Who is financing sustainable aviation fuels?

“The world will always assume something can’t be done, until you do it”, quipped Richard Branson, the founder of Virgin Atlantic after Flight100 landed in New York. Flight100, a Boeing 787 powered by Rolls Royce Trent 1000 engines, flew across the Atlantic from London to New York on 28 November 2023. 

It was the world’s first 100% sustainable aviation fueled flight. Sustainable aviation fuels (SAF) are an exciting prospect and investor optimism has soared in the months following Flight100’s display of SAF’s technological promise.

SAF producers and distributors are now onboarding new investors in a search for economies of scale and ultimately, decarbonised aviation.

Amongst the mix are institutional investors for whom financing SAFs means understanding not only technological tailwinds but also gusty headwinds of higher prices and limited production capacity.

The financiers

The most recent example of SAF financing comes from LanzaJet, an American SAF producer. On July 24, Airbus announced that it would participate in the company’s growth equity financing round, which LanzaJet says is about attracting the right financiers.

“LanzaJet intentionally developed a diverse portfolio of strategic investors comprised of leading, global companies to ensure we have the ecosystem to scale the SAF industry,” said Jimmy Samartzis, LanzaJet’s chief executive.

The investors are a diverse bunch indeed. So far, the list includes a French airport operator (Groupe ADP), a Japanese bank (MUFG), an American airline (Southwest) and Microsoft’s Climate Innovation Fund.

For companies like LanzaJet, the investor list could expand as ticket sizes get larger and the demand for capital rises. At some point - given the capital intensive, long-term nature of the industry - institutional capital’s seat at the table will become both a necessity and a priority.

Tailwinds

At the heart of the investment case for SAFs is proof of concept. SAFs are produced from feedstocks such as waste oils or agricultural residues. They are the air transport industry’s most promising source of emissions reduction. By 2050, 65% of the industry’s emissions reduction is expected to come from SAFs.

What really sets SAF technology apart from others such as hydrogen or electric aviation, is its compatibility with existing infrastructure. The investment pitch rests on the argument that no aircraft changes or infrastructure modifications are required. 

While completely replacing conventional jet fuels in aircraft fleets remains the end goal, the process is likely to be gradual. Currently, most airlines opt to blend SAF with jet fuel. Since 2011, some 350,000 flights have flown on blends ranging from 10% SAF to 50% SAF.

The visible hand

The commercial necessity of blending reflects the cost-prohibitive nature of SAFs. As a nascent industry, scaling up production is a work in progress. Consequently, these fuels are estimated to be three to four times as expensive as jet fuel. In a price sensitive industry like aviation, this is a significant barrier.

While an expansion of production scale will lower prices over time, investors expect the visible hand of regulatory incentives to expedite the process.

When Macquarie Asset Management (MAM) announced a €175 million investment in Dutch SAF producer SkyNRG, policy support played a role. Incentives offered through the US Inflation Reduction Act and Europe’s blending mandate motivated MAM’s first investment in the SAF industry.

Elsewhere, in May 2024, IFM Investors welcomed Australia’s federal budget - citing its support for the SAF industry. According to the asset manager, Canberra’s fiscal support could help direct much needed superannuation fund investment into the Australian SAF industry:

“The Federal Budget confirms that a sustainable aviation fuel industry made in Australia is ready for take-off”, said David Whiteley, IFM Investors’ global head of external relations.

“We look forward to continuing to work closely with the Albanese Government to accelerate superannuation investment in the energy transition in areas that can generate risk-adjusted returns for our clients and their millions of members”, he added.

In the UK too, regulatory support is expected to be announced soon. The King’s speech in July 2024 indicated that the government will introduce a revenue support mechanism for SAF production.

As the SAF industry matures, its appetite for institutional capital will rise. While these fuels seem technologically sound, the investment case for SAFs is dependent on economies of scale and regulatory incentives.