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Richard Welford Author
Researchers: Richard Welford Helen Roeth Sharan Bal

MAY 2010

This report provides an overview of environmental, social and governance (ESG) issues surrounding the airline industry in Asia. The issues that we highlight are those we view as the most material to companies and which pose the biggest threats to the operations of the companies, their brands, reputation and profitability. Responsible airlines will be monitoring, measuring and reporting on the impacts and risks that these issues pose to themselves and their investors. The issues identified in this report are discussed in parallel with an analysis of the disclosure by the airlines on ESG related issues. We undertake a scoring analysis and ranking of the regions 24 listed companies in the sector on the basis of their Sustainability and CSR reports and other disclosure. Recent trends such as the growth of low cost airlines and the potential environmental challenges associated with this development are discussed. Key regulations, legislation and incentives in the region are identified and analysed in terms of how they affect the operation and business of the airline industry. The company scoring reveals that many airlines in the region have systems in place to deal with business issues related to the environment, labour, corporate governance and economic performance. Disclosure on social issues, human rights and product responsibility tends to be weak, as does reporting on key sector specific issues not covered in reporting guidelines such as the Global Reporting Initiative. These key issues include the European Emissions Trading Scheme, biofuels, decommissioning of planes, landing techniques, land use (e.g. at airports), discrimination due to age, gender, physical appearance, and fair operating practices. Cathay Pacific emerges as the leading company in the region when it comes to disclosure on ESG issues. The company demonstrates impressive reporting and communications strategies in the majority of indicator areas covered in this analysis. Korean Air and Asiana Airlines (also Korean) come in second and third place respectively. The aviation industry in Asia is undergoing fundamental changes driven by market liberalisation, changing business models and stronger competition by low cost carriers, and in some parts of the region slowly diminishing political intervention into the management of national or quasi state owned airlines. Airlines are also going to be significantly impacted by climate change and other environmental risks. There is a need for them to engage on these issues if they are to maintain the trust of stakeholders and avoid more damaging regulations. Employment practices are highly variable across airlines in the region. Accusations of gender bias and recruitment of staff on the basis of personal characteristics rather than ability to do the job abound. Recruitment and retention in a marketplace where a new battle for talent is emerging and where, in some places, birth rates are decreasing is going to be a key determinant of profitability. Safety and security remains a huge issue for the industry. Ensuring the safety of passengers and their well-being during flight is an area of concern. There are also major concerns relating to the way that companies are governed and the extent to which companies operate in a truly competitive environment. Disclosure on the economic impacts of aviation and on the governance of companies is relatively strong in the region. Most companies provide significant information on their economic contributions and their governance structures. Labour issues and environmental indicators are less well disclosed even though this report highlights that these areas are very much linked to some of the key risks for companies and their investors in this industry.
For more information, please contact Responsible Research: Email: Tel: +65 9386 6664

Responsible Research is an independent provider of sectoral and thematic Asian environment, social and governance (ESG) research, targeted at global institutional investors. Many of these fund managers and asset owners now find that traditional investment banking reports, financial models and public information sources can no longer be relied on to cover all risks to earnings and deliver superior returns. Companies who do not monitor and report on this non-financial performance not only risk financial penalties for non-compliance with stricter regulatory environments but are also denied access to substantial pools of global capital which are managed according to sustainable principles. Our approach is based on analysis of material ESG factors, which change according to sector and market. We provide our clients with local market knowledge of important regulatory landscapes in Asia, along with a fresh perspective on local operational and sectoral issues. We offer an annual subscription model for our monthly sectoral or thematic reports and give our clients access to the underlying data. Reports can also be commissioned (by investors or foundations) and kept for internal use or be offered for general distribution, as part of a general effort to promote ESG integration into the Asian investment process. Our analysts conduct seminars and webinars to discuss findings, often with contributions from experts, companies and policy-makers. Responsible Research was founded in 2008 by our Board who have been instrumental in promoting Corporate Social Responsibility (CSR) and SRI practices in Asia for over 10 years and have significant experience in the regions emerging investment markets. This team of five works in collaboration with our full time Asian-based responsible investment analysts and the Responsible Research Alliance, a group of consultants with subject matter expertise. Together they provide a valuable balance of market and ESG knowledge, academic rigour, process management, data management, customer relationship management and senior level contacts. Many of our clients are signatories to the UN backed Principles of Responsible Investment (PRI), an investor initiative. As signatories they commit to incorporate ESG issues into their investment analysis and to support the development of ESG tools, metrics and methodologies. As a signatory to the PRI we voluntarily contribute time and resources to the Emerging Markets Disclosure Project and other collaborative initiatives. Responsible Research is also a strong supporter of independence in research, without which conflict and bias can deliver investment risk. The company is one of the founding members of the Asian Association of Independent Research Providers and also of the Asian Water Project.

About the Author

Richard Welford is a Director of Responsible Research. He has spent six years working with the airline sector in Asia and has acted as a sustainability consultant to Cathay Pacific and China Southern Airlines, both mentioned in this report. He is also Chairman of CSR Asia and a Director of ERP Environment.

Investors will already acknowledge that the airline industry is challenged by relatively low profitability and is highly susceptible to economic disturbances. But there is now a growing recognition that the brands and reputations associated with many of the players in the region are likely to be inextricably linked to many of the issues highlighted in this report. Those that are transparent and can respond to the issues via their differing disclosure vehicles are set to gain a competitive advantage through their non-financial performance.

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Airline sustainability analysis Company Performance Key developments in the region


Climate change and carbon emissions Biofuels Air quality Noise Aircraft recycling



Customer satisfaction Employment issues Diversity, gender discrimination and the perpetuation of stereotypes Supply chains Trafficking and combating child sex tourism Engagement with the social media Safety Security



Competition policy Consumer issues and fair marketing Remuneration of Boards Political involvement and government relations Bribery and corruption



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The outlook for the airline industry after the global recession is positive: global air travel demand is expected to double over the next 15 years, led by faster growth in the Asia Pacific region, which is set to become the worlds largest aviation market.1 The air transport sector in Asia Pacific supports more than three million jobs and contributes US$ 170 billion to GDP. Over the next two decades, it is projected, that these figures will rise to almost 20 million jobs, contributing more than USD 1 trillion to GDP.2 The driving forces of much of this growth are a boom in low-cost travel and a growing web of open-skies agreements which are expected to power long-term growth for Asian airlines. The growth potential in the region is immense, in particular in China and India whose populations are only served by 0.3 and 0.1 available seats per person per year (as compared to three aircraft seats per year for each of the 300 million people in the U.S.). If Asians start travelling as much as U.S. travellers the global air transport industry is estimated to triple in size.3 Intra-Asian flights are experiencing significant growth. In 2009, the number of intra-Asian passengers rose to 647 million and International Air Transport Association (IATA) estimates that it will take only two more years before intraAsian flows surpass North America when measured by revenue passenger kilometres, a key measure combining passenger numbers and average flight length.4 Industry experts, however, caution that to reach its full potential the Asia Pacific market needs to boost efforts in tackling key challenges related to the environment, security, governance and market liberalisation.5 In China, the domestic market is dominated by three state-controlled carriers and low-cost carriers have yet to appear. In India, the situation is quite the opposite, with a deregulated domestic aviation market where a large number of private carriers fight over market share.6 Yet, consumers, investors and other stakeholders are increasingly aware of the social and environmental impacts that airlines have. Whilst they can contribute to growth and economic development, stakeholders question the discriminatory hiring practices and implicit human rights abuses of some airlines. Others point to the huge impacts that airlines can have on climate change and air pollution, particularly with regards age of fleet and route optimisation. The debate is still ongoing within the industry as to the environmental benefits of newer, larger aircraft, such as the A380, as much depends on the sectors they are flown on and load factors. Investors need to recognise that airlines are in the forefront of debates over greenhouse gas emissions and are increasingly subject to tough regulatory and market based measures adding to their costs. Whilst newer fleets are generally going to lead to lower emissions of GHGs, the choice of plane and the routes where it is used are also key determinants of climate change impact. Airlines are themselves huge purchasers of goods and services and they need to ensure that they demonstrate ethical supply chains. Many of the national airlines in Asia are inextricably linked to government through share ownership, subsidies and other market distortions. Governance of companies in the sector is highly variable. The industry is not a highly profitable one and carriers are highly susceptible to fuel price hikes and economic and social disturbances which reduce the demand for flying. Within Asia, we find well known global brands associated with airlines such as Cathay Pacific, Singapore Airlines and Qantas. Yet, those brands and others are highly influenced by some of the most material social, environmental and governance issues facing the industry as a whole. There is, therefore, a need to be aware of the issues and monitor performance against those issues. This is the aim of this report.

Airline sustainability analysis

Scoring methodology In this report 24 listed airlines in the region are analysed against a total of 104 ESG indicators covering corporate governance, environmental, human rights, labour, social, product responsibility, and economic issues. The complete list of airlines under analysis is provided in Table 1 below. Indicators were drawn together from the Global Reporting Initiatives (GRI) reporting framework and supplemented with additional indicators of particular relevance to the airline industry. An overview of all indicators can be found in Appendix 1 and summary statistics can be found in Annex 2 and 3. Sector specific issues we considered in the benchmarking exercise included fleet modernisation, development of biofuel use, disclosure on climate change impacts, policies on dismantling planes, landing techniques, noise pollution abatement policies, supply chain code of conduct, participation in the European Emissions Trading Scheme, off-setting options available to passengers and, importantly, route optimization and air traffic management systems.

Table 1: List of airlines benchmarked

Airlines are scored based on publicly available information provided on corporate websites, the latest available sustainability/CSR reports and annual reports. The following scoring system was applied. The maximum score possible overall is 2 comprehensive coverage of the issue therefore 208. Only Cathay Pacific scored 1 some mention of the issue above 50% and Korean Air scored 49%. Few other companies even came close to 0 no mention of the issue achieving an overall score of 50%. We view a score of 50% as very good since it indicates at least some disclosure relating to most of the indicators in this analysis. A score of 50% is certainly a target for other companies in the industry to aim for. Nevertheless, even with the best scoring airlines, there is still significant room for improvement.

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Company performance
The analysis of the 24 listed airlines in the region shows that the majority of airlines have systems in place to deal with business issues related to the environment, labour, corporate governance and economic issues. Disclosure on other social issues, human rights, and product responsibility is, however, weak. It seems that these are areas which companies largely considered as not relevant to their operations and, therefore, shareholder valuations. We believe they are mistaken. With regards to their disclosure on the issues that we highlight, airlines can be grouped into four categories: 1. 2. 3. 4. The leaders: Airlines with sophisticated sustainability reporting that provide information on most of the indicators. In this regard, Cathay Pacific and Korean Air are clear leaders in the region. Cathay Pacific, in particular, reports on indicators where most of the listed airlines performed poorly, such as product responsibility and human rights. The followers: Airlines with comprehensive and clear disclosure on a majority of the indicators, but who do not report to the extent of Cathay Pacific and Korean Air. Among these are Asiana Airlines, Qantas, China Southern Airlines, Malaysia Airlines, Thai Airways, and Singapore Airlines. The timid: Airlines with reasonable reporting on issues they consider as most relevant to their business operations but which lack disclosure on more challenging issues outlined in this report. These airlines include Air New Zealand, All Nippon Airways, Japan Airlines, Philippine Airlines, Air China, China Airlines, China Eastern, Jet Airways, Hainan Airlines, and Eva Airways. Virgin Blue and AirAsia, both LCCs appear in this sector. The laggards: Airlines with an overall poor ESG reporting and disclosure performance include Shandong and Shanghai Airlines, Kingfisher Airlines and Tiger Airways (also an LCC). While some of these issues can be considered as emerging issues, reporting on which would differentiate leaders from the masses (e.g. supply chain codes of conduct or corporate positions on aviation biofuels), other neglected issues are crucial issues for airlines in the region to consider (e.g. discrimination due to age and physical appearance or competition and fair operating practices). Of particular note, the only companies with some disclosure on discrimination due to age and physical appearance are Cathay Pacific and Korean Air. Among the six listed airlines in China, only China Southern Airlines reports comprehensively on CSR issues. However, as with most other scored airlines, the company performs poorly with regard to disclosure on issues related to human rights, social responsibility, and product responsibility. It performs well with regard to reporting on environmental, labour and corporate governance issues but lacks disclosure on sector-specific issues. Listed airlines in mainland China (except for China Southern Airlines) and India constitute the bottom of the scoring chart in all areas. Both of Koreas Airlines perform well in the scoring being the two of the top three leading airlines in the region when it comes to CSR reporting. Interestingly, Asiana Airlines falls far behind in terms of corporate governance disclosure. Arch-rivals and premium airlines Cathay Pacific and Singapore Airlines are a long way apart in our assessment of ESG indicators. Singapore Airlines fails to grasp the importance of disclosure on ESG issues and has certainly not responded to the challenge of sustainable development in the way that Cathay Pacific has. There is now a clear gap between Cathay Pacific and Singapore Airlines a gap that we argue provides Cathay Pacific with a significant competitive advantage over its rival. Even more surprisingly, however, is the fact that Singapore Airlines also lags behind neighbours at Malaysia Airlines and Thai Airways. Although Singapore Airlines demonstrates some strength in engaging with environmental issues, its very poor scores on social issues detract significantly from its overall performance. In the overall scoring the two LCCs Virgin Blue and Air Asia are among the average performers while LCC Tiger Airways is among the laggards. Virgin Blue and Air Asia perform particularly poorly in their disclosure on aspects of social responsibility. Air Asia receives high scores for its reporting on labour issues and Virgin Blue scores high on governance issues.

Interestingly, most airlines performed better with regard to reporting on GRI indicators compared to disclosure on the additional sector specific issues that we included in the scoring related to environment, labour, social and economic issues for airlines. It seems that the majority of listed airlines in the region are focussing their CSR reporting, and by extension their sustainability strategy, on general issues while omitting GRI indicators not deemed relevant to the industry. They are also not reporting on some key industry ESG risk issues not included in the GRI guidelines. Key issues for the industry not covered by GRI and rarely reported on by listed companies include: - - - - - - - - - The impact of the European Union Emissions Trading Scheme Biofuels: their impact and use Dismantling planes at end of life Landing techniques to reduce environmental impacts Land use Supply chain codes of conduct and supplier assessments Discrimination due to age and physical appearance Community investment strategies (particularly in developing countries) Fair operating practices

Industry and company performance by indicator area Annex 2 and 3 provide summaries of overall scores and scores by indicator area. Our analysis is deliberately biased towards environmental indicators, reflecting the environmental bias in the GRI approach. We have added a number of additional indicators because most of the ESG issues likely to deliver financial risk to the industry are environmental in nature. With an overall score of only 18% we can see that most companies in the region need to disclose more on their environmental impacts. Korean Air (51%) scores highest on environmental issues followed by Cathay Pacific (48%) and Asiana Airlines (45%). It is notable that Singapore Airlines (39%) comes fourth in this indicator area, although only eighth overall. This reflects, again, the bias in reporting towards environmental issues and away from broader social issues. It is of no surprise that reporting on human rights issues is generally poor across the industry. There is a clear reluctance to engage with human rights issues in Asia as a whole. Cathay Pacific is a clear leader with a score of 39% followed by Korean Air (28%). But the majority of companies analysed were not awarded a single point in this indicator area. The average score across all companies was a miserable 4%.

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In the area of disclosure on labour issues, scores were also spread widely with the leader, Korean Air, scoring 56% but with three companies scoring zero. Cathay Pacific scored 47% followed by Asiana Airlines (44%). Interestingly, disclosure on labour issues across the whole industry (19%) was slightly higher than that in the environmental area. As discussed later in this report that may reflect the fact that labour issues, labour disputes and employment practices have become important issues recently. Social indicators, as defined by the GRI, comprise a number of issues surrounding community impacts and corruption, political involvement and aspects of social responsibility that exclude labour and human rights issues. Overall, the score in this indicator area is relatively low at 14%. The leading company in this area according to our analysis is All Nippon Airways, surprising because it only manages to come in 11th place overall. Coming in second are Cathay Pacific, Korean Air and Qantas, all scoring 30%. The area of product responsibility is one where many in the industry might not initially see as central since airlines are essentially service providers. Nevertheless, the indicators do include important aspects such as consumer satisfaction (a key determinant of profitability), complaints handling and life cycle analysis of equipment (such as the aircraft, for example). Cathay Pacific, with an impressive score of 56%, is a clear leader in this area. Airlines are relatively good at disclosing economic information and this perhaps reflects their history (in most, but not all cases) of having the government as controlling shareholders, as well as a desire to justify attractive tariff and fiscal status as a result of their important role in economic development, trade and employment generation. The overall score in this indicator area is relatively high at 26%. The leading position is tied between Cathay Pacific and Korean Air, both scoring 63%. They are followed by Malaysia Airlines at 50%. Finally, governance disclosure is good at most companies in our analysis. The overall percentage score for this indicator area is 39% with Cathay Pacific scoring very highly at 93%. Swire Pacific, the largest shareholder of Cathay Pacific, is well known for its rigorous corporate government and internal systems and policies. Cathay Pacific is followed by Qantas (79%) and Korean Air (64%).

Figure 1: Scoring results

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Key developments in the region

Market liberalisation The Asian market, considered one of the fastest growing, remains strongly regulated at present. The bilateral aviation deals between Asian nations are still among the most restrictive in the world. The Asian airline industry does not enjoy the same deregulation that started in the U.S. and spread to Europe in the 1990s, culminating in a transatlantic open-skies pact. Asia-Pacific states trail the liberalisation moves elsewhere in the world and the region needs to increase activities in this area if it is to meet its target of deregulating market access by 2015.7 National ownership and control requirements prevent airlines from fully accessing international capital markets, resulting in a highly fragmented industry. Cross border mergers and acquisitions activity, commonly seen in other sectors, simply cannot take place. Whilst progressive liberalisation has at least allowed the industry to expand to meet growing demand, the shape of the industry reflects these distortions, and may also account for other structural weaknesses which underlie the chronically poor profitability of the airline industry. It seems clear that further liberalisation is needed to address these fundamental challenges and pave the way for the successful evolution of the industry.8 Market liberalisation is the major growth engine for the regions airline industry. China and the Association of Southeast Asian Nations (ASEAN) have a combined population of 1.8 billion. Opening of new routes between secondary destinations, especially in China, India and Southeast Asia, will lead to a major influx of new passengers. Talks on further opening up of aviation markets between China and ASEAN, as well as within ASEAN, are expected to conclude this year.9 The phased introduction of the ASEAN Open Skies Agreement covering 10 countries in Southeast Asia from 2008 has prompted major Asian markets (including Japan, China and India) to consider similar initiatives. The Open Skies Agreement was signed in December 2009 between the United States and Japan and is expected to go into force in the middle of 2010.10 Within ASEAN, the 10 member countries are reviewing a deal allowing for maximum competition by 2015 as part of a regional free market. The agreement will allow regional air carriers to make unlimited flights to all 10 ASEAN member states and promises to boost intra-regional tourism, trade and investment among member countries - Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.11 Other unlisted airlines in the region (including Vietnam Airlines, Garuda, Cebu Pacific and others are also likely to benefit by the expansion of routes and travel A number of these are likely to expand and seek listings in the future. Whether greater openness will lead to additional aviation market entrants is still unclear, given the flagging fortunes of many of the existing airlines. A recent report from the Sydney-based Centre for Asia Pacific Aviation predicts future industry reorganisation among smaller players, many of which it predicts will be forced to merge or close as competition heats up.12 We expect there to be further industry consolidation amongst all parts of the industry in the medium term and a continuation of highly mixed economic performance globally in the LCC segment of the industry. Brand name companies that can associate themselves with good levels of safety and security, good environmental performance and high levels of customer satisfaction are likely to be able to differentiate themselves and charge premium prices. In a highly competitive marketplace, we see differentiation strategies as just as important as cost controls. It is clear that ESG issues are one source of competitive advantage therefore. CASE STUDY: Garuda struggles to get listed Indonesias state enterprises ministry recently invited Capital Group to invest in flag carrier Garuda Indonesia in advance of an IPO. The company pulled back from an IPO in 2008. The government is hoping to raise around US$400m from a privatisation and listing exercise. Proceeds are earmarked for fleet modernisation, debt refinancing and expansion of operations. Garuda Indonesia plans an IPO in the third quarter 2010. Management has said it would like to buy 23 Boeing 737800s and one Airbus A330-200. Garuda was taken off the European Unions list of banned airlines in 2009 after it improved safety procedures, and competes with a host of local and international budget carriers on domestic routes across Indonesia. Source: Reuters, Thu Apr 15, 2010

Competing with low-cost airlines The rapid development of low-cost carriers (LCCs) has stimulated massive change in the airline industry. The proliferation of LCCs, also known as budget or no-frills airlines, has been so rapid that worldwide four out of every five airline markets (i.e. the areas served by a pair of airports) now feature a budget carrier. In addition all aspects of the business model continue to change at an ever increasing rate. The low-cost phenomenon is possible due to innovative use of economic, marketing, geographic and management models.13 By flying new routes, offering improved frequency on existing routes and through new aggressive forms of pricing and marketing, LCCs have reacted swiftly to changing consumer preferences and trends. In 2009 we saw premium carriers struggling to survive the impact of the financial crisis - Japan Airlines (JAL) filed for bankruptcy and others, such as Singapore Airlines and Thai Airlines, incurred record losses. Garuda Indonesia was forced to defer its plans to list on the stock exchange due to its financial performance. By contrast, airlines pursuing the low-cost approach in this region have largely endured and (to some extent) prospered using the global economic crisis as a golden opportunity to gain market share and consolidate their positions vis-a-vis the premium airlines. LCCs such as Tiger Airways made record profits, realised their expansion plans and a stock market listing.14 According to the Centre for Asia Pacific Aviation, overall global capacity growth between 2001 and 2009 was entirely attributable to LCCs. LCCs accounted for 15.7% of Asias aviation market in 2009 (from a merely 1.1% in 2001 and 14% in 2008), or just under one in every six seats sold in the region. Those market gains, analysts say, have come at the direct expense of the regions premium airlines.15 Some of the thriving low-cost airlines are now going so far as to attempt to lure higher-paying business travellers away from their premium peers and to break into premium fliers once-exclusive domain of long-haul travel, including flights from Asia to Europe at unprecedented low fares. In 2009, Malaysias AirAsia introduced long-haul routes from the region to London for a fraction of what premium airlines charge.16 Hong Kong LCC Oasis started flying the Hong KongLondon route (but soon filed for bankruptcy) and Singapores Tiger Airways has a busy Singapore-Perth service.17 The one-way cost of this 4000km flight including tax and fees is a mere US$150, a third of the Singapore Airlines flight cost.18 LCCs operate on a different set of economic and financial parameters compared to premium airlines, many of which are burdened with rigid fixed-cost structures and high debts. LCCs offer a no-frills service and seek to keep their expenditure down by seeking the lowest airport handling fees. Tiger Airways, for example, has eliminated on-board meals and most ticketing counters. If a booking is made by phone a US$10 fee is levied.19 LCCs have also found creative ways to raise non-

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ticket-related income by unbundling products and services that allow passengers to pick and pay for what they want, such as charging for up-front seats, priority boarding and flight insurance. LCCs have traditionally flown routes of four or fewer hours, enabling them to use the same flight crew for return flights on the same day. That has allowed LCCs to hire fewer staff and avoid the significant expense of overnight accommodation for crew members.20 To combat competition within their established market a few legacy airlines in the region have created subsidiary carriers-within-carriers with lower unit costs than the parent companies. Examples of budget offshoots include Korean Airs premium short-haul carrier Jin Air and Qantas low cost subsidiary Jetstar, which has recently expanded to Vietnam. The emergence of low cost airlines and the new business model is having a tremendous impact on the tourism and travel industry in Asia as well as on travellers behaviour. New travel destinations have emerged, airport passenger traffic has increased, more people now travel more often, while others that could never previously travel can afford a long distance holiday. This is creating critical implications in the tourism industry and has a potentially huge impact on the environment. While some declare that cut-price air travel is costing the Earth due to increased traffic (on the ground around airports and in the air) and increased emissions21 others argue that budget flights have a comparatively lower carbon footprint per passenger. Budget airlines, it is argued, fit more seats into their planes, have a higher occupancy rate, operate newer, more fuel-efficient airplanes, providing low-frill services with less waste and operate from less congested secondary airports thus driving costs and the carbon footprint down.22 While there has been no consensus agreement on quantifying the reduced environmental impact of LCCs, a few budget airlines are taking a pro-active approach and have started reporting on their environmental performance. AirAsias annual report includes two pages dedicated to disclosure on how the airlines low-cost business model has been adjusted to minimise negative environmental impacts. Although many of the measures are cost-motivated, based on AirAsias business model, the modern fleet, efficient use of the aircraft by maximising seats, keeping the aircraft light by minimising the weight of food and beverage, and the simple airport infrastructure all contribute to reducing greenhouse gas emissions. As far as we know, no other airline has gone to the extent of All Nippon Airways recently and suggested that passangers go to the toilet before boarding in a bid to reduce carbon emissions. Management claimed that empty bladders mean lighter passengers, a lighter aircraft and lower fuel use. ANA hoped the weight saved will lead to a five-tonne reduction in carbon emissions over the course of 30 days. It was intended as a one month experiment on 42 flights, the trial may be extended if it is well-received by passengers and if results are positive. Based on an average human bladder capacity of 15oz, if 150 passengers relieved themselves on board an aircraft, this would amount to 63.7kg of waste and associated weight.23 We expect the LCC segment of the market to continue to grow substantially. However, there is renewed concern over the potential profitability of the LCCs in the light of increasing fuel costs. LCCs need to demonstrate that they are engaged in the debate surrounding environmental, social and governance issues or they run the risk of being labelled low cost and uninterested. LCCs must avoid the common accusation thet they are low cost precisely because they are less responsible. The existence of LCCs is likely to continue to put pressure on the economy class of the mainstream airlines. We expect the fastest growth, however, to be on new routes between many of the second-tier cities in Asia.



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Climate change & carbon emissions

Airlines are in the spotlight. It is undeniable that they have received attention from regulators, policy-makers and politicians disproportionate to their impact on climate change. Nevertheless, climate change impacts of flying have become a major issue for airlines and those companies that fail to engage with the issue are likely to be seen as not responsible. For investors, it is important to recognise that current and proposed regulations and market-based instruments, current and planned, are going to add significantly to the costs of operations. According to IATA, disagreement remains over aviations contribution to climate change. While there is a good understanding of the contribution of CO2 and nitrogen oxides (NOx) emissions and water vapour to climate change, little is known about the effect of contrails, cirrus cloud formation and the methanereducing capabilities of NOx.24 At present, it is estimated that aviations climate change impact is about 3% of the total contribution by human activities and it is expected to grow to 5% by 2050.25 IATA has drawn up an industry vision to build a zero emission commercial aircraft within the next 50 years (starting 2007) and achieve carbon neutral growth by 2020 based on a four pillar strategy which looks at technology investment, effective operations, efficient infrastructure and economic measures. With a key target in achieving this vision being driving fuel use down and cutting emissions in half by 2050 compared to 2005, IATA calls upon airlines to improve fuel efficiency by 25% by 2020.26 IATA and the International Civil Aviation Association (ICAO) advocate a global sectoral approach to be taken by governments to drive down aviations emissions based on market-based and voluntary measures, and suggest an open emissions trading system for international aviation.27 So far there have been few major climate change related regulatory or policy actions in the Asian region but action taken by governments elsewhere in the world are having an effect. The European Union has introduced legislation to include aviation in their Emissions Trading Scheme (EU ETS) which will require all airlines flying in and out of Europe to monitor their emissions and to acquire permits to cover the emissions they produce.28 Iceland, Norway and Liechtenstein will include aviation in their emissions trading scheme from 2010.29 Such initiatives will be costly for airlines flying into Europe. National emissions trading schemes are planned in Australia, New Zealand, and Japan30 but other governments in the region seem to be far from putting in place equivalent regulatory measures. Nevertheless, IATA and major airlines in the region are calling for a global sectoral approach to aviations emissions and pressure on airlines to measure and reduce their contribution to global climate change is growing. With passenger awareness in the region increasing, airlines failing to engage with climate change issues face reputational risks. The main parameter determining the impact of a flight on climate change is the amount of fuel burnt and emissions of carbon dioxide associated with that. Average fleet fuel consumption per passengerkilometre is a fair proxy for the environmental efficiency of an airline. This factor depends on the age of the fleet (See chart, attached showing the lower age of fleet of the low cost carriers and Singapore Airlines, in particular) and on average seat density of the aircraft. The energy consumption per passengerSource: Design Q, 2009 kilometre is a function of the technology age of the fleet. The design age is the number of years ago of first market introduction of the specific aircraft design. However, it is also important to recognise that the type of aircraft flown on different routes will affect performance. Large aircraft designed for long-haul flights will be relatively less efficient on short-haul routes because of the larger fuel burn of large aircraft upon take-off. In recent years, newer long-haul planes are routinely used on short-haul routes in order to avoid aircraft standing idle which complicates the issue. Improving efficiencies by increasing seat density is another contentious issue. Suggestions have been made of vertical seating, with Spring Airlines, the Chinese low-cost carrier apparently holding initial talks with Airbus to add standing-seats on its A320s to increase by 40% the number of passengers it can carry on shorthaul flights. A company called Design Q envisages a solution that entails a row of inward facing seats on each side of the aircraft plus two back-toback rows down the middle resulting in a configuration whereby passengers are facing each other, in a somewhat military formation. Potential passenger health and safety issues are obvious concerns here. Passenger awareness of the sectors contribution to greenhouse gas emissions is not only driven by the media or vocal NGOs in the region, but also by airlines themselves finding new ways to communicate on this issue to their customers. Thai Airways Internationals in-flight menu, for example, now features carbon footprint information on its Thai Signature Dishes served on board. Its Chicken Mussaman Curry with steamed Thai Hom Mali Rice apparently has 13.6 kg CO2e per 250g serving and its Green Curry with steamed Thai Hom Mali Rice weighs in at 13.9 kg CO2e. Cynics could say, however, that the airline would possibly be a more responsible corporate citizen by simply not printing menus and putting the info on the inflight entertainment system instead. However, through this carbon labelling a least the airline is demonstrating its commitment to reducing its climate change contribution to knowledgeable passengers and introducing the issue to passengers which may be unaware of it.31 An indicator of increased pressure and interest in the region to act on climate change is evidenced by the recent addition of Japan and Singapore air navigation service providers (ANSPs) to the Asia and South Pacific Initiative to Reduce Emissions (ASPIRE). The initiative was established to develop and showcase best practices to maximise operational efficiencies and emission reductions within the Pacific region.32

Average Age of Fleet in Asia Source:

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With Asia Pacific being one of the most vulnerable regions in the world to climate change impacts, adaptation to climate change is also becoming an important issue for the airline industry. Water, an already stressed resource in the region, will be significantly affected by climate change and companies will increasingly have to show how they monitor and reduce their water consumption. The Carbon Disclosure Project (CDP), known for its global climate change reporting system, has, in 2010, launched CDP Water Disclosure. This new programme seeks to help institutional investors better understand the financial risks that water-related issues pose to their investment portfolios and follows a similar format to CDP. Annual information requests will be sent out on behalf of institutional investors to large, publicly quoted companies asking them to disclose on water impacts of their business.33 The regions major airlines will definitely be among these companies. But airlines will also have to increasingly adapt to freak weather, which could cause major problems with business continuity and associated revenue streams. Typhoon and cyclone activity is set to increase in the region with predictions of more frequent and more severe weather events. Disruptions to flights caused by freak weather are set to increase. More sophisticated business continuity planning is going to be required. Low lying airports (such as the Hong Kong International Airport, reclaimed from the sea) may also be affected by rising sea levels and associated sea surges. As we saw in April, 2010 freak weather associated with naturally occurring or man-made events can have a devastating impact on the airline industry. Clouds of volcanic ash coming from an Icelandic volcano closed many European airports for several days and left passengers stranded for even longer across the globe. The financial impacts ran into many million of dollars for many airlines and illustrates what is likely to become even more frequent in the future as we see increased cyclomic activity in the region.

Climate change is also going to encourage some stakeholders to consider alternatives to flying. Sophisticated video-conferencing now being offered by IT and telecommunications companies already provides an alternative to business meetings, although the impact of this on business travel may have been overstated. Research performed by Wainhouse Research in 2005 provides the following chart on potential savings. They suggested that a firm with 10 offices and 10 travelling employees could save up to US$110,000 in the first year of investing US$85,000 in equipment with 40% of meetings being converted to videoconferences. There would be a breakeven in 9 months and an ROI over 200%. The soft benefits are also better employee morale and health, quicker decision-making and higher productivity. Companies can achieve even greater savings when they run their videoconferences through IP rather than ISDN networks. Converting Air Travel to Video Conferencing

CASE STUDY: POTENTIAL ECONOMIC LOSS FROM NATURAL DISASTERS The International Air Transport Association says disruptions to European air travel from the volcanic ash cloud have cost the industry at least US$1.7 billion. The disruption exposed weaknesses in logistics and distribution systems and laid bare those companies without adequate contingency plans. The situation could, indeed lead to new investment in rail networks which may have a positive economic and environmental benefit. In terms of trying to quantify financial impacts, the World Travel and Tourism Council believes that travel and tourism, including transport, hotels and related investment, comprise about 4 % of West European GDP. Schroders estimated it would take as little as 10 days of inactivity in the aviation industry to trigger a 0.1% decline in GDP in the UK where airlines accounts for around 0.53%. Chatham House estimated it would only cut Euro GDP by 1-2%.34 Source: The Business Case for Video Conferencing, Wainhouse Research, 2005 A bigger threat comes from the growth of high speed train links that connect cities, which can often match flight times when taking into account time taken to travel to airports, to check-in and to go through the new enhanced security screens in place today. There is little doubt that the impacts of climate change are going to have a significant impact on the industry. In the short-term we should expect to see mitigation measures being put in place (which are, in any case, often cost saving) and a significant increase in the reporting and disclosure of related issues by most airlines. In the short to medium-term airlines will have to be engaged with climate change adaptation strategies and business continuity planning. This will require them to demonstrate the development of real and meaningful partnerships with businesses, governments and civil society actors to deal with adaptation issues. In the longer term we face much uncertainty and the worst effects of climate change could severely damage this industrys ability to be profitable.

Pressure on airlines to mitigate their own impacts on climate change are set to increase. We believe that the responses that airlines make to the growing demands from stakeholders will have a significant impact on their reputations and brands. Leading companies, such as Cathay Pacific, have already differentiated themselves from competitors through a sophisticated climate change strategy. But pressure for airlines to engage on climate change adaptation is also going to increase. This is going to require them to work collaboratively and with other associated businesses (e.g. the airports) to adapt to the inevitabilities of climate change over the next decades. There are real financial risks associated with companies that do not acknowledge the full potential impacts of climate change in the future.

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With climate change being a key issue for the aviation industry, airlines in the region have joined the quest for alternative fuels. Biofuels have the potential to reduce aviations carbon footprint by up to 80%.35 They have been confirmed as a viable option36 and certification is expected in 2011.37 Whilst the use of biofuels offers many opportunities for business and can provide some mitigation for smoothing future traditional fuel price volatility, its use remains controversial amongst environmentalists worried about impacts on biodiversity, emissions from burning, food production and water usage. Airlines using biofuels in the future will have to ensure that they are sustainable and do not solve one problem by creating another. IATA, which has set a target for its member airlines to be using 10% alternative fuels by 2017,38 is focussing efforts on so-called sustainable biofuel from second or new generation biomass such as algae, jatropha and camelina, which are thought to have a reduced impact on food crops and freshwater usage. According to IATA, tests demonstrate that the use of sustainable biofuels as drop-in fuels is technically sound and that no major adaptation of aircraft is required.39 The Association points out that biofuels can be blended with existing jet fuel in increasing quantities as they become available.40 Tremendous business opportunities are being seen in developing sustainable biofuels. According to Giovanni Bisignani, IATAs Director General and Chief Executive, aviation biofuel is a US$100 billion plus business opportunity.41 With the worldwide aviation industry consuming some 1.5 to 1.7 billion barrels of Jet A-1 annually, analysis suggests that a viable market for biofuels can be maintained when as little as 1% of world jet fuel supply is substituted by biofuel.42 A few airlines have already tested biofuels, among them Qantas, Air New Zealand and Japan Airlines.43 Virgin boss, Richard Branson, has pledged to commit all profits from his travel firms, such as airline Virgin Atlantic and Virgin Trains, over the next 10 years for investment in new renewable energy technologies.44 While biofuel test flights have shown promising results the economics are complex, and a number of commercial challenges will need to be overcome before biofuels can be truly competitive with conventional jetfuel.45 The expected growth in air travel in the region is likely to lead to significant increases in air pollution emissions including those from associated ground travel to, from and around airports. Aircraft emissions produce air contaminants such as nitrogen oxides (NOx), hydrocarbons (HC) and fine particulate matter (PM), which in turn can contribute to broader environmental issues related to ground level ozone, acid rain, climate change, and present potential risks relating to public health. As aircrafts travel great distances at a variety of altitudes, they generate emissions that have the potential to impact air quality in the local, regional and global environments.48 Aviations contribution to local air pollution, however, is comparatively small. According to the Hong Kong SAR Governments air emissions inventory 2007, for example, aviation contributed 5.5% of nitrogen oxide (NOx), 3% of carbon monoxide (CO) and less than 1% of other air pollutants to local levels of air emissions.49 Worldwide national air quality regulations are still evolving and gradually becoming more stringent as industrial activities and transportation systems expand and the impact of local air quality on human health is better understood. In the region, air quality regulations and emissions guidelines vary by country, with Japan, New Zealand and Australia having more strict guidelines.50 In many parts of Asia there has been a rather low level of government commitment to air quality monitoring, air quality management and policy implementation and enforcement. To date there has been no regional harmonisation of emission standards which could better tackle challenges related to trans-boundary emissions and global climate change.51 In recognition of growing pressures due to local air quality and climate effects, coupled with the predicted continued growth in air traffic, aviation stakeholders have set out their goals and vision for the future of aircraft emissions in the medium and long term. NOx, unburned hydrocarbons, carbon monoxide and smoke are subject to international standards set by ICAO who regularly tighten engine emission standards for each new generation of aircraft. The organisation also promotes the use of operational measures as a means of limiting or reducing the impact of aircraft engine emissions and has published guidance material.52 Target efficiency gains will also lead to a further reduction in pollutants such as NOx and carbon monoxide. Airports have a significant part to play in cleaning up the industry. It is considered essential to effectively manage emissions from: terminals, maintenance and heating facilities; airport ground service equipments (GSE); and various ground transport travelling around, to and from airports.53 In Europe, older aircraft with high NOx ratings are being charged higher landing fees than cleaner aircraft.54 In addition, some airports are working with the aircraft and engine manufacturers to deliver reductions in emissions and noise impacts on local communities. Another emerging issue relates to onboard air quality and air circulation. This issue has received much attention in the UK after aircrew who suffered from aerotoxic syndrome have made their cases and concerns public.55 Symptoms apparently include fatigue, blurred vision, vertigo, seizures, headaches and dizziness. On most aircraft warm, compressed air is delivered to passengers from bleed air delivered from the engines mixed 50/50 with re-circulated cabin air. Various engine lubricants may end up as organophosphate fumes in the cabin air that are thought to affect the health of frequent passengers. The Boeing 787 Dreamliner seems to be the aircraft industrys answer to this issue as electrical compressors supply cabin air, thus reducing the risk of contamination from engine oil. Responsible airlines could also install fume detectors and use a low fume engine lubricant, such as that produced by the French company NYCO. This company does not use the organophosphate anti-wear additive, Tri-cresylphosphate, (TCP) that is present at 2-3% in most other engine oils. Tests are still being undertaken to see if their type of engine lubricant really does result in reduced neurotoxicity.56

CASE STUDY: Japan Airlines Camelina Biofuel Flight, January 2009 Camelina sativa: a plant which needs little water or nitrogen to flourish and that can be grown on marginal agricultural lands thus not competing with food crops. It may be used as a rotation crop for wheat, to increase the health of the soil.46 Japan Airlines became the fourth airline to test biofuels in flight and the first to successfully demonstrate camelina as a potential biofuel feedstock. The airline conducted a onehour 747-300 flight test using a B50 blend of camelina, jatropha and algae based biofuel in the number 3 engine. Pilots reported that the biofuel was more fuel efficient than traditional jet-A fuel (kerosene) and indicated that biofuels may not only be a carbon-neutral option, but a more fuel efficient one. Pratt & Whitney, whose engines were used in the test, confirmed that the biofuel met performance criteria established for commercial aviation jet fuel. Boeing Japan said that the company is hopeful of flying revenue passenger flights within 3-5 years using biofuels.47

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In 2008 a panel of experts across the aviation industry recommended voluntary standards for onboard air circulation, lower ozone exposure, new monitoring for contaminated air from oil or hydraulic fluid leaks, and limits on pesticides used on planes. However, these issues have not gained much attention in the region and worldwide most aviation regulators and airlines have yet to act.57 Airline companies need to measure their impacts on air pollution, which must include all the services linked to their operations (ground transportation, impacts of airports etc.). They need to be reporting on their impacts and setting clear reduction targets for the future. It is likely that the costs of air pollution are going to be significant in many jurisdictions in the future and in some countries (most notably European ones) we are likely to see older, more polluting aircraft banned. Standards and policy positions regarding aircraft noise have long existed and the issue of aircraft noise has been a driving issue in the location and operational parameters of airports and in the design of newer generation aircraft.58 On average, aircrafts are already 50% quieter today than they were ten years ago, according to Boeing and Airbus. It is estimated that the noise footprint of each new generation of aircraft is at least 15% lower than that of the aircraft it replaces. ICAO estimates that between 1998 and 2004, the number of people exposed to aircraft noise around the world was reduced by 35%.59 In 2006, ICAO introduced a new noise certification standard, Chapter 4, that aimed to ensure new aircraft were at least 10 decibels (or one third) quieter than those built to the previous Chapter 3 standard. Overall, ICAO advocates a balanced approach to noise reduction that combines noise reduction at source; land-use planning and management; operational procedures; and flight restrictions. When it comes to noise abatement procedures, airlines are faced with a delicate balancing act as these might counteract efforts to reduce fuel by shortening routes. A few airlines in the region, including Cathay Pacific and Singapore Airlines have started investing in quieter aircraft that meet the latest noise standards. Airlines failing to make necessary investments in new generation aircraft face substantial financial risks with airports such as in New York, London, Frankfurt, Amsterdam and Brussels having stringent airport noise requirements in place and which regularly fine airlines for noise standard infringements. There is a powerful incentive to continue tackling this issue, as concerns over noise pollution can and do - affect the viability of airport expansion plans.

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Aircraft recycling
More than 3,500 aircraft will reach their end-of-life between 2008 and 2025 at a rate of around 200 per year. Disposal of scrap aircraft is a major concern as only a few are being used for ground training purposes while the majority are often literally left to rot. However with retired airlines providing a source of aluminium, the price of which has increased dramatically until the Global Financial Crisis in 2008, aircraft recycling is growing rapidly.60 Aluminimum Price per Metric Ton


It is estimated that over 95% of a plane can be recycled, whether that be for spare parts or, indeed, melted down for other uses. In fact, manufacturers of aircraft such as Airbus and Boeing are now designing aircraft not just with a safe and long life in mind, but how compatible they will be to recycling once they have reached the end of their useful service life (normally 20-30 years).61 The Aircraft Fleet Recycling Association has developed a set of standards for the dismantling and recycling of aircraft. The Association seeks to instigate good practice and drive up environmental standards through its audit and accreditation process.62 This has allowed more companies, such as aircraft manufacturer Bombardier, to move into the aircraft recycling business, which was so far limited to specialist companies.63 To date, two Asian airlines are reporting on aircraft recycling. The lack of reporting on this issue indicates that aircraft scrapping has not become common practice yet. This is surprising as it provides added revenue and contributes to a companys image as a responsible aircraft operator. Those that are reporting, are doing so in a minimal way, without evidence of the progress of their efforts or the benefits to the business and the environment. All Nippon Airways (ANA) includes recycling of aircraft engine parts and aluminium scraps from repairs into metal materials as part of their recycling initiatives. Asiana Airlines includes a statement about promoting the recycling of resources including aircraft parts. In the future we expect companies to report more on full life-cycle environmental impacts including end of life impacts. With recycling and reuse of valuable resources in mind, leading companies will begin to think not only about cradle to grave impacts but also cradle to cradle impacts and the use of waste as valuable inputs into new products.



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Customer satisfaction
Customer loyalty and customer satisfaction are a critical part of a healthy airline business. On established airlines in the region as much as 50% of sales are from repeat customers on frequent flier schemes. Responsibility towards customers is nothing short of critical and if airlines lose the trust of their customers the financial consequences can be disastrous. During the economic crisis many Asian airlines have cut routes, shed staff and scrapped aircraft orders. Customer service and maintaining customer satisfaction, however, has been an area where Asian airlines have generally avoided cutting costs and, even amidst the economic turmoil, they have introduced further services and technologies to ensure their passengers enjoy their travelling experience. For example, Korean Airlines is spending US$200 million to equip its aircraft with high-end seats and upgraded in-flight entertainment systems in all cabins and has introduced organic free-range chicken and beef to its menu. Cathay Pacific and Singapore Airlines have both launched world-class entertainment options on its long-haul flights. Qantas cancelled orders for several new aircrafts in June 2009 as a result of the financial crisis which has made funding less accessible. It has, however, introduced a programme designed to halve check-in times on domestic flights by allowing members of its frequent flier program to check in with a membership card fitted with a special chip.64 All Nippon Airways is adapting to Japans aging consumer base and has made investments to ensure the satisfaction of its elderly and disabled customers. Special assistance desks have been established so these customers can enjoy their travel in the same basic way as others.65 It is also important for airlines to ensure mechanisms are in place to collect customer feedback and consider their comments in future developments. All Nippon Airways stands out as an example of best practice for its 12 page spread in its CSR report dedicated to transparency regarding its management of customer opinions and results of its latest customer feedback survey. The report highlights a few specific complaints and suggestions raised by customers and provides a company response alongside them.66 With the growing concern over security and required compliance to international and national regulators, airlines are increasingly losing control over many customer experiences involving aviation, in particular issues that impede the smooth and predictable movement of air travellers. In addition, premium airlines have to increasingly compete with LCCs for domestic as well as long-hauls flights. Against this background, premium airlines have sought to expand customer services in order to differentiate themselves from their no-frills competitors. Increasingly, we expect perceptions of customer satisfaction not only to be linked to tangibles such as in-flight entertainment, meals and the customeremployee interface, but also linked to perceptions of social and environmental responsibility. LCC models and premium-carrier models are likely to differ in this respect, but increased customer satisfaction will be vital if premium prices and profitability are to be maintained in the industry.

Employment issues
In 2008, some 32 million jobs were linked to civil aviation globally. Employment in airlines, airports, air navigation services, and aerospace industries (5.5 million jobs) plus indirect and induced multiplier effects account for 15 million jobs. A range of industries related to trade and tourism supports some additional 17 million jobs. Civil aviations extended global economic impact is estimated to be around US$3.5 trillion and 8% of global GDP.67 Yet, many countries are experiencing shortages of suitable technical staff and aviation is witnessing migration of professional staff between states and regions, detrimental to some while beneficial to others. This is particularly a problem in Asia as the youth in the region see careers in other sectors as holding more promise.68 Among the Asian airlines, many offer training courses at aviation schools in order to create job opportunities for those considering the aviation industry. Dragonair (a Cathay Pacific subsidiary) has an Aviation Certificate Programme which aims to inspire a new generation of aviators in Hong Kong by providing young cadets from the Hong Kong Air Cadet Corps with first-hand knowledge of operations of an international airline. The programme includes mentorship with pilots, training sessions, and tours, in conjunction with a range of the airlines business partners.69 Companies who are considering ways to create new job opportunities or extend employment to those who may experience barriers to access are the ones that will help develop the industry while also benefiting the communities in which they have a business presence. Philippine Airlines, for example, provides workshops that are available to the general public, to aid them in their chances of successful recruitment. The making of a Flight Attendant Workshop is available several times a year and open for anyone to attend.70 Qantas aims to ensure a fair representation of indigenous employees in their provision of jobs to parallel their presence in Australian society. The company developed its Reconciliation Action Plan, a multifaceted approach to ensuring the inclusion of aboriginal and Torres Strait Islanders people in their company and aims to have 450 indigenous employees by December 2011 through ensuring their employment into mainstream roles across a range of business segments. The airline supports indigenous university students through cadetships and indigenous school students through school-based traineeships. Qantas has also formed a key strategic partnership with IBM to attract more Indigenous Australians into the IT industry, as well as offering school based traineeships and cadetships for university students.71 The so-called battle for talent is a recurring theme particularly in locations such as Hong Kong and Taiwan where birth rates have been falling dramatically. Successful airlines are likely to be the ones who are able to recruit and retain the best talent, particularly in customer facing roles. Recruitment, in particular, is likely to be easier amongst companies that are able to pay good salaries and offer rewards (financial and non-financial) linked to performance. The entry of the Y Generation into the employment market is making recruitment more difficult because of an emerging demand for interesting experiences over traditional career structures. To some extent this might benefit parts of the airline sector in Asia, where travel and destination experience already attracts a young and sophisticated cabin and flight crew. Premium airlines are likely to find it easier to find such staff than LCCs where the model of swift turnaround of planes on shorter routes offers fewer opportunities to stay in out-ports. There has, however, been downward pressure on wages and other benefits in the industry. We have also witnessed rapid growth of hourly paid workers rather than salaried staff and recruitment by carriers located in high cost bases has often been targeted towards hiring staff residing in lower cost countries. We see a future where because of the growth of the industry and increasing alternative employment opportunities, the hiring of well qualified, suitable staff is going to be increasingly difficult. Good employment practices are going to be vital to recruitment and retention of top talent. Those unable to hire and keep good staff are likely to see a downturn in their profitability.

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Diversity, gender discrimination and the perpetuation of stereotypes

Diversity, Discrimination & Stereotypes

Chinese Airline hostesses practice their deep curtsey72 The industry is already a relatively diverse one with many airlines wanting to recruit a wide range of nationalities in order to provide a range of language skills to meet customer needs. Yet diversity often does not extend beyond national origin and crews are often also recruited on the basis of physical appearance and age. Yet recruitment from a narrow segment of society runs the risk of companies not actually recruiting the best staff and losing out on an important part of company competitiveness.

Supply chains
We expect more airlines to establish codes of conduct for their suppliers and carry out assessments to ensure that brands and reputation cannot be damaged by accusations of supply chain labour abuses, complicity in human rights abuses, health and safety violations and environmental degradation. Procurement departments should have in place policies and procedures for sourcing goods and services in more ethical and sustainable ways. Airlines should demonstrate that they have responsible supply chain practices and that unfair exploitation of people or the environment is not a source of price competitiveness as we see in other industries. Sustainable procurement and the use of products that have positive social and environmental characteristics is an important part of supply chain related product responsibility. Companies can do more to steer their purchasing decisions to encourage more sustainable consumption by passengers. The use of recycled materials, Fair Trade products and organic food are all important considerations for airlines wanting to differentiate themselves through their sustainable development practices.

Korean Airlines Advert 2008 How low can you go?

Discrimination on the basis of personal characteristics is not only a human rights abuse but also extends to concerns over the smooth and efficient operations of any company. Companies need to ensure that they are not engaging in any activity that might be seen as constituting a human rights abuse or being complicit in such an abuse. Air Asia puts out a fresh, modern image Gender discrimination and the perpetuation of stereotypes is so high that it seems common practice in the regions aviation industry. Examples are various and include:

- Korean Airs advertisement of flight services in 2008 featuring female flight attendants on their knees bowing down to serve guests and its practice of excluding men when advertising for cabin crew74 - Philippine Airlines making stricter age requirements for female cabin crew and requiring them to be single75 - Malaysian Airlines unfair policies for female flight attendants who fall pregnant and require maternity leave76 - Singapore Airlines marketing of the Singapore Girl as traditionally subservient to males.77
While many of the listed companies report on the composition of their workforce, only a few make a statement on discrimination due to age and physical appearance. These include Cathay Pacific and Korean Air. Asiana Airlines is particularly transparent about its workplace policies and the subsequent training for employees to familiarise themselves with them and handle potential problems at work, such as sexual harassment. Cathay Pacific is the only airline reporting on the number of incidents of discrimination and actions taken. Best practice examples in the region include Korean Air providing employee training on diversity and sexual harassment and Qantas promoting equal opportunity employment for women and indigenous peoples. The business case for having a diverse workforce is extremely strong and includes the ability to recruit and retain the top talent. There is also significant evidence to suggest that diversity leads to a more innovative and productive workforce as well. We would expect responsible companies in this industry to end discriminatory work practices and embrace diversity in all its forms in the future. The airline industry is not associated with the ubiquitous sweatshop issues in the same way as we might find in outsourced manufacturing. Nevertheless, airlines do buy enormous quantities of goods and services ranging from the aircraft, fuel, uniforms for staff, food, toys and meal trays. Responsible companies will have in place risk assessments to determine where supply chain issues might impact their brands and reputation and should be guided by codes of conduct that stipulate minimum standards for their suppliers. The undoubted leader in this area of social responsibility is Cathay Pacific. The airline has a sophisticated code of conduct to which all suppliers are bound. All existing and potential suppliers must complete an innovative on-line assessment tool. The company has carried out risk assessments to highlight particular concerns and targets its assessments at those high-risk supply chains. It stresses the need to work in partnership with its suppliers in addressing social responsibility issues. Plans are in place to extend the coverage of supply chain issues to include more environmental aspects in line with growing stakeholder concerns around this area.
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Trafficking & combating child sex tourism

One issue that may often be linked to both supply chain and consumer issues involves trafficking and sex tourism. The trafficking and exploitation of children for sexual purposes is heavily prevalent in Asia and in particular in: Sri Lanka, the Philippines, Thailand, Taiwan, and Cambodia. Globally, it is a multibillion dollar industry that is said to affect as many as two million children. The extreme illegality and underground nature of the crime means statistics are less accurate. Nevertheless, it has been estimated that children make up 40% of sex workers in Thailand, and that in Cambodia about one third of all sex workers are under the age of 18. The numbers are alarming, and probably understated, but indicate that a lack of coordinated regional efforts towards eradication have allowed the industry to continue and thrive.78 The airline industry is inextricably involved in the facilitation of this problem, as a channel that offenders use to gain access to children from all over the world. At the same time as part of the tourism industry it is also well placed to help protect children. The Human Trafficking Organization implicates the airlines by suggesting that some are lax in scrutinising passengers, a situation which can contribute to the problem as traffickers then select these airlines to smuggle children. It is important for airlines to take a stance in acknowledging this problem, and they can help by raising awareness and potential deterrence.79 Despite the prevalence of this crime in Asia, most counter-trafficking efforts have been first introduced in Europe. In February 2010, the Indian chapter of the Pacific Asia Travel Association (PATA) has implemented guidelines for the Indian tourism industry which require airlines to include information about the illegality of child abuse in their promotional brochures and other publicity materials. Airline employees will be trained to monitor paedophiles and will block the accessing of Internet pornography on their premises.80 End Child Prostitution, Child Pornography and Trafficking of Children for Sexual Purposes (ECPAT) is an international organisation aimed to end child prostitution, child pornography and trafficking of children for sexual purposes and has developed an initiative which aims to engage the private sector. The Code of Conduct for the Protection of Children from Sexual Exploitation in Travel and Tourism81 is funded by UNICEF and supported by the World Trade Organization. The only scored company to sign the code is Japan Airlines, with three of its tourism specific subsidiaries as signatories.82 ECPAT, in conjunction with Air France, has developed an awareness building in-flight video for airlines.83 None of the listed Asian airlines have shown this to passengers to our knowledge. Air France allocates a portion of in-flight toy sales to fund its Child Sex Tourism awareness programs. KLM does not run the video but it made a statement concerning child sex tourism to travellers, encouraging them to report any suspicious behaviour.84 As an example of best practice within the region, Qantas has demonstrated its support with the Australian Federal Polices commitment to combating the crime of child trafficking by displaying full page advertisements in their in-flight magazines to raise awareness.85

Engagement with the social media

Today Twitter, Facebook, Flickr, YouTube and blogs, offer largely unexplored new advertising and promotion platforms to promote products, target the online and younger community, and develop brand loyalty. Word of mouth advertising is the largest influencer in travel making decisions, and social media platforms can greatly facilitate this.86 In Asia Pacific an increasing number of airlines are using social media to engage with different customer segments - Air New Zealand, Cathay Pacific, Jetstar, Philippine Airlines, Qantas, Thai Airways, Tiger Airways, and Virgin Blue all have Twitter accounts. Taking the example of Tiger Airways, their twitter account not only reminds followers of special deals and seasonal sales, but also asks for opinions, on various topics, such as, celebrity endorsements for LCCs and desirable destinations. These are examples of how these airlines are using the accounts to simplify the customer feedback mechanism, modify their product and service offering and to retain customer loyalty. YouTube is another social media phenomenon, which taps into the youth market much more effectively than TV advertising. Air New Zealand has benefited greatly from their YouTube advertising campaign of July 2009, which cleverly highlighted their commitment to transparency regarding the airlines all-inclusive domestic fares and received nearly 10 million hits.87 Blogging is an avenue that some airlines are pursuing to capture target markets. Malaysia Airlines stands out in this regard for its employee created blog. This multi-lingual blog is accessible by the public. Titled Living Malaysian Hospitality and powered by employees, posted categories include so said the customer and giving back to the community. The customer feedback section allows passengers to submit praise as well as complaints and to receive prompt response from the airlines employees. The community section describes the volunteer activities of Malaysia Airlines staff - in a much more personalised and detailed way than CSR Reports are able to.88 It is becoming increasingly important for airlines to keep track of the social media and utilise these avenues to engage with their stakeholders. Social media provides passengers with a more immediate and broad audience to express their frustrations and airlines need to be able to manage this negativity. However, there are downsides to such social networking, considering the public nature and significant online presence of these formats. Virgin Atlantic and British Airways have both faced problems in the past with flight attendants posting negative comments about passengers on Facebook. This highlights a need for internal awareness and communication on the management of social media. Singapore Airlines has released guidelines on employee blogging and internet usage. Employees are forbidden to write about work or provide any pictures in the public social media sphere.89 There is little doubt that the power of the social media has the power to enhance brands. But there is also a significant threat to the reputations of companies embroiled in online attacks from customers, employees and others. There is a need for an industry, which is very much the attention of many stakeholders, to engage with the social media and monitor and manage online content. We expect more engagement with a range of stakeholders through the social media in the future.

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While, globally, 2009 was one of the safest years in aviation history90 the accident rate in the Asia-Pacific worsened to 0.86 (aircraft written off per million flights) compared to 0.58 in 2008, with three major accidents involving carriers from the region.91 Safety, therefore, remains the number one priority of IATAs Asia Pacific regional priorities for 2010 and of the Association of Asia Pacific Airlines (AAPA).92 AAPA raises some significant concerns on the issue, stating within the region there is still an apparent disparity in the levels of regulatory oversight in some countries and conversely varying levels of compliance by some operators existing and new entrants.93 Within the region, South Korea was ranked highest for aviation safety oversight by ICAO following its recent Universal Safety Oversight Audit Programme (USOAP) audit, where it demonstrated 99% compliance, a noteworthy achievement. At the other end of the spectrum, the EU list of carriers subject to an operational ban, which was up-dated in November 2009, now includes carriers from four Asia Pacific countries, namely Cambodia, Indonesia, the Democratic Peoples Republic of Korea and the Philippines.94 All Nippon Airways reports comprehensively on its Safety Management System which covers the following key aspects: ANA Group safety principles, safety management regulations, risk management, reporting programme, education and training, internal safety auditing programme and external audits. The airline seeks to continually make safety improvements via the four stages of the cycle Plan, Do, Check and Act.95 Food safety is a particular area on which an increasing number of airlines are reporting, including Cathay Pacific, Korean Air and All Nippon Airways. This seems to be driven by the motivation to increase customer service and to respond to the increasing number of health-conscious passengers. Safety issues remain one of the most material risks for airlines and, therefore, a major concern for investors. One major accident or incident that can be linked to negligence on the part of an airline can cause shareholder value to be destroyed as possible litigation costs rise. In the eyes of many customers there are still some doubts around the safety of LCCs where older aircraft, serviced less frequently and flown by less experienced pilots are in use. Premium airlines are increasingly using safety records as a source of competitive advantage. CASE STUDY: INDONESIAN SAFETY RECORD 12 crashes in the past two years, seven of them with fatalities. Twenty people were injured this year when a Boeing 737 operated by Merpati Nusantara Airlines, a small domestic Indonesian carrier, overran a runway in heavy rain at Manokawi Airport in Indonesias Papua Province. The aircrafts body was split open in the crash.The aircraft was carrying 103 passengers and six crew members. Since 1971 Merpati has suffered 36 serious safety incidents in which 297 people have died, according to the Aviation Safety Network. Among its more recent fatal accidents, was a crash in August 2009 that resulted in 15 fatalities, one in 2001 in which three died, two in 1997 that killed 18 and one in 1995 that resulted in 14 deaths. The airline has had 21 fatal accidents in 39 years, an average of one every 22 months. The European Union banned all Indonesian-registered aircraft from flying over its airspace in June 2007, acting on a report from the International Civil Aviation Organisation (ICAO) which criticised the countrys safety standards. The EU ban followed a number of air crashes, including an Adam Air jet fell into the sea off Sulawesi on January 1, 2007, killing all 102 on board. A Garuda jet crashed in Yogyakarta in March the same year, with 21 dead. Garuda was taken off the EU banned list in July 2009.96

Chart of Airline Accidents Source: and company websites

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The 2009 Christmas Day bombing attempt on a trans-Atlantic Northwest Airlines flight97 has highlighted airline security once again and fired discussions on how to best improve security for international aviation. The discussion centres around acts of sabotage, unlawful seizure of aircrafts and terrorist attacks as well as on health crises and communicable disease pandemics. Currently challenged by a multitude of individual national regulations and protocols, airlines and airports are calling for a harmonisation of security requirements on a global scale98 and, also, to weigh the related costs to productivity and customer satisfaction against the benefits to society.99 Following the attempted terrorist attack in the United States on December 25, 2009, the U.S. Transportation Security Administration issued a new directive, developed in consultation with law enforcement officials and domestic and international partners, which mandates that every individual flying into the U.S. from anywhere in the world who holds a passport issued by or is travelling from or through nations that are state sponsors of terrorism or other countries of interest undergo enhanced screening.100 According to IATA, airlines in the region pay almost US$6 billion a year towards security. It calls for improved government-industry cooperation on security in the region and stresses that security should be mainly a government responsibility. In 2005 AirAsia led the field when it introduced FlightVu Cockpit Door Surveillance Systems (CDSS) for seven Boeing B737-300 aircraft, which enables the flight crew to view the area outside the flight deck door and to visually identify anyone requesting entry and take appropriate action should an incident arise.101 Many other airlines have now followed suit ensuring that flight decks are not easily accessible. With the collection, analysis and exchange of passenger information, the use of biometrics and passenger vetting playing a crucial role in improving security, information security and the protection of passenger data are becoming key issues for the industry. Airlines need to get appropriate systems in place to ensure that the collection of personal data is limited to information that is either essential or provided with the consent of the individual passenger. All Nippon Airways has developed a system for raising employee awareness, and controlling and using information properly by revising rules concerning overall information security in 2008. This initiative followed a review of rules and guidelines concerning the handling of personal information of customers.102 In an industry where security has always been a priority, we nevertheless expect further breaches of security as almost inevitable. Although Asian airlines have historically not been the centre of terrorist and other attacks on their operations, we cannot necessarily expect this to continue. The growth in ethnic, religious and political conflicts in the region adds to risks in this industry. Airlines need to have in place proper and regular risk assessments that can highlight possible threats to their operations.



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Competition policy
Market liberalisation and competition have changed the economic environment of air transport in the region. While the North American and European aviation industry is witnessing protectionist measures and government subsidies as companies fight for survival, the Asian aviation sector is moving more towards greater liberalisation with the ASEAN Open Skies agreement in place. Antitrust and unfair competition laws have been passed under the belief that the economy functions best when monopoly, pricing limitations, predatory practices and merger control are governed to permit activities that hinder healthy growth. The Association of Asia Pacific Airlines (AAPA) tracks issues related to anticompetitive behaviour in the aviation industry and advises its member airlines on recent developments. It provides information about US Department of Travel legislation, as a way to prepare airlines for the upcoming legislation trends in the region. Singapore and Thailand have signed liberalisation agreements, with Singapore especially tapping into the foreign market. In 2004, Singapore, Brunei and Thailand concluded a multilateral agreement providing for unlimited direct passenger flights between any destinations in the three countries. In order for successful liberalisation to be achieved, throughout the process, specific attention will be paid to market competition issues. This is especially the case for code shares between airlines competing directly on routes. In 2003 when Japan Airlines International merged with Japan Air Systems, taking the number of domestic airlines down to only two, measures were enacted to ensure competition could still thrive fairly between the two and that they would not prevent other airlines from entering the market. In fact, Japan Airlines International and All Nippon Airways cooperated in order to compete with the bullet train on their domestic routes between Osaka and Tokyo. Measures were enacted to ensure that customers would still be receiving affordable airfares. For example, they agreed that normal airfares would be reduced by 10% and that the airfare would not be raised in at least three years unless the business environment changed drastically.103 Competition policy and liberalisation of the skies is supposedly designed so that passengers will benefit from lower fares and better services. In the long term, airlines gain as their costs tend to fall as well as revenues declining due to lower fares. Airlines that can improve their productivity to match a more competitive environment will survive, while those who cannot will struggle. The Cambodian, Laos, Myanmar, Vietnamese (CLMV) airlines are already open to international air services and thus exposed to competition from more established regional airlines, such as Singapore Airlines, Malaysia Airlines and Thai Airways. Nevertheless, they have a significant opportunity for growth and expansion through increased tourism and trade revenues in their countries. Out of all the ASEAN members, only Singapore has adopted an open-sky policy for international routes. Others in the region have adopted bilateral or multilateral air service agreements. Previously, ASEAN members had been conservative in their treatment of domestic and intra-regional aviation policy despite being very liberal in allowing freedoms with international routes and carriers. LCCs have recently taken advantage of the liberalisation in intra-regional routes that was rooted in passenger complaints over high prices for domestic routes and rising demand of regional tourism. Indonesia has rejected appeals for liberalisation and made moves to protect its many small private airlines by disallowing nonIndonesian LCCs to land in any of its cities.

Consumer issues & fair marketing

Liberalisation of aviation markets in ASEAN and the resultant competition may cause mergers between major airlines or consolidation through code shares as airlines seek to emerge as dominant players. This will create serious implications for consumer protection and competition protection. Merged airlines can introduce predatory practices that are detrimental to smaller players and to consumers with lower purchasing power. Governments, therefore, play a key role in putting in place appropriate competition policies when they begin to liberalise the ownership of airlines under their control. A major principle of fair marketing is that companies provide to their customers education and accurate information, using fair, transparent and helpful marketing and contractual processes.104 This means they must openly disclose total prices and taxes, terms and conditions of the products or services as well as any accessories required for use and delivery costs. In the airline industry, with the introduction of ancillary fees by premium airlines who are trying to lower costs or by LCCs who provide low-frills service, transparent pricing is an issue of great importance. Furthermore, advertising and marketing associated with low-frills service or promotional deals can often be misleading and leave potential passengers upset at the final amount of payment compared to what they were led to believe they would be paying. In 2008, Malaysia Airlines and AirAsia were criticised by the Malaysian Association of Tour and Travel Agents (MATTA) for advertising zero fare flights. MATTA said that such advertisements were misleading and should be banned as they do not provide customers with the full range of prices to expect. Customers still had to pay airport taxes, fuel surcharges, and other fees for the limited zero fare tickets. While New Zealand, Australia and Europe have outlawed such advertising practices, and the European Parliament had agreed to a new law to include such costs and fees in the advertised offer, such legislation has not been passed in Malaysia.105 We would expect responsible companies to be entirely transparent in respect of their pricing policies and their communications with respect to pricing and special offers. We are likely to see tough laws and guidelines coming from competition authorities and other government agencies covering such behaviour. Prosecutions are likely to follow.

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Remuneration of Boards
Board Remuneration is an aspect of corporate governance reporting that is yet to develop sufficient transparency in Asia. Many annual reports or corporate governance reports will state basic fees or salaries that board members receive for attending meetings or per annum; yet, do not explain how it is linked to the performance of the company or, more particularly, if it is affected negatively by poor company performance. In more established markets such as Australia, there are corporate governance disclosure requirements for listed companies, however, an Association of Chartered Certified Accountants (ACCA) report argues this has not made an impact in slowing the growth of executive pay. Despite legislation in the 1990s requiring companies to disclose executive salaries, remuneration committees have not responded adequately.106 Regulations on disclosure and transparency differ among the Asian economies. China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand all require disclosure on directors remuneration. However, this differs in some countries allowing this disclosure on aggregate rather than for each individual director. Shareholders cannot obtain minutes of board meetings in Hong Kong, Malaysia, Singapore or Thailand, making it difficult for them to understand how the board operates.107 But, in the face of recession some airlines have demonstrated greater transparency in an attempt to prove responsibility in cost-cutting measures. In mid-2009, Singapore Airlines announced that it would cut salary of managerial staff from July, ranging between 10% and 20%, while its board of directors also agreed to take a cut of 20% as part of efforts to keep the airline profitable.108 We expect to see increased transparency and accountability amongst the most responsible companies in the region. This requires increased transparency on the selection and criteria for selection of Board members, remuneration, links between remuneration and performance, diversity of the Board and decisionmaking processes.

Political involvement & government relations

It is important for companies to be transparent about how much money they give to the government, even in the form of supporting public policy positions or government charities. In the same principle, companies should indicate when they have received support from the government and in what capacity. This is of particular importance in Asia where a large number of airlines are semi-state owned or receive government subsidies (hidden or otherwise). Nearly all national carriers in ASEAN and China are majority owned by the government on the grounds they should meet national needs, promote national security and enhance national pride. Against this background, profit oriented incentives are often less important and pose a significant risk for minority shareholders. The Malaysian government, for example, holds shares in Malaysia Airlines that gives it a right of veto on major decisions. Malaysia Airlines has often limited freedom to increase domestic fares because the government does not want to cause inflationary pressure. Another example is Vietnam Airlines, which was established as a state owned enterprise in 1986. Despite its transition to a corporation in 1996, members of management remain political appointees. The corporation has a seven seat management board whose members are appointed by the Prime Minister.109 In Indonesia, national airlines are important in serving the domestic transportation needs of a largely populated and hugely dispersed archipelago, ensuring that all parts of this country remain connected. This includes remote areas where air routes are uneconomical. This connectedness has important implications for political stability as well.110 Political involvement with airlines has an impact on the competition policy in the region. Amid the financial crisis in 2009, Thai Airlines, for example, sought co-operation from the Comptroller Generals Department to strictly ensure that all air travel by officials of government agencies, state enterprises and public organisations was on the flag carrier. This was in response to calls by some officials for flexibility in the fly-THAI directive so that they can use foreign airlines for reasons such as lower fares, service preferences or better connections.111 The Chinese aviation industry has been consolidated geopolitically around three major airlines (Air China, China Eastern Airlines and China Southern Airlines) with hubs in Beijing, Shanghai and Guangzhou. In the aftermath of the recession in late 2008, the Chinese government instituted several measures to relieve the pressure from these airlines, including restrictions on start up carriers. Such interventionist measures are said to sustain inefficiency in a struggle to resolve short-term survival and will most certainly not promote long-term competitiveness.112 After the economic crisis it seems that in some parts of the region political intervention in the airline industry is about to diminish. In 2006, for example, Malaysia Airlines, published a Business Turnaround Plan, which made the airlines weaknesses public, looking even at a possible bankruptcy situation. With a subsequent promise by the government not to intervene, various measures to lower costs have been introduced, ascribed to a new generation of more independent executives. These have included the cutting of unprofitable routes, reduction in fleet, and increases in employee productivity and aircraft daily usage. Compensating for a further reduction in its long-haul network (the closure of New York and Stockholm routes), the airline is planning to expand to Australia, China, South Asia, the Middle East and ASEAN countries.113 Among the listed companies in the region only Qantas and Malaysia Airlines report on their contribution to political parties. Malaysia Airlines discloses its involvement with Project PINTAR as a joint project with Government linked companies to promote education within the underprivileged youth. The Chairman also publicly thanks the government as a key stakeholder for its unwavering support, specifically stating it would benefit from the governments stimulus plan which provided a 50% rebate on landing charges.114

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Bribery & corruption

According to Transparency Internationals Global Corruption Report 2009 the level of corruption in the private sector worldwide remains disturbingly high. Prominent corruption scandals and lack of transparency and accountability were at the root of the financial crisis.115 With the liberalisation of the aviation market in Asia there is a risk of an explosion of corrupt practices. Corruption in the private sector has traditionally been severe and it remains one of the most commonly found forms of poor governance in places such as China, Vietnam, and Indonesia, amongst others. While there is evidence of new legislation tackling private sector corruption throughout the region, from the establishment of new anti-corruption agencies to the provision of whistleblower protection, there is still a lack of political will to fight corruption and the effective implementation of laws is still underdeveloped. In South-Korea, for example, the current government has introduced business-friendly policies, sometimes at the expense of anti-corruption initiatives.116 When it comes to fighting corruption, a typical challenge in the regions aviation sector is the complex interrelationship of politics and the private sector with significant government participation in the aviation sector and considerable business participation in politics. This means that corruption may take place with impunity in some countries. Thai Airways is under scrutiny from its customers and has been accused of corruption charges associated with its government involvement. In 2009, for example, the director of Thai Airways Internationals Crew General Administration Department filed a complaint with the National Anti-Corruption Commission against a selection committee chaired by Finance Ministry permanent secretary Suparut Kawatkul. This was in response to the committee naming appointees for the position of Executive Vice President for Operations and Business Administration, which were found to be connected to some of the committee members, as a brother-in-law and classmates.117 In Indonesia various fatal accidents raised concern that regulatory neglect, coupled with bribery, might have undermined passenger safety and led to Indonesian airlines being banned from European Union airspace in July 2007. According to reports by testimonies, the institutionalisation of bribery related to certificates (which included operating permits, pilot license extensions, increasing pilot ratings and even airplane flightworthiness) discouraged investment in maintenance and training costs.118 Against the background of weak government initiatives and law enforcement, we see private sector initiatives and collective action by companies as crucial in raising corporate integrity and fighting corruption. Stock exchanges in the region such as Shanghai and Malaysia are increasingly engaging listed companies in strengthening corporate integrity by developing mandatory corporate governance standards. Our analysis shows that business initiatives on corruption are still low in the regions aviation sector with only four companies reporting on this issue, namely the leaders, Asiana Airlines, Cathay Pacific, Korean Air, and Quantas.

The outlook for the airline industry as a whole is largely positive with an inevitable growth in the number of passengers flying in Asia. We expect to see further liberalisation of the market coupled with a degree of industry consolidation. The growth of LCCs will be significant in markets serving second tier cities within the region. Yet, the airline industry is not a hugely profitable one and continued tough competition coupled with rising costs associated with fuel and environmental costs means it is likely that profits will remain modest despite growth. Our analysis of the 24 listed airlines in the region shows a great disparity between companies recognising their responsibility towards ESG issues and those who seem to be blissfully unaware. We have demonstrated in this report that there are a growing number of risks associated with many of these issues and that companies that cannot engage with them or fail to do so will face both reputational and financial penalties. On the other hand we have pointed to the real advantages associated with differentiation on social and environmental issues that can lead to a competitive advantage and increased profitability for some companies. The leaders in the airlines industry have demonstrated that they can and do take ESG seriously. Impressive scores by Cathay Pacific, Korean Air and Asiana Airlines provide a benchmark for others to follow. But a number of companies remain timid and have a long way to go to catch up on the ESG performance of the best companies in Asia. Disclosure on the economic impacts of aviation and on the governance of companies is relatively strong in the region. Most companies provide significant information on their economic contributions and their governance structures. Labour issues and environmental indicators are less well disclosed even though this report highlights that these areas are very much linked to some of the key risks for companies and their investors in this industry. Perhaps most importantly amongst the issues we have identified are the environmental risks associated with climate change and air pollution. Although only responsible for 3% of global greenhouse gas emissions, the sector has been identified by many regulators as an area of concern. There are undoubtedly going to be increasing costs associated with environmental damage caused by airlines. But in an increasingly sophisticated market customers and other stakeholders are increasingly going to judge airlines on their environmental performance. Profitability is also likely to be hit by the inevitability of rising fuel prices over the medium term as resources become more depleted and harder to extract. The growth of the airline industry will also increase demand for fuel and other resources and inevitable price rises. Social issues remain important as well. The airline industry makes considerable contributions to the GDP of many countries and employs, directly and indirectly, many thousands of people in the region. Yet, there are a number of questions raised in this report about the basis on which staff are hired and possible discrimination and human rights abuses associated with some employment practices. We have also highlighted the impact that airlines have on secondary sectors through their purchasing policies and point to the need for supply chain codes of conduct and sustainable procurement practices. The industry has always put an emphasis on safety and this has become an important part of the profile of airlines. Yet there are major concerns in some parts of the industry concerning the degree of regulatory oversight in place and the potential for bribery and corruption to impacts on safety and security. This last point relates to the governance of many of the companies analysed in this report and their relationships to governments when they are perceived to be a national carrier. Government ownership, subsidies and political involvement distort competition in the sector. Investors will already acknowledge that the airline industry is challenged by relatively low profitability and is highly susceptible to economic disturbances. Yet it is an industry that continues to grow, particularly in the Asia-Pacific region. There is now a growing recognition that the brands and reputations associated with many of the players in the region is likely to be inextricably linked to many of the issues highlighted in this report. Those that are transparent and can respond to the issues via their differing disclosure vehicles are set to gain a competitive advantage through their non-financial performance and that will build loyalty and trust amongst customers and other stakeholders. Those continuing to lag behind on issues of transparency and accountability will face huge potential risks and are best avoided by responsible investors.

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Appendix 1
Environmental indicators based on GRI
EN1 EN2 EN3 EN4 EN5 EN6 EN7 EN8 EN9 EN10 EN11 Materials used by weight or volume Percentage of recycled input materials used Direct energy use Indirect energy use Energy Use Ratio (efficiency) Energy efficiency initiatives or renewable energy sources Energy use reduction initiatives Total water withdrawal by source Water sources significantly affected by withdrawal of water Percentage and total volume of water recycled and reused. HR1 Location and size of land owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value outside protected areas Description of significant impacts of activities, products, and services on biodiversity in protected areas and areas of high biodiversity value outside protected area Habitats protected or restored Strategies, current actions, and future plans for managing impacts on biodiversity Number of IUCN Red List species and national conservation list species with habitats in areas affected by operations, by level of extinction risk Total direct and indirect greenhouse gas emissions by weight Other relevant indirect greenhouse gas emissions by weight Initiatives to reduce greenhouse gas emissions and reductions achieved Emissions of ozone-depleting substances by weight NO, SO, and other significant air emissions by type and weight Total water discharge by quality and destination Total weight of waste by type and disposal method Total number and volume of significant spills Weight of transported, imported, exported, or treated waste deemed hazardous under the terms of the Basel Convention Annex I, II, III, and VIII, and percentage of transported waste shipped internationally HR8 HR7 HR4 Total number of incidents of discrimination and actions taken Operations identified in which the right to exercise freedom of association and collective bargaining may be at significant risk, and actions taken to support these rights Operations identified as having significant risk for incidents of child labor, and measures taken to contribute to the elimination of child labor Operations identified as having significant risk for incidents of forced or compulsory labour, and measure to contribute to the elimination of forced or compulsory labour Percentage of security personnel trained in the organizations policies or procedures concerning aspects of human rights that are relevant to operations Total number of incidents of violations involving rights of indigenous people and actions taken HR2 XEN 4 XEN 5 XEN 6 XEN 7 XEN 8 XEN 9 XEN 10 XEN 11 Fleet Modernization Biofuel Climate change impacts Dismantling planes Landing techniques Noise pollution Taking up land (e.g. airports) Supply chain code of conduct

Human rights indicators based on GRI

Percentage and total number of significant investment agreements that include human rights clauses or that have undergone human rights screening Percentage of significant suppliers and contractors that have undergone screening on human rights and actions taken Total hours of employee training on policies and procedures concerning aspects of human rights that are relevant to operations, including the percentage of employees trained

EN12 EN13 EN14 EN15 EN16 EN17 EN18 EN19 EN20 EN21 EN22 EN23 EN24






Identity, size, protected status, and biodiversity value of water bodies and related habitats significantly affected by the reporting organizations discharges of water and runoff Initiatives to mitigate environmental impacts of products and services Percentage of products sold and their packaging materials that are reclaimed by category Monetary value of significant fines and total number of non-monetary sanctions for noncompliance with environmental laws and regulations Significant environmental impacts of transporting products and other goods and materials used for the organizations operations, and transporting members of the workforce Total environmental protection expenditures and investments by type

EN26 EN27




Additional sector specific environmental indicators XEN 1 XEN 2 XEN 3 European Emissions Trading Scheme Offsetting option for passengers Route optimization and air traffic management

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Labour indicators based on GRI

LA1 LA2 Workforce by employment type, employment contract, and region Total number and rate of employee turnover by age group, gender, and region Benefits provided to full-time employees that are not provided to temporary or part-time employees, by major operations Percentage of employees covered by collective bargaining agreements Minimum notice period(s) regarding operational changes, including whether it is specified in collective agreements PR1 Additional sector specific social indicators


Public health issues (SARS, swine flu, etc.) Community investment strategies (particularly in developing countries)


Product Responsibility
Life cycle stages in which health and safety impacts of products and services are assessed for improvement, and percentage of significant products and services categories subject to such procedures


Percentage of total workforce represented in formal joint managementworker health and safety committees that help monitor and advise on occupational health and safety programs Rates of injury, occupational diseases, lost days, and absenteeism, and number of work related fatalities by region Education, training, counseling, prevention, and risk-control programs to assist associates, their families, or communities regarding serious diseases Health and safety topics covered in formal agreements with trade unions


Total number of incidents of non-compliance with regulations and voluntary codes concerning health and safety impacts of products and services during their life cycle, by type of outcomes



Type of product and service information required by procedures, and percentage of significant products and services subject to such information requirements Total number of incidents of non-compliance with regulations and voluntary codes concerning product and service information and labeling, by type of outcomes Practices related to customer satisfaction, including results of surveys measuring customer satisfaction Programs for adherence to laws, standards, and voluntary codes related to marketing communications, including advertising, promotion, and sponsorship Total number of incidents of non-compliance with regulations and voluntary codes concerning marketing communications, including advertising, promotion, and sponsorship by type of outcomes

LA8 LA9 LA10 LA11 LA12 LA13 LA14


PR5 Average hours of training per year per employee by employee category Programs for skills management and lifelong learning Percentage of employees receiving regular performance and career development reviews Diversity of governance bodies and workforce Ratio of basic salary of men to women by employee category PR8 PR6


Total number of substantiated complaints regarding breaches of customer privacy and losses of customer data Monetary value of significant fines for noncompliance with laws and regulations concerning the provision and use of products and services

Additional sector specific labour indicators XLA 1 XLA 2 Discrimination due to age and physical appearance Health and safety (specific issues relating to air travel, DVT, etc)


Social indicators based on GRI

SO1 Nature, scope, and effectiveness of any programs and practices that assess and manage the impacts of operations on communities, including entering, operating, and exiting


Percentage and total number of business units analyzed for risks related to corruption


Percentage of employees trained in organization's anti-corruption policies and procedures Actions taken in response to incidents of corruption Public policy positions and participation in public policy development and lobbying Total value of financial and in-kind contributions to political parties, politicians, and related institutions by country Total number of legal actions for anticompetitive behavior, anti-trust, and monopoly practices and their outcomes Monetary value of significant fines and total number of non-monetary sanctions for noncompliance with laws and regulations



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Annex 2: Airline scores (total mark)

27 20 63 18 69 63 42 57 7 9 2 6 6 2 25 Thai Airways International Thailand 55 109 43 31 22 101 31 1 7 2 3 8 0 10 Philippine Airlines Average score Philippines 41 12 20 38
EC2 EC3 EC4 EC5 EC6 EC7 EC8 EC9 Climate change financial implications, risks and opportunities Defined benefit plan obligations Significant financial assistance received from government Range of ratios of standard entry level wage compared to local minimum wage at significant locations of operation Policy, practices, and proportion of spending on locally-based suppliers Procedures for local hiring and proportion of senior management hired from the local community at locations of significant operation Infrastructure investments and services provided primarily for public benefit Understanding and describing significant indirect economic impacts Additional sector specific economic indicators XEC 1 XEC 2 XEC 3 Industry associations and collaborations (e.g. IATA) Fair operating practices Responsiveness to consumer concerns

Overall score


Direct economic value generated and distributed




Indicators (104 indicators in total, maximum score = 208) LA (16) SO (10) PR (9) EC (12) GOV (7)








Corporate Governance and Engagement

CG 1 Governance structure of the organization, including committees under the highest governance body responsible for specific tasks, such as setting strategy or organizational oversight.





CG 2

Indicate whether the Chair of the highest governance body is also an executive officer (and, if so, their function within the organizations management and the reasons for this arrangement)

CG 3

For organizations that have a unitary board structure, state the number of members of the highest governance body that are independent and/or non-executive members.


CG 4

HR (9)

Linkage between compensation for members of the highest governance body, senior managers, and executives (including departure arrangements), and the organizations performance (including social and environmental performance).












CG 5

Additional sector specific governance indicators XCG 6 Stakeholder engagement strategy in place, objective of engagement stated, stakeholder groups indentified, and commitment for continuous engagement Stakeholder concerns and comments and company response to those disclosed


ENV (41)

Internally developed statements of mission or values, codes of conduct, and principles relevant to economic, environmental, and social performance and the status of their implementation.

China Southern Airlines

All Nippon Airways

Singapore Airlines

Shandong Airlines

Kingfisher Airlines

Shanghai Airlines


Asiana Airlines

Cathay Pacific

Japan Airlines

Tiger Airways

Eva Airways

Jet Airways

Korean Air

Malaysia Airlines

Air New Zealand

Hainan Airlines

China Eastern

China Airlines

Virgin Blue

Air China

Hong Kong

New Zealand




Mainland China


Responsible Research 2010 | Issues for Responsible Investors | 46





Air Asia






Annex 3: Airline scores (percentages)

Japan Singapore Hong Kong Mainland China New Zealand Australia Korea India Taiwan Malaysia Thailand Thai Airways International 30% 11% 19% 30% 11% 38% 50% 27% Philippines Philippine Airlines 12% 0% 25% 15% 11% 29% 7% 15% Average score (percentage) 18% 4% 19% 14% 13% 26% 39% 18% Country

1 2 3 4 5 6 Karlsson, T. 2007: Asian Aviation: Big Growth, Big Challenges. Heidrick & Struggles International, Inc. 7 8 9 and 45119 10 asiapacific-passengers-1856368.html 11 12 13 14 15 16 17 18 flight costs as per company websites, sourced April 27th 2010 for one month out, one way 19 Button, 2009 20 21 22 footprint/ 23 passengers-use-toilet-boarding.html#ixzz0mO5ziObr 24 25 26 E6DEDA2A6964/0/ Global_Approach_Reducing_Emissions_251109web.pdf 27 28 29 30 31 and http://www. 32 33 34 35 E6DEDA2A6964/0/ Global_Approach_Reducing_Emissions_251109web.pdf 36 37 38 E6DEDA2A6964/0/Global_Approach_Reducing_Emissions_251109web.pdf 39 E6DEDA2A6964/0/ Global_Approach_Reducing_Emissions_251109web.pdf 40 E6DEDA2A6964/0/ Global_Approach_Reducing_Emissions_251109web.pdf 41 42

Shanghai Airlines

Shandong Airlines

Tiger Airways

All Nippon Airways

Japan Airlines

Hainan Airlines

China Southern Airlines

China Eastern


Singapore Airlines

Cathay Pacific

Air China

Air New Zealand

Kingfisher Airlines


Eva Airways

Virgin Blue

Asiana Airlines

Jet Airways

Korean Air 51% 28% 56% 30% 33% 63% 64% 49%

China Airlines

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Air Asia 13% 0% 28% 15% 11% 46% 43% 20%

Malaysia Airlines 32% 6% 28% 25% 22% 50% 43% 30%

ENV (82)









45% 11% 44% 25% 22% 46% 36% 38%








0% 0% 0% 0% 0% 0% 43% 3%

1% 0% 6% 10% 0% 4% 43% 6%

5% 0% 3% 15% 6% 17% 50% 10%

HR (18)


11% 34% 30% 22% 25% 79% 33%

Indicators (104 in total) Percentage score out of maximum 208 points available












0% 13% 0% 11% 17% 57% 15%

0% 16% 10% 0% 17% 21% 11%

LA (32)

19% 0% 11% 25% 50% 18%




47% 30% 56% 63% 93% 52%


16% 0% 28% 38% 50% 21%



3% 10% 0% 4% 7% 2%

9% 50% 28% 29% 29% 20%


SO (20)


15% 0% 33% 50% 26%

10% 0% 25% 36% 9%


5% 0% 21% 0% 3%

0% 0% 0% 7% 0%

0% 17% 8% 29% 10%

PR (18)

22% 33% 50% 30%

6% 29% 50% 13%

EC (24) GOV (14) Overall score

43 44 45 AAPA Asia Pacific Perspectives June 2009 46 47 success-camelina-algae-jatropha-used-in-b50-biofuel-mix-fuel-economy-higher-thanjet- a/ 48 ICAO, 2007 49 50 ICAO, 2007 51 Stockholm Environment Institute et al., 2004 52 53 54 55 56 to%20E ASA_engine%20oil%20tox_24Nov09.pdf 57 html 58 59 60 61 62 63 search.cgi?blog_id=2&tag=recycling&limit=20&Include Blogs=2 64 r=1 65 66 67 68 Karlsson, T. 2007: Asian Aviation: Big Growth, Big Challenges. Heidrick & Struggles International, Inc. 69 70 the_ma king_of_a_flight_attendant_workshop.jsp 71 72 73 74 news/2100720d6a9dd4eaaa253a198e70e042 75 76 77 78 79 80 81 82 83 84 85 86
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87 88 89 90 AviationSafety_08Jan10.p df 91 92 93 94 L&age d=0&language=en&guiLanguage=en and ban/ doc/list_en.pdf name=newsletter &id=995 95 All Nippon Airlines (2010) ANA Group CSR Report 2009 Web Edition. 96 Apr 13, 2010 97 See for example 98 99 100 102 All Nippon Airlines (2010) ANA Group CSR Report 2009 Web Edition. 103 104 ISO 26000 105 nation/21903750&sec=nation 106 107 108 2/Article/index_html 110 111 112 113 airlines 114 115 Transparency International et al., 2009: Global Corruption Report 2009. Corruption and the private sector. Cambridge University Press. New York. 116 Ibid. 117 118 Transparency International et al., 2009: Global Corruption Report 2009. Corruption and the private sector. Cambridge University Press. New York.


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