As jet fuel market craters, sustainable aviation fuel prepares for takeoff

Welcome aboard Pandemic Flights, with service today at half that of a year ago. In this emergency event, please place your mask over your mouth and nose, and keep it there for the whole flight.

There is no cruising for airlines at this unknown economic altitude, but the crew may just offer today’s meal … as tomorrow’s jet fuel.

Few industries have suffered as much from the coronavirus pandemic worldwide as airlines. Worldwide commercial airline traffic reached 54,308 flights a day on August 9, 2020, just 52% of the volume on the same date in 2019, although that’s better than 23% in April, based on data from FlightAware.com.

By mid-September, US passenger volume had yet to crack 1 million – a mark that would be roughly 40% of year-ago levels – since the low of 87,534 on April 14, which was just 4% of the previous year, according to the Bureau of Transportation Statistics. BTS data also showed the 23 major US passenger airlines had a combined first-half loss – of $16.2 billion – for the first time in 11 years, likely to grow into a record yearly loss.

The data shows the airlines’ pain. But for once, the big hurt isn’t in the cost of jet fuel, which makes up just 5% of total operating expenses, compared with one fourth a few years ago.

S&P Global Platts Analytics estimates a 35% reduction in US jet fuel consumption this year, but expects a path to recovery by mid-decade. Faced with such a crisis, why would airlines devote time to something called sustainable aviation fuel, or SAF?

The clunky acronym refers to an environmentally friendly replacement for jet fuel, made mostly from used cooking oil or rendered beef fat, known as tallow, but also increasing options from algae to alcohol.

A decade ago, aviation experts forecast SAF would be anywhere from 1% to 5% of their fuel supply by 2020. Since the first major airline test using a biojet blend 12 years ago, it has been used in fuel for nearly 250,000 flights globally, usually at no more than a 50/50 split, according to industry group IATA.

For context, though, that’s two average days of passenger and cargo flights on jet fuel, pre-coronavirus. Meanwhile, new cost-based SAF price assessments for Northwest Europe and California launched by S&P Global Platts in August and September, respectively, highlight the challenge ahead for the fuel. The spread for European SAF started life on August 17 at 4.3 times jet fuel and ended September 16 at 5 times. That’s in line with where market players predicted, but highlights that SAF is nowhere near competitive on its own.

Nevertheless, SAF is a regular agenda item for airline boards, one veteran fuels manager said: from how to get it on board, how to afford it, how to find more of it, “it’s a big topic and one of great interest to the airlines.”

So why does the SAF push feel differently now, even though the stats suggest real volume parity is decades away? The reasons are found in regulation, technology, incentives, and perceptions

Regulation

Norway was the first country known to add a quota requirement for SAF, 0.5% of annual fuel from 2020, with a target of 30% by 2030. Other countries, mostly ones in Europe like Sweden, Finland and France, are proposing similar approaches. Aviation has been relatively untouched by fuel spec requirements, unlike land-based transport, where cleaner fuel changes started in the 2000s with introductions of ultra low sulfur diesel in trucks, for example. Then last decade, with the IMO 2020 initiative, marine fuels started moving away from using bottom-of-the-barrel fuel. Airplane fuel has largely avoided sweeping sulfur and emissions regulation due to safety concerns: you can’t just pull over at 30,000 feet and fix a fuel issue. But technology has caught up with those fears.

Technology

The number of certified conversion processes is increasing, from coal-to-jet fuel through the Fischer-Tropsch process to another seven processes, including fatty acids and recycled oil, alcohol-to-jet from ethanol, and lately, co-processing fats and oils from petroleum refining. All have gone through extensive testing and test flying, to a stage where the bigger worry is how to supply SAF in large volumes. But this year, with the coronavirus-wracked demand for fuels so bad and incentives so good, some major US refiners have accelerated plans to retool refineries into renewable fuels plants by mid-decade, including Marathon and Phillips 66 refineries on the West Coast.

Incentives

While some say the US may mandate biojet use, most see another route due to programs like tradeable RINs credits under the Renewable Fuels Standard. “SAF uptake in the US is particularly incentivized through federal and state policies – with the ability to earn California Low Carbon Fuel Standard credits, federal RFS D4 RINs and to take advantage of the federal biomass-based diesel blenders tax credit – which together can total several dollars per gallon,” said Roman Kramarchuk, head of energy scenarios, policy and technology for Platts Analytics. At least one supply company hired a full-time SAF trader because it sees the market growing due to all the credits. Platts publishes SAF with and without credits for the US West Coast. Federal and state incentives greatly narrow the SAF gap to jet fuel, and even go beyond it as the combined value of credits can be higher than the cost of SAF production. Platts Analytics expects tallow prices to rise as demand increases, but does not see any direct correlation between the feedstock and traditional jet fuel. So if jet fuel spot prices double or triple to levels often seen in the last decade, credit-added SAF may even be lower than jet fuel, if only temporarily. “Eventually, we’ll get to parity but the trouble is as soon as we get close to it, the demand will grow and prices will go up again,” the veteran fuels manager said.

Perceptions

Finally, long before US West Coast air quality dropped to worst in the world thanks to forest fires, companies were coming under pressure to adopt clean and green fuels. Amazon, for example, just secured up to 6 million gallons of an SAF blend for its cargo planes in the next year as part of its target to achieve net-zero carbon by 2040. In the US and Canada, the aviation industry in 2019 accounted for around 5%, or nearly 300 million metric tons, of total energy CO2 emissions annually, according to Platts Analytics, equivalent to 250 kg of CO2 emitted per thousand passengers carried. The tricky part is avoiding food-versus-fuel fights over feedstock, or stigmas attached to the harvesting of sources like palm oil, which is more popularly used in Asia. Airlines are also conscious of investors’ commitments to sustainability as shareholders and debtholders are considering ESG scores as well as return on investment.

Even with all the hurdles, IATA believes 1 billion passengers will have flown on an SAF-blend flight by 2025 and penetration should approach a tipping point of 2% of jet fuel.

A second US fuels manager said airlines are now truly serious meeting environmental goals through SAF. He said San Francisco and Los Angeles airports are soaking up most of the supply, but he is seeing storage interest in states outside California for alternative fuels to meet emission goals. “SAF is really the next IMO 2020, the next thing to talk about,” he said.

So secure your storage, and read the warnings chart. Even in the most challenging year in modern airline history, it’s time to at least prepare for SAF takeoff.