The sky’s the limit?

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.