The Aviation industry contributes approximately 3% of all global CO2 emissions, with the majority of it being contributed by aircraft movement. Such emissions have been increasing at an annual rate of about 3%. This growth can be attributed to the constant increase in passenger demand, which is expected to double by 2050. If no actions are taken, this surge may result in aviation accounting for 25% to 30% of all CO2 emissions by 2050. When the negative impact and the forecasted growth of the industry are considered together, the need and urgency to take immediate action to achieve net-zero becomes even more critical. COP28 aims to fast-track the switch to cleaner energy sources and phase out GHG by the end of this decade to drive a positive momentum change in the usage of clean and sustainable fuels in aviation.
Current technology available for commercial use to support sustainability is still in its nascent stage, for instance batteries offering a limited power-to-weight ratio that makes it difficult for aircraft to have smaller and lighter batteries to fly longer and with more passengers. Hydrogen propulsion technology is still in the prototype/testing stage and considerable improvements are needed in terms of storage and processing till the technology can provide the desired results. Similarly, with Sustainable Aviation Fuel (SAF), the blending percentage to reach a full 100% will be based on how the blending technology evolves and can be standardised across the aviation industry. While other technologies are being developed, SAF appears to be the key solution for airlines to achieve net-zero targets.
As per IATA (International Air Transport Association), the global production of SAF in 2022 was around 450 million litres, which is less than 0.05% of the global demand for jet fuel. The main reason for limited production is the high cost of production, availability of feedstock, and that setting up of SAF plant takes up to around three years. Major SAF producers such as NESTE is constantly ramping up production of SAF. Given the increase in investment from existing and new players, SAF production is expected to increase multi-fold. Recently, Emirates became the world’s first airline to operate an A380 flight using 100% SAF. While it was just a demonstration flight, it could be seen as the catalyst for further adoption and standardisation for 100% SAF flying. Just a few days before COP28, Virgin Atlantic operated a transatlantic flight with a Boeing 787 aircraft from London to New York on 100% SAF. These test flights could make a strong case for standardising the commercial use of unblended SAF.
Multiple airlines and suppliers have announced partnerships to increase the production of SAF. These are all encouraging signs that the industry takes its sustainability target seriously and sees SAF as an important component of that strategy. The challenge lies in the fact that this falls significantly short of the necessary requirements. IATA has projected a massive increase in the need for SAF production in order to meet their target for 2050 carbon neutrality. Airlines have been placing offtake orders ranging in millions of litres to be fulfilled in the next few years, which gives a boost to the supply of SAF and injecting much needed investments. It is estimated that the production capacity needs to exceed 30 billion litres by 2030 and 450 billion litres by 2050 for airlines to achieve their net-zero targets.
A new agreement was announced by the International Civil Aviation Organisation (ICAO) at the CAAF/3 conference held in Dubai. According to the global framework, ICAO and its member states have agreed to strive to reduce CO2 emissions in international aviation by five percent by 2030, by increasing the production of SAF & other clean energy sources. This agreement is intended to put an increased focus on financing and investments in production and supply.
For the long haul, the industry needs to see more collaborations for investments, vertical integrations and offtake agreements. A unified approach by airlines and other stakeholders in the value chain will be critical. A majority of the existing SAF agreements with suppliers/producers are by the leading carriers of the industry. Airlines with lower purchasing power may find it difficult to scale up SAF investments and production to achieve fly net zero targets. While airlines collaborate on loyalty programs and revenue-sharing business models/groups, it will be important for the inception of airline consortiums to invest with SAF producers and suppliers. At the recent Dubai Airshow 2023, Frost & Sullivan was a contributor to the panel on SAF financing and development. The members of the panel unanimously agreed to the Frost & Sullivan view that while airlines should continue to compete on flight routes, airport slots and revenue share, SAF is an area that should be reserved for collaboration rather than competition.
We are beginning to see movements in this space with International Airlines Group (IAG) and Microsoft having signed a joint purchase agreement for SAF emissions reductions, where both parties will co-fund a portion of the supply cost. The SAF will be supplied to IAG member airlines which operate from London Heathrow and Gatwick airports, this year. Airline consortiums are also beginning to move towards offtake agreements with fuel suppliers to supply SAF. A bright spot is the offtake agreement agreed between Gevo and OneWorld Alliance, which is one of the biggest till date.
Regional disparity in SAF production, supply & investments also continues to affect commercial airlines and business aviation. For example, the SAF industry in South America is non-existent with negligible local production. This was publicly commented upon by LATAM Airlines CEO Roberto Alvo, citing that a bulk of their SAF is imported from the US. While climate SDG and targets are for global adoption, it is evident that there are regions that delay its achievement. It will be important for ATAG (Air Transport Action Group) to address this aspect at the forum taking place during COP28. With the ICAO initiatives on “No Country Left Behind” on aviation standards and the overall “international cooperation” theme at COP28 expected to be in the spotlight, the expectation is for decisive actions to be taken to ensure the aviation industry is propelled towards fulfilling carbon net zero goals.
To learn more about the implications of COP28 developments on your Growth Journey and to speak to Frost & Sullivan Growth Experts, contact Nimisha Iyer at nimisha.iyer@frost.com
