Philippa Kaur

Living in California, as Schumpeter does, you would think licence plates called it the Red Tape State, not the golden one. Last August it led the world in announcing a ban on new gasoline-fuelled cars by 2035. In December its petrol prices soared higher than anywhere else in America, leading to an onerous cap on refiners’ profit margins. Early this year you could barely find an egg to fry, partly because of an animal-welfare measure from 2018 that keeps eggs off its shop shelves if they are laid in cages.California has the privilege of being a colossal market irresistible to manufacturers, so some of its rules become standards well beyond its borders. But it is not unique in wanting to go its own way. Across America, a mishmash of regulations from state to state differ on everything from how to manufacture lifts and how to produce liquor to how to run a bank. In theory that is all well and good. Regulatory experimentation can be healthy. In practice it creates a minefield. Every American state border is festooned with so much red tape that it costs businesses an arm and a leg. For a columnist from Britain, this is strange. Having grown so accustomed to hearing about the shortcomings of the European Union’s single market, it is a shock to realise that America’s interstate equivalent is no paradise, despite being bigger, constitutionally protected and far more rooted in history than the EU’s. And if anything, it is in danger of fraying further. A combination of local one-party supermajorities, populism and the culture wars are making states—led by chest-thumping attorneys-general—only too eager to get into the ring with business. Companies have long feared the Democratic sucker punch. Now Republicans are threatening business, too, their free-market instincts overtaken by their desire to assert state interests over federal regulatory authority. This political polarisation raises two big questions. Does it affect the ability of American firms to do business at home? And what are they doing about it? Companies face several challenges. The first is legal, exemplified by moves to ban abortions. Take Walgreens, America’s second-biggest pharmacy chain, which this year found itself in a Catch-22. In February it received a letter from 20 Republican attorneys-general warning it that it might be breaking federal and state laws if it mailed mifepristone, an abortion pill, to their states. It then made the seemingly unobjectionable point that it would only supply the medication to states where it was legally permissible. In response, California’s Democratic governor, Gavin Newsom, scuttled a state contract with Walgreens and threatened a boycott. Walgreens’ rivals, such as CVS, wisely kept quiet. Yet they, too, may find themselves in a similar legal quagmire if the issue becomes politicised even further. The second headache is cultural. Among blue states, California has passed laws (later struck down in court) encouraging racial diversity on company boards. Among Republican-leaning states, Florida, via the “Stop WOKE Act”, has sought to outlaw discrimination by race, even in pursuit of diversity, equity and inclusion. Such inconsistencies make it hard for firms to apply a one-size-fits-all policy. Different state governments have different views as to what kinds of diversity ought to be promoted. This month 19 Republican attorneys-general attacked JPMorgan Chase, America’s biggest bank, for a “double standard” on inclusiveness. They noted that the lender had affirmed its “unwavering commitment” to LGBT+ Americans. The same commitment had not been extended to religious or conservative groups, they said.The third pitfall has to do with greenery. According to Ropes & Gray, a law firm that tracks environmental, social and governance (ESG) legislation, states are introducing contradictory regulations about oil, gas and coal investments. In 2021 Maine, a blue state, got the ball rolling with legislation prohibiting its public pension fund from investing in big fossil-fuel producers, and set out a timetable for divestment. The same year Texas banned state funds from having relationships with financial firms that boycott energy companies. More than a dozen blue and red states have followed their respective leads. These initiatives are linked to Democratic support for ESG and Republican hostility to anything that smacks of “non-pecuniary” investment considerations. Compounding the problem, says Joshua Lichtenstein of Ropes & Gray, is that doing business in the EU may require sustainability reporting, which is anathema in parts of America.Firms may be accused of sleepwalking into their predicament. During Donald Trump’s presidency they stuck their necks out on hot-button issues, for instance opposing North Carolina’s “bathroom bill” that would bar transgender women from ladies’ toilets. They embraced ESG-infused stakeholder capitalism, hoping to attract consumers and workers. Then came the “wokelash”. Florida’s war on Disney, after the firm opposed a bill barring talk of sexual and gender identity in some primary-school year groups, marked “a fork in the road”, says Maggie Mick of MultiState, a consultancy. Since then, companies have had a rethink. One way they have done so is by making political donations more bipartisan. Another is to go quiet on their climate commitments, a tactic known as “green-hushing”. Equally quietly, some asset managers are lobbying state governments to reverse their ESG prohibitions. As yet, no one is throwing in the towel on the United States. From Brexit to Texit Craig Parsons of the University of Oregon notes that, for all its frailties, America’s single market has some resounding strengths, such as use of a common language and a shared culture. That heritage is delicate, though, especially in the context of the culture wars and political schisms. If the trend of state supermajorities persists after the 2024 elections, things could get worse. America should be careful. Its coast-to-coast marketplace is far too important to take for granted. Take that on trust from a Brit. ■Read more from Schumpeter, our columnist on global business:Writers on strike beware: Hollywood has changed for ever (May 10th)America needs a jab in its corporate backside (May 3rd)Is mining set for a new wave of mega-mergers? (Apr 27th)Also: If you want to write directly to Schumpeter, email him at [email protected]. And here is an explanation of how the Schumpeter column got its name. More

It had all the hallmarks of a coming-out party—or, more accurately, a coming-out-again one. After being uncharacteristically absent from public view for a few years, Mukesh Ambani re-emerged at the end of March for the opening of the Nita Mukesh Ambani Cultural Centre in Mumbai’s new business district. It houses three theatres, a conference hall for trade shows, as well as a small museum. Plans are afoot to build an adjoining apartment complex and shopping mall. The precise cost of the project is veiled in secrecy, though the figure of $1bn has been rumoured. A single lift, said to be the world’s largest, with a capacity of 100 people, is thought to have set the tycoon back $45m. The sprawling and opaque endeavour is an apt metaphor for Reliance Group, the business empire that has made Mr Ambani Asia’s richest man. The conglomerate reported record profits in the fiscal year to March, stealing the limelight from a rival tycoon, Gautam Adani, whose businesses are on the defensive after an attack in January by a short-seller. Last year its listed flagship, Reliance Industries, accounted for 21% of the collective revenue of the 30 Indian blue-chip firms in Mumbai’s Sensex index, and 13% of their net profits. With the beleaguered Mr Adani reining in investments, Mr Ambani remains a rare Indian industrialist who is keen to build. Reliance Industries’ capital spending grew from $10bn in fiscal 2021 to $14bn a year later. Last year it spent $18bn, equivalent to 45% of the Sensex total.In the sectors where Reliance operates, it is dominant. Its Jio telephony unit went from nothing to 439m mobile customers, or 37% of India’s total, in seven years. It gained 1m users in February even as Vodafone, the erstwhile market leader, lost double that number. Reliance’s retailing arm has 18,000 stores, up from 12,000 two years ago, a digital marketplace and a logistics network. It sells everything from gadgets and groceries to garments (many coming straight from numerous fashion brands that Reliance has been acquiring). Its renewable-energy arm has grand ambitions in solar power, green hydrogen and other climate-friendly businesses. On May 2nd the group spun out Jio Financial Services, which could fast become a force in payments and consumer lending thanks to troves of data on Jio’s mobile customers. Then there is Reliance’s core business: petrochemicals. It is less sexy than the much-trumpeted new-economy ventures, but more lucrative. Last year the group’s refining operations produced 56% of its total revenues and 59% of earnings before interest and taxes. Reliance is believed to be the single biggest beneficiary from India’s abrupt transformation into a huge importer of sanction-hit Russian oil and a leading exporter of refined products. Mr Ambani’s business benefits from both ends of this equation, buying cut-price Russian crude and selling the refined stuff into global markets, where prices remain elevated. According to Jefferies, an investment bank, this adds up to $5 of gross margin to every barrel of Reliance’s refined oil. The company says that “As part of overall crude sourcing strategy, Reliance is always in the market to source arbitrage barrels.” Yet Reliance’s ambitions have a flipside. It makes relatively little money from its operations. Though its return on capital is higher than for the Sensex as a whole, it has not exceeded 10% since 2007 (see chart 1). Last year it was 5%. Year-on-year revenue growth slowed in each of the past three quarters. Debts are up (see chart 2), having dropped in 2021 after capital injections from foreign tech giants such as Alphabet and Meta, and sovereign-wealth funds, which all saw teaming up with a local titan as a way to partake in India’s rise. Net debt trebled in the last financial year, relative to the one before.In the 12 months to March Reliance Industries’ market value fell by 18% in dollar terms, or $43bn. Among big Indian firms, only Mr Adani’s battered businesses and two IT giants caught up in the global tech crunch, Infosys and TCS, did worse. Reliance has since clawed back some of that. But it will take more than a snazzy cultural centre to impress investors. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

Given the political weather, Western makers of wind turbines should be flying high. America’s Inflation Reduction Act is stuffed with goodies for all sorts of renewable energy. In late April European leaders pledged to increase the North Sea’s offshore-wind capacity to 300 gigawatts by 2050, from about 100 gigawatts today and double a previous commitment. That looks like an awful lot of future business for turbine manufacturers. If only shorter-term forecasts were as clement.The four biggest Western makers of wind turbines—GE Renewable Energy, Nordex, Siemens Gamesa and Vestas—supply about 90% of the market outside China. Together they made revenues of €42bn ($46bn) in 2022. But whereas wind-farm operators benefited handsomely from high electricity rates after Russia invaded Ukraine in February last year, the turbine-makers sank into the red and their suppliers barely made money (see chart). Last year the big four racked up combined net losses of nearly €5bn. In recent weeks GE Renewable Energy, Nordex and, on May 15th, Siemens Gamesa, reported more losses in the first three months of the year. Although Vestas, the biggest of the lot, eked out a slim net profit of €16m on sales of €2.8bn, its chief executive, Henrik Andersen, nevertheless conceded that conditions were still “challenging”.The struggle of wind-turbine companies to make money is the result of market forces blowing in opposite directions. On the one hand, prices that turbines can fetch have been coming down. In the past few years Vestas and its competitors rushed to outdo each other by building ever-bigger turbines that offer ever-cheaper capacity to wind-farm developers, a group that includes big utilities and private infrastructure investors. On the other hand, those buyers’ appetite for new kit has been cooled somewhat by the difficulty of securing the permits necessary to install it. The average selling price per megawatt, the industry’s preferred measure, fell from nearly €1m in the mid-2010s to about €700,000 in 2020.The time between signing a contract with wind-farm developers to actually erecting the turbines and getting paid is as much as three years on average for onshore projects and five for offshore ones, estimates Endri Lico of Wood Mackenzie, a consultancy. Because terms are mostly locked in during that time, that exposes turbine-makers to any market vagaries. Lately these have combined into a “perfect storm”, in the words of Mr Lico: supply-chain disruptions, lack of raw materials and components, inflation, higher interest rates and geopolitical tensions. The race to develop bigger turbines may come to haunt the industry for a longer period, says Thomas Cobet of AlixPartners, another consultancy. The largest machines are not yet a mature technology. They could also prove costly for turbine-makers to maintain. This, in turn, would hurt the margins of the manufacturers’ biggest moneymaker: service contracts in which operators pay them a predetermined fee for everything from spare parts to full operations programmes.The industry would also love to avoid the fate that befell Europe’s solar-panel industry, which lost an early lead to cheaper state-subsidised Chinese rivals. China’s turbine-makers are growing quickly—and profitably. The world’s biggest such firm is now Goldwind, which installed 12.5 gigawatts of capacity in 2022, for the first time edging ahead of Vestas, while generating an annual net profit of around $340m. Although the Chinese firms mostly cater to their home market, in which Western companies are not allowed to compete, they are also eyeing foreign customers, notably in countries along China’s Belt and Road Initiative of infrastructure projects. Amid rising Sino-Western tensions, and a broader protectionist mood gripping Washington and European capitals alike, Chinese manufacturers are increasingly unwelcome in America and Europe. Europeans in particular, having been burned by a dependence on cheap Russian gas as war broke out on their doorstep, do not want to rely on cheap Chinese turbines, says Harriet Fox of Ember, one more consultancy. But if Vestas and other Western turbine companies are to do their part in the continent’s decarbonisation, they must first return to profitability. In today’s adverse market conditions, this may necessitate government action. In April the EU agreed to make permissions for new wind farms and related infrastructure easier to obtain, for instance by allowing the creation of “renewable acceleration areas”, where projects may be approved in one year or less. That is a start. Still, argues Phuc-Vinh Nguyen of the Jacques Delors Institute, a think-tank in Paris, the EU needs to do more to reduce the uncertainty for turbine-makers and wind-farm developers—something that the Inflation Reduction Act does much better than Europe’s current rules do. This does not necessarily mean more public money. Europe is actually held back by a lack of concrete timelines for investments and clear regulations. Without them, the forecast for Western turbine-makers will remain choppy. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

It has been a jittery few months for the economies of the West. First came the nerve-rattling crisis in the banking sector. Then came the as-yet-unresolved prospect of a default by America’s government on its supposedly risk-free debt. Many now fret over what other hidden dangers lie in wait.An understandable area of concern is the hefty debts racked up by non-financial companies in recent decades courtesy of low interest rates. Since 2000 non-financial corporate debt across America and Europe has grown from $12.7trn to $38.1trn, rising from 68% to 90% of their combined GDP. The good news is that hardy profits and fixed-rate debts mean the prospect of a corporate-debt-fuelled cataclysm in the West remains, for now, reassuringly slim. The bad news is that businesses will soon find themselves waking up to a painful debt hangover that will constrain their choices in the years ahead.The West’s corporate-debt pile has so far proven less wobbly than many feared. On both sides of the Atlantic roughly one-third of debt covered by credit-rating agencies is deemed to be speculative grade, less charitably known as junk, with iffy prospects for repayment. The default rate for those debts remains at a comfortable 3% in both America and Europe (see chart 1). A pandemic-era spike in downgrades from the more reassuring investment grade down to speculative has also since been largely reversed.The explanation for the resilience is two-fold. First is better-than-expected corporate profits. According to The Economist’s calculations, earnings before interest, tax, depreciation and amortisation of listed non-financial firms in America and Europe were 32% higher in the final quarter of 2022 than in the same period in 2019. Some of that is thanks to bumper profits in the energy industry, but not all. Companies from McDonald’s, a fast-food chain, to Ford, a carmaker, handily outperformed analyst expectations on earnings in the first quarter of this year. Procter & Gamble, a consumer-goods giant, and others have successfully protected profits in the face of cost inflation by jacking up prices and cutting costs. That has left plenty of money to continue paying interest bills.The second factor is the structure of corporate debt. In the years after the financial crisis of 2007-09, many firms began opting for long-term fixed-rate debts, notes Savita Subramanian of Bank of America. Today three-quarters of non-financial corporate debt in America and Europe is on fixed rates, according to S&p Global, a rating agency. Rock-bottom interest rates at the height of the pandemic created an opportunity to lock in cheap debt for many years. Only a quarter of the combined debt pile of American and European firms will mature in the next three years (see chart 2). The average coupon rate that issuers actually pay on American investment-grade corporate bonds is currently 3.9%, well below the yield of 5.3% that the market is pricing in at the moment (see chart 3). For high-yield speculative bonds the average coupon rate is 5.9%, compared with a market yield of 8.4%.The morning afterComforting stuff. Yet businesses and their investors would be wise not to take too much solace. GDP growth in America and Europe continues to slow. Analyst estimates suggest that aggregate quarterly earnings declined in the first quarter of this year for listed non-financial firms in both America and Europe. The Federal Reserve and its European counterparts are still raising interest rates. On April 3rd Multi-Color Corporation, an American label-maker, issued $300m of bonds at a hefty 9.5% coupon rate. Firms like Carnival, a cruise-operator, are drawing on cash buffers built up during the pandemic to delay refinancing at higher rates. Such nest-eggs are steadily dwindling.The strain will begin at the flakiest end of the debt spectrum. Less than half of speculative-grade debt in America and Europe is on fixed rates, according to S&P Global, compared with five-sixths for investment-grade debt. Goldman Sachs, a bank, reckons the average coupon rate on speculative-grade floating-rate loans in America has already soared to 8.4%, up from 4.8% a year ago. Floating-rate debt tends to prevail among the most indebted firms, and is particularly common in businesses backed by debt-hungry private equity (PE). Although some PE funds hedge against higher interest rates, the squeeze is already beginning. Bankruptcies of PE-owned businesses in America are so far on track to double from last year, according to S&p Global. On May 14th Envision Healthcare, a provider of doctors to hospitals, declared bankruptcy. KKR, a private-equity giant, paid $10bn for the business in 2018, including debt. It is expected to lose its $3.5bn equity investment.That will make for an uncomfortable ride for the pension funds, insurers and charitable endowments that have entrusted money to the PE barons—not to mention the financiers themselves. Fortunately, for the economy more broadly the effect is likely to be contained. PE-backed businesses employed around 12m workers last year in America, according to EY, a professional-services firm. Listed firms employed 41m.Indeed, it is the effect of rising interest rates on large listed firms, whose debts are mostly investment-grade, that may be the most consequential both for investors and the economy. The S&P 500 index of large American companies accounts for 70% of employment, 76% of capital investment and 83% of market capitalisation of all listed firms in the country. The equivalent STOXX 600 index in Europe carries similar weight in its region.In the years before the pandemic the non-financial firms in these indices consistently splashed more cash on capital investments and shareholder payouts than they generated from their operations, with the gap plugged by debt (see chart 4). But if they wish to avoid a sustained drag on profitability from higher interest rates, they will soon need to start paying down those debts. At current debt levels, every percentage point increase in interest rates will wipe out roughly 4% of the combined earnings of these firms, according to our estimates. Many firms will have no choice but to cut back on dividends and share buy-backs, squeezing investor returns. That will prove especially painful in the spiritual heartland of shareholder capitalism. High payout rates in America—63% of operating cashflow, compared with 41% in Europe—have helped push share prices relative to earnings above those in other markets. Suddenly, borrowing money in order to fork it over to shareholders makes less sense in a world of higher interest rates, argues Lotfi Karoui of Goldman Sachs.Plenty of companies will also find themselves forced to scale back their investment ambitions. Semiconductor companies swimming in overcapacity have already cut back on spending plans. Disney, a media titan with hefty debts, is cutting investments in its streaming services and theme parks. From decarbonisation to automation and artificial intelligence, businesses face an expensive to-do list in the decade ahead. They may find their grand ambitions in such areas derailed by the indulgences of yesteryear. That would be bad news for more than just their investors. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

FLYING IS A dirty business. Airliners account for more than 2% of the annual global emissions from the burning of fossil fuels, many times commercial aviation’s contribution to world GDP. Two forces will push this figure up in the years to come. First, people love to fly. IATA, the airline industry’s trade body, predicts that 4bn passengers will take to the skies next year, as many as did in 2019, before covid-19 temporarily grounded the sector. Airlines could be hauling around 10bn passengers by mid-century (see chart 1). Boeing, an American planemaker, estimates that this will require the global fleet to roughly double from around 26,000 in 2019 to 47,000 by 2040. After a pandemic blip, investors are more bullish again about the sector’s prospects (see chart 2). Showing its confidence, on May 9th Ryanair, a giant of low-cost air travel, placed an order worth $40bn for 300 new Boeings.Second, as other carbon-belching industries, from electricity generation and road transport to steel- and cement-making, go green, air travel is proving harder to decarbonise. If the aviation business is to reach the industry’s goal of net-zero emissions by 2050, tomorrow’s fleet will need to be much cleaner than today’s. Mission Possible, an industry consortium, reckons this could only be done by doubling historical fuel-efficiency gains, putting aircraft powered by novel technologies in the air by the mid-2030s and rapidly rolling out sustainable fuels (plus carbon-capture technology to offset residual emissions, see chart 3).A recent report by SEO Amsterdam Economics and the Royal Netherlands Aerospace Centre, two think-tanks, puts the necessary investment between now and 2050 in Europe alone at some €820bn ($900bn) at 2018 prices, on top of the €1.1trn required for business as usual. Alas, the aviation industry’s current state-of-the-art technology and its economics make Mission Possible sound anything but.When it comes to cutting emissions, aviation has a “wonderful history” compared with other sectors, says Steven Gillard, a director of sustainability at Boeing. He is not wrong. Carbon emissions per kilometre travelled by the average passenger fell by more than 80% over the past 50 years. Each new generation of aircraft generally consumes 15-20% less fuel than the previous one, largely thanks to improved engines. Boeing’s boss, Dave Calhoun, told investors last year he wants his next model to be “at least 20%, 25%, maybe 30% better” than aeroplanes it replaces. The trouble is that the technology that might help Mr Calhoun meet this goal is barely perceptible on the horizon. As the jet age nears its centenary, even the historic pace of improvement is becoming tougher to sustain. “Every leap in tech makes the next one harder,” says Andrew Charlton of Aviation Advocacy, a consultancy. And not just for Boeing and its European arch-rival, Airbus. Take engines. CFM, a joint venture between GE and Safran, two engine-makers, has over 1,000 engineers working on Rise, an open rotor-engine that does away with the cowling that covers the fan blades. Rolls-Royce and Pratt & Whitney, two other big engine-makers, are also beavering away on their own ideas. But neither engine is likely to provide the efficiency gains that Boeing is after. Tweaking the airframes, such as the potential upgrade to Airbus’s A320 short-haul jets with composite wings that can carry larger, more efficient engines, may help—but only a bit. Work on more radical airframe redesigns is preliminary at best. Boeing and NASA, America’s space agency, are developing a narrower, lighter wing held in place with a strut extending from the bottom of the fuselage as in small propeller planes. If Mission Possible’s efficiency targets look distant, the prospects for new types of planes or fuel seem remote. A few startups, such as Electra.Aero and Heart Aerospace, are working on battery-powered prototypes. Heart already has orders from Air Canada and United Airlines for 30-seaters that could fly 200km on batteries alone, or double that with hybrid power using sustainable fuel. If all goes well, these could be in the air by 2028. Anders Forslund, Heart’s boss, reckons that by 2050 all routes up to 1,500km could be served by electric planes. But such trips account for only 20% of today’s airliner emissions. Another option is liquid hydrogen. In 2020 Airbus said it would start work on this technology, with the aim of having a short-haul commercial jet in the air by 2035. This seems unlikely. Hydrogen must be stored below -235°C and takes up more space than kerosene per unit of energy. Using it would thus require a thorough redesign of the aircraft—with heavy cooling systems and bigger fuel tanks that leave less room for passengers—and of airports, which are not equipped to deal with the gas. If hydrogen can be made to work, it would, like battery-powered flight, probably be limited to short-haul flying. Reducing the carbon footprint of long-haul flight requires something else. The most promising something on offer is sustainable fuel, which though not fully carbon-free emits 80% less greenhouse gas than kerosene. Such fuels are currently produced from old cooking fat, and occasionally blended in small quantities with the conventional stuff. Boeing has promised that all of its planes will be capable of running on 100% sustainable fuels by 2030. Many airlines and energy firms have announced joint schemes to boost production and bring down the cost, which currently stands at roughly twice that of kerosene. Output reached 300m litres in 2022, according to IATA, a three-fold increase on the year before.That is still a drop in the bucket. For sustainable fuels to get the industry 65% of the way to net zero by 2050 would require 450bn litres a year by then, iata reckons. Obstacles to achieving such scale remain formidable. A big one is availability of feedstocks. Second-hand cooking oil is not mass-produced in sufficient quantities. Nor are household waste and by-products of forestry, two other potential sources. Converting food crops to fuel use would get you further. But this is politically thorny at a time when food prices are already rising fast. To avoid controversy, international sustainable-fuel standards currently prohibit using food crops as a feedstock altogether. Synthetic alternatives, made from carbon captured from industrial sources or directly from the air, are so far the preserve of a few pilot projects.Overcoming the technological hurdles is made harder by the competitive dynamics of the planemaking duopoly. The covid crisis and the grounding of the 737 MAX, Boeing’s short-haul workhorse, for 20 months after fatal crashes in 2018 and 2019 have left the American firm with long-term debts of $47bn. It is already busy launching a bigger version of the MAX and certifying the 777X, a variant of its popular long-haul jet. If it does not launch an all-new plane until late this decade, that will be a gap of 25 years from its last big debut, of the 787 in 2005. Its engineers’ skills may atrophy. A new plane programme that might cost up to $30bn and take ten years from launch to commercialisation would not sit well with Boeing’s other aim: to resume returning money to shareholders by 2026. Airbus’s finances are healthier. But it, too, has little incentive to place a giant bet on an untested new technology with its American nemesis in no position to exert competitive pressure. As it is, the European company’s orders are already around 7,000 planes, roughly 50% more than Boeing’s. Flying is, then, unlikely to become radically climate-friendlier soon. Scott Deuschle of Credit Suisse, a bank, calls the industry’s net-zero target “low probability”. The only other option is for governments to get serious about the matter. Some are. The EU is phasing in a mandate for sustainable fuels, whose share in European airlines’ tanks will need to rise from 2% in 2025 to 70% by 2050. In 2026 the bloc will start phasing out free emissions allowances for carriers under its emissions-trading scheme. As part of its covid bail-out of Air France, the French government forbade the carrier from competing with trains on routes of less than two and a half hours. The Dutch authorities ordered a reduction by late 2023 in the number of flights at the state-owned Schiphol airport, the Netherlands’ biggest, by 8%, to 460,000 a year, mainly to cut noise pollution though carbon emissions were also a concern. The French ploy may work, though just how much good it will do is debatable. The Dutch one was foiled in April by a court, with the backing of several airlines. The aviation business wants climate virtue—but not yet. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

FLYING IS A dirty business. Airliners account for more than 2% of the annual global emissions from the burning of fossil fuels, many times commercial aviation’s contribution to world GDP. Two forces look poised to push this figure up in the years to come. First, people love to fly. IATA, the airline industry’s trade body, predicts that 4bn passengers will take to the skies next year, as many as did in 2019, before covid-19 temporarily grounded the sector. Airlines could be hauling around 10bn passengers by mid-century (see chart 1). Boeing, an American planemaker, estimates that this will require the global fleet to roughly double from around 26,000 in 2019 to 47,000 by 2040. After a pandemic blip, investors are more bullish again about the sector’s prospects (see chart 2). Showing its confidence, on May 9th Ryanair, a giant of low-cost air travel, placed an order worth $40bn for 300 new Boeings.Second, as other carbon-belching industries, from electricity generation and road transport to steel- and cement-making, go green, air travel is proving harder to decarbonise. If the aviation business is to reach the industry’s goal of net-zero emissions by 2050, tomorrow’s fleet would need to be much cleaner than today’s. Mission Possible, an industry consortium, reckons this could only be done by doubling historical fuel-efficiency gains, putting aircraft powered by novel technologies in the air by the mid-2030s and rapidly rolling out sustainable fuels (plus carbon-capture technology to offset residual emissions, see chart 3).A recent report by SEO Amsterdam Economics and the Royal Netherlands Aerospace Centre, two think-tanks, puts the necessary investment between now and 2050 in Europe alone at some €820bn ($900bn) at current prices, on top of the €1.1trn required for business as usual. Alas, the aviation industry’s current state-of-the-art technology and its economics make Mission Possible sound anything but.When it comes to cutting emissions, aviation has a “wonderful history” compared with other sectors, says Steven Gillard, a director of sustainability at Boeing. He is not wrong. Carbon emissions per kilometre travelled by the average passenger fell by more than 80% over the past 50 years. Each new generation of aircraft generally consumes 15-20% less fuel than the previous one, largely thanks to improved engines. Boeing’s chief executive, Dave Calhoun, told investors last year he wants his next model to be “at least 20%, 25%, maybe 30% better” than aeroplanes it replaces. The trouble is that the technology that might help Mr Calhoun meet this goal is barely perceptible on the horizon. As the jet age nears its centenary, even the historic pace of improvement is becoming tougher to sustain. “Every leap in tech makes the next one harder,” says Andrew Charlton of Aviation Advocacy, a consultancy. And not just for Boeing and its European arch-rival, Airbus.Take engines. CFM, a joint venture between GE and Safran, two engine-makers, has nearly 1,000 engineers working on Rise, an open rotor-engine that does away with the cowling the covers the fan blades. Rolls-Royce and Pratt & Whitney, two other big engine-makers, are also beavering away on their own ideas. But neither engine is likely to provide the efficiency gains that Boeing is after. Tweaking the airframes, such as the potential upgrade to Airbus’s A320 short-haul jets with composite wings that can carry larger, more efficient engines, may help—but only a bit. Work on more radical airframe redesigns, like using a narrower, lighter wing held in place with a strut extending for the bottom of the fuselage as in small propeller planes, under development by Boeing and NASA, America’s space agency, is preliminary at best. If Mission Possible’s efficiency targets look distant, the prospects for all-new types of planes or fuel seem remote. A few startups, such as Electra.Airflow and Heart Aerospace, are working on battery-powered prototypes. Heart already has orders from Air Canada and United Airlines for 30-seaters that could fly 200km on batteries alone, or double that with hybrid power using sustainable fuel. If all goes well, these could be in the air by 2028. Anders Forslund, Heart’s boss, reckons that by 2050 all routes up to 1,500km could be served by electric planes. But such trips account for only 20% of today’s airliner emissions. Another option is liquid hydrogen. In 2020 Airbus said it would start work on this technology, with the aim of having a short-haul commercial jet in the air by 2035. This seems unlikely. Hydrogen must be stored below -235°C and takes up more space than kerosene per unit of energy. Using it would thus require a thorough redesign of the aircraft, with heavy cooling systems and bigger fuel tanks that leave less room for passengers, and of airports, which are not equipped to deal with the gas. If hydrogen can be made to work, it would, like battery-powered flight, probably be limited to short-haul flying. Reducing the carbon footprint of long-haul flight requires something else. The most promising something on offer is sustainable fuel, which though not fully carbon-free does emit 80% less greenhouse gas than kerosene. Such fuels are currently produced from old cooking fat, and occasionally blended in small quantities with the conventional stuff. Boeing has promised that all of its planes will be capable of running on 100% sustainable fuels by 2030. Many airlines and energy firms have announced joint schemes to boost production and bring down the cost, which currently stands at roughly twice that of kerosene. Output reached 300m litres in 2022, according to IATA, a three-fold increase on the year before.That is still a drop in the bucket. For sustainable fuels to get the industry 65% of the way to net zero by 2050 would require 450bn litres a year by 2050, according to iata. And obstacles to achieving the required scale remain formidable. A big one is availability of feedstocks. Second-hand cooking oil is not mass produced in sufficient quantities. Nor are household waste and by-products of forestry, two other potential feedstocks. Converting food crops to fuel use would get you further but is politically controversial at a time when food prices are already rising fast. The EU recently barred fuel producers from using food-crop-based feedstocks to meet new mandates for sustainable fuels. Synthetic alternatives, made from carbon captured from industrial sources or directly from the air, are so far the preserve of a few pilot projects.Overcoming these technological hurdles is made more difficult by the competitive dynamics of the planemaking duopoly. The covid crisis and the grounding of the 737 MAX, Boeing’s short-haul workhorse, for 20 months after fatal crashes in 2018 and 2019 have left the American firm with long-term debts of $47bn. It is already busy launching a bigger version of the MAX and certifying the 777X, a variant of its popular long-haul jet. If it does not launch an all-new plane until late this decade, that will be a gap of 25 years from its last big debut, of the 787 in 2005. Its engineers’ skills may atrophy. A new plane programme that might cost up to $30bn and take ten years from launch to commercialisation would not sit well with Boeing’s aim: to resume returning money to shareholders by 2026. Airbus’s finances are healthier. But it, too, has little incentive to place a giant bet on an untested new technology with its American nemesis in no position to exert competitive pressure. As it is, the European company’s orders are already around 7,000 planes, roughly 50% bigger than Boeing’s. All this means that flying is unlikely to become radically climate-friendlier soon. Scott Deuschle of Credit Suisse, a bank, calls the industry’s net-zero target “low probability”. The only other option is for governments to get serious about the problem. There are signs of this happening. The EU is phasing in a mandate for sustainable fuels, whose share in European airlines’ tanks will need to rise from 2% in 2025 to 70% by 2050. In 2026 the bloc will start phasing out free emissions allowances for carriers under its emissions-trading scheme. Some countries are going further. As part of its bail-out of Air France during the pandemic, the French government forbade the carrier from competing with trains on routes of less than two and a half hours. In the Netherlands, meanwhile, the authorities mandated a reduction by late 2023 in the number of flights at the state-owned Schiphol airport, the country’s biggest, by 8%, to 460,000 a year, to cut both carbon-dioxide and noise pollution. The French ploy might work, though just how much good it will do does is debatable. The Dutch one was foiled in April by a court, with the backing of several airlines. The aviation industry wants climate virtue—but not yet. ■ More

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