The Farce of the Sustainability-Linked Bond
I can't blame Air France-KLM for going for one, but airlines have a long way to go on emissions reductions. Also, why is Airlines for America so pessimistic?
Airlines should do anything they can to raise money during times of rising interest rates and greater uncertainty. If the government, and investors want to make the investment, the airline should take it, even if it seems too good to be true.
But when I saw Air France-KLM was raising 1 billion euros in sustainability-linked bonds, I was surprised, even though the offering easily meets the standard requirements for the bond category. These bonds, which have been around since 2019, require companies to pledge to meet self-set environmental goals and pay a penalty if they don't meet them. Unlike other green-style bonds, in which proceeds must go to environmentally related projects, revenue from these bonds typically can be used for anything. In this case, part of the proceeds will go toward paying back pandemic-era bonds from the French government.
You can probably argue two things. One, that Air France-KLM is still an airline and will remain a major global polluter for the foreseeable future. And two, these bonds are working as designed, which is to coax companies into prioritizing sustainability, as economics can be a powerful force for change. Then again, Air France-KLM sought reduce emissions before the bond, for a variety of reasons, including cost savings (new airplanes burn less fuel), government regulation, and customer expectations.
Like every airline group, Air France-KLM has a long way to go to reach its goal of net carbon zero by 2050. To get there, it told investors, it may need new turbines, improved aerodynamic frameworks, and airplanes that run on liquid hydrogen, along with more sustainable aviation fuel, and increased operational efficiency.
The bond issue doesn't require anything close to net zero, however. Instead, Air France-KLM just needs to meet its goal of reducing greenhouse gas emissions per revenue tonne kilometer by 10 percent by 2025, compared to a 2019 baseline. If it does — and what company sets a goal it cannot easily achieve? — the tranche with a 3.3-year maturity will have a coupon rate of 7.25%, while the tranche with a 5.3-year-maturity will have a coupon rate of 8.125%. If the company fails to reach the goal by Dec. 31, 2025, it will pay a slightly higher rate.
If you're wondering, Moody's evaluates these things based on the environmental merit. It says Air France's efforts will have a "significant" effect on sustainability, one rung from its highest level on a five-point scale. That seems a bit generous, no?
Air France-KLM is not the first airline to tap this type of financing market. Other airlines that have announced similar sustainability-linked bonds include Etihad Airways and Viva Aerobus, and British Airways.
If you want to learn more about these bonds, Bloomberg had an interesting story on them in September. Not surprisingly, investors don't know what to make of them, particularly how to evaluate the goals companies set. "Criticism has mainly come from investors with concerns of greenwashing such as targets being not ambitious enough and penalties too insignificant," the publication said. There is also some pushback on the practice of back-dating the start date for evaluation. Air France-KLM is using 2019 as its baseline, which is better than Tesco, the supermarket chain, which used 2015 as a baseline for a bond it sold in 2021. According to Bloomberg, the company had reached 90 percent of its goal by the time it sold the bond.
What do you think of these bonds? Leave a comment, and maybe we can get a conversation going.
Depressing data from Airlines for America
Like most trade groups, Airlines for America is a major booster for its members, and it will defend almost all of their policies, no matter how boneheaded.
But in a world in which travelers and politicians constantly beat up carriers for operational miscues or poor customer service, Airlines for America seems to understand that, as far as public perception goes, it may win airlines more latitude if it is truthful with the public. So rather than parroting the same sort of “the industry is great!” talk that we hear on earnings calls, the group is a bit more honest. It is far more likely to share data showing how airlines haven’t recovered from the pandemic, perhaps to curry favor with politicians and media who then might be more open-minded about the industry’s failure to deliver.I flipped through the group’s latest slide deck, dated Jan. 19, and here’s what the trade group representing airlines wants us to know:
This month, the number of tickets sold by U.S.-based corporate travel agencies is down roughly 24 percent compared to the same period in 2019, according to ARC data.
U.S. airlines have been “taking on enormous debt, with heavy cash outlays for interest. Total net debt at nine of the largest U.S. airlines rose from $105 billion to $154 billion during the same period. Net annual interest expense for in the United States has gone from $1.9 billion in 2019 to $4.7 billion last year. Net interest expense per seat mile (who knew this was tracked?) increased an estimated 170 percent compared to 2019.
Last year, the number of passengers screened by the TSA decreased 10 percent compared to 2019. It was up in only seven U.S. states — Arizona, Montana, Idaho, South Dakota, South Carolina, Tennessee, and Florida. (Fun fact: All of these states had a Republican governor last year.)
The number of U.S. international air passengers dropped 23 percent last year, compared to 2019. The Japan-to-Hawaii segment got a special call out, with the trade group calling this market “depressed.” Top international cities for traffic from the U.S. were (in order) London, Cancun, Toronto, Mexico City, and Paris.
Jet fuel prices, while down from their peaks, remain83 percent higher than 2019 and 120 percent higher than 2015.
In inflation-adjusted terms, airline fares decreased 6.8 percent last year compared to 2019. (On a nominal basis, fares were up 6.7 percent.)
In November, U.S. airlines had more employees than at any time in 20 years, more than 23,000 more than before the pandemic. That’s great news for customer service, but not good for cost control. (Unit costs are up 28 percent against 2019.)
I don’t know about you, but if I read these figures in a CFO’s presentation, I might be scared off from investing. But this is for a different audience.
One more thing – shifting seat share
Not every U.S. market lost capacity after the pandemic. Some Sunbelt markets, plus Hawaii, ended up picking up share. (Hawaii is no longer so hot, however, as airlines probably sent too many airplanes to the islands during the pandemic.)
The Airlines for America presentation showed that these cities picked up the most seats for sale between 2019 and 2022.
Austin (+48.4%)
Nashville (+34.7%)
Maui (+31%)
Charleston, SC (+29.6%)
Ontario, CA (+24.5%)
And these markets lost the most seats:
Milwaukee (-22.4%)
Philadelphia (-16.8%)
Los Angeles (-16.7%)
Fort Myers (-16.2%)
San Francisco (-15.8%)
Do you see any surprises?
Its passenger airline members are American, United, Delta, JetBlue, Alaska, Southwest, and Hawaiian. But its data sets often include all publicly-traded airlines.
Very good piece. 👍