IATA Chief Economist: Should Airlines Insource Fuel Production?

IATA chief economist and sustainability SVP Marie Owens Thomsen has questioned whether airlines should insource fuel production given the strategic significance of fuel costs, the need to transition to sustainable aviation fuels (SAF), and the aviation sector holding limited clout with traditional fuel suppliers.

“It seems like airlines, over the years, have outsourced everything that makes money and kept everything that doesn’t make money,” Owens Thomsen told delegates at the recent Aviation Carbon 2024 conference in London. “The fantasy that I harbor is that airlines can take greater control over their destiny, progressively, and maybe insource more of their fuel supply.”

Owens Thomsen spent 30 years in the banking industry. She sees potential for airlines—which make a 3% net margin—to benefit from 20% margins by investing in fuel production, especially as fuel represents around 30% of an airline’s cost base.

“I observe that some airlines are doing it and I dare believe that, for them, this might be a really interesting and profitable strategy,” she said. “They gain greater control over their fuel supply and the price that they’re going to pay for that fuel, and they reduce uncertainty in the process, and so on.”

Gaining purchasing power is important, given that diesel carries a much higher priority with the oil refiners than aviation fuel. “We take only 8% refined output today,” Owens Thomsen said. “They don’t need us. Any self-respecting oil company makes $30 billion profit in a single quarter. One company. One quarter. We make $30 billion in the whole industry in a whole year.”

However, China is switching its diesel-powered trucks to natural liquid gas and road transport is increasingly shifting to electrification. This could free up refinery processing space for aviation fuels, potentially bringing costs down. “The larger the share that we can get of refined output from future renewable refineries, the fewer refineries we have to build,” she said. “That really has a very material impact on how much this transition is going to cost.”

The flip side is that today’s low oil prices are acting as a demotivator for the energy transition. “The [incoming] Trump administration has made no secret about its intentions to continue to oversupply the market, so we’re going to get even cheaper oil going forward,” she said. “I think, generally speaking, it means that the energy transition will drop a few notches on the world’s priority list.”

Owens Thomsen believes too much emphasis is being put on demand reduction. “The problem is obviously the energy source, not the activity,” she said. “People’s minds are not sufficiently focused on what the real task is yet. And the real task is to switch the energy source from fossil fuels to renewable energies.”

However, SAF supply timelines are not being met, partly because fossil fuel has a 20% return and Owens Thomsen speculates that SAF has low single digit returns of around 5%. “We were already slow, and now we’re even slower. This is really the elephant in the room conversation, right?” she said.

Meanwhile, Owens Thomsen said the oil majors receive a trillion dollars a year in subsidies, which is impacting the energy transition, but the G20 narrative has moved away from tackling fossil fuel subsidies.

“It’s like we’ve got blinkers on yet, pretending that we’re not seeing that all of these countries are subsidizing fossil fuel production,” she said. “Unless we change the fundamental investment proposition to make it attractive for those who need to invest in renewable energy, it’s going to be like we’re driving this car with both the brake and the gas pedal down—and then we’re surprised that we’re not going anywhere.”

While Europe is powering ahead with sustainability regulations, Owens Thomsen fears they are “out for the land grab,” ignoring ICAO’s jurisdiction over international aviation.

“That’s not out of ignorance, that’s out of willful spite,” she said. “It looks like overstepping to me. It looks like fragmentation, wanting actively to fragment a global industry, where any type of fragmentation—however small—is immediately multiplied by all the countries and all the destinations that we fly to. Fragmentation is a really dangerous thing in our industry.”