Why Airlines Are Sounding Alarm On Carbon Net-Zero Transition Costs

With most grand projects, there’s usually an early excitement and enthusiasm stage followed by a phase of seeing the full costs of the endeavor become clear. The airline industry’s plan to be carbon net zero by 2050—a plan that relies heavily on being able to use much more sustainable aviation fuel (SAF) than is possible today—has reached the sticker shock phase.

To reach net zero by 2050, the annual average capital expenditure required to build the 5,000-7,000 biorefineries that will be needed over the 30-year period is about $128 billion per year, with a minimum total expenditure over 30 years of $4.7 trillion, according to IATA’s updated Sustainability and Economics Roadmaps, which are published in addition to five Net Zero Roadmaps.

Capital expenditure needs are expected to be around $2 billion in 2025, escalating to $10 billion in 2027, and growing to a peak of $576 billion by 2048.

The IATA roadmap is an eye-opener to anyone looking at the long-term health of an industry already knocked sideways financially and carrying debt from the effects of the pandemic.

The annual cost for airlines to transition from jet fuel to sustainable alternatives will be $1.4 billion in 2025 and could be as high as $744 billion in 2050, representing an annual average transition cost of $174 billion and a cumulative total of $4.7 trillion, according to the new reports released during the IATA World Sustainability Symposium in Miami in September. The finance roadmap details estimated costs on top of jet fuel for airlines from procuring SAF, and leveraging other, further-out technologies like hydrogen- and electric-powered aircraft.

“The updated IATA policy and finance net-zero roadmaps make it clear that decarbonization by 2050 is possible,” IATA director general Willie Walsh said. “They also sound a warning bell that, to achieve this, all stakeholders, particularly policymakers, must collaborate more broadly and act with greater urgency.”

The 2050 net-zero goal was committed to by IATA member airlines at the association’s AGM in Boston in October 2021.

At the Miami symposium, Walsh acknowledged that the decarbonization transition costs were “eye watering,” but he believed they will mostly be handed down to the consumer, via ticket price increases, because airlines cannot absorb them.

To put these transition costs in context, the global airline industry as a collective is forecast by IATA to post net profits of $30 billion in 2024, equal to a 3% net profit margin or $6 per passenger.

“Putting the transition cost in perspective in this way should make it blatantly clear that policy support is urgently required to bring the cost of the transition solutions down and to minimize their premium over fossil fuels,” the finance roadmap report says. “The analysis presented in this finance roadmap shows that air transport’s net-zero CO₂ emissions goal is attainable, comparable in many ways to the solar and wind energy transitions, and similarly critically dependent upon policymakers’ concerted efforts to make it happen.”

In comparing the net-zero transition costs with the investments made in the solar and wind energy markets, IATA also flags that the aviation sustainability investment is relatively inexpensive. The association estimates the solar and wind transition costs were about $280 billion per annum between 2004 and 2022.

OIL BACKS AWAY

What’s missing in SAF investment that governments provided for solar and wind energy development is a uniform and global commitment to policies and regulation that would encourage or require SAF production. And big players in the oil industry appear to be getting cold feet on SAF, seeing high costs and risks in biorefinery investments that would lead to much-reduced margins.

Shell’s Dutch subsidiary announced in early July that it was placing a “temporary pause” on construction at its 820,000 tonnes-per-year biofuels facility at the Shell Energy and Chemicals Park Rotterdam in the Netherlands, citing a need to address project delivery and ensure future competitiveness, given current market conditions.

“Temporarily pausing on-site construction now will allow us to assess the most commercial way forward for the project,” Shell downstream, renewables and energy solutions director Huibert Vigeveno said at the time. A few days later, Shell acknowledged that it would likely take an impairment cost of up to $2 billion related to the Rotterdam refinery decision and also a decision to sell a plant in Singapore earlier this year.

During a panel discussion at the IATA symposium, Shell Aviation president Raman Ojha declined to give a timeline for the “pause.”

Meanwhile, BP has announced it will scale back plans for the development of new SAF and renewable diesel biofuels projects at existing sites.

The announcements could not come at a worse time for airlines. In some regions, notably Europe, SAF mandates start taking force from as early as 2025, and airlines insist they cannot get hold of enough SAF, which can be three or four times the cost of jet fuel.

During a media briefing at the symposium, IATA director general Willie Walsh said the decisions by major oil companies like BP and Shell were “very, very disappointing and frustrating. The demand [for SAF] is there. We should be shining a spotlight on these producers because they should be participating [in growing the SAF supply]. We are disappointed to see them shelve these plans when they have clearly made massive profits. They need to put their money where their mouth is,” he said.

SOUNDING THE ALARM

American Airlines CEO Robert Isom also raised the alarm during the symposium. “SAF is critical, and while supply is growing, it still falls far short of what is needed,” he said.

Isom, who also chairs the oneworld global alliance, said airlines had taken bold decisions and actions regarding their goal to transition to net zero, but that actions within airline operations alone “are not going to be enough to move the needle.”

He explained: “We are not moving fast enough. We need to take more bold and aggressive actions,
or we risk not meeting our goals.”

Among things to be done, Isom listed the need for more innovators and scientists to work on “beyond horizon” technologies. More stakeholders across the private and public sectors were needed to get involved in aviation carbon reduction. Governments must invest in better air traffic control technologies so aircraft are not burning fuel—and creating emissions—unnecessarily because of airspace congestion. And the production of more SAF was “critical.”

“While the supply is growing, it still falls far short of what is needed,” he said. The cost of transitioning to net zero with SAF significantly pricier than jet fuel is “incredibly high, but it is not an option.”

He said American was investing in decarbonization initiatives, but it was “a drop in the bucket.”

He encouraged every airline, manufacturer and fuel supplier to get actively involved.

“I am happy to plant seeds, but we need a lot of watering to come,” Isom said.

In an apparent reference to the ICAO CORSIA global carbon offsetting and reduction scheme adopted by 191 nations in 2016, he also said it was time for countries to act on what their delegates voted on.

The cry for unity and more hands onboard was a common theme at the symposium.  ICAO Secretary General Juan Carlos Salazar said he had one request: “Full engagement of the entire aviation eco system is vital. We must move together as a team.”

During a panel Walsh said “more and more people” were listening to what the airlines were doing in sustainability and airlines should be optimistic. But he said he would like to see governments do “a bit more listening.”

“It’s critical that governments step up. Robert’s right to sound the alarm, particularly with the need to accelerate SAF production,” Walsh said.

Walsh added that the European Union’s aviation sustainability model, which hinges on SAF mandates and forcing some short-haul flights to be replaced with rail or other ground transport modes, was an example of a model not to follow.

“I think they [the EU] are making big mistakes and we should learn from their mistakes. Certainly, the idea that you impose a regional solution on other regions is nonsense,” Walsh said.

MATCHMAKER PLAN

IATA announced plans at the symposium to create a platform to link airlines with SAF suppliers in a bid to accelerate and grow the availability and uptake of SAF. The Matchmaker platform is expected to launch in the first quarter of 2025 with the goal of creating “a transparent, efficient and accessible matchmaking platform that will accelerate the uptake of SAF as the aviation industry progresses towards net-zero CO₂ emissions by 2050,” IATA SVP sustainability and chief economist Marie Owens Thomsen said. “The platform will do that by reducing the costs and complications that airlines face when looking for SAF suppliers.”

SAF producers and suppliers will be able to post available or planned SAF volumes, and airlines will be able to register their interest in purchasing them. Any subsequent trades will take place outside the platform. Owens Thomsen said the platform would be particularly helpful to smaller carriers. That’s an important point because some small carriers are losing out to larger airlines and airline groups that can seal mass, long-term deals with SAF suppliers.

In its Policy Roadmap Update, IATA lists some of the recommendations for collaborative actions it believes will most make a difference in the increasingly short time available. First is immediate action to unlock the CORSIA eligible emissions units and to prioritize SAF in the product mix at refineries.

Second is what IATA describes as “strategic policy sequencing” to combine technology-push and demand-pull measures. “Governments must foster global, liquid, and the transparent markets for cleaner aviation energy,” the roadmap states.

Third, IATA calls for transformative collaboration between governments, aviation, and all sectors to remove barriers and promote investment in new technologies and SAF. “Air transport’s decarbonization is part of the broader global energy transition,” the roadmap states. A global SAF accounting framework would ensure transparency and prevent double counting of SAF’s benefits.

IATA and airlines know the key pathways to achieving their net-zero goals: reducing aircraft energy use in flight and on the ground; changing the type of fuel used from more than 99% fossil-sourced fuel to net-zero and true-zero emissions alternatives; and recapturing all the CO₂ emissions that cannot be avoided. The question is who, besides the airlines and aircraft and engine suppliers, will step up to make those pathways open fast?