Global Hydrogen Strategies

Hydrogen has been heralded as the ultimate green fuel for a long time. Almost like clockwork, the British periodical "The Economist" runs an article every decade how the hydrogen economy is imminent. There were articles in 1997, 2010 and quite recently in 2020 and now 2021 that raise the familiar questions and doubts, however restate their belief in the future of a hydrogen economy.

But this time, something has changed. As the world has switched to renewable power sources, its lack of reliability has raised major concerns.

• Renewable electricity cannot be turned on or off on demand. It means electricity transmission and distribution companies cannot plan their baseloads around renewable generation.
• Renewable sources have caused havoc on electricity grid stability. Traditional transmission and distribution grids were designed based on one-way traffic, from generators to consumers. With distributed generation like roof top solar and wind, transmission and distribution companies need innovations in balancing loads.
• While Battery Electricity Vehicles (BEVs) have finally taken off, this cannot be extended to bigger forms of transport like trains, ships and freight trucks due to the considerable weight of chemical batteries that makes these applications uneconomical.
• Renewable power sources alone are not adequate to allow countries to meet their net zero and decarbonization targets. Alternate strategies need to be considered to reduce dependance on carbon based energy sources at a faster rate.
• Finally countries are also realizing that decarbonization would mean loss of jobs for many energy professionals, especially those tied to transportation of fuels. This could become a secondary crisis on its own.

The answer to many of these concerns has surprisingly turned out to be hydrogen as fuel source.

• Renewable sources like solar and wind can be used to generate hydrogen during times when generation exceeds demand.  Once generated, hydrogen can then be stored or transported as fuel.
• Hydrogen fuel cells are being used by electricity grid operators to balance their grids.
• Hydrogen is very efficient as a fuel on weight basis (per kilogram) though a poor energy source on a volume basis (per litre/ per gallon). This means it can be used to power fleets of large vehicles like trains, ships and freight trucks that worry about weight but are not concerned with large volumes.
• Hydrogen fuel cells are also becoming the backup power of choice for large box retailers in North America like Home Depot, Walmart, Amazon and others.
• Hydrogen can be transported in trains, pipelines and ships very much like petroleum and its derivatives. All this means many jobs in the fuel transportation sector can be saved/ re-purposed.

Governments around the world, many in their wisdom and foresight, but perhaps most in anticipation of their pledges in Glasgow COP-26 summit have recently announced hydrogen strategies and roadmaps.

• European Union came out with their strategy in July 2020 
• This was followed by countries in different continents
• Japan released their strategy in 2017  and a roadmap as well.
• Norway, as a country with a strong history of environmental advocacy released their hydrogen strategy in 2019. 
• US released their strategy in July 2020 followed by a roadmap in 2021 
• Government of Canada announced their national hydrogen strategy in December 2020 
• Not to be left behind, the UK announced their national hydrogen strategy in August 2021 
• Even states and provinces came out with their strategies
• Alberta in Canada released their hydrogen roadmap in November 2021. 

All the above have prompted consultants to look deeper and present their analysis of what is being said. Yele Consulting from France has published one such comparison. KPMG has published another one.

This yet does not change the fundamentals. Hydrogen will need a lot of investment on the demand, supply and transmission side to become a viable alternate fuel. Government investments in demand mean that private sector will have an incentive to invest in this sector. This may drive innovation and reduce costs.

Airline and Travel business - what's in store after covid

As countries re-open their borders and people start to travel again after covid, a key sector that is overdue for recovery is air travel. No country and indeed no airline was spared from the lockdown and the resulting revenue losses. Now, a few key questions need to be answered.

1. Which airlines are still viable candidates to recover? On what basis?

2. Will post-pandemic travel behaviour change? How so?

3. What strategies will airlines employ to recover back to profitability?

4. Which airlines will survive and become profitable?

5. Based on this which airlines are best investment candidates?

 

Let's tackle each of these questions one by one based on data that is available.

Our analysis will be limited to the following airlines

1. United Airlines

2. Singapore Airlines

3. American Airlines

4. Delta

5. South West Airlines

6. Virgin Atlantic

7. Lufthansa

8. Air Canada

As can be seen from the above list, we have a mix of different airlines. We did not find much information on Virgin so we had to drop it. Here is a quick comparison of Revenue and Net income for these airlines for Trailing Twelve Months of 2021 and FY 2019.

	United Airlines	Singapore Airlines	American Airlines	Delta Airlines	South West Airlines	Lufthansa	Air Canada
Ticker symbol	UAL	SINGY	AAL	DAL	LUV	DLAKY	AC.TO
Total Revenue TTM	14.59	3.8	18.86	18.3	9.86	9.7	3.15
Total Revenue 2019	43.26	15.97	45.7	47	22.42	36.42	19.1
Net Income	-5.53	-4.2	-5.8	-6.7	-1.6	-5.6	-4.3
Net Income 2019	3	0.6	1.68	4.76	2.3	1.2	1.47
Revenue TTM / 2019 % age	33.73%	23.79%	41.27%	38.94%	43.98%	26.63%	16.49%
Costs as %age of TTM revenue	137.90%	210.53%	130.75%	136.61%	116.23%	157.73%	236.51%
2019 Costs as %age of 2019 revenue	93.07%	96.24%	96.32%	89.87%	89.74%	96.71%	92.30%

On the whole these airlines are carrying 25% to 40% of 2019 traffic. Airlines with more International travel such as Singapore Airlines are < 25% of revenue and more domestic airlines such as South West are > 40% revenue.

On the other hand, Singapore Airlines Net Income in 2019 was a mere 0.6 B. South West who has the highest Net Income comparatively speaking (- $1.6B), had $2.3B revenue in 2019. Prior to covid, South West had the best handle on its cost (89% of revenue).

If we look at International Travel alone, the following table provides a breakdown of origin and destination across markets and their percentage share of Revenue Passenger KMs

	Africa	Asia	Central America Caribbean	Europe	Middle East	North America	South America	Southwest Pacific	Total
Africa		0.4%		4.3%	1.6%				6.3%
Asia		8.5%		8.4%	7.6%	5.7%		3%	33.2%
Central America Caribbean			0.3%	3.8%		4.6%	0.7%		9.4%
Europe				21.1%	5.5%	8.9%	2.3%		37.8%
Middle East						2%			2.00%
North America								1.3%	1.3%
South America							0.7%		0.7%
Southwest Pacific									0.0%
									90.7%

Asia and Europe account for almost 70% of revenue KMs split between them.

Post-pandemic behaviour change

This is the hardest puzzle to solve. Traditional wisdom would suggest that post-covid, domestic travellers would choose personalized mode of travel compared to air travel. Also, given that the pandemic has proven that business can be done across a screen, people will no longer be interested in traveling short distances by air for business. 

However in many unrestricted markets, domestic air travel has resumed and reached pre-pandemic levels.

As can be seen from the above graph, domestic travel in US and China has is only 10% away from 2019 figures. Globally, the gap is only 15% in terms of Revenue Passenger KMs.

The above figures should not be taken at face value, as the increased domestic travel includes pent up demand due to lockdown. We can assume that many segments such as business and conference travel will not resume to the extent as it used to be.

International travel has definitely not recovered to the same extent. We can assume that this recovery will be slow over the next few quarters.

Overall, it looks like domestic airlines in US and China who have limited international exposure should be doing fine, and are perhaps closest to recovery.

	World share	RPK	ASK
Total Market	100%	-53.10%	-45.20%
Asia Pacific	38.60%	-62.70%	-54.10%
Europe	23.70%	-56.50%	-46.50%
Latin America	5.70%	-44.50%	-40.50%
Middle East	7.40%	-73.20%	-57.50%
North America	22.70%	-28.50%	-24.70%
International	45.80%	-73.60%	-63.80%
Asia Pacific	10.90%	-94.20%	-86%
Europe	18.60%	-64.20%	-53.80%
Latin America	2.20%	-66.30%	-60.50%
Middle East	7%	-74.50%	-59.50%
North America	5.40%	-62.10%	-52%
Domestic	54.20%	-15.60%	-10.70%
Australia	0.70%	-75.40%	-61.00%
Brazil	1.60%	-19.60%	-18.00%
China	19.90%	-2.50%	6.20%
India	2.10%	-59.40%	-47.10%
Japan	1.40%	-53.90%	-36.10%
Russian Fed	3.40%	28.90%	34.80%
US	16.60%	-7.70%	-7.10%

Looking at just the US carriers, we can see that with the exception of South West, everyone else is waiting for travel to resume.

Q2 2021	Revenue Passenger Miles (RPM)	Available Seat Miles (ASM)	Passenger Revenue per Available Seat Mile -  PRASM (cents)	Cost per Available Seat Mile - CASM (cents)	Profit (cents)
South West	27689	33414	10.68	10.22	0.46
United	28514	39613	11.02	14.49	-3.47
AAL	42022	54555	12	12.9	-0.9
Delta	33285	48529	11	14.43	-3.43

Adding the international carriers and translating everything to KMs, we get the following results

Q2 2021	Revenue Passenger KM (RPK)	Available Seat KM (ASK)	Passenger Revenue per Available Seat KM - PRASK (cents)	Cost per Available Seat KM - CASK (cents)	Profit (cents)	Profit (% age)
South West	44,302	53,462	6.7	6.4	0.3	4.5%
United	45,622	63,381	6.9	9.1	-2.2	-23.9%
American Airlines	67,235	87,288	7.5	8.1	-0.6	-7.0%
Delta	53,256	77,646	6.9	9.0	-2.1	-23.8%
Lufthansa	14,034	27,317	7.0	12.4	-5.4	-43.8%
Singapore Airlines	1,857	12,571	2.5	7.3	-4.8	-65.8%
Air Canada	2,699	6,400	5.3	24.3	-19.0	-78.3%

As we can see from the above table, only South West airlines in the above cohort looks to be recovering their costs. The remaining airlines are operating at losses, sometimes quite significant at that. The international carriers and Air Canada are the worst off.

An important point to highlight that Lufthansa, Singapore Airlines and Air Canada despite being worst off are being supported by their respective governments. So their long term viability is not in question, but they are likely to remain in the red the longest given their high cost structures.

What strategies will airlines employ to recover back to profitability?

 Already, airlines have started making changes to different aspects of their strategy. Airlines that have the option will need to focus on domestic or international cargo markets. US carriers with high Available Seat Miles (ASM) are expanding their operations to include smaller destinations, and also more equitably distributing their fleet. Again, South West seems to have the least idle capacity.

Staff salaries are the biggest component of an Airlines expense closely followed by fuel and fleet maintenance.