Leaders of the Irish aircraft leasing community gathered on 27 October to sign the Aircraft Leasing Ireland (ALI) sustainability charter, a commitment made by over 30 Irish-based lessors on how the sector can contribute to the aviation industry’s goal of reaching net zero emissions by 2050.

The gathering brought into focus the opportunities as well as the enormous challenges the industry faces on its pathway to decarbonisation, with leasing executives acknowledging that Environmental Social and Governance (ESG) is no longer a choice but an obligation.

“It’s important for ACG, it’s important for our industry and it’s important for humanity,” said Tom Baker, Aviation Capital Group’s chief executive officer, immediately following the signing of the charter.

“Starting this initiative and seeing the progress we've made gives me great hope that we can achieve our goals,” he added.

In a keynote address, the European Union’s director general MOVE Henrik Hololei, says he is excited about the work being done by ALI in supporting the industry, noting that the organisation is in a “unique position” to support the industry.

“Given that over 50% of the commercial fleet is owned by lessors, this means that the sustainability drive must be supported by the leasing companies,” he commented.

Threats and opportunities

Hololei also called on lessors to push for greater Sustainable Aviation Fuel (SAF) uptake. “That will make all the difference as the industry strives to reach net-zero.”

Aercap’s chief financial officer Peter Juhas agrees that the only viable way to decarbonise within the 2050 timeframe is through SAF uptake.

“I don’t think anyone here thinks we will achieve it without significant use of SAF… today it is totally marginal, so we have to scale up there and airlines have to start using it more,” he said.

“Fortunately, it is doable technologically today, it’s just a question of scaling up.”

Throughout the event, panellists underlined the amount of scale involved for SAF to replace fossil fuels.

“If Lufthansa Group took all the SAF in the world, it would take something like four days for us to go through it,” commented Claudia Huegel, senior director, head of ESG rating and reporting at Lufthansa Group.

“We're going to have to 1000x the amount of SAF we need to meet the mandates in the US and Europe,” said Boeing’s vice president global sustainability, Brian Moran. “But in the meantime we're not going to stop innovating. We won’t ever let an improvement in flying technology pass us by.”

Avolon’s head of counterparty risk and sustainability Rosemary O’Leary, believes standardised ESG reporting and metrics in the leasing space will improve access to capital as financiers take ESG more seriously in their lending strategy.

“We need to change the narrative… We're a small community, and if we can align and have a standardised reporting, it will make a significant difference in how we can attract more capital to the sector,” O’Leary continued.

Sky Leasing’s chief financial officer, Ailbhe Kenny, agrees that there are opportunities when it comes to embracing sustainability within the business. “We're at a difference stage in our ESG journey than other more established lessors but we are keen to embrace the business opportunities that it will bring but also acknowledging the challenges that come with it.”

“We see the value of embracing ESG in all of our business decisions, both in terms of creating shareholder value as well as retaining employees,” she added.

ESG-linked financing

How can lessors help their airline customers move the needle?

While sustainability-linked financing is in its infancy, exploring ways in which lessors can structure sustainability metrics into funding are on airlines’ radar, according to Yvonne Moynihan, corporate officer at Wizz Air.

“I’ve only seen one example of green financing so far, but I think that it is something that is really interesting, linking a percentage of financing to sustainability criteria, so I think it is a way forward,” Moynihan said during the conference.

Investment in sustainable aviation fuel should also be a priority. “Lessors have the access to capital, they can invest in start-ups and help stimulate the industry and help productivity and capability of the technology and work together with airlines in that regard,” argued Moynihan.

She also encourages lessors to invest more in emerging technologies and ways to decarbonise the sector, including hydrogen. “Even now lessors should look into the option of hydrogen.”

Quizzed on whether airlines would see value in key performance indicators structured into leases, Moynihan said it’s a “no-brainer” for low-cost airlines that report lower emissions per available seat kilometre than legacy carriers due to their higher seat density.

“It depends on what those conditions are,” argued Ryanair’s sustainability and finance director Thomas Fowler.

“The only thing airlines can really control is the operational efficiency. If you wanted a higher SAF intake it would be a harder sell,” he added.

Lufthansa’s Huegel said banks are scrutinising airlines’ ESG metrics more and more, pushing carriers to improve their performance.

“ESG is a matter of fact, no matter what we are doing… there is not one deal nowadays where ESG is not a substantive matter related to financing,” she commented.

International Airlines Group (IAG) is also seeing strong demand from lenders around the topic of sustainability regarding access to capital perspective.

“We're seen a lot of interest from our investors to report on our carbon strategy… Pretty much every deal we've done in the last three years has been linked to sustainability performance,” IAG’s head of sustainability, Jonathon Counsell, said during a conference earlier this month.

Counsell added that while IAG is a strong supporter of hydrogen technology, he agreed that SAF ramp-up is the “only viable option” in order to reach net zero by 2050.