1. Why should Scandinavian Airlines be concerned with environmental issues? What are some of the critical factors to consider? As our society evolves, our knowledge expands and our awareness grows. Today as more and more people realize the importance of sustainability, companies find themselves re-evaluating their strategies. Airline industries in particular are perceived as contributing to the global warming effect, and are therefore subject to government regulations with regards to noise, CO2 and NOx emissions. Currently Sweden is a leader in reducing the effect of air travel on environment.
To ensure these goals are met, a Swedish governmental agency called Swedish Civil Aviation Administration imposes fines and taxes on any airline that doesn’t conform to the standards of CO2 and NOx emissions (Lynes 4). Considering the fact Stockholm-Arlanda, a Swedish airport that utilizes such aviation charges is the center of activity for Scandinavian Airlines (SAS), it makes sense for SAS to concern itself with environmental issues to comply with government regulations and avoid fines. Furthermore, commitment to greater sustainability creates a good public image as well as value for a brand.
This plays a significant role in attracting investors, consumers, as well as potential talent. Investors view companies involved in environmentally friendly practices as a safer investment, because these companies are less likely to be involved in a massive lawsuit. In addition, banks and insurance companies have less liability concerns. Consumers prefer companies that are more ethically and socially responsible in their practices. Talented employees are also more likely to work for a company committed to environmental issues.
Scandinavian culture in particular places significant of value on environment which further encourages Scandinavian Airlines to align its strategic goals with sustainability. While it is true that pressure from the government, consumers, general public, investors as well as the Scandinavian culture are the main driving forces behind SAS’s commitment to improved environmental performance, competition plays a significant role as well. As competing airlines such as British Airways undertook new environmental practices, SAS should and did respond with new environmental practices to maintain competitive edge.
SAS even managed to maintain industry leadership in environmental management. There is no question that continuous commitment to sustainability and a resulting drive for innovation means gaining and holding a competitive advantage over other airlines. Innovations can reduce costs in the long run and determine which companies will be the leaders in the marketplace. As Dow’s CEO, Andrew Liveris states, “Companies that value and integrate biodiversity and ecosystem services into their strategic plans are best positioned for the future”. (Chouinard et al, 2011, pg. 55). 2.
Does the company have enough information at this time to make a sound decision? If not, what is lacking and can they resolve this before they have to finalize the contract? Scandinavian Airlines does not have enough information at this time to be able to make a sound decision. The company is lacking further data regarding the impact of the green engines to the bottom line, additional information of the future regulatory requirements, and more research on the DAC engine’s current reliability of proper function. Furthermore SAS needs to understand to a better extent the different alternatives and potential outcomes.
According to the decision making process (Hitt, Miller & Colella 365), there are six steps to successful decision making; 1. Define the problem (Scandinavian Airlines needs a new aircraft fleet), 2. Identify the criteria (what is needed from the new fleet and type of engine needed for these), 3. Gather and evaluate information (“Nas and his team of aircraft analysts had spent several years researching types of aircrafts SAS needed for its new fleet. ” (Lynes 1), 4. List and evaluate alternatives (cost per aircraft when choosing DAC vs. the opportunity to become the leader in environmental forward thinking fleets within their sector), 5.
Select best alternative, 6. Implement and follow up. Scandinavian Airlines has successfully satisfied the first three steps towards fulfilling both their commitment to improving the environment while still procuring profit through the process, however, still needs to fulfill two of the major decision making points; list and evaluate alternatives and select the best one. The decision to buy the new engines is one that is being affected by many factors such as environmental policy and regulations, high sustainability expectations from the local
community and ultimately the desire of SAS to remain competitive in a market where improved efficiency has become the new standard. (Lynes 2). SAS needs to focus on the three needed points of making an effective decision; that it is timely, acceptable, and satisfies the decision criteria, this vs. the assuming model or “Assumptions of Rationality”, (a world in which the problem is clear and unambiguous, a single well-defined goal is to be achieved, all alternatives and consequences are known, preferences are clear and stable, there are no time or cost constraints, and the final choice will maximize economic payoff).
The truth lies in what is known as the grey area, decisions aren’t made will all the possible answers at hand and ultimately managers are not always right. SAS needs determine the relevant factor of how DAC engines would affect the company, taxation, bottom line, efficiency, goodwill, consumer attraction, and competitiveness within the industry. Furthermore, SAS needs to determine to a very detailed level what will have to be given up if in case these new engines are purchased (i.
e. the example of removing stairwells as a potential cost that could be cut). This research is to be executed by a reliable source that can present concise evidence on pros and cons of buying the “green” engine, these findings are of utmost importance as this will be the foundation of the “best known alternative” that will dictate the course for SAS’s commitment to sustainability.
We will address our suggestions of how to go about making a sustainable, yet profitable decision in our recommendations below, however, at this time with the information at hand SAS is not ready to make a decision and is due to the complexity of the continued research needed it is not possible to gather such data prior to finalizing the contract. 3. What are the forces for, and against, purchasing the more expensive green engines? Consider the point of view of a) the director of aircraft and engine analysis, and b) the SAS management team. Are there any other stakeholders to consider?
Technological advances as well as an anticipated increase on emission charges and taxes for the European airline industry are the external forces that influence the decision making of the purchase of green engines for the SAS airline fleet. Internal forces are influential in the process as well. Environmental awareness in general and the concept of sustainability has evolved from concerns about a company’s environmental footprint to including considerations of its impact into all the decision making of the firm (Chouinard et al, 2011, pg. 54). SAS has implemented environmental goals and layered its “eco-political” vision to a strategic level.
This stipulates the internal pressure SAS is facing in the process. However, the unknown economic payback for the green engines and lack of a calculation model that measure investments into sustainability, can be a force against the engines. From the point of view of the director of aircraft and engine analysis, the trade off is between additional costs for the whole fleet of 12B kr/1. 8B USD that could be used for other development or decisions that need to be made on the set-up of a new plane or the investment into minimizing the risk of future limitations.
The government-imposed emission cap at the Stockholm airport could potentially become a problem. Hence, Nas felt the pressure to have the fleet ready for that change. Furthermore he was concerned about the technological fit of the new engine into the aircraft body. The necessary configuration could potentially delay the time to market, complicate the internal process by requiring new skills and worry management as returns on investment would we delayed. In addition to that, Nas also had to think about other stakeholders, for example corporate clients.
Their expectations is environmentally responsible suppliers and ISO certifications. The SAS management team made an internal commitment to integrate environmental affairs into decision-making with its goal setting process and mission statement. Therefore cautious decisions based upon sustainability was anchored into SAS’s vision and needs be considered by SAS Management in the decision. With publication of an annual sustainability report the commitment was externalized and linked to the reputation of SAS. CEO Sternberg clearly made his point by saying that “a sound environmental profile is profitable. […
] It is our contribution to a sustainable society and to future generations”. (Lynes 5) By saying this, he became a role model for environmental conscious decisions. By making a decision not based on environmental considerations, SAS’s reputation as industry leader would be at stake. As a result, this potential negative publicity would influence consumer behavior and their perception of the brand. Negative publicity in turn may impact the market value and not only because of that will affect the negotiation position with the shareholders. As the governments of Sweden, Denmark and Norway are the majority shareholder and therefore
stakeholders in SAS (SAS Group, 2006), their acceptance of the solution is essential. It is further of importance to be in “good terms” with the governments, as the EU as well as the public have put a lot of pressure on the aircraft industry to increase environmental awareness. Hence politicians and the public are stakeholders to consider. In European, and especially nordic countries the environment plays a big role in societal values. SAS’s corporate image fits those values. Not acting upon them would harm the relationship to these stakeholders.
Disregarding the company’s mission would also cause a negative impact on the company’s bottom line. SAS is a forerunner of a sustainable economy model and hence has taken on a leadership role in dialogues about the regulatory environment. Regulatory authorities are no stakeholders, and yet play a key role in the future of SAS. 4. Strategic decisions are influenced by a variety of external factors (e. g. , competition, industry trends, regulatory structures) and internal factors (e. g. , corporate culture, leadership, management style). What internal and external influences were involved in SAS’s decision?
At the core of the decision making is the inherent understanding that Scandinavian people are incredibly passionate and vocal about the environment. Keeping this idea in mind while operating in Scandinavia is crucial to a businesses success. Niels Eirik Nertun, the environmental director for SAS once explained, “[the Scandinavian people] wouldn’t fancy having a company like SAS behaving badly, not in the environmental sector…I think we would be hated”. Boeing once described, “On a scale of one to ten, Scandinavian countries were a ‘twelve’ with respect to environmental commitment”.
While the rate of emissions from planes are comparable to other forms of transport, due to the altitude, the effects are thought to be three times greater. The airline industry is under constant surveillance for it’s environmental impact and can also be subject to increased public scrutiny. As the largest airline in Scandinavia, SAS would bear the brunt of any negative backlash. SAS’s leadership believed that such negative publicity could be so damaging that it would have “immediate effects on the company’s bottom line”.
Because of this, being environmentally conscious was a strong part of SAS’s corporate culture and their management was required to focus on the environment impact for all company decisions. This internal influence would play a strong role in the engine purchase decision. Altruism and public concern were not the only motivating factors in SAS’s choice to be environmentally conscious. There was strong external factors influencing corporate decisions as well. Since 90% of an airline’s environmental impact comes from its flight operations, including emissions, the choice of engine is incredibly important.
The airline industry is regulated and can be taxed and/or fined by three different governing bodies: international, federal, and regional. Each of the aforementioned can determine their own requirements and forecasters have suggested that increased emissions charges and taxes for the European airline industry are looming. In addition to the previously mentioned, airlines are also subject to the governing structure of their home base. Accordingly, SAS must follow the current requirements of Stockholm’s Arlanda airport – the largest airport in Sweden with some of the strictest requirements on airlines in the world.
Arlanda airport not only imposes charges and taxes against airlines to reduce noise and fuel emission but also implemented a cap that means once the NOx or CO2 emissions reach a certain level, the airport will not allow an increase in traffic flow. As the hub to SAS, this could be detrimental to SAS in particular. Should the numbers of passengers into Arlanda continue to increase and the emissions cap be reached, future SAS flights could be grounded. 5. Assume you are a consultant hired by SAS. What would you recommend they do?
As consultants, we would gather all facts and data by interviewing SAS management about their motives, concerns, and priorities of the company (i. e. environmental, profit, image, etc. ). The question to be asked is what would be the impact of the change – internally and externally. Also, we as consultants would gather all available data regarding opportunity costs (stairwell, other engine costs, etc. ). As the regulatory environment is complex and bears uncertainty, we would also take into account other technological options that the competition has used in order to create a more diverse portfolio to base our decision on.
To make a sound decision, all facts need to be understood. We would build the business case around the data at hand as well as the three factors of interest – commitment to the environment, profitable investment, and being at the forefront of technological advances. The following suggestions are to be presented to senior management. This strategy is broken into two parts, this will satisfy both the need to make an immediate impact (to satisfy the high expectation of the Scandinavian people), and a more rounded strategy that would protect the company’s bottom line in case of malfunction or further research needed for the DAC engines.
Short-term actions: (1-2 years) It is suggested that SAS immediately takes advantage of their position as an important player in the airline industry in Europe and as leader of regulatory dialogues to work together with regulatory authorities. The aim is twofold: a) Work with the authorities to build the emission cap plan around what is technologically possible b) Get a tax break from regulatory authorities during trial period and leverage their position to come up with future tax regulations. Invest between 25-35% of the 55 required engines into the green DAC model that lowers the NOx emission.
Use these engines during a “trial” period, until reliable data of the results of the environmental impact is available. Trial period can range from 1-2 years, or up until further technological advances become available. The benefit of this approach is for SAS to be part of the initial group that will set the future standard of sustainability and what a company is able to achieve. This will set SAS as an originator of this trend and will allow them to influence the regulatory developments and decisions on emission caps and taxation.
Long-term goal: (5 years) Be 100% green and utilize the best available “green” technology. Set the precedence to go green by supporting corporations that provide innovation in technology (work with other airlines as “green” becomes the new standard) that addresses both, NOx and Co2. Initiate long-term project to analyze possibilities to minimize environmental footprint by stepping outside the box (utilizing solar power in planes? recycled material for aircraft body? SAS foundation of sustainability?
) Endeavour to be the first to set new emissions reduction standards and further solidify SAS as a leader in environmental management Addressing the issue in both the short term immediate measure and a long term environmental vision, goes along with the company’s image and culture. This will boost SAS’s reputation and goodwill among the Scandinavian people and airline users, making the brand more valuable. As SAS propels itself into a leadership position with regards to sustainability the company would be more attractive to prospective investors/stakeholders, fueling the company’s growth.
