Airline SLB debate takes off with Air France-KLM
Although Air France-KLM’s €1bn sustainability-linked bond is a step forward for the aviation sector, the debate about the quality of its targets highlights the difficulty of creating sustainability metrics for a sector that many still believe is inherently unsustainable.
The French-Dutch airline operator said the deal, which comprises a €500m three-year tranche and a €500m five-year tranche, is the first public euro-denominated SLB to be issued by the airline sector, which remains one of the most polluting industries.
Airlines account for around 2.5% of global emissions and are expected to remain high-emitting as the world moves to a low-carbon economy due to the lack of alternative technology and the limited availability of sustainable fuels.
While some criticised the company for using sustainable debt to partially redeem a French state-guaranteed senior bank loan issued in May 2020, others praised it for increasing sector transparency and emphasising the group’s commitment to reducing emissions.
“Aviation is a sector that needs more focus and attention. Increasing SLB issuance in the space will improve disclosure and debate for climate solutions in this area,” think-tank the Anthropocene Fixed Income Institute said in a report.
Air France-KLM’s choice of an emissions-intensity metric for its KPI target sparked vigorous discussion about what is appropriate for the industry. Intensity metrics compare emissions with economic output, while absolute emission targets reduce total emissions.
The airline operator’s KPI aims to reduce emission intensity (measured by CO2 per revenue tonne-kilometre) by 10% by 2025 and 30% by 2030. This applies to Scope 1 emissions covering the direct activities of the group and indirect Scope 3 upstream emissions from fuel production, which covers 92% of the group’s footprint.
ABN AMRO's ESG and corporates strategist Larissa de Barros Fritz said an absolute emissions reduction target would have been "more appropriate" but said an absolute emissions number did not seem to align with the Paris Agreement to limit global warming to two degrees Celsius or less.
She also pointed out that Air France-KLM is relying on efficiency measures such as lower-emitting aircraft and sustainable fuels to hit its SLB targets and is not addressing the critical question of demand reduction.
“We would like to reinforce the importance of having more KPI-target transparency in terms of what part of the carbon-intensity reduction is being driven by behaviour changes – lower demand growth rates – and what is being driven by lower absolute emissions,” she said.
Air France-KLM is one of the first airline operators worldwide to have its targets independently validated by the Science Based Targets initiative, which said the deal was Paris-aligned. AFII said that as the SBTi validated targets between five and 10 years from submission, its interpretation is that only Air France-KLM's 2030 target was validated, which meant the 2025 target is not.
Despite this, the deal had more than €2.6bn of combined orders. Each tranche was increased from €300m and more than half of the investors in both tranches were identified as "dark" or "medium" green investors. The three-year tranche tightened by 37.5bp to price at 7.375% and the five-year by 25bp to price at 8.25%.
Natixis was sole sustainability-linked structuring adviser, as well as global coordinator with Deutsche Bank, HSBC and Societe Generale. Credit Agricole was an active joint bookrunner.