Considering the “Net Present Value” of Sustainability Actions in Aviation
When we invest for future returns we consider the Return on Investment. We can model this a number of ways depending on the situation. We often consider discounted cash flow. Discounted cash flow allows us to value a project using the concept of the time value of money. That is, forecasted returns further in the future are discounted more than those more near term.
When we invest for sustainability results in aviation, we are often investing to achieve a blended result, wherein the “returns” are both economic and sustainability related. For example, if we make an investment that reduces fuel consumption, we realize a very clear economic benefit of reduced fuel cost, and the corresponding benefit of reduced emissions. There are many downstream benefits which flow from the latter. These may include societal goodwill, carbon credit banking, market advantage, and compliance with local or regional requirements.
Note: For a more detailed discussion focused on the use of digital and data to drive sustainability in aviation, see this related blog: https://blogs.cranfield.ac.uk/aerospace/environmental-benefits-of-integrated-vehicle-health-management-ivhm/
As of now, there is no single formula which easily captures the complexity of the true ROI calculation. There is, however, an immediate need to understand the value of different activities with respect to sustainability benefit.
The reality is that there are few if any things we can do that will have very large, step-change payback that are also easy. The step-change innovations, such as new engine design, new wing design, and alternate powered electric propulsion, are all the result of enormous investment and industry commitment. The conundrum is that there are many smaller things we can do, and are doing now, but looked at one-at-a-time are often dismissed because they are not considered material. However, there is an old saying which applies here:
“Many streams make a great river.”
In a similar way, we can create new “streams” in a shorter timeframe than a new “river”. With this in mind, we can rethink the way we value these smaller and more attainable activities.
If we look at the equation for Net Present Value (NPV), it may serve us in this discussion. The formula for NPV is:
Using this formula with some creative substitutions, let’s compare some different scenarios using this formula, but instead of dollars we consider a hypothetical unit representing the total sustainability benefit delivered. In this illustration, the units range from 0–100, where 100 is a theoretical maximum benefit. Again, this is not a real unit, but a placeholder to illustrate an idea.
In the example above we have 11 different theoretical actions which deliver sustainability benefits over a 20 year period. Action “A” delivers very material benefits starting in year 10, ramping up between years 10 and 20 from 1 to 50 as the actions are deployed after a ten year development and investment period. 50 being very material. Actions “B” through K represent ten currently available actions which are maximized from 0.5 to 1 in the next five years. While each of these ten is seemingly not material, together they form a “great river” which actually delivers much more “Net Present Sustainability Value” than the much greater Action “A”. Specifically, the “NPSV” of Actions “B” through “K” are 30% greater than Action “A” using a common discount rate of 10%.
The values in the above illustrative example are not arbitrary. It is generally recognized that the sustainability opportunity in aviation resulting from operational efficiencies are approximately 10% of the total. The example shows the importance of getting to that 10% opportunity as fast as possible (e.g. over the next five years), and shows the value to the industry in terms of sustainability benefits.
Operational efficiency is good for the bottom line and the environment, and we can and should maximize it via technology and processes as fast as possible.
