At the same time as ramping up production of its existing aircraft products, Airbus and Boeing have been preparing the future of aviation, and implementing a roadmap for decarbonisation. 

Aviation’s role in the climate change debate has changed significantly over the past few years. The COVID-19 pandemic grounded flights and halted air travel, reversing the runaway growth that the industry had enjoyed for the past decade.

Although the crisis in the early days pushed environmental issues to one side while airlines and lessors dealt with more immediate threats of business continuity and survival, the lengthy interruption later provided a perfect opportunity for the world to embark on a “build back better” programme with baked-in sustainability goals for a renewed global economy.

Airlines have steadily bought into the net zero pledge, which culminated in the IATA AGM resolution for the global air transport industry to achieve net-zero carbon emissions by 2050, aligning the industry with the 2015 Paris Agreement goal for global warming not to exceed 1.5°C. 


Achieving net zero emissions is an enormous challenge for any carbonemitting industry, but the aviation industry must progressively reduce its emissions while accommodating the growing demand of a world eager to fly. Many airlines have pledged to become net zero in line with the IATA resolution, with the larger companies pouring resources into new technology aircraft and greener infrastructure as well as stepping up efforts to transition to use more sustainable aviation fuel (SAF) and carbon offsets. 

Currently, the aviation industry is pursuing four levers in its goal for net zero emissions for 2050: improving energy efficiency, using sustainable aviation fuel, developing alternative technologies, and utilising carbon offsets.  The vast majority of airline scope 1 emissions are tied to jet fuel combustion, which means efforts are being focused on upgrading fleets to the most fuel-efficient new technology aircraft and transitioning to the full use of sustainable aviation fuel.

Jan Melgaard, executive chairman of FPG Amentum, strenuously defends the ambitious targets set by the industry. “We need to get to net zero by 2050; it’s basically our industry’s license to operate.” 

Although aviation is a small contributor to overall emissions, the industry is large and growing and very visible. The real fear is that if the aviation industry doesn’t take a lead in reducing its emissions, governments will. 

“If the airline industry doesn’t take the lead on this, governments will, and we are probably not going to like what is done and what is required of the industry,” warns Becker. “It’s going to cost a lot of money and it’s probably not going accomplish a lot.” 


Airlines in general have always worked to improve their energy efficiency in a bid to control costs – newer more efficient aircraft use less fuel and require less maintenance. Although airlines will continue to improve that energy efficiency, controlling operational efficiency is out of their control. 

The aircraft leasing industry is also taking a lead on this. In January 2020, Aircraft Leasing Ireland (ALI), the Ibec group that represents the aircraft leasing sector in Ireland, launched an ESG narrative, “Aviation Sustainability: Our Future”, which outlines the aviation industry’s pathway to decarbonisation, noting the steps that the industry is committing itself to and has already begun to embrace to support its ambitions of achieving net zero carbon emissions by 2050. 

“We will improve our operational efficiency and become better at flying in more straight lines from A to B today,” says Melgaard. “We have some unfortunate situations where we end up flying longer routes than necessary, which will undoubtedly disappear, but it will still take a little bit of time. The biggest component has to be sustainable aviation fuel.” 

“Every airline that we speak to are investing in SAF,” says Becker. “The two elements that can quickly lower emissions are improving air traffic control with more direct routing; and the use of sustainable aviation fuel.” 

President Biden’s announcement in September 2021 with the goal of replacing all jet fuel with SAF by 2050 was welcomed by the industry but also brought into sharp focus the enormous challenge of meeting such an ambitious goal.

If the airline industry doesn’t take the lead on this [carbon emissions reduction], governments will, and we are probably not going to like what is done and what is required of the industry. It’s going to cost a lot of money and it’s probably not going accomplish a lot.

Helane Becker,
Cowen & Company

Sustainable aviation fuel

Depending on the production pathway and the feedstock used, SAF can produce approximately 80% fewer CO2 emissions than conventional jet fuel on a lifecycle basis, but emissions reduction depends on the production pathway and the feedstock used. CO2 emissions reductions from SAF use come from feedstock production and fuel conversion, not from fuel combustion. SAF is designed to have very similar properties to fossil fuel, burns the same way, and emits a similar amount of CO2 (3.16 kg of CO2 per kg of jet fuel). 

All Airbus aircraft are currently certified to fly using 50% SAF mixed with kerosene, and an Airbus-led project in collaboration with Rolls-Royce is testing the emissions performance of 100% SAF use. Boeing has committed that its commercial airplanes will be certified to fly on 100% SAF by 2030. 

Besides CO2 emissions, other pollutants such as nitrogen oxides (NOX), sulphur oxides (SOX), soot particles, and water vapours pose environmental challenges. SAF has been shown to burn cleaner than fossil fuels, thus contributing to reducing non-CO2 emissions. 

There are two main types of SAF: biofuels and e-fuels. Both can be used as “drop-in”, mixed with Jet A-1 fuel without the need to modify the aircraft design or the supply infrastructure. 


The European sustainable aviation fuel (SAF) is expected to be one of the fastest growing segments in biofuels in 2022, alongside hydrotreated vegetable oil (HVO), or renewable diesel, according to S&P Global Platts Analytics. 

The European Union (EU) ReFuelEU Aviation proposal was published in 2021, a draft regulation targeting airlines, fuel suppliers and airports, which would apply EU-wide harmonised rules for SAF, binding in full on all member states.

The proposed regulation would apply to all flights leaving EU airports. Under the proposals, fuel suppliers are required to include SAF in aviation fuel supplied at EU airports; aircraft operators are required to uplift SAF-blended aviation fuel when departing from EU airports; and airports are required to provide the necessary infrastructure for storage and blending of SAF to allow fuel suppliers and aircraft operators to meet their obligations. 

The central pillar of the rules requires fuel suppliers to include increasing proportions of SAF into jet fuel with a separate minimum for e-kerosene (the aviation category of e-fuels) from 2030. The proposal promotes advanced biofuels and synthetic fuels produced from green electricity. 


The ReFuelEU Aviation package proposes a 2% blending mandate for EU fuel suppliers by 2025, 5% by 2030 and 63% by 2050 to target net-zero emissions in the aviation sector by 2050. S&P Global Platts Analytics believes these targets are likely to trigger mandates implemented at a national level in 2022, following the lead of Scandinavia and France, leading to concerns whether there will be sufficient supply to meet demand.

As it stands, Norway and Sweden are the only European countries to have a SAF mandate, both at 1%. France has announced it is imposing a 1% blending mandate in 2022. 

George Duke, Associate Editor, EMEA Biodiesel Pricing, S&P Global Platts, states: “Market participants are expecting supplies to increase with the addition of new facilities in Europe, but not sufficiently to converge sustainable aviation fuel prices with conventional A1 jet fuel prices, with current SAF price levels four times higher than their fossil fuel alternative.” 

The main challenges to a greater use of SAF in the aviation industry is the current low level of production, energy and deforestation concerns from the production and use of biofuels, and the cost.


Governments are starting to put in place subsidies and incentives to increase the rate and volume of production, and airlines are also stimulating more demand by directly investing in SAF producers.

But despite recent efforts, aviation leaders don’t think enough has yet be done to make the use of SAF economically viable for airlines and to facilitate the increase in commercial capacity needed to meet future demand. 

“There has to be an investment in the technology to bring down the cost of SAF, which is a multiple of what Jet 1A costs,” says AerCap’s Kelly. “Unless we invest heavily as a global effort, which will be very significant amount, SAF will continue to be a margin product.” 

Kelly also has concerns about regulations mandating the use of SAF and creating an unlevel playing field for certain airlines.

“This cannot be done on a regional basis,” he says. “You can’t say to airlines in Europe, for example, that they have to fly 50% SAF when other airlines in the world don’t have that obligation, those airlines will be at a huge disadvantage. The governments of Europe would have to subsidise those airlines, which is never a good thing. It is much better to tackle the root cause and accept the inconvenient truth that the world is powered by oil and gas. If we want that to change, then we have to invest significantly in new technologies.”

Chart 24: SAF pricing trends

Sustainable finance

The investor-led initiative, Climate Action 100+, which was formed in the wake of the 2015 Paris Agreement to help carbonemitting companies they invest in plot a course to reduce emissions and encourage greater disclosure of climate change risks, published specific recommendations for the aviation industry that investors expect in January 2021. Foremost were aviation companies’ explicit commitment to achieving net zero by 2050, adopting SAFs, along with the implementation of a strong sustainability governance framework, and the disclosure of robust Paris Agreement-aligned transition plans in line with the Task Force on Climate related Financial Disclosures (TCFD). 

Plane flies among trees

The 26th UN Climate Change Conference of the Parties (COP26) held in Glasgow in November 2021 accelerated the efforts of corporations, investors and regulators to encourage real climate-related change. 

Investors and banks are already asking about issuers’ ESG scores, but it has not quite yet reached the point where certain investors refuse to participate in funding for aviation companies due to their inadequate green credentials.

However, this may be only a matter of time since banks and helicopter lessors have reported that funding oil and gas industry-related companies, including helicopters that serve oil rigs for example, is becoming much more difficult. 

“A lot of our clients ask us about ESG,” says Cowen’s Helane Becker. “We include an ESG score on every report we issue. I feel like investors are starting to be measured on it. We’re not hearing investors say that they are not investing in the airline industry because of their carbon footprint. I haven’t heard that yet. Maybe that’s coming. Airlines haven’t been stymied in terms of raising capital due to ESG concerns, but potentially it’s coming.” 

Becker surmises that this may be a consequence of the sheer amount of capital that’s out there. “If that tightens, people will be a bit more conscientious about where they put their cash, and aviation is going to be challenged. It’s never going to be a green investment. You can buy all the new technology aircraft you want, it’s not going to solve your problem,” she says. 

Green finance

The greening of the financial system has already begun with many banks having ESG policies in place when considering investments. Aviation has already begun to test sustainability-linked financing methods. 

The “green finance” term covers a broad church in terms of products. Today, sustainable finance from a debt perspective is split into two types of products: use of proceeds instruments, such as green bonds and loans, and sustainability-linked instruments, which can be bonds or loans. 

Green bonds are products where the proceeds raised are demonstrated as being used for green projects, such as renewable energy and energy efficiency projects, which aids decarbonisation. 

Sustainability-linked loans or bonds are not concerned specifically with how the money is being spent, the loan or bond pricing is linked to the overall performance of the company on specific ESG performance indicators. 

Targets and KPIs

Sustainability-linked loans or bonds are based on the borrower’s sustainability performance, which is measured using predefined sustainability performance targets (SPTs), that are measured by predefined key performance indicators (KPIs). The KPIs have to be meaningful, verifiable and quantifiable.

Examples on the environmental side, can be as simple as meeting reductions in CO2 emissions by certain target dates. The SPTs also need be ambitious, quantitative and measurable on an annual basis, and which are consistent with the issuers’ overall sustainability objectives. 

Borrowers must obtain independent and external verification of its performance level against each SPT for each KPI – this is mandatory for compliance with the Sustainability Linked Loan Principles (SLLP), which were developed by a working party, consisting of representatives from leading financial institutions active in the global syndicated loan markets.

Well-known ESG ratings analytics companies include: Vigeo Eiris, a Paris-based sustainability research group that was recently acquired by Moody’s; Sustainanalytics, an independent ESG and corporate governance research, ratings and analytics firm; Standard & Poor’s; ISS ESG; MSCI; and ecovadis, with many more coming online. 

If the company meets its targets it can gain a discount on the interest rate for the sustainability-linked loan; likewise, if it doesn’t meet those targets and actually emits more, it is subject to a financial penalty. 

Incentives and penalties

As these products are highly bespoke, sustainability-linked loans can feature a variety of covenants. These can range from only incorporating incentives for price cuts when targets, are met or exceeded, to only incorporating penalties for failing to meet targets or both incentives and penalties.

Sustainability-linked bonds closed to date are almost all penalty-based for missing targets, which is consistent with their development by investors rather than commercial banks since they are not willing to receive a lower coupon if the issuer meets its targets, whereas banks have been willing to offer interest rate cuts as incentives.

Although sustainability-linked loans performance targets are reviewed annually, sustainability-linked bonds have been structured in various ways. For example, a ten-year bond may have a coupon step-up through its lifecycle if a target is not met, or it may incorporate a larger one-time premium upon maturity. 

The potential market for sustainability-linked loans and bonds for aviation is certainly there but it is limited. The industry is now exploring transition bonds and loans that are being specifically developed for carbon emitting industries, such as aviation. Transition bonds are essential “use of proceeds” structures where the proceeds have to demonstrably contribute to the issuer’s decarbonisation targets. 


Having raised $21bn in the capital markets, AerCap’s Kelly has spoken with hundreds of investors recently and confirms that the subject of ESG came up in every one of those conversations, “as we knew it would”.

AerCap is the only lessor that has an ESG rating, which was recently upgraded by MSCI, a Board-level ESG Committee and has had ESG targets in place for many years. “This is a very important matter,” stresses Kelly, noting that AerCap’s ESG rating and targets were in the roadshow presentation for its recent bond offering. Kelly believes that the industry could benefit from green bonds, and notes that ESG funds are the fastest growing funds in the investment industry.

“You have to be very cognizant of that fact and it is a trend that will continue. I think green bonds will be an opportunity for the industry going forward.”

Sustainable finance deals

Over the past few years, sustainable finance deals in the aviation sector have been relatively few and far between but they have increased in recent years. In July 2021, British Airways (BA) made history raising $785m with the first enhanced equipment trust certificate (EETC) transaction linked to the airline’s sustainability targets.

Proceeds from the two tranches of notes were secured on BA’s remaining fleet deliveries for 2021 of three A320neos, three 787-10s and one A350-1000. The sustainability feature states that if the average carbon emissions per passenger kilometre for BA is not below a specified level for the financial year ending December 31, 2025, the interest rates on the certificates will increase by 25 basis points. The target contemplates a reduction of 8.1% in this metric versus its level in 2019. 

Sustainability-linked financing is also not just the preserve of banks. Crianza Aviation – the aircraft leasing company created in 2016 with the express aim of becoming a leasing entity in Korea for the Korean market – made headlines in late 2021 with the announcement that it had successfully arranged the world’s first sustainability linked operating leases with a global airline, in relation to Boeing 787 and Airbus A350 aircraft. 

Although sustainability-linked aviation finance deals have been closed and are becoming more popular as the industry’s sustainability efforts improve, to date this is the first known operating lease to be linked to an airline’s ESG performance. 

The operating lease – signed with the unnamed airline earlier in 2021 – include a two-way step-up / step-down pricing mechanism, to incentivise improvements in the airline’s ESG performance and demonstrate commitment to its sustainability strategy. Banco Santander acted as the ESG Structurer on the deal. 

We need to get to net zero by 2050; it’s basically our industry’s license to operate... We will improve our operational efficiency and become better at flying in more straight lines from A to B today... but it will still take a little bit of time. The biggest component has to be sustainable aviation fuel.”

Jan Melgaard
FPG Amentum

Investing in the future

The OEMs are expending a great deal of resources working on the future generation aircraft, which will require a dramatic leap in terms of technology to meet the net zero carbon emissions target. Airbus has set a target to fly a hydrogenpowered aircraft by 2035. “That is extremely ambitious because 2035 in our long cycle space is very challenging and it requires disruptive technologies, which are not yet transferable into the air because of some of the laws of physics,” says Airbus’ Meijers. “We have huge challenges to bring this together, but we have seen a lot of movement over the last year to drive sustainability.” 

Plane flies among trees

Airbus has created a new ESG fund initiative jointly with Air Lease Corporation. The aim of the multi-milliondollar ESG fund initiative is to contribute towards investment into sustainable aviation development projects, which will also be opened to multiple stakeholders in the future from the aircraft leasing and financing community and beyond. 

ALC has been looking intensely at the environmental dilemma facing the industry for the past few years but as a leasing company felt that its practical talents were limited, which is why partnering with an OEM made such sense. 

“As a leasing company, we don’t have the engineering and technical capabilities to substantially change the aviation industry and although we have as many ideas as the next person, the ability to partner with an OEM who actually has the capability to put those ideas into action and which has significant global influence made perfect sense,” says Plueger. 

The ESG fund

Although few details have been shared publicly about the ESG fund, it is clear that it is a multi-million dollar fund that is growing, with a remit to invest in sustainable projects. Its initial focus will be assisting with enhancing the use of sustainable aviation fuels going forward.

“Sustainable aviation fuel provides the most immediate and obvious benefit for the aviation industry, our fund could be used to enhance production and distribution,” notes Plueger.

“Beyond that, Airbus has already been doing quite a bit of advanced work on a number of other platforms, such as hydrogen and electric propulsion and other sorts of combination propulsions. It’s the airframer that has to actually produce these aircraft and bring them to the market. Partnering up with some smaller start-ups, which produce smaller airplanes is great for some companies, but our role lies more with the larger commercial aircraft.

Therefore it made a lot more sense for us to partner with an OEM, Airbus, that has really been devoting a tremendous amount of time and work in this area and which is the most likely path towards being able to accelerate some of these initiatives into the mainline marketplace and into the larger aircraft types. It may take longer for alternatives, but certainly initially looking at pushing sustainable aviation fuels as the next easiest step that can be adopted today.” 


The fund is very much still in the development phase but the idea is for ALC and Airbus to work collaboratively with others in this space and eventually open the fund to other buyers, to other lessors and even to other airlines. As Meijers says, “everybody needs to participate… and now is the time to take action”. 

Aviation industry leaders are sceptical of Airbus reaching its goal of developing a hydrogen commercial airliner by 2035, and even if they succeed, the certification process would take years, and it would take several more years ramping up the infrastructure to enable a marketplace launch. 

Airlines are taking notice, however. In December 2021, United Airlines took a new equity stake in ZeroAvia, which is focused on hydrogen-electric aviation solutions. United expects to buy up to 100 of the company’s new zero-emission, 100% hydrogen-electric engines (ZA2000-RJ). 

Hydrogen-electric engines

The airline commented at the time that the engine could be retrofitted to existing United Express aircraft as early as 2028. One potential use is on United’s 50-seat CRJ-550. 

“Hydrogen-electric engines are one of the most promising paths to zeroemission air travel for smaller aircraft, and this investment will keep United out in front on this important emerging technology,” said Scott Kirby, CEO of United. “United continues to look for opportunities to not only advance our own sustainability initiatives but also identify and help technologies and solutions that the entire industry can adopt.” 

The ZA2000-RJ is expected to be used in pairs as a new power source for existing regional aircraft. Under the agreement with United Airlines Ventures, United will pursue a conditional purchase agreement for 50 ZeroAvia ZA2000-RJ engines, with an option for 50 more, enough for up to 50 twin-engine aircraft which would be operated by United Express partners once they are fully developed and certified by regulators as soon as 2028. 

ZeroAvia is accelerating development of its ZA2000 engine and will soon begin ground tests of its ZA600 in a 19- seat aircraft, with the aim of entering commercial service with this smaller engine by 2024. ZeroAvia’s roadmap calls for it to develop hydrogenelectric propulsion for progressively larger aircraft. 


Some airlines and lessors are betting on the development of Electric Vertical Take-Off and Landing (eVTOL) aircraft. These lightweight aircraft, powered by electric motors, are usually small, seating only four to six passengers; as a result, they are not considered seriously by many to be solution for commercial airlines. However, several airlines and leasing companies have placed orders for these aircraft betting on their use as regional feeder aircraft as well as their proposed replacement for land travel as so-called air taxis, as well as small cargo carriers to access hard-to-reach destinations. 

Electric Vertical Take-Off and Landing (eVTOL) aircraft flying above city

In June 10, 2021, Vertical Aerospace’s VA-X4 project gained orders from leading airlines and lessors that placed conditional pre-order for 1,000 aircraft for a total of up to $4bn. 

The VA-X4 is a zero-carbon aircraft, capable of carrying four passengers and a pilot, that can fly at speeds up to 200 mph over a range of over 100 miles. It is claimed to be near silent when in flight, produces zero emissions and features a low cost per passenger mile. 

American Airlines agreed to pre-order up to 250 aircraft with options on an additional 100 aircraft. Avolon preordered up to 310 aircraft with options for a further 190, and Virgin Atlantic has an option to purchase between 50 and 150 aircraft. All have agreed to work together towards the “prompt certification and deployment of aircraft in commercial operations”. 

In the US, American Airlines expects to work with Vertical Aerospace on passenger operations and infrastructure development. In the UK, Virgin Atlantic and Vertical expect to work together to explore the joint venture launch of a Virgin Atlantic branded short haul eVTOL network, including operations and infrastructure development. 


In 2021 Avolon announced that it has placed 70% (or 350 units) of the VX4 eVTOL order, with GOL and Japan Airlines. 

“2021 saw Avolon make its landmark investment in zero-emissions aircraft,” said Dómhnal Slattery, CEO of Avolon.

“Both our investment in, and our orderbook with, Vertical Aerospace – which successfully listed on the New York Stock Exchange in December – will prove to be a game-changer. eVTOLs are the first step towards a revolution in air travel and the strong demand for our VX4 orderbook from the world’s leading airlines shows that our airline partners share this view. We look forward to continuing to work with our customers to decarbonise air travel and work towards a net zero carbon economy.” 


United Airlines Ventures (UAV) – the corporate venture fund set up in 2020 to allow the airline to invest in sustainability concepts – with Breakthrough Energy Ventures (BEV) and Mesa Airlines, inked an investment with electric aircraft startup Heart Aerospace in July 2021.

United Airlines also backed the company with a conditional order for 100 ES-19 aircraft. Mesa Airlines, United’s key strategic partner in bringing electric aircraft into commercial service, also agreed to add 100 ES-19 aircraft to its fleet, subject to similar requirements. 

In December 2020, the US-based aircraft lessor Azorra signed a Letter of Intent (LOI) to order up to 200 of Eve’s eVTOL aircraft. SkyWest also announced a Memorandum of Understanding and non-binding Letter of Intent for SkyWest to purchase 100 of Eve’s eVTOL aircraft. The partnership will focus on developing a network of deployment throughout the United States. 

In addition to SkyWest’s LOI for 100 aircraft, both companies have agreed to form a working group to jointly evaluate the utilization of Eve’s next generation air traffic management and fleet operating solutions as the Urban Air Mobility industry prepares to scale over the next decade. 

The future of eVTOLS

Despite these industry endorsements with hundreds of orders for concept aircraft, some industry observers remain more sceptical.

Cowen’s Helane Becker sees eVTOL aircraft and replacements for ground transportation rather than air travel: “eVTOLS are basically four passenger aircraft with one pilot, which are flying from a downtown area to an airport or vice versa, or from your home to your office – these are not great distances. These aircraft will not replace A320s between London and Paris or between New York and Chicago. That’s just not here yet and it’s probably not going to be here for a decade.”

She is more supportive of a hydrogen-powered solution for commercial airliners but recognises the limitations there despite the fact that United Airlines has recently invested in ZeroAvia to support the development of its whole hydrogen powered aircraft. “This innovation has to come from the manufacturers and from the airlines,” she says. “It’s kind of a push and pull. We want it, we’ll take it, you develop it, we’ll buy it.” 

Although Becker admits that the eVTOLS will eventually replace some air services, especially the larger versions of up to 19 seats, she maintains that these aircraft will replace ground transportation rather than aircraft in the near term. “Longer term we could see development of larger aircraft,” she says. “We view this decade as one of development; the 2030s will be innovation and refinement and the 2040s will be implementation.” 

The good news is the amount of new technology in development, which is incredibly well financed. With so much will and money behind these projects, their prospects for success are as good as they can be. Once the programmes are more developed and there have been successful tests, there will likely be consolidation in this market that will in turn create larger scale and more momentum to the development of alternative, zero carbon aircraft. 

Final thoughts

Overall, the industry outlook is cautiously optimistic. The last two years have been the most challenging time that aviation has ever faced, but the resilience of the entire sector has been remarkable. 

The widely-held belief is that the worst of this crisis is behind us, and that a globalised vaccine rollout, coupled with a coordinated international effort in managing restrictions, will drive a recovery towards 2019 air travel levels. 

Over the course of 2021, we have seen that the appetite of human race to take to the skies is undiminished. The question is when, not if, a full recovery will take place.

Get in touch

The pace of change is challenging leaders like never before. To find out more about how KPMG perspectives and fresh thinking can help you focus on what’s next for your business or organisation, please get in touch with our team below. We’d be delighted to hear from you. 

More in the Aviation Leaders Industry Report 2022