The sky’s the limit?

Despite aviation’s bounce back from the pandemic still being slower than hoped, the Sustainable Aviation Fuel (SAF) revolution shows no sign of losing momentum, with dozens of deals announced already in 2022, spanning governments, producers, and airlines around the globe, writes Chris Brown.

A combination of increasing regulatory ambition and passenger demand look set to ensure the growth of the SAF market for some time to come. EU regulators are leading the charge; jet fuel supplied to EU airports will need to be 2% SAF by 2025, increasing at 5-year intervals to reach 63% in 2050. Sweden, Norway, and France all have their own SAF mandates in place. Announcements are expected in the near future from the UK, while the balance of US politics will ultimately determine if the present system of incentives remains State driven or takes on more Federal coordination (and/or EU-style mandates). 

Where mandates do not yet exist, industry is taking the initiative, with a number of partnerships already announced between major airlines and fuel suppliers to trial SAFs. So whilst major aviation markets such as, for instance, Australia, China and Japan have yet to make policy commitments on SAF, there are already industry-led initiatives committing dozens of operators to net zero targets, with some (e.g. the WEF’s Clean Skies for Tomorrow Coalition) already translating those into explicit SAF blend mandates (10% by 2030, to be precise).

At a cursory glance, all of the above points to a bright future for SAF. But how bright, and on what time horizon? Our modelling suggests that whilst the next ~15 years will continue to see predictable demand growth, based largely on regulatory imperatives and / or present industry-led alternatives, the picture beyond that is less clear, clouded by a range of factors that threaten to depress the market’s overall potential for SAF. Since many bio and synthetic fuel refineries are likely to require 30 years or more to make a clear case for return on investment, it behoves would-be market entrants to understand those factors in some detail. Here we consider a number of variables in turn.  

The current price differential between conventional jet fuel and SAF is estimated from a few percentage points at one extreme (where US incentives are at play) to up to five times, which is highly prohibitive for any airline. For as long as it is cheaper to offset carbon emissions through trading schemes than through the use of SAF in place of A1 jet fuel, we do not expect SAF to meaningfully exceed government-mandated levels. Our modelling suggests that such a pivot point may not be reached before 2040 at the current projected rate of ETS price increase.

Much hinges of course on the market engineering radical reductions in the cost of SAF (such as scalable synthfuel that is not reliant on bio feedstock), but whether producers can do this remains to be seen. Question marks still exist over the availability, scalability and sustainability of different feedstocks, which are likely to be impacted by tightening regulatory criteria in the coming years. Blending mandates that are too aggressive too early also run the risk of spiking SAF prices as they force demand to run ahead of supply.

Moreover, the length of this time horizon raises important questions about the shape of the future regulatory landscape. We expect the regulatory approach to aviation emissions to evolve significantly over the coming decade, and today’s focus on SAF is likely to be diluted, at least partially, by new priorities and approaches as decarbonisation strategies are fleshed out. Direct carbon emissions will be eclipsed by total sector CO2e as the primary concern for regulators, expanding attention to contrails management, data and associated services, all of which may serve to displace the focus on ever-higher SAF blends.

The forecast growth in both electric and hydrogen propulsion systems will eventually curtail SAF demand in the long term, meaning there is a strong imperative to understand the pace at which these technologies will penetrate the market. Activity and investment in both sectors remain strong, with established OEMs and start-ups racing to establish leadership positions in a vast and lucrative market. Advanced Aerial Mobility (AAM) will be the key market conduit for electric, with electric designs now accounting for roughly 90% of all designs in the sector. According to our modelling, AAM could start cannibalising regional jet / turboprop and sub-350km narrowbody routes by the 2040s, with lower vehicle and operating energy costs per passenger km.

Meanwhile, hydrogen retrofits for regional aircraft are already starting, with United the biggest, but not the only, airline to have announced a purchase agreement for hydrogen-electric engines, which it says could be retrofitted to regional carriers as soon as 2028. Inevitably, it will take time for these models to filter through the legacy fleet via retirements and retrofits, but we think it’s realistic that a sizeable proportion of new regional and even narrowbody aircraft entering service by 2050 could be hydrogen powered, which means a realistic peak SAF demand point within 30 years.

We share the view that the long-term (past 2050) safe haven for SAF demand will be the widebody fleet, where powertrain alternatives will penetrate last. As a result, accurately forecasting the widebody fleet size is important to understanding the long-term market size for SAF. In our view, current OEM widebody fleet size projections of ~9,000 in 2040 look bullish, given the ongoing industry pivot towards narrowbody models, a trend that predates COVID and that we expect to continue, driven by the improving range options and relative route flexibility from narrowbodies. While there will still be demand for SAF-fuelled narrowbodies in the long-term, that exact mix of narrowbody fleet, especially on domestic and continental routes, will materially impact where the total demand for SAF eventually plateaus.

As one of the toughest sectors to decarbonise, the sector will need to avail itself of a range of technologies to have any chance of meeting its ambitious commitments. The current enthusiasm for SAF, which has the potential to make an immediate impact, is therefore understandable. However, for producers contemplating the major investments required to ramp up SAF production, it will be critical to consider not only the prevailing market and regulatory conditions of 2022 or 2032, but those beyond 2040 and even 2050. On a sober assessment of these longer timeframes, the case for SAF requires thought around realistic market assumptions that may not see it as the predominant solution for the sector’s decarbonisation.

If you have any queries regarding sustainable aviation fuels and their impacts for your business, please contact Chris Brown, Head of Strategy. We'd be delighted to hear from you.