Airlines must ink long-term deals on greener fuels to boost volumes: Bayer exec

Airlines need to commit to long-term, large-volume purchase agreements for sustainable aviation fuel (SAF) to incentivize increased production and meet industry climate targets, according to a Bayer executive. Despite IATA's net-zero emissions target by 2050 and projected doubling of SAF production to 2 million tonnes by 2025 (0.7% of consumption), long-term contracts are crucial to guarantee farmer and processor participation, mirroring the renewable energy sector's demand signaling.

Analysis

The airline industry's commitment to net-zero emissions by 2050 faces a significant hurdle due to insufficient Sustainable Aviation Fuel (SAF) supply, with projected 2025 production of 2 million tonnes representing a mere 0.7% of total airline fuel consumption. A Bayer executive posits that long-term, large-volume SAF purchase agreements from airlines are essential to stimulate production, mirroring successful demand signaling in the renewable energy sector. Such commitments would provide the necessary assurances for farmers, who are potential suppliers of biomass feedstocks and customers of Bayer's Monsanto unit, and processors to invest in scaling up SAF output. Despite airlines calling for greater action from energy companies, the onus is placed back on them to create stable demand for SAF, which is currently more expensive than conventional jet fuel. The cautious sentiment surrounding this issue, reflected in a -0.15 score, underscores the substantial challenge and financial implications for airlines in transitioning to greener fuels, a transition critical for meeting industry climate targets.

Key Decisions for Investors

• Investors should closely monitor airlines' strategies for securing long-term SAF supplies, as the ability to do so will be a key differentiator in managing ESG risks and future compliance costs, albeit with potential impacts on near-term fuel expenditure.
• Consider potential opportunities in the SAF value chain, including agricultural producers and biofuel refiners, which stand to benefit from increased demand if airlines adopt long-term procurement strategies as advocated.
• Recognize that the current low SAF adoption rate (0.7% projected for 2025) versus ambitious 2050 net-zero targets implies significant future investment, potential regulatory interventions, or rising carbon costs for the aviation sector.