SAF-route is indispensable to start reducing net-emissions in aviation

The aviation industry has faced extraordinary challenges in recent years but has rebounded strongly from the pandemic, with ongoing high demand for air travel, especially in Asia, where travel propensity is high despite flights per head being far lower than in the US, for example.  A constant factor is the urgent need to reduce emissions, as the sector is among the hardest to abate. Its current 2% share* in global GHG emissions could quickly rise if no changes are made and demand reduction is ignored.

Most airline emissions come from longer-haul flights over 1,500 km. Realistically, there is no clean and commercially scalable alternative technology for longer journeys yet. With the highest safety standards and significant investments in R&D, introducing a new generation of aircraft usually takes up to 20 years, and order books for the current generation already extend well into the 2030s.

Fleet renewal programmes are a crucial part of airline strategies to reduce seat emissions. However, aircraft life cycles are long, there are delays, and these measures alone are insufficient. Therefore, sustainable aviation fuels (SAF) play a critical role in making flying more sustainable despite concerns about sourcing, efficiency, and the required lifecycle assessment (LCA) for emissions, also known as 'well-to-wake'. While SAFs still emit CO2 during combustion, the CO2 savings are generated earlier in the supply chain through the use of bio-feedstock. This approach faces criticism due to land use and potential competition with other uses, but there are no easy alternatives.

The lifecycle emissions from SAFs and their feedstocks vary widely, with different levels of regional acceptance. This means some SAFs offer significantly more carbon reduction potential compared to conventional jet fuel.

*This excludes the climate impact of non-CO2 emissions (nitrogen emissions, particles, and water vapour) from jet fuel combustion at high altitudes, which is still under investigation but is estimated to be significant.

Several variants in play, with BioSAFs covering the far majority

Previously, we explored the various production routes for variants of Sustainable Aviation Fuels, their economics, and the regional blending mandates and ambitious corporate goals driving their adoption. It's evident that a stronger supply is needed to meet these ambitions. BioSAF, and particularly those produced via the HEFA process, constitutes the majority of supply and offers the best economic proposition for short-term scaling.

All SAF types are expected to remain more expensive than conventional jet fuel. Conventional jet fuel typically accounts for 20-35% of total airline costs, which is significant in the low-margin aviation sector; someone has to bear the premium cost, which is a major challenge. The global and regional supply and demand dynamics of SAF are evolving, as is the thinking about how to navigate these changes and the actions of market players.

In this piece, we will focus on regional supply and demand developments for biogenic SAFs up to 2030, as well as the feedstocks behind these SAFs. What is the current dynamic, where are we heading, and what challenges do we face in pushing for widespread adoption? Synthetic SAFs will also start to play a role, but due to high costs, availability constraints for green hydrogen, and inefficiencies, we only expect significant uptake from 2030 onwards. We have examined the economics of synthetic SAF, and you can read about it here. 

The world wants sustainability, so now comes the action

The global aviation authority ICAO aims to reduce emissions by 5% in 2030 through SAF blending. On the private side, IATA targets a 6% blend, while collectives like ‘Clean Skies for Tomorrow’ and ‘One World Group’ (including airlines such as American, Qantas, and Cathay Pacific) aim for 10% by 2030. Europe’s largest airline by passenger numbers, Ryanair, has committed to 12.5%. With an expected blend rate of just 0.5% in 2024, it’s clear there’s much work to be done in the next six years.

Governments worldwide have introduced blend mandates ranging from 1% by 2025 (Malaysia) to 10% by 2030 (UK) to encourage uptake. However, these efforts are fragmented, and targets alone are insufficient. Public (‘hard’) targets are more compelling, and shortfalls may lead to fines in countries like Germany.

With SAF prices unlikely to match conventional jet fuel, more policy support is needed to turn aspirations into acceleration. Under current policies, the IEA expects bio-jet fuel to make up just 2% of global jet fuel consumption by 2030. In Europe, the emission trading scheme (ETS) helps create a more level playing field with conventional jet fuel, but additional measures are likely needed to achieve significant progress

Short term vs. long term SAF market

Airlines worldwide are beginning to blend SAF into their fuel supply. They can secure SAF supply by participating in investment initiatives, making long-term commitments, or relying on the spot market. Off-take agreements are a common method for ensuring future deliveries. These agreements also provide insight into future blend rates, demonstrating airlines’ commitment to sustainable sourcing

SAF blending has started, but more support is needed to get beyond 2%

Expected blend rates* towards 2030 in two scenarios 

Source: BNEF, IEA, ING Research *The BNEF-scenario includes a minor fraction of synthetic SAF

Expected global SAF blend rates far from stated goals

Global conventional jet fuel consumption is projected to rise to 6.6 million barrels per day (306 million tonnes) in 2024, with further increases expected in the coming years. The current small fraction of SAF is anticipated to grow to 3.5% by 2030 in an energy transition scenario (BNEF), assuming greater policy alignment. However, under the current stated policies scenario, the IEA expects this to reach only 2%. Both projections fall short of the targets set by the global aviation industry and individual airlines.

Airlines need to speed up SAF progress

European airlines are leading the way in SAF adoption, but there are significant differences among them. DHL Group, which operates freighters, is ahead, having successfully marketed SAF to B2B clients. Air France-KLM follows as a passenger airline, while other major European airlines like IAG (including British Airways) and Lufthansa began their SAF journey in 2023. However, many other airlines are just starting by preparing their supply chains.

In 2024, we expect to see progress in SAF blending, with Ryanair, for example, increasing SAF usage on specific routes in Europe. On the other hand, the overall climate strategy has faced setbacks due to various challenges. For instance, Air New Zealand has dropped its 2030 climate target.

European airlines ahead in SAF-blending, but still need to ramp up quickly

Ranking SAF Blend rates, airlines 2023, per region

Source: Bloomberg, ING Research

Three reasons why blend rates are not yet on track to meet targets

Slower than expected realization of production facilities (particularly in Europe) ;

Global airline traffic and jet fuel demand have massively rebounded, surging 20% in 2023 and 2024 combined. Volume eventually recovered faster than expected at the point of target setting. This means SAF volumes will need to progress even more;

Airlines struggle to pass on the premium to private consumers on a voluntary basis. And the return of margin pressures also led to profit warnings in 2024. Required cost discipline could have a slowdown effect on short term blending efforts.    

Europe and the US are expected to lead in SAF adoption, while Africa and Latin America lag behind. In the Asia-Pacific region, the world’s largest and fastest-growing air traffic market, SAF blending is emerging. However, due to the high pace of expected growth and fragmented policy structures, increasing blend rates is expected to progress more slowly in the years leading up to 2030.

SAF will be sourced regionally, but Europe to remain reliant on imports

Sustainable Aviation Fuel (SAF) is expected to be sourced locally and initially supplied to relevant hubs. However, global trade flows will also play a role, involving either the feedstocks or the refined products. North America, Latin America, and Asia are anticipated to be exporters, while the EU market is expected to remain in deficit and continue importing feedstocks and SAF. Additionally, the eligibility of feedstocks varies by region and country, adding another layer of complexity to these trade flows.

North America expected to be the main producer of SAF by 2030

Forecasted production capacity in million tonnes of SAF

Source: Bloomberg, SKY NRG, ING Research

A regional flavour to the feedstock mix used for SAF production

Overview of some of the most relevant types of feedstock per region, including their reduction potential compared to emissions from conventional jet fuel

Source: ICAO (CORSIA), ICCT, RSB, ING Research, *without CCS and climate smart-growing practices, ** Excluded: any SAF from food or feed crops (like palm oil / corn / sugarcane)

A shared diagnosis                                                                   

Embracing European public goods

Conditions for sharing economic sovereignty

Germany’s government is poised to cut its prediction for Europe’s biggest economy, and now expects no expansion at all this year, according to people familiar with the matter.

Officials in Berlin are set to cut their forecast for growth in 2024 to — at best — stagnation, down from 0.3% previously projected, said the people, who declined to be identified because the predictions remain confidential for now. 

Such an outcome would mean yet another lost year for an economy that has been weighed down by the weakness of its industrial sector, amid the shutdown in gas supply after the invasion of Ukraine, as well as feeble Chinese demand and its struggle to pivot to electric vehicle production.

The prospect of no growth is an effective admission of defeat by the coalition government and another blow to the record of Chancellor Olaf Scholz, who hasn’t seen the economy grow for two consecutive quarters since taking office in December 2021.

With an election now less than a year away, it also narrows the window perilously for him to achieve any meaningful pickup before going to voters, whose discontent has already made itself known this year in ballots for the European Parliament and in eastern states. 

Traders now see a roughly 80% chance of a quarter-point reduction next month, swiftly off the back of a move in September, as signs keep mounting that the euro-area economy is slowing.

The government’s final estimate for 2024 might come in even weaker than zero growth for Germany depending on industrial orders and output data due shortly before the release of its updated forecast for gross domestic product (GDP) on Oct 9, the people said. 

Economy Ministry officials are currently working on the new projection, which could still change before its final release. 

No expansion, if that can be achieved, would still exceed the result of a 0.1% contraction anticipated by the nation’s leading economic institutes in the past week.

A string of bad news — from Volkswagen AG’s threat to close factories in Germany to Intel Corp’s decision to postpone a €30 billion (US$33.5 billion or RM138.53 billion) investment decision for a new chip plant in the country’s east — underlines the additional headwinds bearing down on the economy. 

Together with weak demand from China and the risk of Donald Trump returning to the White House, Germany is heading towards a perfect storm, which could depress GDP even further, one of the people said.

Weaker growth prospects would dent tax revenues, which could further complicate efforts in Scholz’s ruling coalition to close a budget gap in the 2025 finance plan. However, it would also allow more net new borrowings — roughly an additional €2 billion — under a debt rule that allows the government to take on more debt in economic difficult times, the people said.

A spokesperson for the Economy Ministry didn’t immediately respond to requests for comment. 

Source: The edge markets