The Long Haul to Decarbonizing Airline Fuel

Aug 4, 2023

Refiners, chemical companies and airlines could benefit from the move to curb emissions with sustainable jet fuel.

Key Takeaways

  • Air travel is expected to surge in the coming years and increase the airline industry’s carbon footprint.

  • Sustainable aviation fuel could be the best medium-term solution for decarbonization. 

  • Refiners and chemicals companies may benefit from the shift from traditional jet fuel. 

The global aviation industry is aiming for decarbonization. And while it will be a long and expensive journey, the transition could bring billions of dollars in investment opportunity. 


The challenge: How to curb and offset the industry’s carbon dioxide (CO2) emissions, which were estimated at 1 billion metric tons in 20191–roughly equivalent to those of Japan—and expected to double or even triple by 2050 amid increased demand for international air travel, according to the UN agency that regulates international aviation.  


To meet net-zero targets aligned with the Paris Agreement, the airline industry needs to reduce its carbon footprint to around 885 million metric tons by 2030, 13% below a 2019 baseline, and to about 200 million metric tons by 2050—an 80% reduction, according to International Energy Agency estimates.


“Sustainable aviation fuel, which can offer over 80% reduction in CO2 emissions over conventional jet fuel, presents the best solution for decarbonizing in the near to medium term,” says Ravi Shanker, Morgan Stanley's Freight Transportation and Airlines Analyst.  


Supply and scale will be a big part of the success story for sustainable aviation fuel (SAF), with investment implications for global refiners, airlines, chemicals and aerospace companies.  


On the Runway to Sustainable Aviation 

Airlines continue to upgrade their fleets with more efficient aircraft, but an expected 4% annual increase in air travel demand through the end of this decade would offset the potential reduction in emissions from that shift. That’s where SAF could help. Made from feedstocks including corn grain, used cooking grease and byproducts from forest harvesting, SAF can be integrated into existing planes. Although SAF is currently used in less than 1% of flights, multiple global airlines have said they plan to replace at least 10% of jet fuel with SAF by 2030. Meanwhile, the U.K. and Japan are targeting low-carbon fuels to represent 10% of jet fuel demand, also by 2030. 


To meet those goals, however, SAF supply would have to increase to 5.5 million barrels per day from about 20,000 at the end of 2022. 


“Scaling SAF just to reach the 2030 goal would take a massive global effort and could cost up to $475 billion,” says Shanker. “In the most likely scenario, SAF production increases to 350,000 to 400,000 barrels per day by the end of this decade to represent a greater share of jet fuel as overall demand grows, accounting for 4% of global aviation fuel from about 1% now, with needed investments of $20 billion.” 


Global refiners could realize $10 billion in annual profit opportunity under that scenario. The impact on airlines’ profits is expected to be net neutral, at best, but SAF will allow carriers to make significant progress on meeting their environmental, social and governance (ESG) goals, with the added benefit of reduced volatility and geopolitical risk around jet fuel prices. 


Policy and Innovation Needed for Takeoff

SAF can cost up to two-and-a-half times more than standard jet fuel (roughly $2 per gallon), so airlines need credits and incentives to bring prices down. In the U.S., an estimated $4 per gallon in federal and state policy incentives—up from roughly $3 per gallon currently—will be required to spur more widespread SAF production, according to Shanker. “This will bring SAF somewhat in-line with the cost of jet fuel and lower prices to a level that airlines are willing to pay, while providing refiners with the returns they seek,” he says. 


Some of these policy measures are already underway. President Joe Biden's 2021 climate agenda and the 2022 Inflation Reduction Act are expected to help increase SAF capacity to 250,000 barrels per day from around 20,000 as of year-end 2022, with the goal of producing 3 billion gallons of SAF per year by 2030. 


Additionally, evolving technology is helping the decarbonization cause. For instance, artificial intelligence (AI) tools make operations more efficient through monitoring and data analysis of customer interactions, demand forecasting and risk mitigation.


Further innovations such as electric/hybrid engines and hydrogen-fueled planes; newly designed engine technology that more efficiently uses biofuels for air travel; and advances in scaling SAF production could also drive decarbonization beyond the next decade. 



For complete analysis on the future sustainable aviation fuel, ask your Morgan Stanley Representative or Financial Advisor for the full report, “Decarbonization in Aviation: A Long Path—With Many Turns—to a Greener Destination,” (June 25, 2023). 

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