Scandinavian Airlines serves 32 million people and is the largest airline in Scandinavia. It has been a first-mover in many areas and has built a positive reputation for corporate responsibility. Having decided to update its fleet with 55 Boeing 737s, SAS now has to decide whether to purchase DAC green engines.
Arguments for and against purchasing the green engine – Director of Aircraft & Engine analysis Having spent almost five years on the decision to purchase a new fleet of airplanes, Nas the director of aircraft and engine analysis, was fully involved and committed to researching and presenting the best option to SAS’s management team. The arguments for purchasing the DAC green engine include the continued commitment to the company’s environmental position, decreased fuel costs, a reduced risk of operational limitations, and a potential increase in passengers.
SAS has developed a strong environmental position since 1995 and stated that it was “committed to using the best available environmental technology” which in the airline industry meant noise and emissions reduction technology (pg. 7). SAS is in the position to prove to its stakeholders how strong its commitment is to the initiative. Since 90% of an airline’s environmental impact is a result of its flight operations, the implementation of the engines will greatly reduce this effect (pg. 3).
Furthermore, purchasing the engines may result in reduced fuel costs due to increased fuel efficiency which can counteract the initial cost of the more expensive engines. Purchasing the engines will also allow the company to continue to be a first-mover in the industry and will enable them to comply with the expected future emission restrictions. By already having low-emission engines, SAS will also be able to avoid any operational limitations imposed on airlines and will be able to remain under the NOx and CO2 emissions caps longer than its competitors, allowing SAS to provide more flights to its customers. Being able to operate more flights will increase the airline’s customer base and thus will increase revenues allowing SAS to recover the cost of the engines over time.
Arguments against purchasing the engines include the significant cost requirement, the opportunity costs, and the uncertainty of the operating effectiveness of the new engine technology. The cost of the engines is significant, adding about $21 million dollars to the whole fleet. This money could be spent on other features on the planes, such as a different engine, individual entertainment options, more comfortable seats, or ‘forward air stairs’. These are the opportunity costs of purchasing the engines and must also be considered in the decision. Finally, the engines use a technology that, although developed in the 70s, has not been used on 737s and thus may result in additional costs to ensure the engines operate properly and are delivered on time.
Arguments for and against purchasing the green engines –SA S management team The management team at SAS has many of the same arguments for purchasing the green engines, but has a primary focus of establishing a clear financial cost-benefit analysis. SAS’s management team will argue that purchasing the engines will have a strong impact on its brand image and will allow the company to compete in the industry through its customer’s loyalty. Ultimately this loyalty will drive revenues and will determine if the company can remain in operations. Another argument will be the benefit of curtailing the expected emissions restrictions which will allow SAS to continue to operate more efficient flights in and out of heavily regulated areas, as well as reduce fuel costs and the imposed emissions taxes and charges. Consideration of the company’s reputation as a first mover will also be argued because purchasing the engines will allow SAS to implement a new technology first and will most likely be beneficial financially.
Arguments against the purchase of the green engines are also very similar from SAS’s management team’s perspective as Nas’. The main argument against the purchase is the significant cost of the engines which could be used to implement other elements into the plane that appeal to its passengers. However, the cost of ignoring its stated level of commitment to the environment would be far greater and may have detrimental consequences to its reputation if not followed. Another argument against the engine purchase
is that the DAC engines have not been used on the 737 bodies and may have potential complications with integrating the technology, resulting in additional expenses.
Internal and external influences
The internal influences that were involved in SAS’s decision to purchase the green engines include its ability to finance the additional expenditure of the engines, its environmentally conscious corporate culture, and the management team’s commitment to its environmental position. The company has already decided to invest in a new fleet of 55 Boing 737s, so it must have the financing aspect secured. The additional cost of the engines, although significant, will be recaptured in future increases in revenue. Additionally, the corporate culture of SAS has been highly focused on the environment in the past and has remained faithful to the cause despite the economic pressures in the industry. This can be seen through its use of passive solar lights and ergonomic furniture as well as developing policies and strategies that enable them to anticipate regulatory changes and plan for them in advance (pg. 4). The environment has become part of the policy-making structure of SAS and will greatly influence the green engine decision, which implies that the management team of SAS is also committed to the company’s stance on its corporate responsibility to the environment.
The external influences include the regulatory structure, the Scandinavian culture, and competition and trends in the industry. The airline industry is highly regulated by international, federal, regional and local legislation which imposes strict guidelines for air traffic control, airspace, safety and security, including air and noise emissions (pg. 3). Due to the difficulty of assigning boundaries, each airline is subject to the regulatory structure of its home base as well as each country in which they fly. In SAS’s case this would primarily be Sweden’s Stockholm Arlanda airport, which currently imposes use charges and taxes in an attempt to reduce noise and fuel emissions and has also implemented a cap on emissions, poising a large monetary threat to SAS in the future if it does not implement the green technology (pg. 4). The Scandinavian culture has a deep set of values and beliefs regarding the importance of environmental
responsibility and has played a large role in addressing the environmental challenges in the airline industry. This aspect will greatly influence SAS’s decision since it has tried to mimic the Scandinavian position on the environment. Furthermore, competition in the industry is high resulting in pressure to adapt to cultural changes as well as through the increasing trend of operational efficiency. All of these internal and external influences will affect SAS’s decision.
Corporations should make environmentally responsible investments even if they don’t have a short-term payback or direct payback. They should do this because they have a responsibility to reduce their footprint on the environment. If every corporation in the world operated in a way that only reduced the earth’s resources, without attempting to replenish or limit the impact on its systems, then the earth’s population may find itself in distress in the future. Individuals and corporation need to be good stewards of resources and think about the long term consequences of their decisions. By voluntarily implementing green initiatives, corporations have the opportunity to demonstrate to their customers that they are committed to reducing their environmental impact and may increase their brand image and reputation. However, this should not be the focus of the investment but the additional benefit.
Based on this analysis and the information in the case study, the SAS management team should approve the purchase of the DAC engines. SAS has worked hard to establish itself as an environmentally friendly company and the purchase of the green engines would further this reputation. Furthermore, the Scandinavian culture is also environmentally conscious and by continuing to adhere to its environmental position, SAS will be able to develop customer loyalty to its brand. Overall, the long term benefits of furthering its environmental reputation, maintaining its status as a first mover and sticking to its environmental position, and reducing the expected operational limitations outweigh the short term cost of the DAC green engines and will give SAS a competitive advantage in the industry.