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Sustainable aviation fuel is ready for take-off

We are now less than a decade out from the self-imposed deadline set by many companies to become carbon neutral by 2030. Similarly, the 2050 deadline set by many countries to this achieve this is looming into view. Big strides will need to be made in order to achieve these targets. But how?

One sector that consumes massive amounts of natural resources, but in our opinion boasts the opportunity for realistic change, is aviation. Successfully reducing emissions would be a big win. In 2019 the sector consumed 8% of all oil1, the equivalent of almost 7.5 million barrels a day.2 In 2020, Covid-19 grounded most airlines leading to a 39% drop in fuel consumption3, but the long-term appetite for air travel will likely still grow – mobility is important. Without policy intervention, however, planes will continue to use fossil fuels, and it is estimated that by 2050 the sector could consume over 14 million barrels a day, more oil than China consumed in 2019 (Figure 1).

Figure 1: Aviation fuel demand and country oil demand

Milion barrels per day graphs

Source: BloombergNEF, 2020

If the demand is to remain, it is surely better to look at changing how planes are powered. This turns the spotlight to alternative fuels such as hydrogen, sustainable aviation fuels (SAF) or electricity. Electric planes may have a future in 25-30 years, but we don’t yet have sufficient infrastructure to recharge electric vehicles on roads, or batteries with truly long ranges, so the idea of electric planes remains some way off. Hydrogen is an interesting prospect but, like electricity, requires a completely new infrastructure and technology to make it work, both with the aircraft themselves and at airports. Although there is a drive to invest in solutions such as hydrogen and electricity, for now the focus is on SAF.

Straight in the tank

We believe a major differentiation between airlines and cars is the massive amount of capital tied up in existing planes – these are assets that are viable for the next 20-30 years and simply replacing them would be prohibitively expensive. Alongside this, the technology is too far out to make them run on different fuels, so the need is for something that can go in the existing tank. SAF can. SAF is made from waste destined for landfill, such as used cooking oil and discarded animal fat, blended with existing fossil fuel.

Although the SAF market is small and early-phase, we see opportunities for investors with a number of companies getting a foothold, among them Neste4, the world’s largest producer of renewable diesel and sustainable aviation fuel refined from waste and residues5, and renewable solutions firm UPM.

Market size and penetration

In our view, sustainable aviation is the only way the aviation sector’s emissions can be brought down in the medium term, providing a bridge to technologies such as hydrogen and electric planes which are decades out. This creates a massive market.

In 2019, aviation fuel was a 300 million tonne global market.6 The International Air Transport Association’s fuel forum projects a 420 million tonne market by 20307, and the World Economic Forum predicts a rise to 510 million tonnes in 2040.8 The European Union accounts for around 20% of this total, and is targeting 14% of this amount for use with SAF, creating 11 million tonnes of demand by 2030 in Europe alone.9

But it is not the size of the market alone that makes SAF an exciting prospect. There is an increasing desire within the aviation industry for reform and regulation. First, firms that have traditionally been devoted to fossil fuels, such as oil refineries, are exploring SAFs – after all, they too have sustainability targets to hit. Second, the pandemic has offered a glimpse of a world with lower carbon emissions, but also made us realise not enough is being done, pushing sustainability up airlines’ agendas. Numerous airlines now say they are aiming to reduce their emission to zero by 2050, and achieving carbon neutrality by 2035 – as JetBlue’s CFO said, they would rather be driving the bus than be hit by it.10 Neste has signed deals with a number of airlines during the pandemic to increase the use of SAFs, including All Nippon Airlines.11 But the game changer is regulation.

Mandates

SAFs remain expensive, but mandated blending could force the issue into the mainstream by the mid-2020s. This means governments forcing a certain proportion of SAF fuel use by airlines. Some countries are already moving on this: Sweden is mandating a minimum of 0.5% of SAF in 2021, and France 1% in 2022.12 Holland is considering regulation which would see a 14% blend by 2030.13 In the EU, the ReFuelEU initiative is set to be announced in July 2021, and will likely have a target of blending levels of 2% in 2025 and 5% in 203014, while President Biden is being urged to introduce a pan-US 1% mandate.15 Once mandates are introduced and begin to rise, and regulations improve, scalability will lead to reduced costs and even greater adoption – a virtuous circle.

On top of government support, SAF requires end-consumer pressure to develop. Passengers and corporates, under pressure from increasingly ESG-aware investors, can force airline companies to reduce their carbon footprint and will accept temporary price hikes owing to the cost. A 2% blend for a three-hour flight is estimated to cost each passenger US$2.16

Investor opportunities

For us investors this is an exciting opportunity. We like to explore themes that play into the UN Sustainable Development Goals (UN SDGs).17 The SAF market is directly linked to a number of these: the Sustainable Transport element of UN SDG 11, Make cities and human settlements inclusive, safe, resilient and sustainable; the Sustainable Tourism element of UNSDG 12, Ensure sustainable consumption and production patterns; and UN SDG 13, Take urgent action to combat climate change and its impacts.

To use an aviation analogy, SAFs are taxiing on the runway, but with technology, the right political will, shareholder pressure and mandate development, they can take off.

20 May 2021
Andrea Carzana
Andrea Carzana
Portfolio Manager
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Sustainable aviation fuel is ready for take-off

1 BP, Statistical review of world energy, June 2020
2 BloombergNEF, 2020
3 BloombergNEF, 2020
4 The mention of specific companies should not be taken as an endorsement
5 https://www.neste.com/about-neste/who-we-are/business#9507dabd
6 IATA, 2021
7 IATA, 2021
8 World Economic Forum, 2021
9 Neste management presentation, February 2021
10 Exane BNP Paribas, Global Airlines: Sustainable Change, 13 May 2021
11 https://biofuels-news.com/news/neste-and-all-nippon-airways-collaborate-on-first-supply-of-sustainable-aviation-fuel-in-asia/ 26 October 2020
12 ISCC Global Sustainability Conference, February 2021
13 https://www.ainonline.com/aviation-news/business-aviation/2020-03-06/dutch-government-targets-saf-blending-mandate-2023 6 March 2020
14 Exane BNP Paribas, Global Airlines: Sustainable Change, 13 May 2021
15 https://www.reuters.com/article/us-usa-energy-aviation-idUSKBN2AJ0LH 19 February 2021
16 Columbia Threadneedle analysis, 2021
17 https://sdgs.un.org/goals

Important Information

For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). This is an advertising document.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This document has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the ce (Chapter 622), No. 1173058.
In the UK: Issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).
For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution.
For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.
In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). This is an advertising document.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This document has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the ce (Chapter 622), No. 1173058.
In the UK: Issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.
In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).
For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution.
For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.
In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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