Representatives from aviation leasing companies, airlines, aircraft manufacturers and regulatory bodies met recently in Dublin at the second Global Aviation Sustainability Day hosted by Aircraft Leasing Ireland, the aviation leasing sector industry body in Ireland.
The day was full of a mix of optimism of what the industry should now be doing to meet net zero by 2050, but also a sense of the challenges faced to meet that goal. Much of the focus was on the increased use of sustainable aviation fuel (SAF), a predominant topic in aviation sustainability more generally.
Who pays?
IATA Director General, Willie Walsh, kicked off the day with a reminder that the costs of the aviation sector reaching net zero by 2050 - upwards of US$4 trillion - should not be underestimated. Ultimately, the key question was: who will pay? Followed a close second by who should pay? Walsh observed, generally, that in an era where airlines are operating on squeezed margins, highly leveraged, and still recovering from COVID-19, allocating increased budget to SAF is certainly not an easy ask. Costs will one day inevitably be borne by consumers through higher ticket prices. Yet the opportunities arising in the industry are apparent and in a sense Walsh's key message was that the industry cannot afford to sit around: time is of the essence and the chances for job creation, energy independence and ultimately environmental progress are numerous. Read more about financing a sustainable future for the industry in our recent article.
Government intervention will be needed to incentivise and fund the use of SAF
Neither the airline industry nor consumers could carry US$4 trillion of development costs alone. The US has begun to incentivise producers with the Inflation Reduction Act. The scale of the challenge is key -more support will be needed to bring online enough SAF plants, an estimated 400, over the next few decades to meet demand while the pricing model for airlines buying SAF needed to be determined now given the investment decisions being taken over the next eighteen to twenty four months. Costs, clearly, should be spread between airlines, leasing entities and, ultimately, government support would be needed.
What role should the leasing industry play?
At a conference attended by many lessors, it will come as no surprise that the question of whether lessors should supply SAF to airlines became a hot topic of debate for the day. Willie Walsh mentioned early on that lessors should not provide SAF to airlines if this was going to be at a price higher than the wholesale prices for SAF. A panel of senior aircraft leasing company representatives emphasised that the leasing industry has a responsibility to lead on sustainability and activities including SAF production and supply. Fleet renewal was seen as an opportunity to bring online more fuel-efficient aircraft, especially given the levels of capital available to lessors. In turn, as more energy efficient aircraft emerge, a reduction in emissions would naturally occur, supplemented by increased use of SAF.
How does the leasing industry incentivise the use and increased production of SAF?
Financial incentives for the use of SAF by airlines were also discussed, with suggestions that leasing documentation could one day also include sustainability goals, actions and metrics. This would mirror the way sustainability linked loans, green loans and social loans have emerged in the market. The sense of whether there would be 'durability' to the latest measures to achieve net zero also emerged: the upcoming inclusion of aviation in the EU Taxonomy Regulation was considered a major step forward with the potential to reward the 'right' type of investments in the sector. Overall, the message from the lessors was clear: lessors do have an integral role in the sustainability drive, even if one day that does mean providing SAF to airlines.
What do the airlines think?
The main concern was the timescales involved in bringing SAF production online and to the level required to meet demand. The demand was there, the question was who would provide the finance, the support and the access to scale up production quickly. Equally, airline fleets themselves have changed, modern aircraft today are upwards of 80% more fuel-efficient compared to aircraft flying in the 1960s, an achievement in itself that has reduced the need for even more SAF production. As an increasing number of airlines test 100% SAF flights, the growth of SAF provision and use will surely follow.
SAF will provide a market for renewable energy products already in production
One particularly interesting observation was that certain producers have been producing renewable products such as renewable kerosene for many years without a market for that product. Now that one exists, production will surely increase as industry players acknowledge the demand from airlines and plan accordingly. Time, and ultimately agreement on a pricing model that would work for both airlines and lessors, will be key.
What next?
As the conference drew to a close, it was noted that the industry needed to remain honest and not 'sugar-coat' the challenges: sustainability will more likely than not make flying more expensive. As the use of SAF emerges as the main pathway towards achieving net zero, partnerships between airlines and lessors would no doubt grow.
SAF has to be appealing for investors
In particular, it was noted that for financiers more SAF project proposals and mandates would be needed to justify investment decisions in SAF, the feeling being that the concepts had to be appealing to investors as much as to airlines and lessors to be 'bankable' for the future: collaboration, honesty and a sense of responsibility would remain at the forefront.
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