Ready for takeoff
27 / 01 / 22 - 6 minute read
Decarbonising flying is no easy task. Despite this, airlines around the globe have signed up for net-zero emissions by 2050 and are now nutting out what their credible pathways look like. The push gained extra impetus last October, in the lead up to COP 26, when the International Air Transport Association (IATA), the global trade association of airlines whose members comprise 82% of the world’s air traffic, announced their commitment to net zero emissions by 2050.
But building a credible pathway to net-zero in less than 30 years is an enormously complicated undertaking for any business, particularly for airlines who in 2019 consumed 360 billion litres of fossil fuels and generated somewhere between 2-2.5% of the world’s carbon emissions. So how do airlines plan to get there? And just how credible are the proposed pathways to net zero by 2050?
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“The role of real asset investors in the transition of aviation will play out in SAF production and longer-term in the infrastructure that will be needed for aircraft propelled by hydrogen and electricity.”
Jane Baseby
The offsets trap
A report from Jane Baseby of PATRIZIA describes the key strategies outlined by the airline industry to reduce carbon emissions. The report takes a detailed look at sustainable aviation fuel (SAF), the technology slated to do much of the heavy lifting for airlines over the coming decades and the subject of recently announced tax incentives by the Biden Administration.
Also placed under the microscope are the regulatory changes and policy incentives implemented or under consideration in key jurisdictions. And. of course, the ramifications of the decarbonisation of the aviation industry for infrastructure investors are also considered.
The momentum behind sustainability is strong. Infrastructure investors and fund managers alike seeking to reduce the carbon footprint of their portfolios are running their eyes over airport and airline exposures. These tend to be carbon-intense parts of any portfolio, whether investors own slices of listed companies or direct stakes.
COVID-19 reduced the carbon footprint of the airline industry overnight as planes stayed on the ground but, of course, as air travel ramps up again, so too will carbon emissions. Understanding the trajectory of airlines to net zero is critical for investors with existing aviation investments who wish to remain invested in the sector and prospective investors.
Airlines have limited decarbonisation pathways and risk becoming reliant on offsets to get to net zero. Air travel is critical for economic activity, human connection, and social cohesion, and people are embracing the opportunity to fly again as borders reopen and lockdowns end.
Indeed, the aviation industry is set to grow over the coming years and decades. Global passenger numbers are forecast to increase at a compound rate of 3.1% annually to 2050, when it is expected that airlines will carry 10 billion passengers some 22 trillion kilometres every year. This is despite anticipated structural changes, including changing consumers’ preferences for environmental reasons and the substitution by rail and other less carbon-intense transport options for shorter trips.
Based on current technology, this magnitude of passengers would generate close to 1,600 million tonnes of CO2 by 2050. This may mean up to 20% of global emissions could be attributed back to the aviation industry. So, something has got to give … but what?
Every tonne of conventional aviation fuel used emits 3.16 tonnes of CO2. ~343 billion litres of aviation fuel were consumed annually pre COVID-19, of which 0.015 billion litres were derived from sustainable sources.
Fuelling the aviation industry
Sustainable aviation fuel is an umbrella term for aviation fuels that are not derived from fossil fuels. There are two types of SAF, advanced biofuels produced from biomass, including vegetable oils, plant materials and animal waste, and synthetic aviation fuels. SAF is a 'drop-in fuel', meaning it conforms to existing petroleum-derived hydrocarbon fuels (diesel, gasoline, kerosene etc.) specifications and can be blended with conventional jet fuel and re-certified as Jet A or Jet A-10. This means no need for costly engine modifications or any change to infrastructure.
Currently, SAF is uneconomic, costing somewhere between two and six times conventional fuel depending on the production method. Indeed, in an industry where fuel comprises somewhere between 17-25% of operating costs, no commercial airline could afford to switch to such a high-cost alternative without adequate incentives.
Further, airlines, aerospace and energy companies will be more likely to invest in nascent technology when confident that policy and regulatory risks are manageable. Several countries around the world are offering incentives for investment, including Europe and the United States, where a significant support package has recently been announced.
Last September, the Biden Administration announced a goal for all aviation fuel consumed in the United States to be sustainable by 2050. In the nearer term, President Biden is seeking to dramatically increase SAF production to at least 11 billion litres by 2030 (equivalent to about 10% of current jet fuel uses), a move that would cut emissions by an estimated 20%.
“The role of real asset investors in the transition of aviation will play out in SAF production and longer-term in the infrastructure that will be needed for aircraft propelled by hydrogen and electricity.”
Jane Baseby
Into the blue skies
The PATRIZIA report acknowledges that across the aviation industry, there is broad consensus on what needs to be done to get to net-zero emissions. This means widespread use of SAF alongside credible offsetting while this ramps up, continued implementation of other efficiencies and ultimately a shift to electric and hydrogen propulsion technology. The decarbonisation of airlines will, in turn, reduce the carbon footprint of other aviation companies, including airports, which currently account for aircraft emissions relating to take-off and landing.
Such a dramatic shift will undoubtedly open up opportunities for infrastructure investors across asset types and public and private markets – airport investors, direct infrastructure investors, natural assets. But SAF will only become economic and scalable with government incentives and regulatory certainty.
Airlines are a low margin business. A spike in fuel cost due to a move towards SAF, whose current price is 2-6 times higher than conventional fuel, would have implications for profitability, tickets costs and overall passenger numbers.
But the trajectory for airlines to get to net-zero has a fat tail, reflecting that the industry is still powered by conventional jet fuel made from crude oil. Currently, SAF makes up the tiniest fraction of overall fuel usage; there is a long way to go before SAF comprises 65% of the overall fuel mix, but this is undoubtedly achievable by 2050.
Download the report, Ready for takeoff: How sustainable aviation fuel will propel airlines to net zero
Image credits: istock (horstgerlach)
“There is potential for investors through the investment in natural assets that generate credible carbon offsets required by the aviation industry to hit interim and long term carbon reduction targets.”
Jane Baseby
