Global Sustainability Spotlight: The Future of Commercial Aviation
This week we’re exploring the commercial aviation industry. Although the industry is responsible for only a small percentage of global emissions, it is a critical area to address as the world explores avenues to curb the impacts of global warming. Progress to date has been slow, but with demand for air travel expected to continue growing rapidly, it is an issue that will be a focal point for decades to come.
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In a world where political and business leaders are focused on limiting the impacts of global warming through lowering emissions, some industries have struggled to demonstrate improvement. Commercial aviation is one of them. Currently the industry contributes to only about 2.5% of total emissions globally, but demand for air travel is expected to double by 2042. Unfortunately, growth will likely be fueled by current emissions-intensive technology; Airbus alone has over 42,000 new aircraft projected to be delivered by 2043. With a lifespan of 25 to 30-plus years, these new aircrafts will lock in new emissions for decades to come. Below we will explore some of the options for the industry in a quest to reduce global emissions.
The Carbon Cost of Transportation
Alternative Aviation Fuels
With airlines and air freighter largely anticipated to utilize current technology for the next few decades, one of the most promising areas to reduce greenhouse gas emissions lies in the use of more environmentally friendly jet fuels. Sustainable aviation fuel (SAF) is an alternative that is made from various forms of non-petroleum-based feedstocks (e.g., corn, canola seed, algae, etc.) that are converted into jet fuel. They then can be used to power aircraft engines or blended with traditional fuel if required. According to Bloomberg New Energy Finance (BNEF), global SAF production is expected to increase tenfold by 2030 and represent 5% of total jet fuel demand.
SAFs are not without challenges, however, as each initial feedstock pose unique benefits and weaknesses, and developing robust supply chains for adequate distribution will take time. Government intervention will also have a huge role to play in pushing this space forward and driving down costs. In the United States, producers of SAF can receive a credit of $1.25 to $1.75 per gallon of fuel, depending on lifecycle greenhouse gas emissions reduction (minimum of 50%).
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Analysis of Future Domestic and International Aviation CO? Emissions
Source: Federal Aviation Administration
Stakeholders like the FAA are heavily relying on SAFs to take commercial aviation towards Net Zero Sustainable.
Notable Companies
BP (A1/A), BP (NYSE)
The British oil and gas powerhouse has teamed up with DG Fuels and Johnson Matthey to produce 180 million gallons annually of SAF from sugar cane waste in Louisiana.
?United Airlines (Ba3/BB-), UAL (NASDAQ)
The airline has historically been the largest purchaser of SAFs, and recently committed to utilizing SAF supplied by Neste for its Chicago O’Hare-based operations.
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Feedstocks Suitable for SAF Production
?There are multiple avenues to create SAF, and each feedstock has unique advantages and disadvantages.?
Electrofuels/E-Fuels
A wildcard for new jet fuels might be the e-fuel space. E-fuels are created through a process known as electrolysis, which uses electricity to split water molecules into hydrogen and oxygen, creating hydrogen known as green hydrogen. The green hydrogen is then used to react with carbon dioxide through a process known as synthesis to ultimately create a synthetic hydrocarbon fuel. These fuels, like SAFs, can largely be used with current technology. The costs to produce e-fuels are currently prohibitive (even relative to SAFs), and they require a lot of energy that would have to come from low-emission energy sources.
Evolution of Current Technology
The de Havilland Comet’s first passenger flight in 1952 marked the beginning of an era of jet-powered passenger transport. Planes have evolved since then (becoming faster and more fuel efficient with longer ranges), but there are many parallels to the technology used over seven decades ago. Though innovative breakthroughs may occur, the base case for investors is to see this evolution continue. Fuel efficiency across the global fleet of aircraft has improved by over 80% in the past 50 years, and we should anticipate those improvements to continue.
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New Engines
?The lifecycle of a commercial plane generally exceeds the lifetime of its engines, so current aircraft will benefit from more fuel and emission friendly technology when engines are replaced. The current technologies being utilized by engine manufacturers are variations of a turbofan design and provide 15% to 20% in fuel savings over replacements (e.g., RTX’s Pratt and Whitney GTF and CFM International’s LEAP). However, new designs are on the horizon, and the one to keep an eye on is the open rotor engine concept (e.g., CFM International’s RISE).
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Notable Companies
?General Electric (Baa1/BBB+), GE (NYSE)
The American conglomerate’s joint venture with French company Safran, CFM International, has developed the RISE open-rotor engine, which is currently undergoing testing.
?RTX Corporation (Baa1/BBB+), RTX (NYSE) Though the company’s Pratt and Whitney engines have struggled as of late with reliability issues, their GTF series engines have secured over 11,000 orders to date.
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Aerodynamic Improvements
?Another area that has led to efficiency improvements is improving aerodynamics (e.g., the adoption and evolution of winglets). Airplane wing design has tended towards utilizing longer wingspans with lighter material to increase lift and decrease drag, but some potentially revolutionary concepts are being explored, such as the utilization of a truss-braced wing design.
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Notable Companies
?Boeing (Baa3/BBB), BA (NYSE)
The company has teamed with NASA for the X-66 protype experimental aircraft, which utilizes transonic truss-braced wings on a modified MD-90 platform. The goal for the project is to lower emissions by up to 30%.
?Bombardier (B1/B+), BBD (TSE)
The Montreal-based aircraft manufacturer has been exploring blended-wing designs through its EcoJet program to reduce the climate impact of future business and regional jets.
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Contrail Mitigation
?If you have looked up in the sky on a given day, you likely have noticed large white streaks that trail the flight path of an airplane. Those streaks are known as contrails (short for condensation trails), which happens in specific atmospheric conditions when exhaust causes water vapor to freeze around nearby small particles. Unfortunately, contrails trap heat, and the IPCC estimated that in 2022 they accounted for roughly 35% of aviation’s global warming impact. Contrail detection, tracking, and mitigation has become a growing area of influence to slightly alter flight paths and altitudes, and growth spaces like commercial satellite imagery and artificial intelligence will lead to strategies to minimize contrail influence.
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Notable Companies
?Alphabet (Aa2/AA+), GOOG (NASDAQ)
The tech company partnered with American Airlines and Breakthrough Ventures to explore how AI could be utilized to limit the environmental impacts of contrails.
?Delta (Baa3/BB+), DAL (NYSE)
The airline has a standing collaboration with MIT to study tools to lessen the impacts of contrails.
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New Power Options
?While the path for commercial aviation emissions reduction appears to be driven primarily by SAF and improvements to current technology, some other emerging options may make headway. Especially in the regional space, where flights are shorter and utilize smaller planes, there is the possibility that battery electric, hydrogen-powered, and hybrid-electric airplanes could make some progress if significant hurdles are addressed.
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Battery Electric
With the success of battery electric vehicles on the global stage, the thought of trying to create that magic in the air seems like a no-brainer. Unfortunately, the massive weight of batteries makes it difficult to create aircraft that have adequate range and payload. As batteries become more efficient and new technologies emerge (such as NASA’s solid-state selenium sulfur battery), the prospect of electric aircraft putting a significant dent in passenger transport becomes more realistic.
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Notable Companies
?Air New Zealand (Baa1), AIR (NZE)
The airline may have ditched its 2030 emissions target, but it hasn’t abandoned plans to electrify some of its fleet. The company has partnered with multiple companies, including Eviation, to utilize electric aircraft in the future.
?Contemporary Amperex Technology Co. (CATL) (A3/A-), 300750 (SZSE)
The world’s biggest EV battery manufacturer plans to delve into the aviation space. The company recently formed a strategic partnership with the electric vertical takeoff and landing (eVTOL) aircraft manufacturer AutoFlight.
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Hybrid
One of the more promising and pragmatic areas that may have the best chance of making inroads into commercial aviation (especially for regional transportation) is hybrid-electric propulsion technology. Utilizing smaller batteries that can also be recharged in flight and pairing them with traditional engines may be a viable path that could lead to significant emissions reductions.
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Notable Companies
?Heart Aerospace
The Swedish startup aims to have its regional plane ready to fly by 2028. The ES-30 can fly 129 miles in all-electric mode and 249 miles in hybrid mode.
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BAE Systems (Baa1/BBB+), BA (LSE)
The British aerospace company is designing the electric systems for Heart’s ES-30 and is also creating the battery system for NASA’s Electrified Powertrain Flight Demonstration project.
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Hydrogen
?One of the most contentious debates in the clean energy transition involves the use of hydrogen, which has the unique advantage of being a very lightweight power source that can be compressed to make it dense as well. There are, however, many logistical and safety challenges that make the technology’s future difficult to predict. It is also very energy intensive when considering its entire lifecycle as an energy source for an aircraft (or any other means of transportation). Nevertheless, many companies are forging ahead and exploring ways to make hydrogen aircraft a viable reality.
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Notable Companies
?ZeroAvia
The privately owned company inked a deal with American Airlines to provide 100 hydrogen-electric plane engines for regional flights.
?Airbus (A2/A), AIR (PA)
The European aircraft maker has made noteworthy progress in its quest to deliver a hydrogen-powered commercial airliner by 2035.
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Conclusion
?When it comes to a decarbonization pathway, perhaps no industry faces as uncertain of a future as the commercial aviation industry does. The booming growth of demand for air travel is expected to be fulfilled primarily with current technology, which will put the industry at direct odds with global demand to reduce emissions. Either we will need to see rapid advances in the spaces listed above, or we will eventually see more efforts from a regulatory perspective to curb air travel in favor of other transportation means (unless there is a lack of political will to limit emissions in this space, which is also possible). Commercial aviation will be an exciting area for investors to follow for decades to come.
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Other Stories Sage is Following
?A Coal Revival
While many have been optimistic about the ultimate demise of coal power, its resurgence globally continues to be in full force. In the US, the Energy Information Administration predicts coal consumption will jump in 2024 due to an increased demand from coal-fired powerplants; as a result, US coal stockpiles have reached their highest levels since 2020. In India and China, coal demand jumped by 10% and 6%, respectively, for 2023. The combination of developing economies needing more electricity, demand from data centers, and the electrification of transportation will slow any push for its demise. Companies are taking note, as mining behemoth Glencore recently abandoned plans to sell off its coal mines due to the long-term prospects for the commodity.
US Solar Industry Continues to Struggle
The Inflation Reduction Act aimed to jumpstart clean energy manufacturing within the United States, but the story of its impact to date has been complicated. The SunPower (California-based solar manufacturer turned installer) bankruptcy filing is a stark reminder that generous subsidies alone cannot carry companies, and other bankruptcies are expected within the solar space. On the manufacturing side, it has been very tough to compete with China, as Chinese companies have been adept at setting up shop in the United States to bypass tariffs and receive US subsides. US legislators have taken note, however, and a bipartisan bill was introduced to end taxpayer support to Chinese companies for solar manufacturing.
Municipality Highlight
San Francisco Airport Commission
Credit Rating: A1/A+
The Commission is responsible for the operation and management of San Francisco International Airport (SFO). The airport receives the highest volume of SAF of any airport in the world (10 million gallons in 2023). Airlines are utilizing SAF at SFO due the California Air Resources Board’s (CARB) Low Carbon Fuel Standards (LCFS) program incentivizing the use of cleaner transportation fuels. And with strict rules from CARB to penalize users of traditional fossil fuels on the horizon, SAF consumption will continue to grow at the airport.
Company Highlight
ONEOK, Inc.
Ticker: OKE (NYSE)
Credit Rating: Baa2/BBB
Headquarters: Tulsa, OK
The midstream company has commissioned terminal capacity at its Houston location to the world’s largest SAF producer, Neste. The Finnish company will blend and store SAF on site, which will then be sent to airports in the central and eastern US through ONEOK’s distribution networks. The company is actively working to add new pipelines, and as an example is building a 230-mile pipeline to provide SAF to Denver International Airport.
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