This is Tom ronnins Reese and you're listening to Switched on the podcast brought to you by bn EF.

Despite an increase in the use of sustainable Aviation fuel or SAF for short, the carbon footprint of the aviation sector is still on the rise.

A lack of policy support and high costs means the use of SAF has been very limited for passenger airlines, who are unwilling to pass additional costs onto their customers owing to tight profit margines in what is an ultra competitive sector.

We do, however, see a different pattern emerging for logistics companies, with dhl's usage rate of for SAF being a standout, having increased to reach three point five percent for its air fleet's fuel consumption.

More efficient planes, hydrogen propulsion engines, and electric vertical takeoff and landing aircraft are all being explored as alternative means of decarbonization, but questions remain about just how large an impact they can have and whether consumers are prepared to take the hit when it comes to higher costs.

To discuss the decarbonization of the aviation sector today, i'm joined by bnif's head of Commercial Transport, Nicolas Sulopolas, and aviation specialist Takahiro Kawahara and were view findings from the note Aviation Decarbonization Outlook one h twenty twenty five, which B and F clients can find at BNF go on the Bloomberg Terminal or on BNF dot com.

All right, let's get to talking about the outlook for aviation decarbonization with Nico and Take, Nico and Take.

Welcome to the podcast.

Hi, Tom, it's great to be here.

Hello Tom, It's great to be here as well.

So we're talking about decarbonization of aviation, which is a topic that I, as a BNF analyst, have sometimes run scared from because it is very much one of the areas that I think we classify as hard to abate, and from where I'm sitting, there's not any easy options.

And I'm actually I mean, obviously I'm going to learn maybe you'll tell me that I'm wrong about that.

And it accounts for what percentage of emissions does aviation account for?

Sorry to put you on the spot here.

It's about two to three percent of the global emissions.

That's really interesting because I mean two to three percent of global emissions.

Obviously a lot of emissions it's not necessarily as much as you might think, given how much emphasis maybe we put in the Western world about our own carbon footprints and how much taking a flight impacts that.

So I think that it's also as much as its volume.

Maybe there's a symbolic importance of decarbonizing aviation because it flying is a privilege, and it's maybe the people with the highest carbon footprints in the world they are getting to fly the most.

Is that part of the reason why you think this is an important topic.

Well, I think the one reason is, of course, it's you're right there, it's very difficult to reduce emission technically.

The other is right now aviation comes for ready be small portion of the global SITTY emissions.

However, highly likely this share of emissions will increase.

It's actually the aviation is the only transport sector that will keep increasing COOTWO emissions, mainly because that increase of of your demand.

Got it.

That's a really interesting point that I hadn't really thought about.

I think it's because we talk so much about the carbon emissions associated with flying, it seems like it's the big problem today.

What you're actually saying.

Is is that these efforts to decarbonize aviation are as much about preventing it from being a really big problem in the future.

M hmm.

Correct.

And you also have some impacts from aviation that may not be entirely se too related.

I mean, they do have some climate impacts if you're looking at the contrails, for example, or emissions of further pollutants high up in the atmosphere.

So these do tend to have some impact that is not directly related to CO two.

It's a broader climate effects there.

Yeah, you're right.

I think there are still scientific works are ongoing to measure the impact of non cootwo emissions.

But then some scientists actually argue that we should pay more attention to non CEO two emissions in press contrails in terms of how they are affecting the climate change.

That's really interesting, and maybe we can return to that little bit more, because actually my first question was actually going to be around decarbonization, and I hope we're going to get time to talk about different technologies and angles and maybe we can talk about how they impact some of those other environmental impacts associated with flying.

But let's talk about decarbonization, because nevertheless, that is still important so yeah, what is happening in efforts to decarbonize aviation.

So airlines they are working on the various aspects to reduce their C two emissions.

As I mentioned earlier, the aviation is very difficult to reduce your emissions.

Traditionally, airlines have worked on a reducing emissions by replacing their old aircraft with more few efficient aircraft or purchasing carbon assets.

Sometimes they try to improve operational improvement either on the ground and also in the sky.

What they're doing in the recent years is that in addition to those conventional efforts, they are trying to maximize emissions reductions impact by using so called sustainable aviation fuel, which is the low carb and alternative instead of the fossil jet fuel.

The other activities they do is to invest in new technologies.

One is the carbon removal technologies.

It's still audio stage, but they are some of the airlines that are aiming to purchase credits based on the carbon removal projects.

The other efforts are investing in new aerospace technologies such as electric or hydrogen aircraft propulsion.

Got it.

So there's it seems like there's three main buckets here.

Like if I'm just going to read back to it.

There's these changes that I would say are incrementally chipping away emissions, but they're never going to be something that solves the problem completely, like these operational efficiency things like that.

Then there's sustainable aviation fuel.

Well as what you called it was so called sustainable aviation fuel, so I want to unpack maybe why you said so called in a moment.

Then there's investing in technologies, and what was really interesting is this point is that some of the technologies are to reduce the emissions of flying, and some of them are it's almost like an acknowledgment that that's going to be really hard, and that carbon removal technologies are a more realistic way of dealing with the emissions associated flying.

So hopefully we'll get through all of that.

Maybe we should start by talking about sustainable aviation fuel though, because that is something that is happening.

It's growing right now from what I understand from the research you've been publishing.

Maybe we start with why.

You did you say it was so called sustainable aviation fuel?

Was that just a was that a conscious choice of words, or was there actually that was just a slip of the tongue.

I think it's not the word, because that's the word genery being used in the public and also if industry.

But I think in order to understand what the sustain vivis fuel means exactly, is that I think we should probably classify this type of fuel into two different types.

One is the biogenic low carbon aviation fuel, which uses biomas feederstock to reduce recycle emissions.

The other is synthetic aviation FIEL, which uses clean hydrogen and alsocio too adds jet fuel because sustain abavition fuel if you use that, just sustain abas fuel that actually has various types.

So as a general term, I use so called.

I guess maybe whether or not it's sustainable truly is dependent on if it's the biomass field, is how sustainable was the farming methods because you could have two identical barrels that have had very different degrees of sustainability.

And then for the synthetic ones, how sustainable was the hydrogen actually, So the sort of what I'm hearing to say is when you say so called sustainable, your so called it's not saying that it isn't sustainable.

It can't be, but we shouldn't just assume it is.

So formally there are the ICA has some definition of what sustainable aviation fuel means, and it is as Taki said, I mean depends on how you make it, where the feed still comes from and everything.

So we use sustainable aviation fuel.

It's a formal term by now and everyone in the industries indeed following.

That got it.

So how much is sustainable aviation fuel currently having an impact and.

Who is it having an impact with?

So right now there's a very limited impact on division decoboniddition.

There are a lot of activities, so we are tracking airlines sustainable aviation Fuel PROCAREM and signed with fuel providers.

There are one hundred and seventy four records so far.

But then when it comes to actual usage of sustainable aviation fuel, it's still very limited.

Globally speaking.

According to the International Air Transport Association or AYATA SASSINO, division fuel accounted for just ero point three percent of the global jet fuel production last year.

If you look at the individual airlines there is a different level of achievement.

For example, International Airlines Group, which is a parent company of British Airways, also Air France CAREM.

They have rendered more than between one percent and two percent of Sasana vivision field with jet fuel in twenty twenty four, which are these numbers are ready to be higher compared to other airlines.

However, some of the Asian airlines, let's say any Holdings Singapore Airlines or KSAs specific they are aiming to blend Saseno division fuel.

They have targets.

However, the usage rate has been very low compared to those European airlines I mentioned out here.

So obviously three percent of global aviation fuel being sustainable aviation fuel, presumably for people in the industry, that's not the end goal.

And we have to remember that there was once a time where solar was just three percent of global power generation.

I don't know what it is today, but it's definitely more than three percent, and that was achieved by you know, the cost of the technology coming down.

But we also know that you know, there's a limit to how much solar.

Can decarbonize the electricity sector because you know it had you know, the various parameters of both the needs of the power system and what it can deliver.

So I suppose similarly with sustainable aviation fuel, is there a pathway for the costs to come down in the same way.

I guess that's the first question.

And the second question is is is there a limit to how far it can go?

I mean, could you see a world where one hundred percent of aviation fuel is is sustainable aviation fuel or is it impossible to deliver that sustainably?

So, by the way, it is ero.

Point three percent.

It was not three percent.

Okay, the blending rate last year, so it was it was really really tiny on the on that front.

So on the second question on whether one hundred percent is possible, I mean it's I guess, technically possible.

The question here is how likely it is, and we think that it's at least with what we know right now, with the combination of the cost of that fuel and the availability of some of the feedstocks.

We're far far from that.

We can discuss, I mean, how far we are from that, But perhaps we can start with the cost trajectory.

And it was interesting to relate it to other technologies, like what we've seen in solar, what we're see in batteries in road transport.

As far as we can tell, there isn't a reasonable pathway under which any sort of fuel that is not fossil based becomes us cheap or even cheaper than fossil based kerosine.

So we're looking at a permanent, so to speak, a premium of that fuel over what we're using right now.

Hence my comment about I mean technically possible, yes, to have one hundred percent, but art proposition.

Right, and I mean, and I suppose that's when you know, if you're trying to get to one hundred percent reducing the emissions from aviation, some of these other technologies, either something that completely different type of aircraft or carbon removals starts to become the question because of just this question of it, it's never going to be cheaper than the fossil fuel alternative.

I think that's a good comment in the sense that perhaps no technology, again with what we're currently seeing, what we currently know is has the possibility to become as cheap as what we currently use in terms of aviation fuel or aircraft or other like propulsion technologies.

So that's where I think that makes sense your comment.

And aviation indust has started to look at other areas and beat carbon offsets or carbon removals and the rest, trying to find the most cost efficient way to achieve emissions reductions.

It's interesting because if we're looking at a choice between sustainable aviation fuels and carbon removal, and let me just say, we haven't got talking about the other technologies, but let's just for argument's sake, these are the only real options on the table for like decarbonizing long haul flights.

You know, however cheap you can make carbon removals.

However much technology advances, it's always going to be more expensive than the fossil fuel alternative because you have to do something extra versus doing nothing extra in this scenario where you just burn fossil fuels and don't do anything.

So then this means that to have a carbon free aviation industry, someone is going to have to pay more.

And I suppose a question I have is do the end consumers, whether it's you know, consumers for passenger flights or if it's the kind of corporate's paying for freight, is there the appetite a willingness to pay for this, So the ring.

Has to pay.

It's a really to be higher in the freight industries.

I think a good example is Deity Express.

So dear branding self branding rate word three point five percent in twenty twenty four, which is higher than passage airlines even International Airlines Group.

The reason is that the freight companies are in a good position in terms of distributing the cost to their customers.

So Detail, for example, has a program called Gogreen prats which allows their Details customers to pay extra for the Detail to use stuff.

In exchange, those companies can reduce their scope three emissions.

So which is driving the interest of those customers of cargo companies.

I think there are other followers in different regions.

One example is FedEx in the US, which have signed for sustainables feel of take agreement with finished company called NESTE.

And sometimes in freight you have some parts of that industry that by definition less price sensitive.

I in some higher value products I mean fashionige one example where we see some activity in terms of the carbonization from you know, from transporting freight with cargon with airplanes.

And so there are some niche areas where you can certainly find the higher like a willingness to pay or lower sensitivity to price.

Yeah, especially like the sectors such as technology companies pharmaceutical companies, do you tend to have a higher inting nest to pay for using SAFF to reduce SCULP three emissions, So there's a difference bisectors.

So we think this is going to be led.

The development of the SAFF industry is currently being led by these logistics companies, but you know, by freight transport, because there are buyers willing to pay for passenger airlines.

I also remember, and I don't know if this is still true, but I remember, like this is maybe ten years ago, someone telling me that being an airline is one of the hardest industries in the world to make a profit if you look at the history of airlines.

I can't remember who told me that, and I don't know if it was true to last year.

And last year was a good year for the airline industry.

Global revenue was about one trillion dollars and global profit was about just over thirty thirty five billion dollars.

So it's a large number, or it sounds like a large number, but it is about three three and a half percent of revenue.

And that was a good year.

And that was a good year.

Yeah, So the fluctuations across a business cycle can be sort of brutal, you know, in the industry.

It reminds me of a couple of months ago.

We had Jenny Chase on the podcast talking about solar and I was saying, why does anyone manufacture solar panels?

Because it doesn't look like it's a profitable business to be in.

So, I, you know, there's a whole separate question.

Why the airlines airline, But in the context of what you're saying, are they really in a position to be able to take this on because I assume the reason, one of the reasons it's so hard to make a profit is they're always undercutting each other on price, and so I would assume then if you're having to introduce a premium, unless there's real willingness among consumers, it's going to be really difficult for them.

To stay afloat and adapt this stuff.

Correct.

So this is the one of the biggest challenges for accelerating self adaption.

It's unlikely that many individual passengers, I like to pay additional cost for suff Of course, many passengers are conscious about the impact on climate change, but when it comes to the increase of airfares, that's a different story.

Yeah, so they're not that concerned.

I feel like I feel like consumers get let off the hook way too easily.

Honestly, everyone blames their own corporations, like we got it here.

People aren't willing to pay for a greener flight.

Let's just call it how it.

Is exactly so interesting.

There's a country that is trying to tackle this challenge.

So Singapore is the first government in the world that has decided to inter use passenger levy for staff from twenty twenty six, meaning that all the passengers to take flights departing from Singapore, we have to pay some portions of money to contribute the premium cost of stuff.

Got it, And you're right, Tommy.

The competition is very strong in the industry, so it's hard to see what's going to give there.

I mean, I think a stack you said.

We see some of the some early kind of attempts from the industry to try and understand what that sensitivity to price is, because it's we know historically and you can go back and check what that coefficient for example, is, and how demand changes according to the increase in price and everything.

But here we're talking about, you know, like a structural shift in the cost base, so it becomes higher permanently and will become higher more and more and more and more.

What the backstop tool of that an extent is in all that competitive environment is regulation of course that we have seen coming online in in different places, and that creates some sort of AI you know, like the boundary conditions under which summer line.

Yeah, have to compete.

There's a big difference between There's kind of two kinds of price sensitivity.

There's the price sensitivity of you, as one airline, changes your prices to increase the uptake of staff, but nobody else does.

And then there's the price sensitivity of if all airlines are adopting this, how much do people reduce flying.

To an extent We don't know.

I mean, we haven't seen that situation before.

And we have seen cost fluctuations, you know, after two thousand and eight, two thousand and nine, oil prices went up and like I'll buy a lot, and that affected airlines.

We show the other side of that cycle, you know, like in the later years of the twenty tens and all that.

But those constant additional costs, I mean still is still very early to know about those.

No airline would I think, in my opinion, would voluntarily go and do that increase prices to go one hundred percent staff the good trying to reduce their emissions in general, beat with SAFF or with anything else that they may come up with.

They do it because they have to in some jurisdictions, and that creates like a very strong incentives for them to go and do it.

Yeah, so some sort of rootmaking is important.

Yeah, let's move on from saf because, as I said, this is a tough nut to crack, doesn't mean it can't be cracked.

But then that's also when it comes.

To decarbonizing and generally reducing the environmental footprint of aviation.

There are other things going on.

So we mentioned briefly electrification of aviation.

That sounds pretty ambitious and potentially quite cool.

Can you tell me a bit more about what's going on with that?

Sure?

So they are broader speaking.

There are two ways of electrification of aircraft.

So one is the fixing aircraft, meaning that replacing conventional propasian system with battery electric propaging systems or sometimes hybrid electric proposing systems or hydrogen fuel celle proposing system to use for some small fixed wing aircraft that are flying regional roots.

The other is electric vertical takeoff and landing aircraft.

I know this is too long, so let's coded air taxis because many people say air taxis.

So in terms of the fast point.

Still, the technology ropment is happening, but some there are some startups.

For example, the company like hot Aerospace in Sweden, they are aiming to introduce the hybrid electric aircraft into the market, which potentially could replace some of the existing tupleproper aircraft that are flying regional roots.

The benefit is, of course, one is reducing cilty emissions.

The other is potentially this type of aircraft could reduce the operating costs that it uses ecosidy animotives.

So now we're talking about a technology that could be greener and cheaper than the current alternative.

So this is sort of interesting really.

I remember actually our San Francisco summit a few years ago, we had someone talking about their company with a sort of an electric aircraft design and their vision, and they were talking about how in the future electrified regional air flights could be a really commonplace thing.

And I was thinking, you.

Know, this isn't just an electric alternative to your fossil fuel plane, but could this be an alternative to trains?

You know, if that's the sort of distance we're talking about, or long car journeys.

And I got quite excited, as this is something that is potentially not just a new technology that replaces another one, but actually something that changes the way we do things.

Is that sort of the vision for some of some of these companies for a.

Regional flight, yes, But then for larger aircraft let's say Boring two seven or about three twenty new carrying one hundred passengers and flying thousand one caimeters, that's not be impossible.

Right, So we're just talking regional flights here, and particularly those are route where we're not likely to have transport infrastructure like rails.

I mean I say this, I'm based in the US, and I'm just really struck by how little you can do on a train in America, and it's such a big country.

And I guess if they were going to build those train lines across the country, they would have done it already.

And so I'm thinking, is there going to be a leap frog for some companies?

But they're going to And I keep main a point about trains.

I don't just mean trains, I mean all kind of transport along in a certain distance does electrified aviation have the potential to leap frog certain forms of transport that we currently rely on for this kind of medium term, medium range trip.

I guess i'd call it no.

No, for sure there and there are two in fact, as you point out, Tom, there are those two aspects of electrifying aviation.

One is replacing some of the existing short haul or medium range route and the other one is having some expanding let's say, the transport infrastructure option, the transport options for different consumers, and potentially pushing some mode switching, you know, from either train or car to these to these aircraft, and that can.

Love in the different switching.

I wish I had said mode switching when I asked my question.

We could have saved so much time.

I think.

I think that's that's also a bit of a term, so it's better to describe it rather than to throw it out there.

So I think listening, if you've listened to the end of podcast, you've learned a new word, mode switching.

I'm gonna use I'm going to try and find a way to use that today in conversation.

Carry on, sorry, And.

Then you have that, and then you have all these potentially new use cases a stuck and mentioned in remote islands or in places you have a lot where you have a lot of airports for example, as in the US, in places where you have airports but you don't have roads, for example.

I mean if you we've heard of people and regulators looking at Alaska even because that is where you know you need these connections and you don't have that.

So that's the one part of it, I mean, the carbonizing some part of the aviation industry, and then you know, introducing some more travel options we need to put into context.

Of course.

Then the context is that these flights that you can potentially replace with electric aircraft contribute to how much tarkey that's perhaps a few percent of total aviation emissions.

Right, very small percenter is I think're roughly actually for a regional tap props just one percent.

So yeah, we're talking about addressing a relatively small part of total aviation emissions.

So electrified transport can do three things.

It can decarbonize aviation, it can provide mode switching options, and it can also allow transport options when none existed before.

But the first of those, that emissions reduction aspect is actually a fairly minor part of its proposition.

What it's really brings to the table.

There's a bunch of cool new possibilities and options for transport, So it's not really a decarbonization play in a meaningful way.

Yeah, I think that's correct.

Yeah, I think that's our view as well, that it opens up opportunities, and some of the opportunities are really exciting.

As you said, I mean on these short and medium hall of flights, but also on even shorter flights like with the nor around cities.

I mean, different type of aircraft and different type of operating models.

But you do have quite a few options, and we have looked at some of those relatively recently in great detail, and there are some exciting stuff happening there.

And I suppose if you're taking an electric air taxi from one side of a city to another where you might have driven a car, there is also an emissions and air quality proposition with that as well.

We talked about SAFF and it's potential to decarbonize sort of mainstream aviation and the bulk of emissions, but there's a cost question.

Who's willing to pay for it?

How we get there.

We've talked very.

Briefly about the electric aviation, and it's not really a decarbonization play.

It's more of an exciting new technology with new possibilities that also happens to be green.

Then finally, hydrogen, Where does hydrogen fit into all of this?

I've heard hydrogen spoken of as a potential fuel.

It's also a potential feedstock for synthetic aviation fuel as well.

So yeah, why would you have hydrogen powered aircraft rather than just synthetic aviation fuel based on green hydrogen.

So yes, hydrogen has a hig potential to make aircraft emission ero if you can replace fossaget field with hydrogen of course, the green hydrogen.

But then there's a huge, huge technical challenges and also infrastructug challenges.

The technical challenge is that if you want to have dark use of hydrogen for propugen, because of the lower borometric energy density of hydrogen niquid hydrogen, you need to have more spaces to store hydrogen tanks, which requires aircraft design changes.

That's one challenge.

The other is infrastructure.

Flying with hydrogen aircraft means that each airport where hydrogen powered aircraft frinds to or fryings from needs hydrogen supply infrastructure, which is not there yet.

So Airbus was originally planning to introduce commercial hydrogen powered aircraft by mid twenty thirties.

However, it is postponing the research and deverronment project.

It doesn't state they will not do that, but it takes longer time than we originally anticipated.

It got it.

So the success of hydrogen as an aviation fuel is also partially dependent on the success of hydrogen as an energy vector as a whole, and including the infrastructure and the provision of it.

So there's various pieces of the jigsaw that.

Would have to fall into place.

That's right, And I suppose in that regard SAFF including synthetic aviation fuel, using hydrogen has a bit of an advantage because it's more of a drop in fuel.

Is that Is that a fair assessment.

That's correct, you directly replaced with fossil fuel.

Of course, the cost challenge is another thing.

But so just quickly one last question on this.

Given that there's this inherent head start, you could say that synthetic aviation fuel has and hydrogen could be used to create that, What is the reason why anyone would try and make a hydrogen powered aircraft?

Because there must be you know, some advantage to that that offsets all the sort of the disadvantages that it currently faces, so you.

Don't get some of the other pollutant emissions that you get with hydrocarbon.

That's that's one of the that's one of the ways, even though you get NOx into you know, like called all those based on nitrogen, which which do have some environmentally booked as well.

So that's that's the one.

The other one is, of course, I mean the economics there and the all the cost advantage and disadvantage are yet to be full understood.

But making a hydrogen and then converting it into a hydrocarbon fuel means that you have a higher cost which you have to compare with all the other costs that have to go into introducing a hydrogen aircraft.

So there are some cost balances there, I mean, largely unknown, I would say.

But the main challenge I think is what Tugy was describing.

It's the infrastructure and getting actually the hydrogen supply to an airport, sometimes a space constrained airport that would need a huge amounts of storage facilities and literally very large quantities of a fuel of a molecule that doesn't really yet exist, so that does create real hurdles for the adoption of hydrogen as a fuel in itself.

This has been such a fascinating conversation.

What I'm really struck by is I said, this is a tough nut to crack, but there are options.

And like all of the best BNF sectors, there's this fascinating combination of the willingness of policymakers to come together and make rules because that is going to be necessary for if we want to see the widespread use of SAFF.

There's also exciting technologies that don't just replace what is already there, but create new possibilities instead.

And there's various sort of I would almost say technology pathways that are almost like scenarios, you know, do we see more adaptation of hydrogen generally that would maybe swing the balance one way or the other.

So there's this really interesting array of questions, not least I should add the kind of consumer aspects and what people are willing to pay for.

So it kind of this is little microcosm of almost every climate related sector at some point in time, and it's been really fascinating.

So I just want to say thank you, Take and thank you.

Nico, Thank you very much, Tom, Thanks very much, Tom.

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