The inclusion of the European aviation industry in the European Union’s Emission Trading Scheme represents a critical moment in the industry’s history. In order to glean insight into the strategic priorities of the industry at this key point, the Russell Reynolds Associates’ Airlines and Commercial Aviation Practice surveyed senior industry executives, as it did in 2008 and 2009. The portrait that emerges from the survey fits a model of how mature industries respond to certain types of change in their industrial environment and shows how companies will be able to emerge from this transitional period with expanded capabilities and significant competitive advantage.
The Response To Change: A Predictable Pattern
While the advent of Emission Trading Scheme (ETS) participation is a significant event for the European aviation industry, the industry is not unique in having to adapt to legislative requirements driven by concern over sustainability and climate change. Indeed, if one looks broadly at how a range of industries has responded to these developments, a clear pattern of behavior emerges: Initially, industries lobby to defeat these measures and produce studies arguing that the environmental impact of their operations is overstated
The 2011 survey results show that the response of the aviation industry to ETS fits the same pattern. When asked in the 2009 survey to identify which strategies were being pursued as a result of the passage of ETS legislation the previous year, the responses clustered among strategies that can be placed on the left side of the spectrum (see Figure 3). The mindset of the industry was further revealed in the 2009 study when respondents were asked about the priority placed on various concerns, including emission control and fuel price (see Figure 4).
In reality, these two issues are on different sides of the coin and should have been viewed as such. But the survey responses showed a telling disconnect. Nearly a third of respondents saw emission control as an insignificant issue, but, while nearly two-thirds did see it as significant, this pales when compared with the 80 percent who saw fuel price as very significant. The industry, in other words, was still struggling to see the connection between sustainability and the bottom line.
In the 2011 survey, respondents were given the same list of strategies and asked to indicate those they had undertaken and those they planned to undertake in the future. When the results are added to the responses from 2009, a clear shift to the right of the spectrum can be seen, as less emphasis is placed on early-stage, communications-based efforts and more attention is given to pricing, policy dialogue and insight acquired from studying other industries (see Figure 5). Although there has been significant progress, there is more to be done: While many companies reported having the necessary processes and departments in place, only 7 percent of those surveyed indicated that their companies were actively involved in emission trading (see Figure 6).
Competencies For Change
Charting the response trajectory of companies facing a new regulatory regime provides a helpful model for understanding how a company is likely to evolve over time. But knowing what the path ahead is likely to bring raises the question of how this transition is to be navigated. At a strategic level, transitions due to tougher sustainability regulations are similar to transitions due to other forces such as technological innovation or emerging markets: Success will depend on expanding the collective capabilities of the company.
With this perspective, the Reject/Awaken/Integrate model takes on a new dimension. Moving from the left of the spectrum to the center—the move that many aviation players recently have made—requires only a modest expansion of capabilities. Adopting different pricing strategies and lobbying for certain implementation policies, for example, are likely well within the capabilities of a company’s current yield/revenue management and government affairs functions. However, the actions required in moving from the center to the right of the spectrum—the task with which most in the industry currently are contending—demand a significant expansion of capabilities. The ability to actively participate in emissions markets requires a significantly different set of skills than was likely to be present before now.
When a company must dramatically (rather than incrementally) expand its competencies, there are a number of strategies that traditionally are followed. It can develop the needed talent internally, it can recruit from other industries, and it can ensure that it is casting a wide net in its recruiting efforts, both in terms of diversity and internationalization. When asked in the 2009 survey what personnel strategies were being followed in the face of the ETS challenge, companies responded that they were much more focused on strengthening their compliance function than expanding their overall competencies (see Figure 7).
This behavior pattern is not surprising; it is consistent with an industry still in the early stages of the Reject/Awaken/Integrate cycle, as the aviation industry was in 2009. However, when asked in 2011 about the issues on the CEO’s agenda, a similar pattern emerged (see Figure 8). Given that companies now must expand their capabilities in order to leverage ETS so that it is not merely endured but that it actively contributes to the bottom line, one must ask if aviation companies are approaching the task of building competencies as aggressively as they should be. It also suggests the possibility that when the dust settles, the market could divide into “haves” and “have nots” regarding ETS-related capabilities.
What are the qualities that aviation companies should seek in their ETS leaders? The technical qualifications, such as knowledge of carbon markets and the financial acumen to manage a trading operation, are critical. Just as important, however, are the candidate’s change management abilities, as well as personal credibility (see Figure 9). After all, a company is not merely creating a new function but is devising one that signals the beginning of a fundamental shift in how business is done with the objective of internalizing a strong commitment to an environmental and sustainability strategy.
Methodology And Acknowledgment
In January 2011, Russell Reynolds Associates’ Airlines and Commercial Aviation Practice sent invitations to participate in an online survey to senior executives of European aviation companies. Forty-six completed responses were received, representing companies from eight countries. Russell Reynolds Associates extends its appreciation to all those who participated and shared their perspectives for this study.
Thomas Tomkos leads Russell Reynolds Associates’ airline, aerospace and defence practice in Europe and is the country manager for the firm’s operations in Germany. He focuses on senior-level search and assessment assignments for airlines, airports, service providers and aircraft financing/leasing companies globally. He also advises clients in the transportation/infrastructure and energy sector, including the renewable and cleantech sector. firstname.lastname@example.org.
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