SAS, the 4th largest airline in Europe, needs to make a decision on engine type that will haunt or help it for the next 25 - 35 years. The stakes are very high and require anticipating the regulatory and environmental laws that will apply to the company’s fleet in the decades to come. The decision on whether to buy the DAC engine must be determined not merely by narrow economics or the company’s ethical philosophy but also by the broader question of whether a new and untried technology will be perform reliably and safely. Will the DAC green jet engine work in a B-737 without compromising the long term profitability of SAS? After five years of consideration should SAS defer the purchase decision and pursue greater clarity?
Analysis and Directly Related Recommendations
- Business Ethics - The conflicts between "ethical universalism", "ethical relativism" and "social contract theory" become irrelevant when the local culture impacting a company has higher standards than the global or any other local average. Sweden, the home country of SAS, "is a leader" in stipulating green aviation practices. On a scale of 1 to 10, Scandinavian countries are a "12" in terms of their very serious commitment to the environment. These clear and compelling local conditions point out which direction SAS must go:
SAS Must Conform With Local Scandinavian Culture and Use a Green Engine
Using any type of engine perceived as dirty would place the company in conflict with the clear prevailing norms of the business environment in which SAS operates.
- Economics of the DAC Green Engine Purchase - There are three additional costs of this engine: (1) Direct marginal costs of approximately $389,000; (2) A reserve for unexpected technological and operational hurdles arising from fitting the engine to a B- 737; and (3) An opportunity cost of lost efficiencies that cannot be afforded because of the added expense of the DAC engine. The sum of these costs must be compared to the present value of any future punitive government levied taxes, lost revenues and lost customers (level 1, 2 and 3 costs) arising from using a dirty engine. Which is greater?
Environment taxes and negative customer response is likely to apply to using a 'dirty' engine over many years. The costs of using DAC are fixed and paid for in present terms. It is more likely that the future costs of using a dirty engine would more than outweigh the present costs and risks of using DAC engines. Thus:
SAS should buy the DAC engine
The social and governmental costs of using a dirty engine for its operational life of 25 - 35 years are likely to outweigh any present savings of doing so.
Hedge the purchase decision
SAS has committed to buying 55 planes. This should be spread out over two installments.A smaller portion should be purchased now with DAC engines and their performance and safety evaluated before buying the remaining quota of planes.
- Advantages of Being an Environmentally Sustainable Company - Industry trends indicate that companies "best able to adapt" to changes have kept or increased market share. Increasing environmental regulation and taxation is a fundamental fact to which SAS must adapt. SAS has positioned itself "as a leader in environment commitment" based on a recognition that companies which "ignore their responsibility will disappear." This is an important reputation asset for SAS (goodwill) which it needs to preserve. Thus,
SAS must continue to preserve its favorable environmental reputation
SAS should actively participate in industry groups studying advanced technologies and aircraft designs that will achieve even greener planes and operational practices. This includes pursuing liquid hydrogen as an aviation fuel by building on the Airbus Cryoplane and Boeing's 2010 Phantom Eye, noise cancelling technologies, and other approaches to reduce the company's carbon footprint.
Certified Public Accountant Master of Business Administration
43 Acme Road Suite F Brewer Main 04412
©2012 Copyright George Adams CPA MBA. All Rights Reserved.