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Green Shoots #1: ESG in Aerospace in Brief
Scope 3 emissions, Bezos, plus the Little Rocket that Couldn't
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Environmental: Scope 3 Emissions - Induced Demand and Aerospace
note: I had a whole section ready to go on thorium-nuclear rocket engines, but I realized I need to do more investigation on actual risk assessments before I’m comfortable publishing
People who don’t follow “Carbon Accounting,” might not be familiar with the concept of scoped emissions, so let’s have a quick look at them and think about how they may apply to aerospace.
There are three Tiers of Carbon1 Emissions that you can attribute to a company.
Scope 1 emissions: These are emissions directly controlled by a company. Example: FedEx’s delivery trucks burn gasoline and their Jets burn kerosene. The CO2 that is emitted from these vehicles is part of UPS’s scope 1 emissions. Simple enough
Scope 2 emissions: These are exclusively associated with “electrical emissions.”
Example: FedEx distribution centers and offices purchase grid power to manage operations. A facility in Memphis (where the grid is 50% fossil fuels) will have a different emission factor per Kilowatt Hour than one in Seattle (16% fossil fuels). Again, as long as you have your power bills and a way to manage this data, it’s not terrifically difficult
Scope 3: This is where things get fun (and convoluted!) This is where all other emissions in your supply chain are accounted for. To get this number right FedEx is going to have to account for the carbon impact of the vehicles they purchase, the packaging they use, emissions from data centers where they host logistics, etc.
Managing Scope 3 emissions is going to be a common theme you see in the coming years and it’s a heck of a challenge. It also creates uncomfortable issues for companies who don’t directly produce lots of emissions, such as tech companies, recognizing their role in climate. Double counting is, of course, always an issue here, so aggregating emissions across multiple companies is unlikely to be very helpful until the reporting requirements are standardized.
But what’s more interesting to me is the idea of Induced Demand. Let’s talk about three companies to illustrate what I mean:
Company 1: Microsoft
Company 2: American Airlines
Company 3: Chevron
Companies 2 and 3 are obviously huge reporters of Scope 1 emissions, where most of the Carbon accounting focus is today. Chevron operates oil fields, transports intermediate and final goods, and refines them into usable products. They take a huge amount of the carbon hit here.
Chevron, when making Jet Fuel, get the embedded carbon off their Scope 1 book once American Airlines takes delivery of it. From there, American airlines has to claim the CO2 emissions (about 3 lb of CO2e per lb of fuel) when burning it.
And Microsoft? Well, they kind of get off scot free. Sure their data centers will have to claim Scope 2 emissions from electricity. But Microsoft provides the enterprise backbone to both American Airlines and every oil company running MS Office or using Windows Server applications to manage logistics. When any one of 190,000 Microsoft employees goes on a business trip, those airline emissions are guilt-free in a world outside of Scope 3 determinations.
Scope 3 is supposed to bridge this gap. But let’s take it one step further.
If Microsoft decides to cut back travel because they say they want to promote MS Teams more, do they get to claim the savings from those Frequent Flier Savings? What if the real reason Microsoft cut down on travel is that flights are more expensive?
What if business travel is cut so much that Airlines lose 10% of their capacity and are flying full planes less often, but don’t have the ability to cut entire routes all together? Those planes will still emit almost as much carbon, but it’s now spread across fewer customers.
What if Airlines get bailed out by the government to keep things afloat, flights crater in price, Microsoft decides to travel more once again and Chevron upgrades a refinery that serves Seattle to produce more jet fuel? Who gets the blame? Did Chevron induce demand by increasing fuel availability? Did the airlines do so by cutting price? What if Microsoft invents a software that helps American Airlines decrease non fuel related operating expenses by 20%? Who’s fault is it? Who do we hold responsible in an ESG Sense?
I don’t have a great answer but it’s something that is crucial to the aerospace industry. This includes the space industry as there are no indications anyone is slowing down.
Airplanes account for only 2% of direct global emissions, but on a scope 2 or 3 basis, their impact is certainly far more than that.
Society: So whatever happened with that Blue Origin Toxic Workplace story?
Hey, so… remember a few months ago, when 21 former and current Blue Origin employees signed a letter about the absolutely toxic work culture at Jeff Bezos’ rocket company? I’m guessing Mr. Bezos sure hopes you have.
After a flurry of stories and tweets and condemnations online, it all sort of…. blew over.
Never fear, because I sure as heck haven’t forgotten. As women remain woefully underrepresented in Aerospace, the toxic mashup of New Age Tech Bro Culture and ancient Old Boy’s Aerospace Club continues to march forward. In addition to the repeated sexual harassment and abuse alleged to have occurred, there appear to be serious internal concerns about Blue Origin’s safety culture.
Blue Origin, at the time, provided a statement to the media, which includes the following:
“(Blue Origin has) no tolerance for discrimination or harassment of any kind. We provide numerous avenues for employees, including a 24/7 anonymous hotline, and will promptly investigate any new claims of misconduct.”
The implication here is that they already investigated claims made in the essay. The PR department went so far as to claim they terminated one of the employees who named themselves in the letter not as retaliation for the sexual harassment complaints that appear to have gone unheeded but rather for the oddly specific reason of “issues involving federal export control regulations.”
Blue Origin claims any issues brought up in the letter (signed by 21 employees) are flat out not true. This is, of course, unsurprising. Blue Origin made no commitment to investigate these specific issues further, which is troubling given the number of co-signers.
But what surprised me the most when I went to check up on this story last week is that the 24/7 hotline is impossible to find. Now, I’m sure there are internal documents about when and where to call if there is an issue. But Blue Origin, who is constantly vying for federal contracts, is required to have a fraud and ethics reporting system. The law requires posting the information at worksites and websites as needed.
The fact that a google search doesn’t produce anything on Blue Origin’s ethics policy or the hotline itself is odd. It is probably acceptable for smaller government contractors to not have this information instantly available. But every large organization I have ever worked for has this information available publicly, and the whistleblower hotlines are typically managed by trusted third parties such as EthicsPoint. The reason for this is that large organizations hire their own contractors and tradesmen all the time. These people are often the first to see serious safety issues or harassment firsthand. They may not have access to the site at all times and don’t have access to the company’s intranet. The fact that people who interact with Blue Origin but aren’t directly employed don’t have a way to report concerns after the job is done is highly concerning and is all but certainly a deliberate decision.
Here’s a challenge: google any Fortune 500 company name and “ethics hotline” and see if something doesn’t show up. Heck, if Koch industries can do it, by golly so can any of these private enterprises run by the latest generation of Great American Men.
Governance: Astra’s Governance failed to deploy
Less than one year after going public, Astra, the small California-based launch startup, is in big, big, trouble.
For those out of the loop, Astra’s debut launch for its first paying customer (NASA) ended in mission failure as the satellite it was contracted to deploy, well… didn’t. There are countless places on the internet you can read about the technical details of the failure if you’re so inclined, but we’re not here to talk about that.
Rather, let’s take a quick look at the company itself and in particular, its governance.
Unless last week’s events were the result of sabotage or willful incompetence, an unsuccessful mission is hardly a governance issue itself. Failure is part of the Space game, it’s expected on some frequency. Launch insurance is a big business for a reason.
Nearly immediately following the mishap, Atra’s stock crashed 45% and the company’s market capitalization now sits at a lowly $850 million, down from its post-SPAC peak of $6 billion.
No spectacular crash in a public company’s shares is complete without the looming threat of shareholder lawsuits. These don’t always have merit, of course, but if you browse the various ambulance chaser press releases, you’ll note a few themes. They all cite Atra’s CEO, Chris Kemp, and his wild claim that by 2025 they intend to reach a launch cadence of 300 per year.
On its face, that claim seems a bit more than wild-eyed optimism. I may not be a rocket scientist but that’s ten times more launches than SpaceX managed last year after 20 years in the business, which appears to be an essentially impossible claim to fulfill. Sure, the rockets are teeny-tiny little things, but we’re talking about a company that’s 300 employees and hadn’t completed a single commercial deployment to date.
At this point, I’m going to direct you to Kerrisdale Capital’s report on the Company back in December of last year. It’s a must-read, and despite all the fist-clenching about short-sellers, Kerrisdale’s reputation is second to none. In particular, some of the quotes Kerriesdale’s research turned up proved quite prescient:
“I laugh at that number…There’s no way they are doing 300 launches by 2025; by 2035 it would still be a stretch.” — Senior Engineer, launch broker
“We are, all around in the industry, in the same spot. Even within Astra and at [our small launch company], I’m looking at [1/10th Astra’s number] rockets, and we are freaking out – are we really going to have enough customers for this?” — Senior Engineer, small launch provider
“Happy they got to orbit on last launch a few weeks ago, that’s great, but there’s just a lot of issues with their rocket and their business model…claims of launching every day? It’s pretty exciting when a launch provider can launch once a month – and sure, everyone would love for rockets to be like airplanes – that’s not going to happen for at least another decade. So yes, I have some serious concerns about Astra’s claims.” — Mission Manager for a broadband mega-constellation
And this one especially resonates:
“I’m personally worried about the reliability issues Astra will face…every single component on Astra’s rocket is cheap. And they are rigorous about testing and they test really hard, and they do everything they can, but still, they don’t have the redundancies that other rocket companies have…I’m not sure customers will be happy with losing half of their payloads…Kemp insists that because it’s a cheap rocket, the customers will have cheap payloads…so the companies will be ok to make two, and launch one / lose one, because it’s a lot cheaper than any other access to space...honestly, not sure how the market will take it when rockets keep failing and I believe they will.”
— Industry professional with knowledge of Astra rocket development
The high failure rate and the impossible to attain launch cadence seems to be common knowledge among experts in the industry. So, while I won’t go out and say that Astra’s CEO (an IT/tech guy) knows he lied to the public, he should have known better. Willful incompetence is not an excuse for securities fraud.
Astra needed the stock to do well, and that is what often leads people down the dark path of stock promotion. That market cap is the lifeblood of the company. With no established platform or revenue streams and given the astronomical2 costs of rocket development, the bond market is essentially closed off to them. Private companies might not have instant liquidity and full access to capital markets, but the valuations tend to be a little bit stickier. Astra doesn’t have that advantage. The market punished them for failure on commercial mission number one. So why does that matter? Well for one, annualized Stock-Based compensation in 2021 was about an average of $90,000 per employee. Netting out executive compensation, this is still in the ballpark of $50,000 per “normal” employee per year. Those stock grants issued last year are now also deeply underwater.
In the first 9 months of 20213 Astra racked up $206 million in losses while burning $120 million in cash. This burn accelerated as the year proceeded with operating expenses in Q3 equaling combined expenses in Q1 and Q2.
At a run rate of 45-50 million per quarter, and $378 million in cash, Astra’s got a few more quarters before they’re not going to be able to keep the lights on.
Astra has noted to investors that they intend to increase R&D and capital expenditures, and in fact, they need to do so if they want to succeed with their high volume aspirations. Burning $300+ million per year is hardly an unusual level of spend in hyped tech companies. The problem here is that at an $850 million market capitalization, shareholders will have to be diluted by 35% just to keep spending at par for a single year.
Their balance sheet shows that intangible assets make up a significant portion of the company’s value, with $58.9 million in Goodwill. That number is going to have to be slashed dramatically, given their best capitalized and most important customer (NASA) lost the very first payload they entrusted Astra with. The company, notably, only considers their Intellectual property to be worth $19.3 million.
So what we have here is a company with hardly any assets who is burning cash like crazy, with no recurring revenue or assets to guarantee any stop-gap funding. This company looks like one in the throes of a death spiral. This is not investing advice, but I would not “Buy the F*cking Dip,” as the kids say.
Another high-flying aerospace startup not making it is hardly a new phenomenon, but what is interesting is to what extent CEO Kemp and other top management will be held accountable for their statements. Good governance means that there isn’t an institutional incentive for lying that goes unchecked. How many dozens of Astra’s employees knew that Kemp’s promises were impossible? How many retail investors were suckered into buying into believing they were buying the next SpaceX?
KEMP: Over the next few years, we're seeing the number of small satellites increasing from first thousands and then tens of thousands as the decade progresses. And so most of these satellites are here to provide better connectivity on Earth, to generally help us manage the resources on Earth. And there's over $1 trillion economy emerging in this space. And most of it isn't people in space. It's putting these satellites into Earth orbit where we'll have the opportunity to better observe and connect our planet.
There very well may be a $1 trillion space economy in the future, but it sure seems like Kemp and Astra will not have a part of any of it.
Carbon is synonymous with GHG emissions and are presented in terms of CO2 equivalents (or CO2e) based on global warming impact
Q4 Earnings have yet to be released for the company