As governments and increasingly conscious consumers push corporations to decarbonize, we expect the use of sustainable aviation fuel to grow, although the change will not happen overnight. (UBS)

Aviation accounts for USD 3.5tr (4.1%) of the world’s GDP, and with summer travel in full swing, we can appreciate its use. The aviation sector is expected to keep growing: The International Civil Aviation Organization estimates that air transport demand will increase by an average of 4.3% a year over the next 20 years. Rising demand for air travel increases the urgency to decarbonize this hard-to-abate sector, which, according to the International Energy Agency (IEA), accounted for 2% of global energy-related CO2 emissions in 2022 (the figure is higher for developed markets).


Many airline companies have committed to net-zero by 2050, but how can they get there? According to estimates from the IEA and individual airline companies, fuel replacement using sustainable aviation fuel (SAF)—a biofuel with similar properties to conventional jet fuel but with a lower carbon footprint—offers one potential solution; that is, if supply can ramp up enough from minuscule levels currently.


SAF can be made out of, among others, corn grain, oil seeds, algae, fats, oils, agricultural residues, and forestry residues. Depending on the feedstock and technologies used in production, it can reduce life-cycle greenhouse gas (GHG) emissions in aviation by up to 80%, as estimated by the International Air Transport Association. SAF is also considered a “drop in” fuel, meaning fleets would not need to be replaced entirely to facilitate the new fuel.


Other measures include better fuel efficiency and alternative propulsion technologies like batteries and hydrogen, but so far airlines are indicating SAF will be one of the primary decarbonization solutions.


Policymakers worldwide are taking steps to achieve net-zero in aviation. Government incentives in plans like ReFuelEU and the US Inflation Reduction Act should help support the industry and improve production economics, but the primary challenge in the near term is supply. SAF usage is currently limited to less than 0.1% and 0.5% of total jet fuel used in the US and EU, respectively.


Currently, there is a notable supply-demand gap. SAF supply depends heavily on government incentives (US) and mandates (EU). The principal limiting factors are the availability of feedstock and the demand for fuel from non-aviation sectors. On the supply side, the US is a major contributor, with the government planning for 3bn gallons per year by 2030 and 35bn gallons by 2050. While demand for SAF is increasing, the higher price compared to traditional jet fuel and the lack of availability at a global level pose headwinds to further adoption.


Investor takeaways

  • As governments and increasingly conscious consumers push corporations to decarbonize, we expect the use of sustainable aviation fuel to grow, although the change will not happen overnight.
  • The opportunity in SAF may expand as the industry matures, although for now it is a small part of the business of fuel providers.
  • We recommend investors focus on long-term investment themes related to decarbonization such as "Clean air and carbon reduction," and consider fixed income opportunities such as green bonds or sustainability-linked bonds. For those interested in SAF specifically, bonds issued by companies in the aviation sector may offer another way to gain exposure.

Main contributor: Amantia Muhedini


Read the full report Perspectives: Net-zero aviation, Asia's plastic problem, Nature Restoration Law and disclosure 4 August 2023.


Watch the video UBS Trending: Aviation net zero—Is it possible? 7 August 2023.