There was one notable exception to the Covid-muted crowds and order activity at last month’s Singapore Airshow: the buzz around biofuels and sustainable aviation.
Finland-based refiner Neste was a major focal point. Ahead of the show, Singapore Airlines agreed to use Neste sustainable aviation fuel (SAF) made from cooking oil and animal fats. ExxonMobil (XOM) will blend the biofuel with traditional aviation fuel at facilities in Singapore for use late this year. Neste also announced plans were back on track to launch its SAF refining facility in Singapore by early 2023, after a Covid-forced detour.
In addition, Boeing’s (BA) new, fuel-efficient 777X took to the skies for its first flight in Asia. The company said the aircraft uses 20% less fuel than older wide-body jets thanks to its lightweight composite wing materials and new wingtip design.
A flurry of related announcements arrived from Airbus (EADSY), General Electric (GE), Delta Air Lines (DAL) and others. Increasingly tough emissions rules, and fuel prices turned even more volatile by Russia’s war on Ukraine, have boosted pressure on the aviation industry to reduce its carbon footprint.
Targeted opportunities for investors remain limited so far. Boeing, Airbus and GE offer broad exposure to advancing technologies. Stocks like Gevo (GEVO) and Darling Ingredients (DAR) provide direct investments in sustainable fuels, although not always specifically for aviation.
Renewable Energy Group (REGI) is also part of the picture. However, Chevron (CVX) announced in February that it would acquire the Ames, Iowa-based outfit for $3.15 billion. Meanwhile, many younger stocks, including EV flight innovator Joby Aviation (JOBY), have struggled to make headway.
A Rising Aircraft Biofuels Sector
Yet the Singapore Airshow announcements reflect just a fraction of the technology in development to help reduce CO2 emissions from the aviation industry.
Europe’s Airbus moved its hydrogen-power ZEROe technology ahead this month, signing a development agreement with General Electric. Airbus also added Delta Air Lines to its growing list of hydrogen collaborators.
In February, Airbus confirmed plans to test hydrogen-fueled combustion engines in its A380 — the world’s largest passenger jet. The engines for the Airbus test are being developed by Ohio-based CFM International. CFM is a joint venture between General Electric and France’s Safran.
On Tuesday, Delta said it boosted its agreement with sustainable fuel-provider Gevo from 10 million to 75 million gallons of alcohol-based sustainable fuel per year through 2028.
Countless smaller names are cropping up — ZeroAvia, AltAir and Alder Fuels — often as partners to major projects underway at Boeing, Airbus and other leading aerospace names.
Considerable consolidation is underway along various links of the biofuel supply chain. Neste has been at the top of that heap. U.S.-based Agri Trading — one of the largest independent U.S. renewable waste and residual fat and oil traders — is among the company’s many recent purchases.
Long-Term Industry, Immediate Concerns
The global aviation industry generates an estimated 2.5% of the world’s annual greenhouse gas emissions. That might not sound like a large figure. But a flight from London to New York produces one ton of CO2 per passenger. That’s roughly what the average citizen in a developing country produces in an entire year.
And the growing aviation industry is on regulators’ radar as more people take to the skies for the first time. That is in large part thanks to the expansion of the middle class in China and India. In an October report, consulting firm Deloitte estimated that emissions from the aviation industry could be 2.5 times higher in 2050 than in 2019.
These Are The 5 Best EV Stocks To Buy And Watch Now
Airlines collectively pledged to reach “net zero” carbon emissions by 2050 at the International Air Transport Association’s annual general meeting Oct. 4. However, Chinese carriers wanted to push the target date out to 2060.
With the IATA’s 2050 goal on the departure board, the aviation industry needs to start investing in forward-thinking technology today and push for governmental support.
“The industry is known for having really long product life cycles,” John Coykendall, head of Deloitte’s aerospace and defense division, told IBD. “You or I could fly in an airplane today and there’s a reasonable chance that it was built in the ’90s. If we want aircraft with different capabilities by 2050, we need to start now.”
Biofuels Turn Waste Into Fuel
The industry strategy wages a two-pronged attack on the problem. One angle is to design lighter, more fuel-efficient models. The other is to develop sustainable aviation fuel alternatives for both future models and aircraft already flying today.
Traditional jet fuel is made from kerosene, an almost transparent, highly flammable liquid distilled from crude oil. Some airlines are turning to biofuels made from biomass sources. Those include agricultural wastes, sea plants and other raw materials.
Biodiesel and other fuels formed from biomass tend to produce less greenhouse gases than the crude oil. Supporters also argue that biofuel production is less environmentally damaging than drilling for oil.
Ethanol is the most widely used biofuel. It is distilled from corn and mixed with gasoline throughout the U.S. and elsewhere. Ethanol blends help reduce visible pollution. They also extend the supply of petroleum-based gasoline.
A Tipping Point For Biofuel
SAF is one aviation technology that is “now at a tipping point,” according to Sean Newsum, the director of environmental strategy at Boeing’s commercial airplanes division.
“Drop-in replacement hydrocarbon jet fuel that has a lower carbon footprint over its life cycle is the best — if not the only — technologically viable solution over the next couple of decades,” he said.
A drop-in type of fuel can be used interchangeably with traditional jet fuel without significant alteration of an aircraft’s engines.
In December, United Airlines (UAL) operated the first commercial passenger flight using 100% sustainable aviation fuel in one of its engines. The flight from Chicago to Washington, D.C., with CEO Scott Kirby aboard charted new territory.
But biofuels are nothing new.
In 2008, Virgin Atlantic flew a Boeing 747 with kerosene blended with babassu palm oil and coconut oil from Imperium Renewables. Renewable Energy Group acquired Washington-based Imperium in 2015.
Today, United is using a biofuel from AltAir made from nonedible oils and agricultural wastes at its LAX facilities. In September, the carrier announced an investment, along with Honeywell (HON), in Alder Fuels. The company aims to turn forest and crop waste into drop-in replacement fuel.
Fuel Costs And Biofuels
But less than 1% of aviation fuel used in 2020 was SAF. Since 2008, 150,000 flights have used biofuel, according to a 2019 International Energy Agency report. The report found that only Brisbane, Los Angeles, Oslo, Stockholm and Bergen, Norway, have regular biofuel distribution facilities, with Singapore ready to come online this year.
The IATA has high hopes for biofuels. It estimates that they could account for 65% of emission reductions. The association said SAF can account for 2% of jet fuel needed in 2025, 17% in 2035 and 65% in 2050.
Scale remains an issue before the fuel can have widespread adoption. Just over 4 million gallons of aviation biofuel were produced in 2018, according to the IEA. That’s less than 0.1% of total aviation fuel consumption.
Why This IBD Tool Simplifies The Search For Top Stocks
Deloitte’s Coykendall said there is a chicken and egg dilemma. Airlines would like to use the fuel, and energy companies would like to invest in more production capacity. “But they need confidence that the airlines are going to buy it,” he said.
Delta Air Lines plans to replace 10% of its conventional jet fuel with biofuel by the end of 2030.
But until more carriers sign up for SAF and large quantities of the fuel are made, the fuel will be more costly.
“The reality is there’s some period of time where it will continue to cost more than traditional jet fuel,” he said.
Kerosene Price, EU Energy Tax
Fuel typically accounts for one-third of an airline’s expenses. Kerosene prices closely track changes in oil prices. And over the years, the aircraft industry has responded to oil price spikes through engineering developments like more fuel-effective engines and lighter aircraft incorporating composite materials.
The IATA put the global average cost of jet fuel at around $2.55 per gallon on February 18, up 57% from a year before.
But for now, biofuels are two to four times more expensive than kerosene, according to an Oct. 7 Deloitte report.
The European Union has drafted plans for a jet fuel tax that would ramp up over the next 10 years. It aims to level the price playing field between sustainable aviation fuel and kerosene.
In addition, in legislation similar to that which cultivated the ethanol industry in the U.S., the EU Commission is pushing for a 2% blending rate for SAF by 2025. That means each gallon of kerosene would contain at least 2% of SAF. The IEA said in December that the blend would only increase the cost of a ticket from Paris to New York by 0.4%.
U.S. Biofuel Tax Credit
In the U.S., the Biden administration proposed a tax credit as part of his Build Back Better plan for producing sustainable aviation fuel. The goal was to boost supplies by at least 3 billion gallons by 2030.
But the bill remains trapped in congressional gridlock.
“It’s going to require some government action and incentives for that to happen. Not dissimilar to what happened in the wind industry, for example,” said Mohamed Ali, GE Aviation’s VP of engineering. “I’m a big believer in the incentives, and the right incentives can create the demand, which will foster the supply.”
New Engines
The IEA agrees. The global energy watchdog expects aviation biofuels prices to fall nearly 10% over the next 10 years.
But SAF has drawbacks other than pricing. Using an alternative fuel doesn’t necessarily equate to a reduction in emissions. Growing crops specifically for biofuel creates its own CO2 and competes with land for growing food staples.
As scientists work on biofuel that can be used in current engines, the GE-Safran joint venture, CFM, is developing radically new engines.
The IATA estimates sustainable aviation fuels can reduce 65% of aircraft emissions. It forecasts another 13% of reductions coming from new engine technology.
Is Boeing Stock A Buy Right Now? This Is What You Need To Know
CFM is known for its LEAP engine used on Boeing 737 Max jets. The LEAP engines provide a 20% improvement in fuel consumption vs. older model power plants.
CFM’s new RISE engine concept goes a step further. It features open fan blades that could cut fuel use by 20%. But it also runs up against the industry challenge of long production cycles. If the concept is successful, the new engine could enter service by the mid-2030s.
The engine could run on current jet fuel and be hydrogen capable. GE’s Ali said hydrogen fuel isn’t likely to become a reality in the near term, but he thinks it will have a role in the future.
“Advanced technologies (like hydrogen), this is a longer cycle business,” Ali said. “It takes years to develop, mature and certify a certain technology to be in use for the public.”
The Hydrogen-Electric Model
United is betting on a hydrogen future. The airline has a conditional purchase agreement for 50 of ZeroAvia’s ZA2000-R engines with an option for 50 more. United Express could begin flying hydrogen-electric powered aircraft as early as 2028.
Alaska Air Group (ALK) entered a development agreement with ZeroAvia in October. That deal aims to incorporate the ZA 2000 into the 76-passenger de Havilland DHC-8-400 aircraft. The deal gives Alaska options on up to 50 of the conversion kits.
The two deals pumped $35 million into ZeroAvia’s development budget.
Hydrogen fuel can be produced from different sources. Currently, it is most often refined from natural gas, making it a fossil fuel, not a biofuel or SAF. But aside from its environmental extraction and refining impact, hydrogen fuel generates electricity without any emissions other than pure water and heat.
Hydrogen-electric engines use fuel cell power plants to generate electricity. That electricity then powers electric motors, which drive the aircraft’s propellers. The combination provides “one of the most promising paths to zero-emission air travel for smaller aircraft,” United’s Kirby said in a Dec. 13 release.
In October, Universal Hydrogen received funding from GE Aviation and China’s Tencent (TCEHY) to start testing its hydrogen fuel cells in 40-seat planes in 2022.
2,000-Mile Range, Zero Emissions
Hydrogen fuel cells, while less well-known than their electric battery counterparts, are powering cars by Honda (HMC), Toyota (TM), BMW (BMWYY) and Hyundai.
Plug Power (PLUG), which brought fuel cell vehicles to Walmart (WMT) and Amazon (AMZN) warehouses, joined Airbus in October to help develop its hydrogen aircraft.
PlugPower CEO Andrew Marsh told IBD that he sees hydrogen being “incredibly competitive” by 2035 in terms of pricing.
But hydrogen aircraft will need a radical new design to hold the fuel. Airbus notes that hydrogen generates about three times the energy per unit mass of conventional jet fuel. But it must be compressed in extremely high-pressure tanks. Creating new designs and safety rules governing the use of such tankers is part of the hydrogen challenge.
In 2020, Airbus debuted three hydrogen-powered aircraft concepts. One of the designs included a narrow-body jet that could hold up to 200 passengers with a range of over 2,000 nautical miles. The other concepts included a turboprop and a “blended-wing body” design.
Still, hydrogen is no silver bullet. The industry remains fossil fuel intense. Governments will have to invest heavily in expanding solar, wind and other renewable energy sources to produce “green hydrogen.” Green hydrogen uses renewable power in the refining process, reducing its carbon footprint.
Boeing doesn’t see hydrogen aircraft servicing regional markets until late 2030, short-haul routes in 2040 and medium-haul routes potentially in 2050.
Electric Air Investments Accelerate
Pound for pound, jet fuel provides 14 times more energy than a battery, Coykendall says, and battery technology must evolve for use in larger aircraft.
That’s not stopping airlines from investing in battery-powered options to expand their operations.
In July, United and regional partner airline Mesa Air conditionally agreed to each purchase 100 ES-19 aircraft from electric plane startup Heart Aerospace. The ES-19 can hold 19 passengers and fly up to 250 miles.
United has been doubling down on its electric aircraft investments. Last year, the carrier said it would invest $20 million in Archer, another electric plane startup. And along with Mesa, it’s ordering up to 200 of Archer’s air taxis, in a deal that could be worth more than $1 billion.
Electric Air Taxis Take Off
United envisions using the aircraft to fly routes from major hubs to smaller regional airports within the next five years. Analysts have dubbed these electric aircraft air taxis. The ES-19 aircraft from Heart Aerospace can hold up to 19 passengers and fly up to 250 miles.
Other air taxi uses include short hops between close cities like New York and Boston or Washington and Philadelphia.
The air taxi market is buzzing with activity. Joby Aviation bought Uber’s (UBER) air taxi business last year, which includes partners like Textron’s (TXT) Bell, Brazil’s Embraer (ERJ) and Boeing’s Aurora Flight Sciences. Boeing also invested over $450 million in Wisk Aero to develop an electric, self-flying air taxi.
Air vs. Rail vs. Regulators
Transportation is just one piece of the total C02 emissions puzzle. But it’s a big piece. Power generation and transport accounted for over two-thirds of total emissions in 2019. And they are responsible for almost all growth since 2010, according to the IEA.
France has a climate bill in the works to cut emissions by 40% from 1990 levels by 2030. The country may also ban flights that could be made by train in less than 2.5 hours, severely curtailing the industry’s short-haul budget airlines. Price increases from the potential EU kerosene tax could also make rail travel more attractive.
Defense And Aerospace Stocks And Industry News
“Limiting flying with retrograde and punitive taxes would stifle investment and could limit flying to the wealthy. And we have never seen an environmental tax actually fund carbon-reducing activities. Incentives are the proven way forward,” said IATA’s Walsh in October.
The return of high-margin business travel — which fell off drastically as a result of the coronavirus pandemic — could be a key in spurring the development of sustainable fuels. Microsoft (MSFT) is buying sustainable aviation fuel for Alaska Airlines (ALK) to help fuel its business travel needs. Deloitte reached a similar deal with American, Delta and United.
Cost Vs. Impact On Climate
While new propulsion and fuel technologies are in the works, less capital-intensive steps can be taken by airlines now to improve fuel efficiency.
United’s Kirby said the industry isn’t using GPS to its full advantage. At the Air Force Association’s yearly meeting in September, he said the “highways in the sky” were established over 60 years ago. Since aircraft and traffic patterns have changed, he suggested that routes could potentially change.
In its October report, Deloitte also argued that airlines and airports can reduce traffic airport congestion that leads to long takeoff and landing times, which suck up additional fuel.
Even with compelling new projects, the move toward more sustainable aviation will be costly. IATA’s director general Willie Walsh estimates that the shift toward a more climate-friendly business will eventually cost the aviation industry $2 trillion.
But the price of not making changes promises to be even higher.