The novelty of this approach is the application of a rationale method to accurately determine the impact of several scenarios of SAF prices on airlines’ business results, plus to evaluate the competitive position among airlines under any boundary conditions. Considering the SAF application, the results show that, in the case of full SAF (2019 figures), a price just slightly above 1.5p is close to reaching the break–even for IAG (Network) and well above the break–even for Ryanair (LCC), which makes 1.5p unaffordable for LCCs. This methodology illustrates that the impact of fuel price increments due to full SAF for LCCs is larger than that for Network airlines, which may be worse for tourism. All this could have two effects:

1. To provide a competitive advantage to Network airlines in relation to LCCs on their segment of short and medium haul because the fares scope of Network airlines is wider than that of LCCs.

2. Some impact on the tourism industry, which is highly sensitive to fares, should LCCs try to transfer fuel price increments to them. Demand can decrease due to elasticity.

In the case of blending SAF as per the EU mandate, the overall impact on cost is obviously lower than that of full SAF, but the relative differences between Network airlines and LCCs remain. In both cases, the SAF price of 2p is unaffordable without a large alteration in prices and demand.

Conclusions

The cost impact for several scenarios of SAF prices and different airlines shows that SAF price increments above 1.5p (50% increment) are unaffordable for many airlines unless it is possible to transfer price increments to fares, particularly for LCCs. In the case of the EU mandate, a 1.5p fuel price is possible for some airlines, including some LCCs. If needed, greater effort in accuracy can be made for each particular case by applying the described methodology.

The obvious solution of reducing CASK and increasing fares is easier said than done. The present airline industry is on the leading edge of competitiveness, following the liberalization of air transport, at a highly efficient level. Their margin of improvement is small and lower than the SAF increments of around 1.5p. Increasing fares to transfer the SAF price increment to passengers can prove very difficult since fares are set by the market conditions, which are beyond the airlines’ control in most cases. In addition, elasticity research may be necessary to assess the impact of increasing fares on demand behavior.

The break–even curve is an indicator of the limits that must not be crossed, showing the profit margins between the present (2019) profitable break–even curve and that for R = 0, where any increase in SAF price should fall before reaching R = 0. The break–even curve for profits is the bottom line that airlines calculate to keep track of profitable performance and continuity. Their goal is to maintain CASK under control and nearly constant in current terms over the years in a highly competitive environment.

This provides a sound and compelling basis before the Environmental Regulation Authorities showing that the effect of fuel cost increase has its limitations when it comes to maintaining an airline operative, and to demonstrate the cost impact of new regulations that are unaffordable to maintain service continuity. Each airline can do its own demo before the Environment Regulatory Authorities showing facts and figures. Continuity is a must for both the air transport industry and society, and the break–even curve is a limit, with a red line not to be surpassed. Scientific research and technological efforts should be made to address the challenge of reducing the SAF cost as much as possible. The net carbon zero target is a passionate challenge for air transport to preserve the planet, while connecting the world with clean energy.

Further research

• Updating results with the fuel price increase impact due to SAF for 2023 consolidated figures, since this is a dynamic system.

• Possible limitations resulting from different policies for SAF implementation of different States, considering fair competition among affected airlines.

• SAF technology development and its relationship with SAF availability and regulatory policy.

• Assessment of the break–even curve for short and medium haul vs long haul. In the case of Network airlines, evaluating their reciprocal contribution to the global results and their respective SAF price impact.

• Impact of a potential limitation of short and medium haul operations to reduce carbon emissions (already implemented in France) to feed the long haul Network, and its effect on global results.

• The study of different scenarios of the SAF cost impact increase on fares, considering the demand elasticity that might apply.

Figures

Figure 1

CO₂ emissions reduction plan (ATAG, 2023)

Figure 2

Graphic representation of the results of an airline. This figure shows the results (R/ASK) in relation to the business variables of yield y, load factor (LF) and unit cost c (9 cts/ASK, in this case)

Figure 3

Break–even curve for a CASK average of Network airlines in 2019: Air France, Delta and Lufthansa (9 cts/ASK)

Figure 4

Margin of CASK increases between two generic break–even curves of an airline to maintain positive results

Figure 5

IAG break–even curves to show CASK margin increments (2019)

Figure 6

Ryanair break–even curves to show CASK margin increments (2019)

Figure 7

Bar charts for IAG and Ryanair to show CASK increments according to 100% SAF prices

Figure 8

Bar charts for IAG and Ryanair to show CASK increments according to 70% blending SAF and different prices

Table 1

Different business data of Network and point-to-point LCC airlines (2019)

Airline	Profits before tax (M€)	Cost/ask (cts €)	Yield (cts€/rpk)	LFbe (%)	LF (%)	Δ LF (pp)
IAG	2,275	6.58	8.93	73.7	84.6	10.9
Air France-KLM	346	8.69	10.32	84.2	87.9	3.7
Lufthansa group	1,857	10.38	13.15	78.9	82.5	3.6
Ryanair	671	3.37	4.06	83	95	12
easyJet	494	5.85	6.82	85.8	92.8	7
Delta	5,537	7.08	9.54	74.2	86.3	12.1
Southwest	2,641	5.97	8.24	72.5	83.5	11

Note:

Annual reports of each airline (currency in euros, €)

Source: Table by authors

Table 2

Business indicators and related to fuel cost (2019)

Airline	Yield (cts/rpk)	LF (%)	Fuel cost (€ million)	Fuel cost/ expenses (%)	Actual CASK (cts €)	CASK for R = 0	Δ CASK (%)
IAG	8.93	84.6	6,021	26.3	6.58	7.55	14.74
Air France-KLM	10.32	87.9	5,511	21.16	8.69	9.08	4.49
Lufthansa group	13.15	82.5	6,715	18.09	10.38	10.85	4.5
Ryanair	4.06	95	2,762	37.49	3.37	3.86	14.5
easyJet	6.82	92.8	1,628	24.0	5.85	6.33	8.29
Delta	9.54	86.3	7,610	21.09	7.08	8.23	16.2
Southwest	8.24	83.5	3,883	22.33	5.97	6.88	15.24

Source: Table by authors

Table 3

CASK Increment due to 100% SAF fuel for different prices

	Network airlines		Low-cost carriers
SAF price	Fuel cost/OEs y = 18% ΔCASK (%)	Fuel cost/OEs y = 26.3% ΔCASK (%)	Fuel cost/OEs y = 22% ΔCASK (%)	Fuel cost/OEs y = 37.49% ΔCASK (%)
3p	36	53	44	75
2p	18	26.3	22	37.5
1.5p	9	13.15	11	19
1.2p	3.6	5.26	4.4	7.5

Source: Table by authors

Table 4

CASK Increment due to 100% SAF prices for different airlines

Airline	1.5p ΔCASK (%)	1.2p ΔCASK (%)
IAG	13.15 (R > 0)	5.26 (R > 0)
Air France – KLM	10.58 (R < 0)	4.23 (R > 0)
Lufthansa group	9.05 (R < 0)	3.62 (R > 0)
Ryanair	18.75 (R < 0)	7.5 (R > 0)
easyJet	12.0 (R < 0)	4.8 (R > 0)
Delta	10.55 (R > 0)	4.27 (R > 0)
Southwest	11.17 (R > 0)	4.47 (R > 0)

Source: Table by authors

Table 5

Effect on fuel cost increment for different SAF prices and EU blending SAF mandate

	EU blending SAF mandate (%)
	Fuel cost increment, ‘x’ (%)
SAF price	2	6	20	34	42	70
3p	4	12	40	68	84	140
2p	2	6	20	34	42	70
1.5p	1	3	10	17	21	35
1.2p	0.4	1.2	4	6.8	8.4	14

Source: Table by authors

Table 6

CASK increment for different airlines with 70% blending SAF

Airline	1.5p ΔCASK (%)	1.2p ΔCASK (%)
IAG	9.21 (R > 0)	3.68 (R > 0)
Air France – KLM	7.41 (R < 0)	2.96 (R > 0)
Lufthansa group	6.33 (R < 0)	2.53 (R > 0)
Ryanair	13.12 (R > 0)	5.25 (R > 0)
easyJet	8.4 (R < 0)	3.36 (R > 0)
Delta	7.38 (R > 0)	2.95 (R > 0)
Southwest	7.82 (R > 0)	3.13 (R > 0)

Source: Table by authors

Table 7

Some business data of 2023 (partial and preliminary) vs 2019

Airline	Yield 2019 (cts €/rpk)	Yield 2023 (cts €/rpk)	Fuel cost/ Expenses 2019 (%)	Fuel cost/ Expenses 2023 (%)	CASK 2019 (cts €)	CASK 2023 (cts €)
IAG	8.93	10.68 (+19.6%)	26.3	29.13 (+10.76%)	6.58	8.03 (+22.04%)
Ryanair	4.06	4.51 (+11.08%)	37.49	45.53 (+21.45%)	3.37	3.65 (+8.31%)

Source: Table by authors

Table 8

2023 Business indicators of IAG and Ryanair

Airline	Profits before tax (M€)	Yield (cts €/rpk)	LF (%)	Actual CASK	CASK for R = 0	Δ CASK (%)
IAG	3,056	10.68	85.34	8.03	9.11	13.5
Ryanair (9 months)	2,461	4.51	94	3.65	4.24	16.15

Source: Table by authors