How Are Firms Adapting to Climate Change?
Lessons from Southwest Airlines versus a Video Game Design Firm
This is my second column exploring how different firms are adapting to climate change. My first column is posted here.
Consider Southwest Airlines (SA). SA sells plane tickets as people fly from an origin to a destination. SA competes against other airlines as it chooses the price, plane type, seats, airports within a city (O’Hare versus Midway in Chicago), and the quality of service (free nuts!?). If SA has trouble with flight delays and cancellations due to crazy weather and especially if other airlines cope better with these shocks, then SA will lose customers. NOTE that competition and the fear of losing customers nudges SA to try new adaptation tactics. For specific details read this March 2023 WSJ piece.
This adaptation investment requires upfront certain expenditures and it offers an uncertain future revenue stream. If weather goes back to normal, then SA “wasted $” by investing in adaptation. The CEO of the firm will have to consider the following “what if”; “What is the stream of our profits going into the future if we do not take proactive climate risk mitigation steps?” This should be compared to; “What will be our expected stream of future profits if we do take costly proactive climate risk mitigation steps today?”
I claim that the costs of adaptation investment decline over time due to technological change. Researchers have not measured this.
Now , let’s discuss a video game design firm. Suppose the boss of this firm only requires that workers go to the office 2 days a week. In my 2022 WFH book, I argue that there is quality versus quantity tradeoff of workplace face to face interaction. During times of horrible weather, WFH allows workers to not commute on those days and they WILL BE even more productive!
When workers know that they only have to go to work 2 days a week, they have more choices over where they live because their weekly commute time has declined by 60%. This larger commuting radius allows those who are risk averse to live further from the office in a climate safer place. They are “free to choose”!
Our locations on a map (where we work, where we live, where we shop), determines what climate risks we are exposed to. Entities such as First Street Foundation inform us about our risk exposure and we locate accordingly. Areas facing more objective risk will feature lower real estate prices and this compensates those who take on more risk.