Listed Infrastructure
Listed Infrastructure

Three ways listed infrastructure in Europe is quietly contributing to the decarbonization of air travel

June 30, 2023 | 3 min read
Rishika Davda, CFA
Senior Analyst, Listed Infrastructure
Download PDF

The air travel industry is under increasing scrutiny for its environmental impact, but with the majority of emissions associated with the flight itself, the role of aviation infrastructure in catalysing change is often overlooked. As active investors in listed infrastructure companies, our sector focus and commitment to sustainable investing takes us under the hood of airports and air navigation service providers, where we uncover their often underappreciated and differentiated contributions to sustainability outcomes.

We aim to identify companies that have underappreciated strategies for driving positive environmental outcomes, whilst delivering compelling financial returns. We consider appropriate strategies to not only include targeted reductions in reported Scope 1-3 emissions, but also efforts to influence other actors, particularly airlines, in the aviation industry’s decarbonisation plans. We explore three contributions from two of our portfolio companies we believe are leading the way.

Working with regulators to incentivise use of sustainable aviation fuels

One of the more credible solutions we see to decarbonising aviation is via the use of sustainable aviation fuels (SAF), with other potential solutions likely requiring greater investments and lead time for development. That said SAF usage comes with its own challenges, including a current market price—4-6x costlier than jet fuel. With regards to the role infrastructure operators should play in the take up of SAF, airports are typically not perceived as having a determining role, although we believe airports can in fact influence the SAF value chain through providing regulatory incentives for airlines to use cleaner fuels. Precedent exists, where many airports offer discounted tariffs to airlines using aircraft models that reduce noise and nitrogen oxides (NOx) emissions, and we believe this can be extended to include discounts for those airlines using SAF. One of our portfolio holdings, a European airport operator, is actively pursuing such regulatory mechanism in its conversations with the relevant parties. We see scope for a final draft regulatory agreement by year end, with implementation possible from 2024. As these discounts are backed by regulation, we do not anticipate the return opportunity to be compromised.

Utilising scale advantages to support procurement and logistics of SAF

In addition to the cost challenges of SAF take up, supply is quite limited at present. According to the International Air Transport Association (IATA), for SAF to account 65% of the sector’s carbon mitigation by 2050, 449 billion litres of annual production capacity would be required, compared to an estimated 2022 production capacity of 300 million litres. Against this backdrop, we also see a clear role for airport operators to support the growth in SAF supply and in bringing that supply to airports. The aforementioned European airport operator in particular is currently involved in a national programme that would coordinate the logistics in bringing SAF to airports, as well as provide visibility on demand by scaling airline requirements across a country wide network. At its current scale, the company has a clear role to play in reducing some of the bottlenecks to greater adoption.

Optimising aircraft flight paths using new tech to minimise fuel burn

‘Free routing’ is a critical project to help reduce emissions from airspace users. ‘Free routing’ allows for airline to fly the shortest and most direct route, rather than using the less direct, pre-defined corridors traditionally used to fly through airspace. This helps airlines save time, fuel, and air navigation costs, all whilst reducing their environmental footprint. Although the European Commission has been encouraging broader adoption of this technology across Europe, implementation has been delayed for numerous reasons by most countries. Another of our portfolio holdings, a company providing air navigation services, was amongst the first air navigation services providers in Europe to launch this technology in 2016, four years ahead of plan. In the process, 51 million fewer kilometres were traveled, less 204 million kilograms of fuel were consumed, and less 643 million kilograms carbon dioxide (CO2) were emitted through 2016 to 2020. As investors in sustainable listed infrastructure companies, we encourage the proactivity and early investment to support emissions reductions across the broader aviation ecosystem, outside of the company’s own Scope 1-3 emissions. We also acknowledge the value that being a first mover in this area can create for shareholders. The company’s early investment decision has allowed it to capture greater market share in the handling of overflight volumes, ultimately supporting long-term financial returns.

Investing in listed infrastructure has the potential to provide exposure to some of the leading contributors to sustainable development. As active investors in aviation infrastructure, we are able to identify companies that are contributing to the wider aviation industry’s decarbonisation plans and are doing so in a way that may not yet be reflected in their own valuations.

Find out more information about the Principal Global Listed Infrastructure Strategy, visit: principalam.com/investment-strategies/listed-infrastructure

Disclosure

For Public Distribution in the U.S. For Institutional, Professional, Qualified and/or Wholesale Investor Use Only in Other Permitted Jurisdictions as defined by local laws and regulations.

Risk Considerations
Investing involves risk, including possible loss of principal. Past performance does not guarantee future results. Infrastructure issuers may be subject to regulation by various governmental authorities and may also be affected by governmental regulation of rates charged to customers, operational, tariffs and changes in tax laws, regulatory policies and accounting standards. Foreign securities involve special risks, including currency fluctuations, lower liquidity, political and economic uncertainties and differences in accounting standards.

Important information
This material covers general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that the investment manager or its affiliates has recommended a specific security for any client account. Subject to any contrary provisions of applicable law, the investment manager and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in the information or data provided. All figures shown in this document are in U.S. dollars unless otherwise noted. Investing involves risk, including possible loss of principal.

This material is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

This document is issued in:

  • The United States by Principal Global Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission.
  • Europe by Principal Global Investors (EU) Limited, Sobo Works, Windmill Lane, Dublin D02 K156, Ireland. Principal Global Investors (EU) Limited is regulated by the Central Bank of Ireland. In Europe, this document is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID). The contents of the document have been approved by the relevant entity. Clients that do not directly contract with Principal Global Investors (Europe) Limited (“PGIE”) or Principal Global Investors (EU) Limited (“PGI EU”) will not benefit from the protections offered by the rules and regulations of the Financial Conduct Authority or the Central Bank of Ireland, including those enacted under MiFID II. Further, where clients do contract with PGIE or PGI EU, PGIE or PGI EU may delegate management authority to affiliates that are not authorized and regulated within Europe and in any such case, the client may not benefit from all protections offered by the rules and regulations of the Financial Conduct Authority, or the Central Bank of Ireland.
  • United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorised and regulated by the Financial Conduct Authority (“FCA”).
  • United Arab Emirates by Principal Global Investors LLC, a branch registered in the Dubai International Financial Centre and authorized by the Dubai Financial Services Authority as a representative office and is delivered on an individual basis to the recipient and should not be passed on or otherwise distributed by the recipient to any other person or organisation.
  • Singapore by Principal Global Investors (Singapore) Limited (ACRA Reg. No. 199603735H), which is regulated by the Monetary Authority of Singapore and is directed exclusively at institutional investors as defined by the Securities and Futures Act 2001. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
  • Australia by Principal Global Investors (Australia) Limited (ABN 45 102 488 068, AFS Licence No. 225385), which is regulated by the Australian Securities and Investments Commission and is only directed at wholesale clients as defined under Corporations Act 2001.
  • This document is marketing material and is issued in Switzerland by Principal Global Investors (Switzerland) GmbH.
  • Hong Kong SAR (China) by Principal Investment & Retirement Services Limited, which is regulated by the Securities and Futures Commission. This document has not been reviewed by the Securities and Futures Commission.
  • Other APAC Countries, this material is issued for institutional investors only (or professional/sophisticated/qualified investors, as such term may apply in local jurisdictions) and is delivered on an individual basis to the recipient and should not be passed on, used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Principal Funds are distributed by Principal Funds Distributor, Inc.

© 2023 Principal Financial Services, Inc. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc. Principal Asset Management℠ is a trade name of Principal Global Investors, LLC. Principal Real Estate is a is a trade name of Principal Real Estate Investors, LLC, an affiliate of Principal Global Investors.

MM13444A | 062023 | 2968477-122024
About the author