DOCUMENT NAME: Samantha.Seetaram.IENG3003.

Assignment1

COURSE TITLE: Engineering Sustainabilty

ID #: 55897

ASSIGNMENT: CORPORATE GOVERNANCE ARTICLE REVIEW

Scandinavian Airlines: The Green Engine Decision

Table of Contents
Introduction.................................................................................................................................................3
Purpose...................................................................................................................................................3
Background..............................................................................................................................................3
Findings.......................................................................................................................................................4
Finding 1.1...........................................................................................................................................4
Finding 1.2...........................................................................................................................................5
Finding 1.3...........................................................................................................................................5
Discussion....................................................................................................................................................6
Recommendation......................................................................................................................................12
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13
 Introduction

Purpose
The purpose of this report is to analyze a case study on Scandinavian Airlines: The green engine
decision and recommend pragmatic and actionable solutions by using the facts and the central
problem provided in the case study.

Background
Scandinavia is located in the northern part of Europe that consists of three countries, Sweden,
Norway and Denmark. Scandinavia’s leading or largest airline is known as SAS (Scandinavian
Airlines) serving 32 million passengers annually and is the fourth largest airline in Europe,
exemplifying that they are an important player in the global airline market. They were the
pioneers of development in the aviation industry and well being of their people and passengers as
they proved to be different.

Ended gender Environmental Economy downfall but

Have its environmental
discrimination by Offered business management was their environmental
1969
hiring the 1st 1981 class. 1995
elevated to a strategic 1996 audited by a 3rd
report 2001std reamined the
party.
female pilot. level. same.

Figure 1. Timeline of company background information on SAS.

Figure 1 shows that in 1995 SAS environmental management was elevated, this was done by
hiring their first environmental director, Niels Eirik Nertunand and by adopting new
environmental policies.

The problem that the company is facing.

SAS had already made the decision to purchase the new fleet of 55 Boeing-737s and the senior
management had to decide on an engine for the aircraft. The company had already built its green
reputation, so SAS director of aircrafts came up with the option to purchase a “green” engine
(DAC) for the new fleet. However the two-stage, dual annular combustion (DAC) had many
concerns; it was developed in the 1970’s, but has not been commercialized, it would add
approximately two billion US dollars to the entire fleet and the director had no specific figures
on the company’s economic impact. On the positive side, this engine produced significantly
lower NOx emissions, which would represent a strong environmental commitment.

Before SAS made the decision on which engine to go with for the aircraft they were already
establishing themselves as a leader in the airline industry in terms of environmental
commitment, the airline developed an environmental policy stating that the company was
committed to using the best available environmental technology. This is a problem since the
cost of the DAC engines was really expensive as mentioned before, with no exact figures of
return on investment or payback period, they may not be able to live up to their word and the
company’s name and reputation may be at risk.

Findings

While conducting research the following data were found:

Finding 1.1

The effects of an airline’s environmental impacts come from 90% of flight operations, 5% of
cabin operations and 5% of ground operations. Emissions from aircrafts at that time, are thought
to have global warming effects up to three times greater than ground transportation. Recent
studies have shown quite the opposite, for example, a study by the University of Michigan
Transportation Research Institute states the energy intensity of car transportation is on average
57% higher than air transports. In other words, a car emits more CO2 than the average planes
because they consume more energy to transport the same amount of passengers. This is because
many generalized assumptions were made apart from the number of vehicles on the road, such as
the number of traveled kilometers, the vehicle model or the number of passengers was taken as
standard values (being the maximum capacity) even though that is not the reality, of course now
we also have to acknowledge that there are Hybrid vehicles, as well as cleaner fuel such as CNG.
With that being said, there are many factors that were not taken into consideration such as, a car
in traffic jam releases 2.5 more CO2 than normal traffic conditions and a car with air
conditioning emits 7%-20% more CO2.

Nevertheless, it does not mean that we should utilize air travel more than ground travel, because
there are many factors that needs to be taken into consideration. Hence we need to use our
discretion. Aircrafts is still indeed a major pollutant to the atmosphere, but so are cars. Air traffic
represents less than 2-3% of the global CO2 emissions, whereas road traffic accounts for around
10% of these direct emissions.
Greenhouse gases are an unavoidable part of airline operations and it is also a necessity for
transportation of goods and people as some countries are too far from each other and time is of
the essence if any other type of vehicle is considered, hence the only option is for us to minimize
the aviation’s climate impact and this is what SAS wants to do. They want to be the first airline
to have a “green” engine so as to have a competitive advantage, this implies moving beyond
compliance, viewing environmental management as good management, seizing environmentally-
based opportunities that have arisen as a result of the environmental challenge and striving
towards state-of-the-art environmental management (Roome, 1992)

Finding 1.2
According to The International Civil Aviation Organization (ICIAO) aircraft noise is the most
significant cause of adverse community reaction related to the operation and expansion of
airports, hence emissions are not the only negative factor that aircrafts bring about, it contributes
to noise pollution as well. SAS took this into consideration as their policy engaged in adopting
the best available environmental technology, pertaining to the aircrafts which meant purchasing
the best combined noise and emission reduction technology. The Swedish Civil Aviation
Administration (CAA) argues that charges and taxes are an effective way to use the best
available technology.

The largest airport in Sweden, Stockholm-Arlanda, uses charges and taxes, are an effective way
to get airlines to use the best available technology. The largest airport in Sweden, Stockholm-
Arlanda, uses charges and taxes, as a mechanism to reduce fuel emissions and noise pollution.
The environmental management of SAS is committed to implementing, by adopting the best
available technologies, sound environmental management practices minimal environmental
impacts and most importantly continual improvement and promoting awareness of
environmental related aspects of the industry to external parties. This means to say that they
pursue a sustainable or ecological strategy in its response to the environment and they continue
to plan ahead with their strategic environmental behavior: proactive strategies by demonstrating
a managed or systematic effort in improving their environmental performance ((Elkington et al.
1992; Fischer and Schot 1993; Dauncey 1994;Roberts 1995)

Finding 1.3
In 1995, environmental management was elevated to a strategic level at SAS. The environment
had become part of the overall policy-making structure for SAS, evident through the
establishment of environmental visions and goals and a commitment to publish environmental
reports on an annual basis (SAS, 1996.) An environmental director was appointed and he
justified the expense of developing environmental initiatives such as reporting mechanisms.
Competitors such as the Bristish Airways were reacting to environmental pressures and big
(corporate) customers were demanding it, hence there is a niche market for the environmental
changes. He is an asset to the company with respect the environmental concerns as he was an
influential player in the decision making process. SAS is the “first mover” in environmentally
sustainable strategies such as the implementation of environmental audits and being one of the
very few airlines who was willing to spend money to be EMS certified.

SAS is considered as the “forward thinking” leaders in the airline industry for many reasons, one
being that they brought about the emission calculator, their environmental outlook now prevails
over the company’s image. This just proves that they are a company that is beyond compliance
leadership because they do not only want to increase the efficiency of their organizational,
processes, but they also want customers and the general public to acknowledge their efforts as
they have spent their money to be EMS certified, subscribed to business policies of
environmental management and invest in unprofitable environmental improvements such as the
emission calculator (Orsato, 2006). However, with the decision that has to be made, if they
decide to purchase the ‘green’ engine which is the director’s suggestion, they will also be using
Eco branding and environmental cost leadership.

Discussion

1) A) List the environmental impact(s) of aircraft engine performance.

The demand for air transport has been increasing over the years and studies have shown that it
will continue to increase, however this also increases in the effects of our environment as it is
paying a heavy cost in global warming. The environmental impacts of aircraft engine are as
follows:
 One of the greatest impact the environment has, is the noise disturbance caused by
the aircraft. It results in noise pollution.
 Due to the exhaust gas coming from the nozzles, of the aircraft, it is released into
the atmosphere, thus increasing the presence of various poisonous gases such as,
CO2, CO, NOx, SOx, and many more which contributes to global warming.
 The heavy air traffic leads to emission of congestion in the environment.
 There are various other kinds of wastes which are being created during the air
transport (90% of the airlines environmental impact comes from the flight
operations, 5% comes from the cabin operations) as well as ground operations
which makes up the other 5%.
B) Which of these impacts were key factors in the DAC engine decision?
 The double annular combustion (DAC) engine is mainly used to decrease the
percentage of NOx in the atmosphere. The emission is an important factor for the
DAC engines.
 The noise pollution is a concern for the airlines as well as people living around
the area, which the DAC engine also reduces.
C) What regulatory or market based mechanisms did SAS need to consider that were
related to these environmental impacts?
 The airline had implemented a comprehensive environmental management system and
had introduced a number of tools and mechanisms to report environmental performance.
These included:
 Annual public and audited environmental reporting since 1995.
 An environmental index that measured economic efficiencies derived from
implementing environmental measures, e.g. Eco efficiencies
 Corporate environmental policy obligates all managers to conduct an
environmental assessment as part of their decision-making documentation. SAS
also supported product stewardship programs and would only deal with suppliers
who had environmental policies and management systems.
 An online emissions calculator for passengers that provided a destination specific
calculation of CO2 generated to raise awareness.

2) List the arguments for and against purchasing the more expensive green engines from the
points of view of the a) director of aircraft and engine analysis and b) the SAS
management team.
a) The director of the aircraft and engine analysis is convincing the management team to
purchase the “Green” engine hence he is “For” it. The following are the reasons:
 Economic efficiencies- The “Green” engine will limit both the sound and
emissions of the aircrafts hence there will be less taxes to pay.
 Passengers Interest- There is already a niche market for a more more sustainable
airlines such as the corporate companies are demanding for it. They want to travel
in a softer, cleaner atmosphere and do not want to be held responsible for
contributing more to global warming.
 Better company’s image- Going green promotes the company’s name and
reputation overall and shows that we do not only care about our airline, but also
about the well being of our customers and future generations.
 Potential of gaining a competitive edge- We will be the first airline to have a
“Green” engine, which is establishing a leadership role as a first “mover” hence
we will have a better reputation, improve competitiveness through increased
efficiency and setting a better standard.
 Payback period- may have a positive financial payback as it minimizes the risk of
future operational limitations.
 Charges and taxes can help with the payback period of the investment.
 Ethical Principles- Having a more sustainable environment is not only for
ourselves, but also for our future generation. Yes, we are concerned about the
cost, but what about the lives lost in the future? Not only our customers, but for
our friends and family and friends and family of those? Most of all what about
the greater good of mankind?
  Last but not least, if not this step? Which one? Where do we go from here? Which
other step does it have to go from here, if not going green? If we do not take this
step someone else would, because eventually we will be forced to take this step
when global warming gets worse, which we all know is depleting right this
second.

b) Some of the director’s colleagues were not convinced on the management team,
especially the Chief Finance officer, hence he was against the “Green” engine: The
following are the reasons:

 The cost of the engine- The DAC engine adds kr 3.5 million per aircraft,
hence for the entire fleet it would cost kr12 billion more than the one that the
company has already.
 A positive financial payback is not substantial proof for the company to spend
kr billion. This was made on solely intuition.
 Charges and taxes means that the customers will have to pay more to travel
leaving SAS at a disadvantage since the customers already have low-cost
airlines to choose from.
 The environmental department of SAS faced cutbacks in the economy and
staff.
 Liability concerns of banks and insurance companies- this engine has never
been commercialized before, so they will have concerns of its lifespan, return
of investment and potential of technical complications.

3) In your opinion, how does national culture affect corporate decision-making? For
instance, when you think of the word “Scandinavian,” what are some of the first things
that come to mind? How do you think Scandinavian culture affected SAS’s decision?

Culture is responsible for the way people think, behave or act, which is embedded with
morals, values and belief.

From research when I think about the word “Scandinavian” I think about people with
open minds, they accept different race, sexuality, religion and more, I think about unity as
they live as one, they do not discriminate, they do not indulge in gossip, trend setters
rather than followers, they love their country and believe is environmental sustainability
such keeping their country clean, they recycle. I would say an ideal place for me to live.

As mentioned before, the Scandinavian culture, believe in caring for the environment and
the well being of their people. Of course, not everyone has the same mindset, therefore
some will agree and some will oppose but I think with good substantial reason their belief
will lure them into choosing to go green, in other words, purchase the DAC engine.
4) Strategic decisions are influenced by a variety of external forces (e.g. competition,
industry trends and regulatory structure), as well as internal forces (e.g. corporate culture,
leadership and management style). What external and internal influences were involved
in SAS’s decision on whether or not to purchase the green engines?
The external forces that were involved in the decision whether or not to purchase the
green engine are:
 Laws and regulations of the government- Sweden was considering tightening
charges on airport emission, therefore it was critical to choose an aircraft to meet
anticipated future regulatory requirements.
 Global warming- the emissions and noise pollution that the current aircrafts emits
contributes to approximately 3% to global warming.
 Competition- other airlines such as the British Airways were reacting to
environmental pressure.
 Demand- increasing pressure of the corporate clients seeking ISO certification
and environmentally responsible airlines.
 The cost of the DAC- the engines are very costly kr12 million approximately.

The internal forces that were involved in the decision to purchase the green engine are:

 Company’s development- improvement of the airline, better company image,

setting a standard for the aviation industry, establishing leadership.
 Company’s Current liabilities- poor aircraft environmental performance will
have to change some time or the other.
 Financial status of the company.
 Company’s reputation- already marketed the company of being green, to the
opposite will ruin the company’s reputation.

5) Given external and internal influences at the time of the decision, what would SAS’s
motivation have been for purchasing the engines? Use the following list as a guide to
discussing which motivations were most relevant to the SAS decision and why.
 Desire to avoid or anticipate future regulatory action- SAS desired to anticipate
future regulatory action since they, he had implemented a comprehensive
environmental management system and had introduced a number of tools and
mechanisms to report environmental performance.
 Financial benefits- Today, ecology-oriented products and services represent a
defined market niche explored by firms worldwide. In Sweden, where consumer,
environmental awareness is remarkably high, one of the largest retailer of food
and domestic products developed a creative way of differentiating a portfolio of
eco-products. It will not be different for the green engine, hence it should bring in
a positive financial payback.
  The competitive advantage- a firm differentiates itself from its competitors when
it provides something unique that is valuable to buyers beyond simply offering a
low price.
 Stakeholder pressures- 50% of the company is traded publicly.
 Enhancing image, being a good corporate citizen- Going green promotes the
company’s name and reputation overall and shows that we do not only care about
our airline, but also about the well being of our customers and future generations.

6) Should corporations make environmentally responsible investments even if they do not

have a short-term payback (e.g. five years or less) or direct payback? Why? Why not?

Yes, they should. Time should not be a concern for payback when it is involving the
environment that we live in and that our future generations has to live in. We may be
comfortable now, but latter years from now if we do not take care of our planet, there will
not be any for us to exist on. The question after that, is, who will be here to have the
money? The environmental investments are for the greater good of mankind and a
payback period with regards of investment of it should never be a problem.

7) a) Based on your analysis and the information in the case study, should the SAS
management team approve the purchase of the DAC engines? Provide a brief
explanation. Use the diagram below to help inform your decision.
 THE GREEN ENGINE DECISION

External Forces:

 Laws and regulations of the government

 Global warming
 Competition
 Demand
 The cost of the DAC- the engines are very costly kr12 million approximately

Internal influences at SAS:

 Company’s development
 Company’s Current liabilities
 Financial status of the company.
 Company’s reputation

Based on external and internal influences, what are SAS’s motivations for being “green”?

SAS is motivated by the Scandavian culture, government implementation of charges and taxes,
emissions and noise pollution,establishing leadership , competitive advantage, and company’s
image and reputation.

What are potential outcomes of purchasing DAC engines for SAS?

Positive Negative
 Company’s image  High cost of technolog
 Environmental sustainability  Potential of technical complications
 Reduce taxes and charges
 Competitive advantage
 Increase profitability
 Anticipation of market demands and
emission caps

Action:

Purchase the “green” (DAC) engines

Recommendation

Having done research and an analysis of the case study on Scandinavian Airlines: The green
engine decision, the following are the recommendations that should be considered:

 Have the Chief Financial Officer work out the payback period.
 Having approximately 32 million passengers annually should more than give a payback
period of no more than 15 years taken to respect with expenses, hence the cost should not
be a problem.
 Some time or the other new aircrafts will be needed with a more efficient engine to
reduce the environmental factors of global warming since there are charges and taxes,
hence the earlier the better, to save money from those taxes and last but not least save our
environment, take the first step and set an example not only for the aviation industry, but
for the world.

Conclusion

SAS should purchase the green engine (DAC). For the following reasons:

 Company’s image

 Environmental sustainability

 Reduce taxes and charges

 Competitive advantage

 Increase profitability

 Anticipation of market demands and emission caps

Make a cleaner, safer home for tomorrow.

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