Bruce Andrews, partner at Alderman & Co and Connor Bernard, an analyst at Alderman & Co explain how cost and supply are the two major hurdles facing the adoption of sustainable aviation fuels
The US Department of Energy estimates that aviation accounts for 2% of all carbon emissions and 12% of all emissions from transportation worldwide.
Sustainable aviation fuel (SAF) is an alternative to Jet-A, the worldwide standard for the commercial aviation industry.
Jet-A is a petroleum product made from crude oil. SAFs are made from feedstocks other than crude oil.
SAFs are designed so they can be a full replacement for Jet-A (used independently) or blended with Jet-A.
They can be blended at different levels with limits between 10% and 50%, depending on the feedstock and how the fuel is produced.
To date, the International Civil Aviation Organisation (ICAO) reports that there have been more than 350,000 commercial flights using SAF at 46 different airports, largely concentrated in the United States and Europe.
SAF can be produced from non-petroleum-based renewable feedstocks, including, but not limited to, the food and yard waste portion of municipal solid waste, woody biomass, fats/greases/oils, and other feedstocks.
SAF production is in its early stages, with three known commercial producers:
World Energy began SAF production in 2016 at its Paramount, California, facility and initially supplied fuel to Los Angeles International Airport prior to supplying additional California airports.
International producer Neste began supplying SAF to San Francisco International Airport in 2020 before expanding to other California airports in 2021 and 2022, as well as Aspen/Pitkin County Airport and Telluride Regional Airport, both in Colorado.
Montana Renewables LLC began production in partnership with Shell at an existing petroleum production plant in 2023, supplying fuel to several partner airlines.
The history of SAF dates back to 2008 when the US Defense Advanced Research Projects Agency (DARPA) first awarded a contract to Honeywell to develop a process of efficient conversion of vegetable and algal oils to Jet Propellant-8 (JP-8, a military designation for a petroleum-based jet fuel that is nearly identical to Jet-A).
This process would come to be known as the UOP process, named after the business unit within Honeywell.
The first commercial flight that used SAF was in 2012, when Virgin Atlantic flew a Boeing 787 from London Heathrow to New York JFK using SAF. The first commercial production of SAF started in 2016, by AltAir, using the UOP Process.
Despite the developments noted above, SAF still only accounts for approximately 0.1% of all worldwide jet fuel, and the portion has not changed much over the past five years.
In 2021, we saw a strong commitment to increase the use of SAFs, with major airlines including British Airways, Delta Airlines, KLM, United Airlines, and Virgin Atlantic all committing to work toward having SAF comprise more than 10% of fuel consumption by 2030. However, two major hurdles are slowing the pace of SAF market share.
The first hurdle is cost; feedstock-based fuels cost approximately 50% more to produce than Jet-A.
In an industry with extremely thin margins (~3%) and where fuel is the largest component of cost (~30%), individual airlines cannot afford to incur higher fuel than their competitors.
To lower emissions and keep the playing field level at the same time, Alaska Airlines, American Airlines, British Airways, Finnair, Japan Airlines, and Qatar Airways announced in July 2022 their collective plans to purchase up to 50 million gallons of ethanol-based SAF annually from renewable fuels producer Gevo.
The second hurdle is supply; there currently are not sufficient feedstocks to facilitate the production of sufficient SAF to meet the demand from the airlines for Jet fuel.
Current production technologies require substantial raw stock to be processed to produce SAF.
For example, using agriculture feedstock, some analysts estimate it would require up to 80% of U.S. farmland to meet annual global jet fuel demand. This crowding-out of resources for the food supply would be unacceptable.
The current scientific hurdle is that while SAF aims to support sustainability, the current production technology does not enable large-scale adoption without compromising land resources needed for food production.
Going forward, investments in SAF technology will hopefully result in substantially higher yields from feedstocks.
What impact will SAFs have on M&A in the middle market of the aerospace and defense industry? First, we expect to see some direct M&A activity in the SAF supply chain, as companies and private equity firms look to make strategic moves in the sector.
For example, Southwest Airlines in April 2024, acquired the SAF start-up SAFFiRE, focusing on converting corn stover (plant material remaining after corn harvest), an abundant agricultural by-product, into ethanol as a feedstock for SAF.
The US produces roughly 400 million tons of corn stover each year, with each ton capable of yielding approximately 50 gallons of jet fuel.
This acquisition supports Southwest’s ambitious goal to replace 10% of its jet fuel with SAF by 2030, moving the airline closer to achieving net-zero emissions by 2050.
Southwest further strengthened its SAF portfolio with a $30 million investment in February 2024 in Lanzajet, an innovator in ethanol-to-SAF technology, which now operates the first commercial plant dedicated to this production process, producing 10 million gallons of SAF per year.
Meanwhile, Airbus, and partners such as Air France-KLM and Mitsubishi HC Capital, have also committed to advancing SAF through a $200 million fund launched in July 2024.
Its first investment went to Crysalis Biosciences, a company that has converted an existing ethanol plant in Illinois for SAF production, highlighting the industry-wide push toward scalable SAF solutions.
In terms of indirect impacts, we believe the growth of SAFs will have a positive impact on business aviation, as owners have been coming under attack from ESG advocates, for their carbon footprints.
By using SAFs, business aircraft owners can more successfully defend their use by showing they have lowered their carbon footprint.
We also believe SAFs will have an in-direct positive impact on the airline industry by enabling the airlines to continue to grow without expanding their impact on the environment and potentially reducing their impact even as they grow, which is important to the regulators of many nations and important to many of the customers of the global airlines.
All in all, while SAFs face difficult hurdles, we believe that production rates and airline use will expand, and we believe that will bode well for aviation and defence mergers and acquisitions in the years ahead.
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