Plotting the Flight Path to Mainstream Sustainable Aviation Fuels

(gentle upbeat music) - Thank you to my panelists. You're coming later in the day, so we'll have to soar even higher to keep our audience's attention, but I'm sure we will be able to do that. John, maybe I'll start with you. If we look at the world of sustainable aviation a lot is riding on sustainable aviation fuels, or SAF, as the shorthand is.

But by almost all accounts, there isn't enough at the moment, and it's gonna be hard to scale up is what I hear from lots of people. You tell me how will the world of sustainable aviation fuels take off? What do we need to really turbocharge this area?

- Well, I think Veejay, you make an important point there that if we're committed to a 65% blend, we'll need something like 400 million tons by 2050, but we need 20 million by the end of this decade, and this year we might just about get two and a half. There's a long way to go. So speed up and scale up is absolutely critical. And it's complicated, right?

Because the processes that we use today are not gonna be the processes that we need tomorrow. There just isn't enough feedstock. And so we're gonna have to go through up to four pathways, technology pathways. And that means that the price relative to kerosene, and assume kerosene doesn't have a carbon tax on it for a moment, the price is gonna remain stubbornly about two X to twice so how are we going to do that?

We need to build a consensus around demand. And I think we've seen some great examples from some leading airlines. Alaska, United, IAG, KLM are all doing great, and we've got some innovative airports in Heathrow, and Changi and these sort of places, but it's not enough. It's not going to be enough.

And what we need is more demand that's linked to production. And I'll stop here. I think bringing together the industry in a much more collaborative way to underpin future capacity and therefore invite in third party finance, we cannot rely on big oil, and gas necessarily to solve this problem.

- Okay, so you've put a few important ideas on the table, we'll impact them in the course of our conversation, but you ended on the point on collaboration as it were, and that might be a good moment to bring airports into the conversation. Could you tell us, what is Heathrow thinking about, not just SAP as a technology solution, but the broader question of sustainable aviation? How are you thinking about this, Matt? What is the carbon strategy?

You're the carbon strategy director. Tell us your strategy.

- The strategy is get rid of as much of it as quickly as possible, in a very crude nutshell. But to unpack that a bit more, we are clear that this is an existential challenge for aviation. The plan that we've set is yes, net zero, 2050, really important north star, but actually it's really focused on taking carbon out this decade. And in the UK, we're a UK company, so we're very aligned.

Actually we've adopted the committee on climate change trajectory for, we split carbon into carbon on the ground, everything to do with running the buildings at the airport, and how people get to and from the airport, and carbon in the air, which is everything to do with aircraft. We've adopted the CCC, Committee on Climate Change trajectory for both of those. So by the end of this decade, we will be at least 45% less carbon on the ground as the goal, and up to 15% less carbon from planes. Both align with the CCC, both making 2019 the year of peak carbon, even as we recover, and both now, not just goals, but actually bound into a sustainability linked bond.

So we are financially incentivized for achieving, and penalized if we don't.

- Now Matt just to clarify, am I right in understanding that the stuff that's on the ground you have more control over than the stuff that's in the air?

- Correct. Although of our carbon...

- If you're taking on some obligations for both.

- Obligations for both because the whole footprint is key to our license to operate and grow. If you look at our carbon footprint, actually the amount we directly control scope 1, and 2 emissions in technical speak is only 0.1%, literally the whole footprint. That's basically gas in our buildings, and some fuel for vehicles.

So 99.9% we can only influence, but you're right, we have more influence on the ground relatively. We can invest in public transport, we can charge more for people to drop off at the airport. When it comes to emissions from aircraft, which by the way are 95% of the total, so absolutely fundamental to the footprint, the role is an influence and advocacy one.

And if I just talk very briefly about SAF, and we can explore this a bit more. I mean the first thing I always say on SAF is, yes, there are challenges, but let's get excited that there's a solution that can take the carbon out of flying, which is absolutely critical. Certainly in the UK the debate over many years has seen aviation almost as this totem of all environmental evil. You know, unsolvable, hard to abate.

Not unsolvable. Yes, a bit harder to abate or actually I'd say will take a bit longer but can be done. So let's remember that to begin with. In terms of Heathrow's role, policy from government is absolutely critical here.

And I'm happy to explain a bit more what we're advocating for in the UK. But it's market signals from government in the form of sticks and carrots, mandates and incentives, that will ultimately unlock SAF investment. But what we're doing at Heathrow in the interim is pulling a lever that we can pull, which is our landing charges. So we have raised the landing charges a bit for everyone to create a pot that airlines can bid for, which closes about half of the price gap that John referred to between kerosene and SAF, and has helped us attract half a percent at SAF, at Heathrow two years ago, rising to nearly one and a half last year.

We're targeting two and a half this year. So that's about 150,000 tons. So these are material quantities beginning to flow.

- [Veejay]

And you think it's very much because of that kitty that you've created that it's happening? Or is it because of, you know, virtue signaling by airlines, they would've done it anyway? How do we know the factors?

- Well, I think, so there's a small amount of SAF currently being produced. All of the evidence we've got is the fact we've introduced a good financial incentive at Heathrow has attracted the small amount that is being produced to flow through Heathrow, because it makes financial sense. The big challenge then, and Diana can chip in, and she may disagree with that, but that's our view. But the big challenge going forward is how do we, instead of our incentive just attracting what is being produced to come to Heathrow, how do we unlock much more significant investment in line with what John's outlined?

And that's where that blend of sticks and carrots from government mandates and incentives comes in.

- [Veejay]

Great, okay. We'll dig into that in a bit. But Diana, you've been called out. You tell us what is, you know, and then people should know, of course you represent someone on the bleeding edge of this because you represent an airline.

How is the situation when it comes to SAF, and the pressures on you and the incentives, and the carrots and sticks? How is Alaska Airlines looking at this?

- Yeah, thanks. It is an interesting journey and it's a complicated one, and you do need partners. For those that don't know Alaska Airlines, we don't fly to the UK, but we're the fifth largest airline in the United States. And part of where we come at this is we fly to many places around the United States, New York, et cetera.

Six other countries in the US, but we fly to some places like rural communities in the state of Alaska where you can't actually get there by a road. Air travel is the way to the doctor, the way to the school sports, and so not flying is not an option. So we have to figure out something else. So we put together a five part path to net zero.

Some of it is operational efficiency, new airplanes. Sustainable aviation fuel is the big nut to crack in the middle. Some is electric or hydrogen electric propulsion. And we do leave a space for high quality carbon removals only as needed to close the gap to our targets.

But recognizing that these technologies are complicated to scale, and we can't quite predict today how quickly they will. So the way we're going about trying to enable the SAF market is through looking at, you know, we need the right inputs, we need a myriad of different feedstocks and technologies. For the most part, the technologies are there. The feedstocks are there.

There's some logistical issues to work out, but we're cracking that nut. We need to unlock the economics, both the capital available to actually build the facilities and produce staff, as well as the economics that can work for a business like ours where 1/3 of our cost is fuel. And mitigate competitive cost disadvantage because we all need to move along this together. And then the third piece is we need the systems to calculate, to certify, and to leverage the environmental benefits of this fuel.

So the inputs, the economics, and the systems. And we're trying to work on all of them at the same time.

- So you've given us a good analytical framework of what you see as the work ahead, but I understand you're still forging ahead even with this sort of set of questions you put on the table. Can you give us an example of what you're doing in SAF? I understand you've been involved in an interesting deal?

- Yeah, so there's a couple of different examples. We're building a portfolio of different types of technology suppliers. One of which is a partnership that we launched about 18 months ago is with an eFuel provider named Twelve. So they take recaptured CO2 from the atmosphere, and use renewable energy and water, and create a hydrocarbon that is functionally equivalent to jet fuel and certified, et cetera.

So they create sustainable aviation fuel using recaptured CO2. They broke ground in a facility in eastern Washington, so just east of where we're headquartered in Seattle, where they will, small volumes to start, but they will produce starting later this year, 40,000 gallons of fuel a day. And it is quite expensive to start, because they're starting using a new technology that they created, and small volumes. So we partnered with a third party, Microsoft, to help us get that project launched.

So we're able, Twelve brought the inputs, the technology between us and actually the US government incentives as well as some permitting enablement, and incentives in the state of Washington, and Microsoft, we were able to put the economics together, and we're working the systems to make sure that both we, and Microsoft can both benefit from the scope 1, and scope 3 respectively, environmental benefits of that fuel.

- Can you clarify, I could see the benefits to your firm just indirectly using the fuel.

- Yes.

- Of course that's straightforward, maybe also some other credits you can claim, but what's Microsoft's angle on all this? Why are they involved? Why are they interested? And what is the nature of their contribution versus what they expect to get out?

- Yeah, it's a great question. So Microsoft I think is generally committed to enabling clean energy. So that's sort of a general thrust for them, but they've committed to a goal of being carbon negative by 2030. And a big part of their carbon footprint is in their scope 3 emissions, is their business travel.

And they're headquartered outside Seattle. They fly a lot out of Seattle. And so it's a partnership that enables us to decarbonize the fuel that we are directly using, and use that fuel on regular flights, and then enable them to claim a credit on their scope 3 books, using a book and claim system that helps them decarbonize their business travel.

- Okay, so that's an interesting new source of revenue, as it were, to help fund some of the scale up. I wonder what you think about this, if we can come back to the framework you laid out in your initial comments, John, we're gonna need a lot of revenues to scale up, we're a long way off, and you gave us some numbers that were daunting. Used to be said that there are only two pockets, you know, in the utility business is either the taxpayer pocket, or the rate payer pocket. We could say similar things, the customer or government subsidies.

Now maybe the corporates could be a source of revenue. What do you think of this, and how does it affect how you think about the scale?

- No, absolutely. And you have to think about the different users of air transport. And as Diana said, if you look at what's going on out there, the cargo freighters, right? They can't get enough of it because they are their customers' scope 3.

If you're are high-end fashion, if you're into consumer electronics, you absolutely have to have green credentials for moving your stuff. So DHL, Kuehne+Nagel, Amazon, FedEx are all over it. The second group is business because being in professional services, and or a bank, they're moving their people around the world, okay? Air travel is a scope 3 just as it is for Microsoft.

So you start to see these constituencies have a fundamental requirement if they've committed to science-based targets, which increasingly they have, and particularly if they've committed to long-term targets so that beyond 2030 targets, they absolutely have to decarbonize their supply chain, and air travel is one, and SAF helps you do it. The big constituency that we need to focus on beyond this is the consumer, the punter. We need to get the punter to understand that sustainable aviation fuel is part of this renewables journey. They understand wind and solar, but what about SAF?

- Why is it important to engage the consumer?

- Because they're gonna have to pay for it.

- I don't want to pay for it.

- Well, you'd be surprised.

- I want this to be magically solved by all of you over there.

- [Matt]

Not gonna happen unfortunately.

- Veejay, Veejay, come on. It's not, that's not gonna happen. And we can't expect government to fund it. What we can expect governments, ask governments to do is put into the right regulatory framework, and it needs to be carrot and stick.

It cannot just be stick. And I think increasingly making the consumer, the leisure traveler aware of their carbon footprint.

- Right.

- But making sure they understand what their carbon footprint really means, and how they can impact it by their choices. And perhaps if they pay a little bit more, they may be able to offset it. There's an interesting group, and I think it'd be interesting to hear from Diana on this one is loyalty schemes. At the top of the loyalty schemes, you have people that travel a lot.

And they travel on business, but as an individual, so they understand it. And if we can harness the interest in loyalty schemes to play a role here, I think that can be another enabler to getting the broader consumer interested.

- Maybe we can turn to that. What do you know about your frequent flyers?

- Sure, and I do wanna add to one point, just to be a little bit provocative, is I don't want the consumer to have to pay more.

- [Veejay]

Good for you.

- That sort of as a fundamental principle. I mean, back to the communities that I referenced that we serve in the state of Alaska, they're flying to make their life work, right? It's not the business traveler that, you know, for whom another $100 maybe doesn't matter as much. And so to keep travel accessible, I do think it's gonna take all of us, but we've gotta figure out a way to sort of crack these nuts over time so that we can scale the technology in a economically sustainable way, and government engagement sort of, to the example that Matt raised to kickstart this thing is just absolutely critical.

And then we do need those big institutional funders to come in. So anyway, just with that premise though, it is a good...

So we did a little experiment at the end of last year, and we're gonna build on this, but between...

Who here has ever done a year-end mileage run, or thinks about getting to that next tier of loyalty at the end of the year?

- [Veejay]

Sure.

- Okay. At least a few people I think there's...

- [Matt]

(laughing) Some people aren't prepared to admit it.

- Exactly, okay. But you at least you wanna get to that next loyalty tier so you get the next benefits. So you have a couple options. One, you can fly more for work.

You can go on a little adventure at the end of the year to get those points. Some airlines will do a promo at the end of the year to sort of sell those points to get you to the next tier. So between Thanksgiving, and the end of the year, last year, American Thanksgiving, we put a promotion in place that you could actually purchase SAF credits, scope 3 credits sort of to offset your individual travel. And for every $100 of SAF credits that you purchased, you received a 1,000 elite qualifying miles.

So those points that actually count toward the next tier up to a cap of 5,000 and the uptake was much more significant actually than we expected. And our goal is not, you know, it does help sort of fund SAF over the long term, but our goal is actually to just get this in the common lexicon. To ensure that people are thinking about SAF, and you do have to sort of make it something that the consumer is going to pay attention to. Hence the loyalty link.

These are also savvy travelers. People that travel a lot, that think about it, may think about their environmental footprint, but partly it's just to make SAF a mainstream idea like wind, and solar so that we can continue to sort of fan the positive flywheel of government support, of public support, even of private institutional capital support, and make it just something that we all think about. In fact, I think it's really fantastic and thank you Veejay, that this is a topic on today's agenda. Many of us have been to SAF conversations over the years that have been more niche, and to have it be part of the mainstream energy transition conversation, I think is a real win.

And the more we can make that a broad consumer concept, I think the better off we'll be.

- Well thank you. We're delighted to have the conversation here on the Economist stage. There are a couple of things in there that I wanted to pick up on from your comments. On the question of economics, now we were joking around a little bit, not too much, though I don't wanna pay too much more.

But if we were to go back to some of the economic effects of higher prices, I wanted to come, I'm sure at LEK you've done some modeling and so on. If your point is well taken that there's no such thing as a free lunch. If we want innovation, somebody's gotta pay for it, whether it's through the venture ecosystem, as in my last panel or customers pay. But this is an industry that's notorious for having low profit margins, a cyclical industry, very sensitive to fuel price as rightly pointed out, doesn't have a history of hedging, broadly speaking.

And so, unlike other industries, does not, hedges fuel risks. And so this is, it's hard to believe that this industry would pay the additional cost for expensive, new, clean fuel. If we were to see simply higher costs passed on to the end user, would we not see an important effect in demand as one would expect that. How price sensitive is it in this industry, and wouldn't that have its own knock on effects on say reduced tourism, would affect the countries where people go, reduce business travel, and may reduce business itself.

And so there's surely second order effects we need to think about. This is one of those enabling industries that one probably doesn't want to discourage as long as it can be done cleanly. So how do you trade off between that price sensitivity of travel, and the societal good?

- That's a great question. Yes, yes, we did some work and we have done some work, and continue to do work. We last year and and you can all read it, it's published, we worked with Shell to answer exactly that question. Which is, what is the likely cost of this?

And it's staggering. It's between three and a half and $5 trillion dollars, but actually through 2050 cumulative. But actually that's about aviation's fair share of what the experts believe it's gonna cost to get to net zero, if you look at the IEA, which is about 140 trillion for all industries. And then you say, well, okay, let's look into the SAF world, and let's get to the 65% blend, which people are you know, are aiming for.

It roughly doubles the cost of jet fuel, but...

- If it were to be done overnight, or with tomorrow's lower cost?

- No, if you, up to 2050. But if just look at that on a per passenger basis versus a no SAF world. And remember versus a no SAF world, and no kerosene tax, which might come in, it's about 18% increase in ticket prices, averaged. And we've looked at business long haul, short haul, all that, done all the price elasticity.

So you say, okay, well that's quite a lot. But actually if you think about the fluctuations in airline tickets that have gone over the last 10, or 15 years, you know, there's been a lot. And so that relative to that is not so much. The second point to say is that what does that mean in terms of long-term demand for aviation?

Through 2050, aviation is still growing at about 3 to 4% per annum. And in aggregate it's about 7% less than a no SAF world. In the meantime, you have materially decarbonized an industry. And I would argue that aviation has just had a renewed social license.

So it's gotta be worked out very carefully. And these are, even though detailed modeling, it's still a high level set of analysis. But you can see that it starts to be attainable.

- If, I mean, again, if these numbers bear out over time, it's plausible.

- It's not...

- Absolutely.

- outside the realm of doable. But it would come at a cost of less travel. It would have an effect that the poorest would be at least able to fly because of course they are more price sensitive. There would be some regressive effects presumably that would be not desirable for society.

- Yeah, and I think you have to trade off that against you know, the climate impact.

- Okay, thank you. Yes? You wanted to jump in?

- Yeah, I mean really just to build on that last point, and some of John's analysis. So as well as Heathrow, I'm currently chairing a group called Sustainable Aviation, which is our National Industry Coalition on sustainability in the UK, so airlines, airports, manufacturers. And we published our latest net zero pathway last year, and looked exactly at this question of cost, and concluded similar to John actually, we had a range of 15 to 20% increase in ticket prices in real terms by 2050. We did see lower demand growth through as a result of that, about 14% lower growth.

But to John's point, still growth, because people value flying, are prepared to pay a bit more in order to decarbonize. So I'll just echo what John said that I think there is some cost to this transition, but it is a cost that with the right policy frameworks from government as well, we can ensure that some of those costs are actually channeled into investing in some of the technologies that we need. I think Diana does make a really important point that actually on some routes, and our equivalent for some of the Alaskan communities in the UK would be, I guess the highlands and islands routes in Scotland where you've got a, they are lifeline links, so you'd need to look at some kind of public service obligation or policies to ensure that those weren't penalized in that situation.

But I think it's doable.

- Yeah, do you accept this analysis? We've had two sources now saying it's a bit more money, a little bit less flying, but it'll be, okay.

- Well...

- How do you feel about that?

- To your point, there is no free lunch. I think the biggest things are we need a policy environment, a regulatory framework, that enables the transition. Another critical point is there's the long-term economics, and then there's this sort of short term activation energy to kickstart some of these technologies, and actually scale production. And that is really critical place for government to play a role, an enabling role, and for private capital to play a role, because we're not going to get there just sort of taking it one step at a time.

We really have to kickstart some things. So I think we really need to invest proactively, and invest now to enable that long-term scenario to occur.

- Let me ask you, as a buyer of fuel, obviously this is a SAF panel, that's why we've talked about SAF, sustainable aviation fuel. On an earlier panel today I did have a company representing electric aircraft, and to my surprise, rather than only touting his technology, he also talked up hydrogen for medium and long haul. Something I think Airbus has been looking into with some enthusiasm. Since you're in the business of moving people rather than being so technology bound, how do you look at the alternatives that are out there within the kind of timeframe we're talking about, 2050?

- Yeah, it's a great question and we do need all of it. I think we don't look at hydrogen as a realistic sort of near medium-term option for long haul. But we do have a pretty significant regional network. And so (indistinct) is a good example.

ZeroAvia who operate up in the Cotswolds airport, and are working on their technology as well as out outside Seattle.

- [Veejay]

They're electric?

- They're developing hydrogen electric.

- [Veejay]

Hydrogen electric.

- Yep, and so we see that as a really viable option for regional flying, shorter haul, smaller aircraft, but that feeds the overall network. And so we wanna enable that technology alongside sustainable aviation fuel. I think sustainable aviation fuel is just sort of the biggest unlock for the majority of the larger scale flying. And so we need all of it.

- [Veejay]

Because it's drop in, it makes it...?

- It's drop in. Because the energy density of fuel is such that it can, you know, it burns off you, you actually land at a lighter weight then you start, and it actually provides more power. Electric has some limitations in that regard, but battery technology's going to continue to advance. So you know, again we need all of it.

- [Veejay]

Yeah, any thought on that choice from either of you?

- No, sorry, absolutely. I agreed with you 100%. I mean we need all of it but hydro's gonna be a long way off.

- Long way off on hydrogen?

- And the energy density is a critical thing. It's the easiest way to describe it.

- Electricity for a niche market, - Again it's, you know, you might get some hybrid electric type hybrid, you know regional type jets, but not mainstream commercial aviation.

- What do you think Matt?

- Yeah, well the one quick thought would be the advantage of SAF is yes it's dropping but also we can do it. So as soon as we can produce it today, we can fly it, and we can start to scale up the solution. Hydrogen, hugely exciting. I was at ZeroAvia's Cotswold base last year, and the story I always tell is when the plane's in the hangar, it's got a little washing up bowl underneath to catch the drips from the exhaust, which is just water.

Which is amazing to think about it, you could fly, and the only emission is water. But there isn't a commercial hydrogen plane flying today. And if you think of the lifespan of aircraft 25 years up to in service, you need to start injecting solutions from now if we're actually gonna hit 2050. So I think it's exciting but SAF is the solution we can scale now.

- [Diana]

Or have retrofit technology, which is another option, - [Matt]

Yeah, true.

- [Diana]

but it's gonna take a while.

- So just in the limited time remaining, I'm gonna do a lightning round. I want each of you to give a year when you think we'll have achieved 50% penetration with SAF. You pick a year and we'll start with you.

- 50%. Not before 2050.

- Not before. How about you?

- I think in our net zero plan it has to be by around 2040. So I have to say 2040.

- Really? Well we've got a bit tussle there. What do you see from Alaskan Airlines?

- I think it's between 2040 and 2050. (audience laughing) And I think...

- There we go.

- For real.

- Very diplomatically put.

- But I think if we make, if we extend the policy incentives, and we make investments now it can be 2040. If we kick the can down the road, it won't be until 2050.

- There we go. They point the finger right back at policy, make it happen, right. Very good. Okay, I think that was a very enjoyable panel.

I think you'll all agree. We learned a lot. (audience applauding) Please give my panelists a round of applause. I'll invite my panelists to step this way.

Thank you so much. Appreciate it. Terrific. Thank you. Thank you so much. (gentle upbeat music)