Investment Memo

TO: Clark Hansen, CEO, AMDP 

FROM: Alexander Gross, Research and Development Analyst, AMDP 

DATE: June 30th, 2021

SUBJECT: Proposal to Invest in United Airlines

Recently, I came across a business that is re-emerging into the market and already an industry leader in sustainability. United Airlines has been battling the effects of the pandemic but are now positioned to reclaim its pre-pandemic highs.  Not only are they already financially stable from previous record lows, but they are committed to values that align with the standards of AMDP. Before my analysis of United Airlines, I want you to keep the following AMDP standards:

AMDP Standards

Triple Bottom Line

Firms commit to this concept by measuring their “social and environmental impact—in addition to their financial performance—rather than solely focusing on generating profit, or the standard ‘bottom line’” (HBS). The structure is the 3 P’s:

1. People - Does the firm commit to a positive societal impact and its people?
2. Planet - Do they show demonstrate concern for the planet?
3. Profit – In the end, are they still making money?

Corporate Social Responsibility (CSR)  

CSR keeps firms “conscious of the kind of impact they are having on all aspects of society, including economic, social, and environmental” (Fernando). CSR demonstrates their willingness to start programs that benefit society whether through philanthropy, volunteering, or environmental initiatives.  

Social Enterprise

This corrects market failures that arise from social challenges like barriers to employment and suitability in good and services. Social enterprise entails “organizations that address a basic unmet need or solve a social or environmental problem through a market-driven approach” (Social Enterprise).

Carbon Footprint 

A carbon footprint is the “best estimate of the total amount of greenhouse gases produced to directly and indirectly build and operate a product, business” (Ferguson). Greenhouse gases are what lead to global warming and cause heatwaves like we are experiencing now. Gases produced by burning fossil fuels, agriculture, livestock, and even air conditioning are contributing. Reduction of a carbon footprint helps to slow and even reverse these effects while also saving money for businesses by choosing more efficient options.

 

My Investment Pick: United Airlines

Who Are They?

One company that I believe embodies the principles described above is United Airlines. United has been around for almost a century. Founded in 1926, they are now the fourth biggest airline in the US, but I think that they will start to surpass the others. They operate both domestic and international flights with hubs in all major airports in the US. They are part of Star Alliance, the largest global airline alliance.

This past year has been detrimental to all airlines due to COVID. Travel restrictions caused many airlines to shut down. United was able to stay afloat and are now climbing back to their former glory. United sustained a loss of $7 billion for 2020 but has raised over $20 billion in liquidity and identified an additional $2 billion in annual cost savings (United). Historically, annual revenue has been growing. Pre-COVID, United generated $43 billion in revenue and is currently on track to profit in 2021. To further prove their comeback, United has just placed their largest aircraft purchase ever. Ordering 270 jets for around $35 billion, this demonstrates another clear sign of recovery from the pandemic.

 

United's Green Business Practices

CarbonChoice Program

Aside from United’s strong presence and financials, they are also taking initiatives to reduce their carbon footprint and promote social responsibility. In 2018, United became the first US airline to commit to becoming 100% green and carbon neutral by 2050. One initiative is the Eco-Skies CarbonChoice carbon offset sponsorship program. By purchasing carbon offsets on the customer’s behalf, they make all corporate air travel 100% carbon neutral. The program reduces greenhouse gases and “provides social and economic benefits to communities around the world” (United). Although this program does not directly decrease the emissions from flying, their donations benefit other carbon reduction projects which represent reduction of gases.

Aircraft and Infrastructure Development

To meet their goals, United is investing into improving fuel efficiency, an initiative they see as critical in managing their carbon footprint. Over the last two decades, efficiency has improved by over 45%. In the air, constant review of planes take place for weight reductions and a routine cleaning of engines allow for maximum efficiency and reduced emissions. Other small changes like single-engine taxiing and lower altitude flying save over 5 million gallons per year. On the ground, their over 4000 ground service equipment are either electric or running on alternative fuels. Many of their service buildings are LEED certified, a globally recognized symbol of sustainability achievement and leadership (USGBC).

Future Sustainability

In the last 6 months, United has started to further action by utilizing sustainable aviation fuel and investing in new technologies. Direct air capture technology literally pulls carbon out of the air and is later securely stored deep underground (United). This process is one of the only proven ways to physically offset aircraft emissions. Last, United is completely transparent about their use. They post data on carbon emissions, air quality, waste management, water, energy consumption and more. Tracked goals update annually and compared against their claims.

 

Evaluations of United's Initiatives

Skift

Outside of the company, United has made many headlines for promoting their green initiatives. Skift, the largest travel intelligence platform provides insights into United and other airlines. Their latest article on the Eco-Skies program analyzes whether it is a viable option as travel becomes more common again. In the short term, the program is sustainable and works to offset the emissions from air travel. However, it is not sustainable long term. According to the CEO of United, there is just not enough land to plant the trees needed to offset emissions in the future (Skift). Therefore, other methods of offsetting would be necessary long term. A single direct air capture center can offset the equivalent of 40 million trees but requires an area 3000 times smaller. This option is more scalable than the Eco-Skies but requires a greater investment.

DW

DW, another independent news source comments that the “technology it's [United] banking on for low-carbon travel is far from being developed” (DW). Although sustainable aviation fuel sounds promising, it makes up a small fraction of United’s overall fuel supply. Finding a steady, scalable supply the organic matter needed to create the biofuel is a difficult challenge to overcome. DW states that they believe a long-term solution is in the hands of the government. Creating policy initiatives that help to scale and commercialize sustainable fuel (DW). A large price gap limits the available supply and leads the struggle for replacement. Another option would be implementing a greater price on carbon, causing the fuel to be more expensive and possibly lead to more investment in sustainability. Overall, United has been a leader in the industry and key driver in aviation sustainability.

 

Verdict

All in all, I believe that United Airlines is a strategic investment. First, its financials are now swinging back from the major dip during the pandemic. This provides an opportune time to get in before travel makes a complete recovery. Second, they focus on and commit to creating a sustainable future where airline emissions are no longer a cause for concern. They have invested billions of dollars into new technology and programs that aim to offset their carbon footprint. If AMDP invested in United, it will only mean a bigger push for sustainability and social responsibility. Considering they already on track for profit, this investment will not only benefit AMDP, but the rest of the world.

Sources

 

Ferguson. “Home.” Ferguson, www.ferguson.com/content/trade-talk/business-tips/what-is-a-business-carbon-footprint-and-why-does-it-matter.

Fernando, Jason. “Corporate Social Responsibility (CSR).” Investopedia, Investopedia, 10 June 2021, www.investopedia.com/terms/c/corp-social-responsibility.asp.

Newsroom, United. “United Announces 2020 Financial Results: 2021 Will Focus On Transition To Recovery; Expects To Exceed 2019 Adjusted EBITDA Margin By 2023*.” United Hub, United Airlines, Inc., 25 Jan. 2021, hub.united.com/2021-01-20-united-announces-2020-financial-results-2021-will-focus-on-transition-to-recovery-expects-to-exceed-2019-adjusted-ebitda-margin-by-2023-2650045521.html.

Newsroom, United. “United Makes Bold Environmental Commitment Unmatched by Any Airline; Pledges 100% Green by Reducing Greenhouse Gas Emissions 100% by 2050.” United Hub, United Airlines, Inc., 10 Dec. 2020, hub.united.com/united-pledges-100-green-2050-2649438060.html.

“The Triple Bottom Line: What It Is & Why It's Important.” Business Insights - Blog, 8 Dec. 2020, online.hbs.edu/blog/post/what-is-the-triple-bottom-line.

“United Airlines Invests in Carbon Storage, Sets '100 Percent Green' Target.” Skift, 10 Dec. 2020, skift.com/2020/12/10/united-airlines-spurns-carbon-offsets-with-new-effort-to-go-green/.

“What Is a Social Enterprise?” Social Enterprise Alliance, 11 June 2019, socialenterprise.us/about/social-enterprise/.

“What Is LEED?” U.S. Green Building Council, www.usgbc.org/help/what-leed.