Future Transport Asset

Equities
Subcategory
Transport and Oil and Gas Thematic research

July 2021
By: Andew Lobbenberg and Kim Fustier www.research.hsbc.com

SPOTLIGHT

Sustainable aviation fuel

The key to aviation decarbonisation
We see SAF as the key enabling
technology for the decarbonisation of
aviation over the next thirty years

Policy intervention focused on

decarbonisation will likely double fuel
and carbon costs for airlines over the
next decade

Policy intervention should enable SAF

to industrialise with new feedstocks
accelerating technological progress
leading to lower costs

Play interview with

Andrew Lobbenberg and Kim Fustier

Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
 Future Transport ● Equities
July 2021

Why read this report

 We see SAF as the key enabling technology for the decarbonisation

of aviation over the next thirty years
 We examine how policy intervention to promote SAF will likely
double fuel and carbon costs over the next decade, in our view
disadvantaging low cost airlines, everything else being equal
 Policy intervention will be focussed on enabling SAF to industrialise
with new feedstocks, accelerating technology and lower costs

Decarbonisation is an imperative for aviation: Aviation’s pre-pandemic focus on offsetting as the

core decarbonisation strategy is changing. Technological advances in aviation have lagged its
growth rate and emissions have grown. This must change. There is pressure on aviation to define a
credible pathway to decarbonisation by 2050 to sustain aviation’s right to exist and grow.

SAF will be a key enabler of decarbonisation: Sustainable aviation fuel (SAF) is a non-fossil
Andrew Lobbenberg*
Analyst fuel low carbon alternative to kerosene, that can be made from feedstocks, including plants,
HSBC Bank plc
andrew.lobbenberg@hsbcib.com
waste and green power. It will be a key tool for aviation to decarbonise. Whilst plans for zero
+44 20 7991 6816 emission hydrogen or electric aviation have accelerated, SAF offers the industry its best
Shadab Ashfaq* opportunity to decarbonise around 2050.
Associate Bangalore
Industrialisation of SAF will accelerate: In order to meet this decarbonisation goal, SAF
* Employed by a non-US affiliate of HSBC
Securities (USA) Inc, and is not registered/ production will diversify across the seven approved technologies, with a significant broadening
qualified pursuant to FINRA regulations of the feedstocks. SAF is currently 2-10 times the cost of kerosene. Governments will increase
demand for SAF through mandates. The cost gap will close and reverse by policy measures to
increase the cost of kerosene and carbon, whilst the industrialisation of SAF production should
see costs fall over time.

Policy is evolving fast: We see the EU’s Fit for 55 portfolio of measures as a holistic way to
incentivise SAF industrialisation, combining the use of a SAF mandate, kerosene tax and
tightening of the carbon market. However, limiting kerosene and carbon measures to intra-EU
flying limits the benefit on the environment and creates inter-regional competitive distortions.
Meanwhile, new legislation recently introduced in the US (the ‘Sustainable Skies Act’) aims at
kick-starting US SAF production through tax credits.

Airlines will need to manage increasing fuel costs: We think airlines will be able to navigate a
prospective doubling of fuel costs over the course of a decade. Whilst a doubling of fuel costs would
require 20-30% increases in fares over the decade, this correlates to 2-3% CAGR in fares. Over the
past sixty years aviation has regularly absorbed a doubling of fuel prices over decades.

A new energy transition business is imminent: For energy producers, we see great growth
in the SAF market, with the key risk being around feedstock sourcing and sustainability. The
SAF market is currently small and a bi-product of renewable diesel. The range of technologies
and feedstocks is set to increase significantly.

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From an investment perspective: We would be cautious about drawing specific investment

conclusions for individual airlines from this subject. Airline investors typically have markedly
shorter time horizons than the multiple decade view discussed in this paper. We would, however,
highlight the positive message that there are plausible paths for aviation to decarbonise, which
means the industry should be able to defend its right to exist and grow. We do expect aviation fuel
to be become materially more expensive, but we note that historically oil prices have regularly
doubled each decade. Over time, we think higher fuel prices would be more challenging for
airlines with the lowest fares and the highest growth rates, yet this long term issue should not
define investment decisions in low cost airlines now, as near term airline economics are shaped by
the pace of recovery from the pandemic. For energy companies SAF is likely to develop into a
relevant business and will play its part in the broad energy transition.

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Contents

Why read this report 1 It’s hard to decarbonise aviation 31

Aviation growth exceeds
SAF: pathways to decarbonisation 4 efficiency improvements 33
The hypothetical pathways to
Related research 5 decarbonise aviation by 2050 38
Decarbonisation pathways evolve 38
Executive Summary 7 The risks 41
SAF holds the key to aviation
decarbonisation 7 Sustainable aviation fuel 43
Investment considerations – Aviation 8 Sustainable Aviation Fuels 43
Investment considerations – SAF 101 43
Energy producers 10
How renewable jet fuel is produced 45
A SAF powered airline industry 13 Pathways to deliver sufficient
SAF in 2050 to decarbonise 48
Implications for airlines 13
Costs of SAF now and cost
Another perspective on the projections 51
doubling of fuel costs – UK APD 17
SAF partnerships and offtake
agreements 55
Policies to incentivise SAF
transition 18 SAF supply outlook 56
Policy challenges for airlines 18 Demand growth trajectory for SAF 58
The policy toolbox to enable SAF 19
Airline emissions data 60
Background: EU’s Renewable
Energy Directive II (RED II) 20 European Airlines 60
Major policy announcement in China and Hong Kong Airlines 62
EU Fit for 55 21 LatAm Airlines 63
Existing European SAF mandates 24 CEEMEA Airlines 63
Regulatory support for SAF is Top 4 US carriers 64
growing in US 24 Appendix: SAF mandates
Consumer and corporate ability by country 66
to support SAF 26
Disclosure appendix 69
Aviation’s environmental
challenge 28 Disclaimer 72
The environmental challenge 28

We acknowledge the contribution of Vaishnavi Tadas*, Associate, Bangalore to the preparation of

this report.
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

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SAF: pathways to decarbonisation

What is sustainable aviation fuel (SAF) and how is it made?
Sustainable aviation fuel captures alternative fuels other than fossil fuels that can safely and effectively power aviation, replacing kerosene.
To be sustainable, the fuels must be produced from feedstocks which are themselves sustainable:

Sustainable feedstocks Power to liquid feedstock

H2

This can include crops which are Crop production should not Other sustainable feedstocks Hydrogen is combined with water
grown for the purposes of energy, compete with food production or include waste, from agriculture, and industrial CO 2 emissions to
absorbing CO2 during their growth put pressure water resources forestry or municipal waste create synthetic kerosene

Where low- and zero-carbon energy could be deployed across commercial aviation
Estimated timelines by fleet and technology*
Electric
Hydrogen
Sustainable aviation fuel (SAF)

Commuter Regional Short haul Medium haul Long haul

9-50 seats 50-100 seats 100-150 seats 100-250 seats 250+ seats
<60 minute flights 30-90 minute flights 45-120 minute flights 60-150 minute flights >150 minute flights

Electric Electric or Electric or SAF

2050e and/or Hydrogen fuel cell Hydrogen combustion potentially some SAF
SAF and/or SAF and/or SAF Hydrogen

Electric Electric or Electric or

2040e and/or Hydrogen fuel cell Hydrogen combustion SAF SAF
SAF and/or SAF and/or SAF

Electric Electric or
2030e and/or Hydrogen fuel cell SAF SAF SAF
SAF and/or SAF

Electric
2025e and/or SAF SAF SAF SAF
SAF

% of industry CO2 emissions <1% c3% c24% c43% c30%

Unit production costs of sustainable aviation fuel are more expensive than fossil-based jet fuel (USD/ton)

~400-800 ~900-2,000 ~1,300-4,500

Fossil-based jet fuel Sustainable aviation fuel from HEFA Advanced sustainable aviation fuel
(currently USD600/ton)** (hydroprocessed esters and fatty acids) using other pathways
* Illustrative seating configuration, general flight times and share of CO2 emissions for context. ** Based on oil prices ranging from USD40/b to USD80/b
Source: Ait Transport Action Group (ATAG), IEA and BNEF, HSBC estimates.

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Related research

Recommended reading...

ESG and Transport

Towards low carbon shipping: 8 stocks to play the theme (10 February 2021)
European Airlines: State aid and governance: what price a rescue? (9 September 2020)
Airline employment: Labour loses leverage. Stakeholder balance in focus (10 July 2020)
Airlines and environment: European airlines: COVID-19 and CO2 (29 June 2020)
European Airlines: Balancing Stakeholders, (13 September 2019)
The second frontier: The climate is changing for airlines (10 September 2019)
The second frontier Why the transport sector is next in tackling climate change (15 Jan 2019)

Energy Transition
Global integrated oils: How long are you willing to wait? (22 July 2021)
Carbon capture & sequestration: More tortoise than hare; for now (30 June 2021)
Energy transition: Our best ideas (29 June 2021)
Gas markets: Is gas still a transition fuel? (25 May 2021)
Oil and gas markets: Long-term demand: a world of uncertainty (24 May 2021)
Energy & Climate Watch : The 'race to net zero' is on (20 May 2021)
Big Oils and Climate: How to engage constructively with oil majors on climate (19 May 2021)
Big Oils and Climate: The journey to “net zero” by 2050 in pictures (20 April 2021)
Energy Transition: Carbon-neutral LNG: 'green' cargoes (19 April 2021)
Carbon Capture & Sequestration: Back in the debate, but no silver bullet (23 March 2021)
Energy Transition: Renewable natural gas (RNG) primer (15 March 2021)
Energy Transition: Hydrogen and Ammonia: Going blue, FAQ's (8 March 2021)
Oil & Climate Watch: Psychology of decision making in climate action (3 March 2021)
Oil & Climate Watch: EU Taxonomy - oil & gas' latest barrier to invest (8 February 2021)
Big Oils and Climate: Decarbonisation targets – reading the fine print (27 January 2021)
Energy Transition: Biofuel mandates - US ethanol, a case study (11 January 2021)
Big Oils and Climate: Should oil majors spin off their renewable assets? (6 January 2021)
Oil & Climate Watch: Climate returns to the agenda in the US (11 November 2020)
EM oil & climate: Strategies developing as global energy transition unfolds (8 October 2020)

Hydrogen
Global hydrogen: Sentiment positive but focus shifting towards actions (22 March 2021)
Hydrogen electrolysers: The rock star of clean energy or just a case of FOMO? (13 January 2021)
Global Hydrogen: 2020s are the roaring decade of hydrogen (13 January 2021)
Global Hydrogen: Approaching sector tipping point – hydrogen FAQs (10 July 2020)
Climate Investment Update: Global hydrogen: Acceleration across the value chain (6 July 2020)
The second frontier: Towards low carbon trucks (26 May 2020)
Global Hydrogen: How to play the emerging hydrogen theme (4 February 2020)
Global Hydrogen: Why the journey from grey to green is taking off (30 January 2020)

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ESG
Fragile Planet 2021: National climate risks meet investment implications (24 June 2021)
On account of carbon: The carbon price of changing behavior (2 April 2020)
Fragile Planet 2021: Scoring climate risks: who is the most resilient? (30 March 2021)
Future Frontiers: The pathway towards net-zero (16 March 2021)
ESG Upcycled: March 2021: CO2 ‘on air’ (1 March 2021)
Spotlight: The second frontier: Towards low carbon shipping (10 February 2021)
Climate Investment Update: Carbon borders add to carbon pricing momentum (8 Feb 2021)
The climate in 2021: Implementing the politics of ambition (5 January 2021)

Aviation
LCCs - On your marks, get set.. (18 June 2021)
European airlines - Checking in on valuation (16 June 2021)
European Airlines - Cabin fever https://www.research.hsbc.com/R/20/F6tPsNnrRHGs (7 June
2021)
Global aviation - A most uneven recovery in store (5 May 2021)
Airline start-ups - A global pandemic - just the time to start an airline (31 March 2021)
European Airlines - Groundhog day: cash if the summer doesn't fly (25 March 2021)
European Aviation - 2021: A year of two halves, hopefully (18 January 2021)
European Airlines: Ownership and control – this debate is not over (7 January 2021)
European Airlines: Summer 21 - Soaring or grounded? (18 December 2020)
European Airports - Risk sharing - an important and yet worrying concept (1 December 2020)
Distributing Vaccines - The plane can take this strain (29 November 2021)

Oil & Gas macro

Oil things considered: OPEC+ deadlock unlocked (20 July 2021)
Oil markets: OPEC+ agreement under pressure as talks fail (5 July 2021)
Global Natural Gas: A hot summer for gas (6 July 2021)
Oil things considered : Oil demand: A game of two halves (25 June 2021)
Oil things considered: If Iranian oil exports return.... (11 June 2021)
US tight oil outlook: Inflection point (8 June 2021)
Oil markets: Saudi Arabia: the power of spare capacity (14 March 2021)

Integrated Oils – Company reports

Equinor (Hold): Headwinds (24 June 2021)
BP: Hold: Funding the future (24 June 2021)
Eni: Low-carbon strategy underrated (15 March 2021)
Equinor: A new offshore wind major (16 February 2021)
Exxon (Hold): The kindest cut (25 January 2021)
Repsol: Climate strategy deep-dive (6 January 2021)
Royal Dutch Shell: Aiming for the right balance (3 December 2020)
Total: Is Total the only oil major that can do it all? (21 October 2020)
BP: A glimpse into the longer-term future (28 September 2020)

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Executive Summary

 Aviation must decarbonise. Sustainable Aviation Fuels will be key to

reduce emissions. The credibility of offsetting faces scrutiny.
Alternative propulsion may be relevant by 2030.
 Government policy will seek to close the cost gap between SAF and
kerosene plus carbon. Airlines will seek to defend inter-regional
competitiveness and make cost changes gradual
 SAF can be produced with multiple techniques and feedstocks. The
industrialisation of SAF production is unproven. Science, technology
and policy-making are evolving very fast.

SAF holds the key to aviation decarbonisation

Before the pandemic, we saw the key focus on decarbonising aviation resting on the offsetting
Focus on decarbonising
aviation grows
of aviation carbon emissions: airlines support positive environmental measures, in other sectors
where it is straightforward to create positive environmental change, such as reforestation; these
positive measures offset the carbon emissions of aviation. Through the pandemic, the focus on
environment has accelerated and doubts over offset evaluations have increased. Investment in
tools to directly decarbonise aviation has accelerated.

Airlines as diverse as United Airlines in the US and Norwegian regional Wideroe have placed orders
Alternative propulsion
technology advances
for electric aircraft. Airbus has announced a trio of hydrogen powered aircraft projects, planning
entry to service for the first by 2035. However, even the most optimistic commentators see electric
aviation being constrained to small regional aircraft, whilst the timeline for hydrogen powered flight is
distant. Estimates from IATA’s air transport action group ATAG foresees SAF being responsible for
97% of aviation decarbonisation in the 2030-2035 period, excluding offsetting.

This leaves sustainable aviation fuel (SAF) as the core policy tool for aviation to decarbonise.
SAF will be central to
medium term
Please see our SAF 101 primer on page 43. Sustainable aviation fuel (SAF) is a non-fossil fuel low-
decarbonisation carbon alternative to kerosene, that can be made from feedstocks, including plants, waste and green
power. SAF is a broader concept than biofuel, capable of being produced from multiple feedstocks.
SAF can be produced by seven different approved technologies. The range of feedstocks includes
vegetable oils, used cooking oil, forest and agricultural waste, and non-food crops which can be
grown on low-grade land, salt marshes or as rotation crops. Other feedstocks include municipal
waste and algae. The most cutting-edge technology, Power to Liquid, combines green hydrogen
with industrial waste CO2 to create sustainable aviation fuel. Today, only converting used cooking oil
and vegetable oils with the HEFA technique is industrialised.

The cost of SAF today ranges from two to three times the price of kerosene (for used cooking oil
SAF is much more expensive
than kerosene.
and HEFA) to around 10 times for the power to liquid technology. The task for policy makers is
to increase demand for SAF, which will incentivise investment in the sector, industrialise it and
see costs fall.

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We also expect SAF to be significantly less volatile than fossil fuel kerosene over time. With
But SAF should be less
multiple technologies and feedstocks, SAF should be able to be produced across a very wide
volatile over time
range of geographies, meaning aviation fuel pricing is less exposed to the geopolitical volatility
in oil producing nations.

The EU Fit for 55 offers a live example of policy making, aiming to mandate the use of SAF and to
EU Fit for 55 seeks to
close the price gap between kerosene and carbon and SAF, by adding taxes to kerosene and
incentivise the
industrialisation of SAF pressuring the price of carbon in the EU ETS higher. Airlines are challenging, not unreasonably in
our view, the pace of change of costs and the significant disadvantages this policy places on
European airlines relative to global competitors. However, we also recognise the policy as a holistic
attempt to incentivise the SAF industry, which will be necessary for aviation to decarbonise.

There is some political resistance to the EU Fit for 55 programme and it is hard to predict with
Fuel and carbon costs will
certainty how, when or indeed whether the policies will be implemented. However, we think it is
likely at last double over the
coming decade reasonable to expect significant cost pressure on airline fuel costs in the future. We think it is
reasonable to expect airlines to face at least a doubling of fuel and carbon cost over the
coming decade.

However, looking at the performance of the airline industry over the past sixty years, we note
Fuel often doubles every
that the doubling of the fuel price every decade is by no means abnormal and we do not see
decade
grounds for particular concern for airlines or airline investors. For context, at easyJet, pre
pandemic fuel cost per passenger was 24% of total revenue per passenger, for IAG 27% and
for Ryanair 33%.

Oil price against airline industry margin by decade (USD/Bll)

80 6.00%
70
5.00%
60 +51%
4.00%
50
40 3.00%
30 +221% +195%
-27% 2.00%
20
+130%
1.00%
10
0 0.00%
1960s 1970s 1980s 1990s 2000s 2010s
Nominal oil price (LHS) Average operating margin Cha nge i n oil price
Source: Airline Monitor, RDC Aviation, IATA, EIA

For aviation to defend its right to exist and grow, decarbonisation is imperative. This will not
Aviation needs SAF to work
happen without the successful industrialisation of SAF.

Investment considerations – Aviation

It is hard to draw conclusions from a review of a future multi-decade process onto airline stocks,
Hard to assess ultra-long
which in normal times trade on the outlook for next quarter’s unit revenue. The current times are
term trends
not normal and airlines currently trade on expectations for next week’s operating capacity, which
ebb and flow with almost wholly unpredictable government policy making on travel protocols.

How should we consider a 30-year outlook to an industry that is finding its path to
Rising fuel prices, no reason
decarbonisation? But outcome of this report suggests that the industry evolves and develops
to avoid the sector
over time: we note that the prospect of fuel prices doubling each decade is not out of kilter with
previous trends over decades.

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Policy moves to encourage decarbonisation will increase costs and led to higher prices. This
We expect aviation to
continue to grow – EM
may slow the pace of growth in the industry. Yet overall, we see the demographics in emerging
demographics say so markets continuing to drive huge growth in air travel, as rising living standards in populous
emerging markets create swathes of new air transport consumers.

We also note that the creation of an effective SAF Certificate structure could enable corporates to be
SAF offers the chance to
defend business travel confident that their business travel is undertaken using SAF, thus defending the future prospects for
business travel in a world where global corporations are focused on their carbon footprint.

Airlines around the world are increasingly committing to net zero objectives, as the table
below illustrates.

Airline net zero commitments and associated SAF agreements as at July 2021
Net-zero target Target SAF Target SAF Partnerships
Company Country announced year SAF Target Year /offtakes
Air Canada Canada Mar-21 2050 - - -
Air New Zealand New Zealand Nov-19** 2050 - - -
Alaska Air U.S. Sep-20 2040 - - Neste, SkyNRG
All Nippon Airways Japan Apr-21 2050 - - Neste
Amazon U.S. Sep-20 2040 - - World Energy
American Airlines U.S. Oct-20 2050 - - Neste
Atlas Air U.S. Mar-21 2050 - - -
Cathay Pacific Airways Hong Kong Sep-20 2050 - - Fulcrum BioEnergy
Delta Air Lines U.S. Feb-20 2030 10% 2030 Gevo, Northwest
Advanced Biofuels
DHL Germany Mar-21 2050 30% 2030 -
EasyJet U.K. Nov-19 2050 - - -
Etihad Airways UAE Dec-20 2050 - - -
FedEx U.S. Mar-21 2040 30% 2030 Red Rock Biofuels
Fiji Airways Fiji Sep-20 2050 - - -
Finnair OYJ Finland Mar-20 2045 - - Neste, SkyNRG
Gol Airlines Brazil Apr-21 2050 - - -
Hawaiian Airlines U.S. Mar-21 2050 - - -
International Airlines Group U.K. Oct-19 2050 10% 2030 Velocys, LanzaJet
Japan Airlines Japan Jun-20 2050 10% 2030 Fulcrum BioEnergy
JetBlue Airways U.S. Apr-21 2040 10% 2030 Neste
Malaysia Airlines Malaysia Sep-20 2050 - - -
Qantas Airways Limited Australia Nov-19 2050 - - -
Qatar Airways Qatar Sep-20 2050 - - -
Royal Air Maroc Morocco Sep-20 2050 - - -
Royal Jordanian Jordan Sep-20 2050 - - -
S7 Airlines Russia Sep-20 2050 - - -
Singapore Airlines Singapore May-21 2050 - - -
Southwest Airlines U.S. Mar-21 2050 - - P66 Rodeo,
Marathon Martinez
Sri Lankan Airlines Sri Lanka Sep-20 2050 - - -
United Airlines Holdings U.S. Dec-20 2050 - - Fulcrum BioEnergy
UPS U.S. Mar-21 2050 30% 2035 -
Virgin Atlantic U.K. Jun-19** 2050 - - LanzaTech
Source: BNEF

We would be reluctant to opine on which companies would benefit relatively from the policy
changes as SAF is adopted. Whenever there is an adverse development in aviation, it is usual
for the lowest cost airlines, such as Ryanair and Wizz to revert to their mantra that lowest cost
always wins. It is true that where airlines start with high margins, they can more easily maintain
profits in the face of a setback. But actually we think that is not necessarily the case here. In
thinking about relative advantage, aspects we think are relevant include:
 Geographic footprint: Airlines in markets where policy making leads the way, such as
Europe, may be disadvantaged relative to global competitors. Among European low cost
airlines, Wizz’s more easterly network, with growing non-EU operations, might delay its
exposure to environmental costs.

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 Growth: Airlines that are growing quickly may face greater pressure from the impact of
price elasticity on consumer demand.
 Price point: As rising fuel costs, carbon costs and taxation increase the cost of travel ultra-
low cost airlines such as Ryanair and Wizz will see a greater percentage increase in their
costs. They will see their relative cost advantage to legacy carriers reduce.

Estimates, ratings and target prices for our airline coverage are unchanged.

Investment considerations – Energy producers

Neste, European oil majors and US independents dominate, but the market is
fragmenting
The primary players in this market currently include Neste, European oil majors ENI, Total and
Repsol, US refiners Valero and Phillips 66, and a number of independent players, mostly US-based.

We have identified over 60 US and European companies which have existing capacity and/or
Major producers are US and
European
disclosed plans to build renewable fuels facilities. In the US, the most notable are Diamond
Green Diesel, REG (Renewable Energy Group), World Energy, Marathon Petroleum, Phillips
66, NEXT Renewable Fuels and Emerald Biofuels. Companies with dedicated existing or
planned jet fuel production facilities include Gevo, Red Rock Biofuels, Fulcrum BioEnergy,
SkyNRG and LanzaTech. The number of players producing renewable fuels is poised to more
than triple, rising from <20 in 2020 to over 60 by the middle of this decade.

Below we briefly summarise the renewable fuels activities of Neste and three European oil
majors in our coverage.
 Neste is by far the largest player with c40% of current world capacity in 2020. It has a total
capacity of 3.2 mtpa, spread across 3 plants in Finland, Singapore and Rotterdam. Its
supply chain is the most advanced in the industry: it uses over 10 different feedstocks,
including an 80%+ share of waste and residue. The Singapore expansion will extend
capacity by up to 1.3 mtpa, bringing its total renewable product capacity to ~4.5 mtpa in
2023 when the new production line starts up. A EUR200m investment at its Rotterdam
refinery confirmed in April 2021 will enable the production of an additional 0.5 mtpa of
sustainable aviation fuel.
 ENI is the second-largest producer of renewable diesel in Europe after Neste with two
converted bio-refineries in operation in Italy. ENI is a technology leader in this area and
developed the EcofiningTM green diesel process together with Honeywell UOP, and was the
first company in the world to convert a refinery to a bio-refinery in 2014.
 Total brought online the La Mède (France) converted bio-refinery in mid-2019. In 2020 it
announced a >EUR500m plan to convert its Grandpuits refinery to a bio-refinery, with 40-
50% of its output dedicated to aviation fuel. Total began producing SAF in April 2021.
 Repsol produces 350-380 ktpa of renewable fuels through co-processing at its five Spanish
refineries. This will grow to 850 ktpa by 2025 thanks to debottlenecking and the 250 ktpa
greenfield Cartagena bio-refinery project, expected to start in 2023. Repsol started
producing SAF in January 2021.

Estimates, ratings and target prices for our energy producer coverage are unchanged.

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Leading players in renewable fuels in 2020 Leading players in renewable fuels in 2025
Capacity in Million tonnes per annum Capacity in Million tonnes per annum
0 1 2 3 4 0 1 2 3 4 5 6
Neste Neste
Diamond Green Diesel Diamond Green Diesel
ENI Marathon Petroleum
Repsol
Phillips 66
Total
Gron Fuels, Fidelis
Gevo
Total
ECO
Preem NEXT Renewable Fuels

Cepsa Pertamina
Huan Yu ENI
World Energy REG (Renewable Energy…
Source: HSBC estimates, company data Source: HSBC estimates, company data

Listed companies involved in SAF

Market Cap
Company Country Ticker Ccy (USDbn) Comments
Shell UK / NL RDSb.L GBp 142.9 Uses HEFA to make LCFs including renewable diesel and SAF, produces low carbon synthetic fuels,
RNG. Has biorefinery in Jackson and is developing in Varennes, Rotterdam and Wesseleng
TotalEnergies France TTEF.PA EUR 108.8 Produces ethyl tert-butyl ether (ETBE) and HVO including SAF. Biorefineries in La Mede (France) and
upcoming in Grandpuits (France), Daesan (SK). Co-processing unit upcoming in Port Arthur (US)
Neste Finland NESTE.HE EUR 47.4 Produces renewable diesel, SAF. Renewable fuels plants in Porvoo, Singapore, Rotterdam
Eni Italy ENI.MI EUR 40.2 Produces HVO biofuels, biodiesel, bio-naphtha, bioLPG and bio-jet fuel. Has biorefineries in Porto
Marghera and Gela (Italy)
Marathon Petroleum US MPC USD 33.2 Produces renewable diesel, naphtha, biodiesel, ethanol biofuel, other renewable fuels. Has renewable
fuels plant in Dickinson and developing in Martinez.
Phillips 66 US PSX USD 30.9 Produces renewable diesel, gasoline, jet fuel. Developing renewables plant in Rodeo and has co-
processing unit in Humber
Suncor Energy Canada SU USD 30.0 Invested in a plant in Varennes along with Shell, Enerkem, which will produce low-carbon fuels and
renewable chemicals products from non-recyclable waste
Valero Energy US VLO USD 25.3 Produces Jet fuel, renewable diesel, ethanol. Operates Diamond Green Diesel JV with Darling
Corporation Ingredients Inc which has renewable fuels plant in Norco and developing in Port Arthur.
Repsol Spain REP.MC EUR 15.8 Currently has 5 co-processing refineries in Spain. Building biofuels plant in Cartagena which will produce
hydrobiodiesel, biojet, bionaphtha, and biopropane
Darling Ingredients Inc US DAR USD 10.4 Produces biodiesel from used cooking oil and meat by-products. Operates Diamond Green Diesel JV
with Valero Energy which has renewable fuels plant in Norco and developing in Port Arthur.
HollyFrontier US HFC USD 4.5 Converting its refinery plants in Artesia and Cheyenne to produce renewable diesel
Corporation
Seaboard Corporation US SEB USD 4.5 Operates Seaboard Energy, a wholly owned subsidiary, which produces biodiesel. Plans renewable
diesel plant in Hugoton.
Renewable Energy US REGI.O USD 2.9 Produces biodiesel, renewable diesel, blended fuels, other low carbon fuels. Has renewable fuels plant in
Group Geismar and about 11 other biorefineries concentrated in US
CVR Energy US CVI USD 1.3 Produces renewable diesel. Developing renewable fuels plant in Wynnewood and Coffeyville.
Gevo US GEVO.O USD 1.1 Produces renewable gasoline, renewable diesel, SAF, RNG, and other low carbon fuels. Has renewable
fuels plants in Silsbee and developing in Lake Preston and Speyer.
Calumet Partners US CLMT.O USD 0.5 Plans to produce renewable diesel. Developing plant in Great falls
Vertex Energy US VTNR.O USD 0.4 Plans to acquire oil refinery in Mobile, Alabama from Shell's subsidiary and produce renewable diesel
Tidewater Midstream Canada TWM.TO CAD 0.3 Developing renewable diesel and renewable hydrogen unit in its existing Prince George refinery
Aemetis US AMTX.O USD 0.3 Produces renewable fuels - Ethanol and Biodiesel. Developing renewable fuel plant which includes
production of SAF in Riverbank
Global Clean Energy US GCEH.PK USD 0.2 Develops, grows, processes, refines and distributes renewable diesel. Through its subsidiary Bakersfield
Holdings Renewables Fuels (BKRF) is developing a renewables fuel plant in Alon Bakersfield in California
Velocys UK VLSV.L GBp 0.1 Working on two projects: Altalto in Immingham, UK and Bayou Fuels in Natchez, Mississippi, US. Both
plants will be dedicated to produce SAF
Source: Company data, HSBC, Refinitiv Eikon. Priced as of COB 19 July 2021

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Companies mentioned in this report

Share Price Market Cap
Company Location Ticker Currency (local ccy) (USDbn) Rating
Oil & Gas
Royal Dutch Shell A UK RDSa.L GBp 1,364.6 145.75 Hold
Royal Dutch Shell B UK RDSb.L GBp 1,339.4 145.75 Hold
TotalEnergies France TOTF.PA EUR 35.6 110.97 Buy
Eni Italy ENI.MI EUR 9.6 41.00 Hold
Repsol Spain REP.MC EUR 9.2 16.55 Hold

Neste Finland NESTE.HE EUR 54.8 49.72 N/R

Marathon Petroleum US MPC USD 53.4 34.84 N/R
Phillips 66 US PSX USD 72.3 31.66 N/R
Suncor Energy Canada SU USD 20.9 31.51 N/R
Valero Energy Corporation US VLO USD 63.5 25.95 N/R
Repsol Spain REP.MC EUR 9.2 16.55 N/R
Darling Ingredients Inc US DAR USD 67.7 11.04 N/R
HollyFrontier Corporation US HFC USD 28.0 4.54 N/R
Seaboard Corporation US SEB USD 3,912.4 4.54 N/R
Renewable Energy Group US REGI.O USD 63.9 3.05 N/R
CVR Energy US CVI USD 13.3 1.33 N/R
Gevo US GEVO.O USD 6.1 1.21 N/R
Calumet Partners US CLMT.O USD 6.9 0.54 N/R
Vertex Energy US VTNR.O USD 8.9 0.46 N/R
Tidewater Midstream Canada TWM.TO CAD 1.3 0.35 N/R
Aemetis US AMTX.O USD 10.0 0.31 N/R
Global Clean Energy Holdings US GCEH.PK USD 5.1 0.20 N/R
Velocys UK VLSV.L GBp 4.4 0.06 N/R

Airlines
Ryanair Ireland RYA.I EUR 15.855 21.10 Buy
China Southern Airlines China 1055.HK HKD 4.59 15.39 Buy
Air China China 0753.HK HKD 5.37 14.48 Hold
IAG UK ICAG.L GBp 170.38 11.63 Buy
China Eastern Airlines China 0670.HK HKD 3.08 10.66 Hold
Lufthansa Germany LHAG.DE EUR 9.744 6.59 Reduce
Wizz Air Switzerland WIZZ.L GBp 4480 6.35 Hold
Cathay Pacific Hong Kong 0293.HK HKD 6.47 5.36 Hold
EasyJet UK EZJ.L GBp 810.6 5.10 Buy
Air France-KLM France AIRF.PA EUR 3.932 2.98 Hold
Volaris Mexico VOLARA.MX MXN 44.88 2.41 Buy
Aeroflot Russia AFLT.MM RUB 67.16 2.23 Hold
Turkish Airlines Turkey THYAO.IS TRY 12.73 2.06 Hold
SAS Sweden SAS.ST SEK 2.036 1.70 Hold
Gol Brazil GOLL4.SA BRL 21.44 1.29 Hold
Finnair Finland FIA1S.HE EUR 0.65 1.08 Hold
Pegasus Turkey PGSUS.IS TRY 70.55 0.85 Buy
Southwest US LUV USD 51.29 30.33 N/R
Delta Air Lines US DAL USD 41.06 26.27 N/R
United Airlines US UAL.O USD 47.95 15.52 N/R
American Airlines US AAL.O USD 21.16 13.57 N/R

Air Freight & Logistics

Deutsche Post DHL Germany DPWGn.DE EUR 58.57 85.58 Buy
Source: HSBC, Reuters Eikon, Priced as at 22 July 2021

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A SAF powered airline

industry

 We think airlines must plan on significant use of SAF in the coming

decade, increasing further to 2050. This will lead at least to a
doubling of the fuel price.
 Investors and the industry should not abandon hope. Decade by
decade the oil price has regularly doubled.
 The aviation sector faces the public affairs challenge of needing to
embrace decarbonisation, whilst limiting near term financial stress as
the industry aspires to recover from the pandemic

Implications for airlines

The aviation sector faces the clear imperative to define and executive a path towards the
Aviation must decarbonise
decarbonisation of aviation. This is a challenging task. The physics of flight mean that aviation is
very sensitive to weight. Batteries are heavy. Hydrogen powered aviation is a future technology.
Nonetheless, constructing a credible path to decarbonisation, that goes beyond offsetting, will be a
necessity for aviation’s right to continue to exist and grow as an industry. Decarbonisation is
complex and expensive: yet it is becoming the price for entering the industry. Running a safe airline
is a pre-requisite today. Very soon, the same will apply to environmental sustainability.


Running a safe airline is a pre-requisite today. Very soon,
the same will apply to environmental sustainability.

There is a saying in the airline industry that goes “If you think running a safe airline is
expensive, see how expensive it is to run an unsafe one”. It is the role of policy makers to
ensure that the same can be said very soon for sustainability: The EU Fit for 55 proposals on
kerosene taxation and the removal of carbon allowances are precisely aiming to do his.

Given the immaturity of electric and hydrogen propulsion, sustainable aviation fuels (SAF) will
SAF will be a core part of
decarbonisation have to take a significant share of the responsibility to decarbonise aviation by or around 2050.
SAF is a necessity given time delay to alternative propulsion. Enabling the SAF sector to
industrialise to a scale that can deliver a meaningful share of aviation fuel will require
partnership across the aviation supply chain, including fuel companies, aircraft and engine
manufacturers, trade associations and governments.

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Today SAF varies between twice and ten times the cost of kerosene. As we describe in this
SAF is currently 2-10x the
price of kerosene
report, over time we expect SAF produced by the currently more expensive technologies to fall
in price. However, even with optimum collaboration and effective policy signals, it will likely see
a doubling of aviation’s fuel price at least over the coming decade, climbing further beyond that.

The prospect of midterm fuel costs doubling before increasing further may appear daunting. The Fit
Policy makers will work to
close the gap for 55 EU proposals, if implemented, would see tax on fossil fuel kerosene increasing the cost of
kerosene by 90%, before taking into account the impact of increased carbon. This suggests that fuel
and carbon costs will more than double over 10 years even without airlines buying any expensive
SAF. Notwithstanding the detail that these kerosene tax and carbon pricing measures only apply to
intra EU flying, the policy objective becomes clear: these proposals are specifically intended to
eliminate the cost disadvantage of SAF relative to kerosene.

Over the coming ten years we expect the cost of fuel and carbon to gradually double,
with the cost equalising between fossil fuel and carbon and SAF.

Airlines are currently struggling to emerge from the operational constraints and economic
Airlines protest incremental
cost pressures damage of the pandemic. The pre-pandemic margins of the airline industry were better than the
industry had ever been, but at face value offered no buffer to absorb a doubling of the largest or
second largest cost line item. Airlines are protesting vigorously against the EU proposals for
kerosene taxation, arguing it will weaken their financial wherewithal to invest in more modern
efficient aircraft.

We understand airlines seeking a gradual rate of change, particularly as they emerge from the
Nominal fuel costs doubling
every ten years is nothing pandemic. We acknowledge industry concerns over uneven competition between airlines in
abnormal different reasons. But we do not, per se, see the prospect of doubling fuel prices as grounds for
concern. Looking over the past 60 years, decade by decade, the airline industry has frequently
absorbed a doubling of fuel price.

For context, at easyJet, pre pandemic the fuel cost per passenger was 24% of total revenue per
passenger, for IAG 27% and for Ryanair 33%. If fuel costs per passenger were to double in a
decade, to compensate, this would require unit revenue CAGR through the decade of 2.1% at
easyJet, 2.4% at IAG and 2.8% at Ryanair.

Oil price (USD/b) against airline industry EBIT margin by decade

80 6.00%
70
5.00%
60 +51%
4.00%
50
40 3.00%
30 +221% +195%
-27% 2.00%
20
+130%
1.00%
10
0 0.00%
1960s 1970s 1980s 1990s 2000s 2010s
Nominal oil price (LHS) Average operating margin Cha nge i n oil price
Source: Source: Airline Monitor, RDC Aviation, IATA, EIA

Over the past 60 years, airline operating margins have been volatile through the cycle. Airline
margins do compress with high fuel prices and rise with lower fuel prices, but the real damage
to airline margins comes from very rapid changes in fuel prices or exogenous demand shocks,
such as 9/11, the global financial crisis or indeed the pandemic.

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Operating margins and fuel

100

Crude oil price (USD/barrel)

90 9.0%

Operating margin (%)

80 7.5%
70 6.0%
60 4.5%
50 3.0%
40 1.5%
30 0.0%
20 -1.5%
10 -3.0%
0 -4.5%
1960 1970 1980 1990 2000 2010 2020

Crude oil price (Nominal) Operating margins

Source: Airline Monitor, RDC Aviation, IATA, EIA

The positives from SAF

The vulnerability of airline margins to exogenous shocks does highlight an important potential
positive factor of a transition to SAF fuel. The aviation sector’s reliance of kerosene leaves it
fully exposed to the geopolitical sensitivities of oil producing nations. Conversely, SAF
production should in future rely on a widespread portfolio of feedstocks, meaning that SAF
production can be geographically widespread and its production significantly de-risked relative
to kerosene. We would thus expect SAF to be less volatile than kerosene.

Less fuel price volatility is particularly valuable. We think the key challenge for airlines is not the
level of the fuel price but the rate of change of the fuel price. If the fuel price rises airlines can,
gradually, adjust the amount of capacity in the market, allowing pricing to adjust higher
matching the higher costs. Hedging can also be used to delay the cost impact, buying the
airline time for pricing to adjust. Where fuel prices change very quickly, capacity and pricing is
unable to adjust quickly enough and profitability is weakened.


Less fuel price volatility is particularly valuable. We think
the key challenge for airlines is not the level of the fuel
price but the rate of change of the fuel price

So SAF delivering less volatility in fuel costs is of value itself.

To be clear, at the moment, SAF is not visibly less volatile than fossil fuel oil prices: volatility in
biofuels is driven by tightness in the feedstock market which is focussed on used oil and fats.
The thesis of reduced volatility is based on the premise of diversified feedstocks and
geographic production.

The charts below illustrate how the industry’s long term unit operating costs have adjusted
successfully for varying fuel prices, with one chart showing the long term trend in current prices
and one in nominal terms.

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Inflation adjusted Industry CASK vs Crude oil price (Constant Dollar 1982-1984)
7.50 50.00

7.00 45.00

6.50 40.00

Crdue Oil Price (USD/barrel) Constant Dollar 1982-84

CASK Constand Dollar 1982-1984 (USDc)

6.00 35.00

5.50 30.00

2019: Crude price up

123% since 1960
5.00 25.00

4.50 20.00

4.00 15.00

3.50 10.00

3.00 5.00
2019: CASK down
60% since 1960
2.50 -
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
CASK Crude Oil Price

Source: Airline Monitor, RDC Aviation, IATA, EIA

Crude oil price: US Crude Oil First Purchase Price (Dollars per Barrel

Nominal Industry CASK vs Crude oil price (Constant Dollar 1982-1984)

Source: Airline Monitor, RDC Aviation, IATA, EIA

Crude oil price: US Crude Oil First Purchase Price (Dollars per Barrel

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Average CASK oil price and margin over different decades

________ CASK _________ _______ Crude oil _______
Constant Constant Operating
Decade Nominal Currency Nominal Currency margins
1960-69 2.02 6.34 2.91 9.13 4.9%
1970-79 2.91 5.47 6.68 12.14 3.4%
1980-89 5.57 5.36 21.44 21.27 2.8%
1990-99 6.96 4.68 15.67 10.57 2.7%
2000-09 7.73 3.99 46.23 23.22 0.7%
2010-19 8.32 3.53 69.61 29.66 5.3%
Source: Airline Monitor, RDC Aviation, IATA, EIA, Refinitiv Datastream

Another perspective on the doubling of fuel costs – UK APD

As the aviation sector faces a doubling of the effective fuel price over the next decade, another
APD in the UK has grown
dramatically since 1993
opportunity to set this in context, is to look at the imposition of the UK aviation tax, the Air
Passenger Duty (APD). Originally introduced in 1993, this tax has proven a highly successful
source of revenue for the UK Treasury, at least until the pandemic.

Between 2000 and 2019, APD increased by GBP15.16 per passenger departing the UK. For
APD growth of 12.5x easyJet
fuel cost per passenger since
context this increase in tax was nearly three times the average cost of fuel per passenger at
2000 easyJet and Ryanair in 2000 and 60% of the BA cost of fuel per passenger in 2000.

To be clear this is a slightly artificial comparison, and the APD rate is a blended average of long
haul and short haul APD. Nonetheless it offers another perspective on why a future doubling of
the fuel price to support the decarbonisation of aviation should not be feared as an existential
threat to industry

Indeed, between 2000 and 2019, when APD per departing passenger from the UK rose by
UK traffic has grown, as have
airline profits GBP15.16, UK departing passengers rose 66%, or 2.7% CAGR. In this period BA underlying
EBIT grew at a CAGR of 9.8%, easyJet’s at CAGR 14% and Ryanair CAGR 45%, despite
average UK APD rising by two and half times easyJet’s fuel bill per passenger and nearly three
times Ryanair’s fuel bill per passenger.

Moreover, whilst there are no current plans to impose kerosene taxation in the UK, more
generally, where kerosene taxation is introduced and carbon allowances removed, airlines
would have a credible argument that the aviation sector should face reduced or no aviation or
environmental taxes.

APD per departing passenger compared to average fuel cost per passenger

50.00 IAG 44.67

45.00
40.00
35.00
30.00 BA 24.79
GBP

25.00
20.00 Ry anair 16.26
15.00
10.00 easy Jet 5.99 easy Jet 14.73
5.00 Ry anair 5.26
-
1993
1994

1997
1998

2000
2001

2003
2004

2007
2008

2010
2011

2013
2014
2015

2017
2018
1995
1996

1999

2002

2005
2006

2009

2012

2016

2019

Air Passenger Duty (APD) / pax

Source: UK Government, company data

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Policies to incentivise SAF

transition

 Key potential policies include SAF mandates, financial support to

SAF developers, central auction mechanisms, and prioritising the
allocation of feedstocks to SAF, but also kerosene tax
 The EU Fit for 55 legislative programme sets a policy framework to
decarbonise aviation relying significantly on SAF. The policy
framework has its flaws, but is a coherent plan to boost SAF.
 SAF Certificates could offer consumers and corporations an
opportunity to support SAF industrialisation.

Policy challenges for airlines

Faced with developing policy interventions to encourage the decarbonisation of aviation, airlines
are faced with a policy challenge in managing and shaping regulatory intervention

Airlines will want to ensure that rules are not developed that disadvantage them relative to local
Airlines seek a level playing
field
and international competitors. This is plainly a challenge for European airlines operating in an
environment where environmental awareness is higher than in many other jurisdictions.

Airlines will also seek to defend their business models against large and rapid cost pressures,
Defend against cost pressure
as they seek to rebuild profitability, cash flows and balance sheets during the recovery from
the pandemic.

It is also not unusual for most policy measures to produce unintended consequences. As
Unintended consequences
governments seek to intervene in the pricing of kerosene, the obvious risk is that this would
encourage fuel tankering. This policy sees airlines optimising their costs by carrying heavy
loads of fuel out of airports where fuel is cheap, to use that fuel for multiple journeys. This is
environmentally inefficient as aircraft burn more fuel to carry the heavier payload of fuel. The
EU Refuel EU proposal includes measures to minimise this, requiring airlines to load 90% of the
fuel needed for their EU operations in the EU. Nonetheless this would allow for 10% fuel
tankering, which is already suboptimal. Airlines will seek to call out unintended consequences
that are to their disadvantage.

Airlines will need to balance these arguments with the need to be seen as embracing the need
Embrace decarbonisation
to decarbonise. To do otherwise would encourage more draconian policy intervention by
regulators, as well as reaction from environmentally sensitive travellers and corporations.

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The policy toolbox to enable SAF

Today SAF is between two and ten times more expensive than kerosene. Airlines will thus
prefer to use kerosene and energy companies will not be incentivised to invest in SAF. Policy
makers can mandate the use of SAF – and the EU is proposing this as part of its policy toolbox.
Yet the heart of the policy objective must be to close and reverse the cost gap between SAF
and kerosene, and the associated carbon cost.

The cost gap can of course be narrowed with both carrot and stick: increase the cost of
Tax kerosene, increase the
cost of carbon
kerosene or reduce the cost of SAF. Governments can act to increase the cost of kerosene and
carbon, through taxation and intervention in the carbon market. Such moves face challenges at
a regulatory level, as many, though not all, commentators argue that the taxation of kerosene is
not permitted under the Chicago Convention, the post WW2 treaty which governs global
aviation. Options to make carbon more expensive are constrained by the fact that the globally
agreed offsetting structure, CORSIA, only includes services on a mandatory level in 2026.
Changing its terms prior to entry into service could be politically challenging. Nonetheless,
moves to increase the cost of kerosene and carbon should incentivise demand for SAF from
airlines and hence investment into SAF industry. In due course the deployment of the stock
should of course lead to the carrot of cheaper SAF: increasing investment into SAF should
accelerate the process of industrialisation and the ultimate reduction in the cost of SAF.

Mandates for the use SAF also offer an opportunity to drive the industry forward. Mandates
Mandate the use of SAF
directly increase the demand for SAF, incentivising investment and leading in due course to
lower production costs. Biofuel use has been mandated for road transport in the US and
Europe already, and multiple countries in Europe were at different stages of launching their own
national SAF mandates, prior to the EU publication of its Fit for 55 action plan. There was much
debate over the optimal structure of potential SAF mandates in the run up to the publication of
the EU Fit for 55 plan:
 Who? Mandates can be imposed on either users, airlines in this case, or on fuel suppliers,
with most environmental research favouring the application to fuel suppliers, who are less
numerous than airlines.
 How ambitious? There is a live debate about how mandates should balance the objectives
of being sufficiently demanding to drive change, yet avoid being so significant that they
become unachievable.
 What? There is widespread concern that large SAF mandates might encourage the use of
the lowest cost SAF technology offering the least lifecycle carbon reduction. This opens the
debate as to whether the amount of SAF, the share of SAF or the reduction in CO 2 should
be the relevant metric. Equally, the technology and feedstocks accepted under the
mandate can also be used to finesse the environmental effectiveness of the mandate.
 Sub-mandates: Any SAF mandate might also include a sub mandate targeting potentially
expensive but environmentally beneficial technology such as PTL (power to liquid).

A further key tool to support the industrialisation of SAF could come from government financial
Government support
support to the SAF industry to kick-start investment. This can take the form of grants, low cost
loans and tax incentives.

The interface between SAF production and existing renewable fuel regulations can be used to
Renewable fuel multiplier
incentivise fuel operators to produce more SAF. Currently in the EU, fuel supplies of SAF
benefit from a 20% premium relative to other biofuels for producers meeting their renewable fuel
obligations. If regulators wished to further incentivise SAF production, this multiplier effect could
be increased.

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A further option to support SAF could be to incentivise the deployment of feedstocks to SAF rather
Prioritise feedstocks to SAF
than other biofuels, such as renewable diesel for road transport. There is a case that ground
production
transport has easier alternative pathways to decarbonise than aviation, notably through
electrification. Hence there could be a policy objective to prioritise feedstocks for biofuels to SAF.

Given the complexity of SAF production, there is the possibility to utilise a Central auction
Central auction mechanism
mechanism for SAF as is utilised for example for the production of green electricity in the UK. In
this example, there is an effective reverse auction with energy providers competing to sell green
energy to the government for a defined subsidy. Conceptually this process stimulates
technological competition and ensures backing to the lowest cost provider of green power.

Background: EU’s Renewable Energy Directive II (RED II)

In December 2018, the European Commission (EC) adopted the revised Renewable Energy
Directive (RED II) for the period 2021 to 2030. For background, the original RED was part of the
EU Energy and Climate Change Package (CCP) that ran from 2010 to 2020. As part of this, a
binding target was set whereby 20% of overall energy use in the EU would be powered from
renewable sources by 2020, including 10% in the transport sector. These targets were largely
met: consumption of renewable energy reached 18.9% of total energy use in 2018, and 8.9% in
the transport sector in 2019. However, these figures include “double-counting” for advanced
biofuels; without double-counting, renewables in transport represented 6.3% in 2019.

In RED II, the overall binding renewable energy target is set at 32% by 2030, with a 14% target
for the transport sector, and a possible upward revision by 2023. Each EU member state was
required to transpose RED II into national legislation by 30 June 2021.

Several targets embedded in RED II aim to encourage the use of waste and residues to increase the
sustainability of biofuels and minimise negative knock-on impacts such as deforestation.
 Within the 14% target for transport, food-based biofuels (“first-generation”) are capped at
7%. Fuels produced from feedstocks with high “indirect land-use change” (ILUC) risk are
capped at 2019 consumption levels, unless certified to have a low ILUC risk, and will be
phased out by 2030. Palm oil and soybean oil are considered to be high ILUC risk
feedstocks. In practice, some EU member states are banning these food and feed crop-
based feedstocks much earlier: France in 2021 and Italy in 2023.
 RED II lists two different sets of targets for “advanced” feedstocks: biofuels made from so-
called “Annex IX Part A” feedstocks such as algae, agricultural waste, municipal waste and
wood residue must be supplied at a minimum of 0.2% of transport energy in 2022, 1% in
2025, increasing to at least 3.5% by 2030. Those made from “Part B” feedstocks such as
used cooking oil and some categories of animal fats are capped at 1.7% in 2030.
 Advanced biofuels can be double counted towards both the 3.5% and 14% targets. Non-
food based biofuels count 1.2x their energy content towards the 14% target for aviation and
maritime transport.

To qualify for counting towards the targets, biofuels, bioliquids, and biomass consumed in the
EU must comply with strict sustainability criteria provided in the RED II, which sets requirements
on the minimum level of GHG savings, safeguarding against the conversion of high-carbon
content land, and protecting biodiversity.

In December 2019, the European Green Deal climate neutrality objective was presented which
included a reduction in net GHG emissions by at least 55% by 2030 vs 1990 levels. To achieve
this objective, the EC announced the “Fit for 55” on 14 July 2021. This new target would require
the EU to set a 24% share of renewables in transport by 2030 (vs 14% as per the RED II),
according to Argus estimates (23 December 2020).

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Major policy announcement in EU Fit for 55

On 14 July 2021 the EU announced a major policy initiative and legislative programme Fit for 55
targeting a 55% reduction in emissions relative to 1990 by 2030. The programme included a
swathe of measures across multiple sectors, mandating for example a 55% cut in automotive
emissions by 2030, with a 100% cut only five years later – calling time on the internal
combustion engine.

Three key elements of Aviation-related legislation

For aviation, the introduction of SAF mandates is a key measure, alongside the taxation of
Three key policies for
aviation in Fit for 55
kerosene and the phased removal of ETS allowances to airlines by 2026, as well as an annual
4% tightening of the overall ETS cap.

In contrast to other aviation measures within EU Fit for 55, the kerosene tax and tightening of
SAF proposals probably
welcomed
ETS rules for airlines, the SAF rules were broadly welcomed by the industry and environmental
campaigners alike.

However, we think it is important recognise that the policy objective of kick-starting the
industrialisation of SAF will need a holistic approach – and raising the cost of both kerosene and
carbon is integral to the policy objective of making SAF investment attractive. The SAF
Directive in isolation could struggle to deliver sufficient investment to industrialise SAF.

The measures incurring the ire of the aviation industry are:

 Kerosene taxation: the Energy Tax Directive, proposes applying EUR10.75/Gigajoule tax
on kerosene for intra EU international and domestic passenger flights. It would not apply to
long haul services. The tax would be phased in over 10 years from 2023 to the EUR10.75
level, consistent with tax on petrol. There are 44.3 GJ in a MT of kerosene, implying a final
tax of EUR476/MT or USD564/MT, 90% of the current USD622/MT spot price.
 Carbon market: as widely trailed, the EU proposes to phase out the free allowances for
aviation’s participation in the EU Emissions Trading Scheme (ETS), phasing out free
allowances by 2026. The proposals also tighten the number of allowances down by 4% pa.
This would put significant pressure on airline carbon budgets. However, the EU ETS only
applies to intra EU international and domestic flights and not to long haul flights.

The SAF detail: RefuelEU Directive

The proposed EU SAF mandate is described below:
 The proposed EU SAF mandate applies to all operators departing EU airports, intra-EU,
domestic and long haul. This is in contrast to the kerosene tax and ETS measures which
only apply to intra EU flying.
 The SAF mandate will apply to fuel suppliers and not to airlines.
 The regulation requires EU airports to take necessary measures to facilitate the access of
aircraft operators to aviation fuels containing shares of sustainable aviation fuels in
accordance with the regulation, providing the infrastructure necessary for the delivery,
storage and uplifting of such fuels.
 The mandate includes specific sub mandate for synthetic fuels, such as power to Liquid.
 The use of SAF would reduce airlines’ obligations under the ETS and Corsia, meaning
that airlines receive full relief for carbon costs if they buy SAF.
 The SAF mandate requires the use of synthetic of second generational fuels with
sustainable feedstocks.

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 The proposal includes specific rules to prevent airlines tankering fuel into the EU to evade
the SAF mandate. It requires the yearly quantity of aviation fuel uplifted by a given airline at
a given EU airport to be at least 90% of the yearly aviation fuel required.
 The proposed SAF volumes are described in the table below.

Refuel EU SAF mandate proposals

SAF Share Synthetic aviation fuel
2025 2% 0
2030 5% 0.70%
2035 20% 5%
2040 32% 8%
2045 38% 11%
2050 63% 28%
Source: EU Commission

Complex politics
The FT (16 July 2021) reports strong opposition to parts of the climate announcement. Austria’s
ETS proposals faces
resistance commissioner voted against the Fit for 55 package and another six commissioners (France,
Spain, Italy, Hungary, Latvia, Ireland and Bulgaria) raised detailed objections to the ETS
reforms. A senior EU diplomat said the ETS expansion could be abandoned, despite being
positioned alongside a proposed EUR72bn fund to help alleviate energy poverty.

The FT notes France is will play a central role in leading negotiations taking up the EU
Opposing political situations
between France and
presidency next year. Macron’s government supports the EU’s climate goals, but heading into
Germany 2022 elections the FT notes it will want to avoid measures that see consumers face energy
price rises, which previously proved particularly controversial, triggering the ‘gilets jaunes’
protests. Conversely Germany faces an election in September, with the Green party sitting
second in the polls and widely expected to be part of the future coalition government, though
other outcomes are possible. These differing political perspectives of the two largest
economies, should be overlaid with broader political tensions within the EU.

Meanwhile on the changes to energy taxation, adding taxation of kerosene and bunker fuel, this
is a tax change which requires unanimous approval by member states, with several member
states identified as potential objectors. In its Q122 results briefing 26 July 2021, Ryanair said it
expected resistance to increasing the cost of air travel from peripheral nations and countries
whose economies are particularly reliant on tourism. The other initiatives require qualified
majority approval, which means the approval of 55% of member states and states accounting
for 65% of the EU population.

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HSBC View on Aviation policies in Fit for 55

We see a lot that is to be admired in the aviation policy making within the Fit for 55 programme.
We think that the EU policy makers recognise that SAF will be key to the decarbonisation of
aviation and they have prepared a suite of measures that aim, holistically, to incentivise
investment and the industrialisation of SAF.

We particularly see merit in the holistic approach to incentivising the SAF industry, seeing how
kerosene tax and higher carbon pricing can work jointly with the SAF mandate to close and
reverse the cost gap between SAF and kerosene plus carbon. We think the SAF mandate
looks sensibly structured with a gradual build of mandate levels, requiring the use of second
generation fuels and using a sub-mandate for synthetic fuel. The legislation preventing the
tankering of fuel looks sensible.

The greatest flaw in the proposal lies in the limitation of kerosene and carbon measures to intra-
EU flying alone. Whilst we recognise the political constraints that make broader application
extremely challenging, this has two significant consequences:
 At least a half of CO2 emissions from European aviation arise from long haul flying and
these are unaffected by these key measures.
 Moreover, as the airlines point out, the structure does disadvantage EU aviation relative to
neighbouring geographies, such as Turkey and the Gulf whose competing connecting hubs
would be spared the impact of ETS and kerosene tax. This is potentially bad for European
jobs and connectivity and risks simply displacing EU emissions to neighbouring hubs.
 Lufthansa’s proposal that the kerosene tax be replaced by an aviation departure tax,
structured to capture the final destination of the passenger would extend in the impact of
the tax to long haul and not disadvantage European carriers relative to international
competitors. However, to be effective as a tool to incentivise SAF, this tax structure would
need to incorporate a discount for SAF. This would run the risk of making the tax a shadow
international kerosene tax, which is challenging from a legal perspective.

The airline industry has also complained that the relatively rapid phase out of carbon credits, by
2026, will mean that airlines face materially higher carbon budgets at a time when they are
recovering operational and financial stability after the pandemic. Whilst the kerosene tax will be
phased in over ten years, the tightening of airline carbon budgets will take place more quickly.
Given that the approval process for the EU polices may also take some 18 months, this would
mean an even faster removal of carbon credits. We have sympathy with airline complaints over
the pace of this.

We also highlight our concern that political opposition to aspects of the proposed tightening ETS and
kerosene taxation could see these aspects of the structure watered down or removed. From a policy
perspective we see the three policies working holistically to attract investment into SAF.

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Existing European SAF mandates

Prior to the publication of the EU Fit for 55 several European countries, both EU and non –EU,
have been preparing national SAF mandates, with Norway leading the process with its SAF
mandate already in force. Across the various existing proposals, environmental activists have
criticised the structures of many of the mandates for being both too ambitious and insufficiently
ambitious with volumes and often over the precise feedstocks that are permitted.

It is currently unclear whether EU national mandates will be replaced by the EU mandate. We

summarise current SAF policies in Europe and North America in the Appendix.

European SAF policies

Norway
The UK SAF blend 0.5% mandate star ted in
The Renewable Transport Fuel Obligation 2020. Considering a 30% target for 2030
(RTFO) rewards SAF production with the same
economic incentives given to road vehicles
Sweden
The Netherlands A carbon neutral country by 2045. Legislative
SAF Roadmap under development with a proposal for SAF blend ratios from 1% in 2021 to
blending mandate at the national or EU level. 30% in 2030. Fossil-free Sweden industry initiative
Focus on advanced feedstocks. First SAF
plant (SkyNRG) in 2022
Finland
Germany A carbon-neutral country by 2035 – increasing
National legislation for GHG r eduction of fuels SAF obligation to reach 30% in 2030
(to transpose the RED II) and the German National
Hydrogen Strategy for esee an SAF energetic sub-
quota of 2% in 2030 and ONLY for PtL-kerosene Denmark
SAF blend obligation under study
France
SAF roadmap to reach a SAF supply of 2% in 2025
and 5% in 2030. Focus on advanced feedstocks

Spain
Climate Change Law: 2% SAF supply objective in
2025. Several new bio-refineries under planning with
special focus on wastes and residues

Portugal
Roadmap for Carbon Neutrality (RNC2050) –
integrated approach to tr ansport decarbonization
including aviation

Source: World Economic Forum

Regulatory support for SAF is growing in US

While much of the focus on aviation decarbonisation has been in Europe, policy support for SAF is
also growing in the US with the introduction of a new bill: the Sustainable Skies Act. The US is set to
become a key producer of renewable fuels including SAF and US renewable fuels production
capacity should overtake Europe in the next few years (see later section “SAF supply outlook”). As
such, policy support in the US is crucial in kick-starting a SAF supply industry.

The US, driven by California, is currently the world’s largest SAF market thanks to biofuels
credits. However, up until recently, SAF was at a disadvantage in the US as it benefits from
fewer credits compared to renewable road fuels. In the US, renewable jet fuel qualifies for up to
three forms of regulatory support, two of which at the federal level and one at the state level.
Two of these policies (the Renewable Fuel Standard and the Low Carbon Fuel Standard) favour
renewable road fuels over aviation fuels.
 The biodiesel Blenders Tax Credit (BTC) of USD1 per gallon (USD42/b, or USD330/ton of
jet fuel). The BTC was re-instated in January 2020 and is guaranteed until the end of 2022.

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 The Renewable Fuel Standard (RFS), under which refiners and importers are obligated to
blend a certain volume of biofuel into transport fuels. Under the RFS, various types of
biofuels generate Renewable Identification Numbers, or “RINs”, which can be traded in the
secondary market. Certain types of biofuels are assigned higher RIN generation based on
their energy equivalence with ethanol. Renewable road diesel generates 1.7 RINs per
gallon, while renewable jet fuel generates only 1.6 RINs. With RIN prices currently at
USD1.6/gal, the RFS policy generates USD850/ton of support for SAF and USD900/ton for
renewable diesel.
 The states of California and Oregon added renewable jet fuel to their respective Low
Carbon Fuel Standards (LCFS) in 2019. Under the LCFS, fossil jet fuel has a lower
benchmark carbon intensity than fossil diesel, resulting in renewable diesel earning more
LCFS credits than SAF.

New bills aim to increase US SAF production

In November 2020, the US Sustainable Aviation Fuel Act was introduced by a California
Representative. If approved, the bill would establish a goal of a net 35% reduction in GHG emissions
from the aviation sector by 2035, and promote the development and use of SAF. Among other
elements, the proposed legislation would create aviation-only LCFS and BTC schemes. The
renewable jet fuel BTC would be set at USD1.5-1.75 per gallon, compared to USD1/gal currently for
renewable diesel. The Environmental Protection Agency (EPA) would need to establish a low carbon
standard for aviation fuels and set annual targets to reduce GHG emissions associated with aviation
fuel by at least 20% by 2030 and 50% by 2050. From FY2023, the US Department of Defence would
need to make a bulk purchase of an amount of SAF that is not less than 10% of the total amount of
aviation fuel procured for operational purposes.

On 20 May 2021, the new “Sustainable Skies Act” bill was introduced, which proposes a new
SAF tax credit to fight carbon emissions and promote the transition to SAF. It is a performance-
based USD1.5-2 per gallon blender’s tax credit for SAF. A 50% reduction in emissions relative
to fossil jet fuel will earn USD1.5 per gallon and would increase by USD0.01 for each additional
percentage of lifecycle GHG emissions savings. Additional incentives applicable depending on
the feedstock being used. For example, SAF using soybean would receive cUSD1.54/gal and
that using cooking oil would get USD1.85/gal given its much lower carbon intensity. The tax
credit would expire at the end of 2031.

Proposed US credits for renewable diesel and renewable jet fuel (USD/gal)

0
Renewable jet fuel Renewable diesel
RIN LCFS Sustainable Skies Act Min Sustainable Skies Act Max Biodiesel Blenders Tax Credit
Source: BNEF

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Consumer and corporate ability to support SAF

We expect the global growth of aviation will be driven by EM demographics. We therefore do

not expect environmental awareness to prevent aviation demand growth. However, we do
expect corporate travel to be more directly impacted by corporations’ focus on managing their
carbon output.

SAFc (sustainable aviation fuel certificate) offers a mutually beneficial tool for corporates to
travel whilst managing their carbon footprint and for airlines to defend corporate travel

Consumer attitudes vary globally

Flight shame is a major influence in Nordics and is changing consumer behaviour. Flight
Flight shame is real but not
global
shaming is a developing factor in Western Europe. The concept is gaining some traction in
Canada, but is not widely accepted more broadly around the world. It is particularly not a
mainstream issue in other emerging aviation markets.

We do expect the building awareness of climate change to lead to a lower multiplier between
Compressing growth in DM
GDP and aviation travel growth as a result of environmental awareness. We expect climate
awareness to lead to modal shift from air to rail where rail services offer relevant services.

However, given that the core huge driver of air travel growth will be demographic based, we do
not expect flight shame to stop growth. Whilst the developed market populations travel at a
high rate, as the standard of living rises in emerging markets, their populations will want to
increase their consumption of air travel.

However, the issue of emissions will be more direct on compressing corporate travel demand.

Harnessing corporate travel to further the SAF project

The WEF has embarked on a project, which aims to harness the desire and need of major
Corporates want to travel
with SAF corporations to reduce their carbon emissions, whilst retaining connectivity with colleagues and
clients globally through air travel. As major purchasers of air transport for both passengers and
cargo, corporations and other organisations have a potential mutually beneficial role to play in
supporting aviation’s net-zero pathway, while also achieving their own direct and business-
travel emissions reduction targets. The concept has the potential to allow corporations to
continue to travel whilst managing their own emissions and to allow airlines to defend their key
business travel revenues.

The World Economic Forum’s Clean Skies for Tomorrow initiative has partnered with
Mutually beneficial
opportunity
RMI, and PwC Netherlands to develop the sustainable aviation fuel certificate (SAFc)
framework to meet this need. The SAFc framework is designed to enable air transport
customers to invest directly in SAF use, receiving ownership of the environmental attributes
linked to the investment. It allows aviation customers to take ownership of their emissions
reduction goals whilst providing the necessary signals to the market to invest in the deployment
of sustainable aviation fuel.

SAFc is a novel accounting instrument that decouples SAF fuel from its emissions reduction
benefits so that the actual fuel can be delivered to the nearest airport and the climate benefits
can be claimed by the SAFc buyer. Firms purchase SAFc, which provides a market-based
mechanism for managing their aviation-related emissions and enables them to be recognized
for their mitigation efforts. By covering SAF’s price premium, the purchase of SAFc also
addresses the aviation industry’s supply-and-demand impasse over scaling SAF.

The concept is currently being tested by CST’s partners, including Alaska Airlines, American
Airlines, Deloitte, Deutsche Post DHL Group (DPDHL), Microsoft and SkyNRG; the outcomes of
the pilots will inform additional refinement and finalisation of the framework.

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Structurally, fuel producers generate eligible SAF from sustainable feedstocks. They issue a
defined amount of SAFc based on either fuel volume or overall life-cycle emissions reductions.
Producers can then sell the actual SAF volume as well as the virtual SAF certificates (SAFc)
separately. SAFc facilitates customer payment in exchange for verified reductions of emissions
through SAF, with each volume of SAF producing a Scope 1 claim for an airline and a Scope 3
claim for the travel customer. SAFc prices could factor in the overall premium of the associated
SAF over fossil-based jet fuel after government incentives are incorporated. In a life-cycle
assessment (LCA)-based model, SAFc prices would be based on overall LCA emissions
reductions over a standardized baseline of fossil-based jet fuel.

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Aviation’s environmental
challenge

 In the past, aviation’s growth rate has exceeded the rate of efficiency
improvement, leading to increasing emissions.
 We foresee a post pandemic resumption of growth, with powerful
emerging market demographics far exceeding climate sensitivity of
corporate and developed economy travellers
 We expect IATA to strengthen the industry’s existing commitment to
decarbonisation this autumn. Yet maintaining the existing rate of
efficiency improvements will not suffice.

The environmental challenge

Aviation faces both a pressing need to decarbonise and a significant challenge to do so. Whilst
Traffic grows faster than
efficiency improves
the global contribution of aviation to greenhouse gas emissions was very low, at only 2% prior
to the pandemic, the heart of the problem is that aviation emissions grow. Traffic grows faster
than efficiency improves so aviation emissions grow. Absent radical change in aviation
emissions it will continue to grow. As other sectors reduce emissions, aviation stands out in
society as a high profile obstacle in the path to global decarbonisation.

Looking through the pandemic, we expect aviation to recover from the unprecedented drop in
Air travel should rebound
from the pandemic
flying. Whilst all traffic forecasts are volatile through the pandemic, we share IATA’s view that
aviation will rebound. IATA forecasts global air travel regaining the level of 2019 in 2023, with
continuing growth thereafter. The pandemic will thus cause aviation to lose four years of
growth, which will not be recaptured, but growth looks likely to continue into the future, with
IATA expecting the lost growth of close to two years of growth and 7% of traffic by 2030.

As we discuss below, consumer and corporate environmental awareness may well constrain
aviation growth in developed markets. However, rising living standards and high populations in
emerging markets appear set to drive global aviation growth in the future.

Over the past ten years, technical improvements have consistently delivered an average of
Technology lags growth
around 2% annual improvement in aviation fuel efficiency and hence emissions. Impressive as
this is, the 5% annual growth rate surpasses the efficiency and leads to building emissions.

Decarbonising aviation is straightforwardly challenging: it is hard to find a replacement power

Electrification of aviation is
highly challenging
source for kerosene. For electrification, range anxiety is of greater relevance for aircraft than
ground based transport. The higher weight of batteries per unit of energy available relative to
kerosene is a major constraint, since you have to use energy to get weight off the ground. This
limits the range of electric aircraft, even if range anxiety can be overcome. Moreover, in the course
of flight kerosene is burnt and the weight penalty reduces, which is not the case for batteries.

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Only 2% of global emissions globally, but far higher in developed markets

In recent years the aviation industry has been keen to emphasise that it is only responsible for
2% of global CO2 emissions. At first glance this suggests that the intense policy focus on
aviation is perhaps overdone.

Aviation is 4% of EU CO2 However, the 2% figure represents global emissions. In developed economies, we see far
emissions higher ratios: Aviation’s contribution to emissions in the EU is an average 4%. On the one
hand this reflects high living standards and correspondingly high consumption of air travel.
Equally, developed economies have made more progress in decarbonising in general and also
in general have less industrial processes.

Aviation’s share of emissions in the UK, at 10% is particularly elevated, reflecting the very well
Aviation is 10% of UK CO2
emissions
developed pre-pandemic aviation sector in the UK, a services rather than industrial based
economy and relatively advanced decarbonisation of power, relative to other countries.

It’s not just CO2

In addition to CO2 emissions, aviation’s climate change impact is exacerbated by the emission
of additional greenhouse gases, notably nitrogen (NOx), soot particles, oxidised sulphur
species, and water vapour.

Furthermore, the emissions at altitude are thought to contribute to higher impact on global
Contrails create radiative
forcing warming. Over time, much attention has focussed on the warming effect of contrail cirrus, the
clouds produced by aircraft engine exhausts. Recent estimates of the impact of contrails have
halved, but they remain an incremental impact from aviation. (EASA: Updated analysis of the
non-CO2 effects of aviation, 24 November 2011).

Transport off course to decarbonise unlike other sectors

As the graph below illustrates, the global transport sector, despite only accounting for 16% of
global GHG emissions in 2017, is the standout weak link in the global effort to decarbonise.

Transport is not on track change to decarbonising in chart

After other sectors successfully started decarbonizing, attention is shifting to av iation, shipping, trucking
140
Indexed EU GHG emissions over time by sector compar ed with

120
Transportis not on track for EU climate targets
the 95% r eduction tar get tr ajector yi(1990 = 100)

100

80
Buildings
Agriculture
Industry
60
Waste
Power generation
40

20

95% reduction target

0
1990 2000 2010 2020 2030 2040 2050

Source: :World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation

29
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Mapping our footprint - global GHG emissions in 2017: Aviation produces 2% of global CO2
Source of emissions Human activities responsible Greenhouse gases (GHGs) Sinks

Electricity final consumption

372 TWh 651 TWh

Residential Commercial 1,012

8,967 TWh
5,780 TWh 4,675 TWh TWh

Industry Transport Buildings Agri/ forestry Other

: 26.2%

: 11.8%
Coal: 30.4%
3.1%
0.1% 18.7%
: 15.9% 2.2% 24% CO2 to land
6.4%
17.8%
Oil: 24.4% : 9.5% 6.2% 23% CO2 to oceans
11.9% Carbon dioxide
2.1% (CO2): 74.0%
1.9%
1.6% 0.7%
0.3% 2.9% 41.3%
Gas: 14.4% : 5.8%
0.2%
~50 53% CO2 to atmosphere
: 1.7%
5.6% GTCO2e
: 1.9% 3.9%
: 0.4% 4.1%
: 4.1% 0.9%
: 2.6% 1.7% 5% CH4 to land
Methane
: 11.4% : 4.8% (CH 4): 16.8%
16.2%
95% CH4 to atmosphere
: 1.2%
: 2.7%
: 6.2% Nitrous oxide 1.6%
: 1.4% (N 2O): 6.2% 27% N2O to pyrolysis in stratosphere
: 9.1% : 2.1% :

Future Transport ● Equities

7.2%
3.0%
: 2.8% 73% N2O & 100% of F-gases to
atmosphere
: 3.4%
: 2.2%
: 3.4%

Source: Source: HSBC, IEA, EDGAR, Global Carbon Project; values for sinks adjust calc. error; F-gases sources are not shown here but typically include refrigeration, air conditioning, aerosols and high voltage switchgear ; LUCF is Land Use Change and Forestry; data for LUCF values are inherently uncertain and may
show variations based on accounting; Own use & other includes losses and agricultural use of energy; Other agri emissions includes direct emissions and emissions from agri waste burning & other indirect emissions; Other industry includes non-ferrous metal, paper & pulp and mining & quarrying;; Energy and process

July 2021
emissions from calcination and cement production is nearly 2.5 GtCO2

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It’s hard to decarbonise aviation

Practical problems for electric decarbonisation

The practical challenge to decarbonise aviation lies in the simple physics – the heavier an
Batteries are heavy
aircraft and its payload, is the more power will be needed to generate the lift to fly. Kerosene
has a significantly higher power to weight ratio. Electric ground transportation is advancing
quickly, yet electric vehicles are heavy. An electric Peugeot 208 weighs 22-43% more than its
petrol equivalent. In aviation such weight penalties literally struggle to fly.

Battery technology is advancing extraordinarily quickly. The power to weight ratio of modern
Electric aviation a solution
for commuter and regional
lithium ion batteries improves. Small electric aircraft are flying today and development of e
aviation aviation is accelerating. Yet the weight issue will limit electric aircraft development to short
range commuter aircraft in the coming decade and to relatively small regional aircraft in the
period to 2050.

A further challenge for the application of electric power to aviation is that liquid fuels are
Batteries do not get lighter
through the flight
consumed through the course of a flight, meaning that fuel consumption reduces in the course
of the journey. As battery power reduces, weight does not reduce. Moreover, this means the
weight of the aircraft on landing is the same as on take-off. This raises new issues for aircraft
design, needing to develop landing gear capable of supporting the impact of the full weight of
the aircraft landing. Today’s commercial aircraft are designed to land at a lighter weight than
when they take off.

We note the strong interest in electric aviation for urban mobility, with multiple operators
eVTOLs do not solve the
commercial aviation problem
planning electric-powered vertical take-off and landing e-copters, commonly known as EVTOLs.
Developers in this sector include Airbus, Archer, Boeing, Eviation, Joby, Lilium, Kitty Hawk,
Vertical Aerospace, Volocopter. For the most part these companies are all pursuing urban
mobility options with aircraft for below 10 passengers. This business area will help the broader
development of battery development for aviation, but the range and size of aircraft do not per se
offer an immediate solution to the technical challenges facing the electrification of commercial
aviation. The fact that this sector is the most vibrant within aviation, is rather a recognition of
the challenges associated with electrifying flight. It is also important to note that given the
multiple planned eVTOL range limitations, they do not offer a practical alternative to medium
haul flying.

Hydrogen technology shows promise, but lies in a distant future

In the quest to decarbonise aviation, Airbus has committed to working on hydrogen powered
Airbus is prioritising
hydrogen for the future
aviation, presenting a portfolio of project aircraft using hydrogen to power a regional propeller
aircraft, a mainstream 200 seat narrow body and a long range blended wing aircraft.

Alternative fuel developer Universal Hydrogen, partly backed by Airbus and Jetblue aims to
develop a hydrogen-fuel supply system based around fuel “capsules”. The capsules would be
filled at hydrogen production sites and shipped to airports via existing global freight networks.
Universal is also modifying a De Havilland Canada Dash 8-300 to have a hydrogen fuel-cell
system. Universal Hydrogen has announced deals with Iberia regional carrier Air Nostrum, for
11 conversion kits for its ATR 72-600s, with Ravn Alaska for five conversion kits for its Dash 8-
100 and -300s and with Icelandair for conversion of its five-strong turboprop fleet.

Separately, Deutsche Aircraft recently announced that it is partnering with fuel-cell firm H2FLY
to incorporate its fuel-cell technology in a modernised variant of the D328 twin-turboprop being
developed by the German airframer.

Hydrogen could be used to power aircraft in cooled and pressurised liquid hydrogen form.
Would require all new aircraft
designs and infrastructure
Hydrogen could either power a fuel cell to drive aircraft engines or alternatively, hydrogen could
be used directly as a power source for turbofan engines. Hydrogen compares very favourably

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with kerosene on the thorny issue of power to weight, with 2.5x the power to weight ratio of
kerosene. However, liquid hydrogen is low volumetric density: IATA estimates that for any given
mission, a liquid hydrogen fuel tank would need to be around four times the size of a traditional
kerosene fuel tank. This would require all new aircraft designs: Airbus’s project aircraft
illustrations use extended fuselages with fuel tanks in the rear of the fuselage for the regional
and short haul aircraft. For its long haul design, Airbus proposes a blended wing design.

However, the lead time to hydrogen powered commercial aviation is lengthy. This power source
Airbus targets entry to
service in 2035
would require radical changes to aircraft design. Airbus targets an entry into service of its first
hydrogen aircraft in 2035, though the regional conversion plans for turboprops may see earlier
entry to service. The use of hydrogen in aviation will require the development of new supply
chain infrastructure at airports. The successful development of hydrogen powered aviation
would obviously rely on a sufficient supply of green hydrogen and aviation competing against
other industries for this asset.

Operational efficiency has improved

The aviation sector defends itself noting a strong track record in improving efficiency over time.
Fleet modernisation has
delivered consistent
Fuel efficiency has improved by an average of around 2% per annum in recent years. Key
environmental progress factors underpinning the improved environmental performance come from fleet modernisation to
larger aircraft with more efficient engines, lower weight, such as through the use of composite
airframes. Aerodynamics have also advanced with wing design particularly advancing. Higher
load factors have also improved metrics of fuel consumption and C02 per passenger.

It is worth noting that fuel efficiency has also faced headwinds, particularly from increasing
Congestion brings
headwinds
congestion, that lead to increased journey times to allow for stacking waiting to land at
congested airports. Lengthy queues to depart congested airports also increase fuel
consumption. Increasing the share of premium seats on flag carrier aircraft serves to lower the
capacity of the aircraft and reduce the environmental efficiency of the aircraft. Similarly, ultra-
long haul flights are not environmentally efficient, departing with elevated fuel loads that
increase average fuel consumption.

Looking to the future there are further operation opportunities to improve environmental
Future operational
improvements
performance of aircraft, including electric ground powered taxi and a project under study by
Airbus called Fello-Fly which aims to reduce the separation of aircraft to allow aircraft on long
haul routes to effectively slipstream one another. A key task that makes frustratingly slow
progress, has been the optimisation of air traffic control processes, bundled in Europe under the
Single Europe Sky initiative and in the US under the Next Gen initiative. More broadly around
the world the freeing of blocks of airspace for military use could reduce flight distances and
reduce fuel consumption and emissions.

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Global operational efficiency

54.3% lower CO2 per passenger kilometre

300 2,000
1,800
CO2 per passenger km (g) 250 1,600

CO2 per tonne km (g)

200 1,400
1,200
150 1,000
800
100 600
50 400
200
0 0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
CO2 per passenger km CO2 per tonne km
Source: ATAG

Aircraft technology advances

100

90

80
Engine fuel
c onsumption
70
% of base (Comet 4)

60

50 49%
Air c r aft fuel
bur n per seat
40

30

20
82%
10

0
1950 1960 1970 1980 1990 2000 2010

Year of model introduction

Source: ATAG

Aviation growth exceeds efficiency improvements

The problem for aviation is that operational and technical advances have fallen short of the
pace of growth of the industry.

We expect aviation to recover from the pandemic

Through the course of the pandemic, the various trade associations such as IATA (airlines), ACI
(airports) and Eurocontrol (the European Air traffic control association) have maintained regular
traffic forecasts seeking to model the recovery path for aviation. With respect, the key common
factor for these forecasts has been that they have been wrong as the unpredictability of the
COVID-19 virus, the development of variants and the uncertain roll out of the vaccines have
created an entirely unstable environment. Moreover, government health policy-making has

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varied widely around the world and within single countries over time. There is a lack of
commonality and predictability around health protocols, which are making the reopening of
travel challenging.

IATA forecasts aviation to recover

Source: IATA Global Travel forecasts April 2021

The April 2021 global traffic forecast from IATA was notable as it was the first update to a major
IATA’s vision of 2019 being
regained by 2023 looks
industry traffic forecast where the recovery date for the re-establishment of 2019 traffic was
plausible drawn forward rather than pushed to the future. The pace of traffic recovery will be shaped by
the success of the vaccine roll out, the nature of future variant vaccines and government
policies in reopening borders. But we think the IATA forecast represents a sensible estimate at
the moment. The evidence from the US and Chinese domestic markets is that there is very
strong pent up demand for leisure and visiting friends and relations travel. We expect this to be
replicated internationally as and when travel restrictions are lifted.

We recognise that business travel will recover from the pandemic more slowly, as discussed in
Business travel growth will
slow?
European Airlines: Cabin Fever, 7 June 2021. We do foresee pressure on business travel growth
post pandemic, as airlines manage employee safety, defend cost savings from T&E budgets and
as corporates seek to reduce their carbon footprints. We do expect business travel to revert to
growth, with early signs of recovery already evident in the US. The importance of managing
carbon footprints will be a real constraint on corporate travel and will see corporate travel grow
more slowly than leisure and VFR travel. Yet this has been the case for the past forty years. We
do not think the pandemic has reshaped the outlook for business travel. We do think that
environmental sensitivities were always going to pressure business travel.

We expect the concept of flight shame will be relevant within developed markets. At present
Flight shame is relevant in
developed markets
this is a concept that is currently relevant in the Nordic markets of Europe and is building
towards relevance across Europe. We think that societal pressures on the environmental
challenges of aviation will compress growth rates in developed markets: some travellers may
cease travelling by air, more may reduce the frequency of trips and some will not be affected.
The scale of the impact on traffic growth in developed markets will depend at least in part on the
effectiveness of the industry’s communication strategy to decarbonise.

However, looking at the global picture of aviation growth, it is very important to recognise that the
The strength of emerging
market growth dominates
key drivers of air travel over the coming decades will lie in emerging economies rather than
developed economies. As the chart below from IATA’s Air Transport Action Group (ATAG)
illustrates, the propensity to fly is directly related to standards of living. Across the world there are
multiple highly populous countries whose living standards climb towards a level at which air travel
becomes attainable. Sensitivities over environmental pressures from aviation will reduce
aviation’s growth in Europe. Yet the reduction of growth in these mature markets will not in our

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view overpower the strong growth in air travel within populous countries such as India, Indonesia,
Brazil and Nigeria. In its last global market forecast before the pandemic, Airbus forecasts the
share of traffic in currently developed economies to fall from 43% in 2018 to 31% by 2038.

Propensity to travel and rising living standards

SINGAPORE
10.00
2018 air passengers per capita to / from / within country

UK
US
SA

JAPAN
1.00

CHINA

ETHIOPIA INDIA
0.10

BANGLADESH

NIGERIA

0.01

1,000 10,000 100,000

2018GDP
2018 GDPper
percapita
capita(2010
(2010$US
USDand
and2018
2018population)
population)
Source: ATAG

Absent radical change, aviation CO2 will continue to grow

If the airline industry continues to do what it has done over the past twenty years, modernising
Absent radical change
emissions will only rise aircraft and working on operational efficiency, it may continue to deliver comparable regular
efficiency improvements to recent years. Emissions will continue to grow as traffic growth
surpasses the environmental progress.

Global aviation energy demand projection (Mton/year)

600
504 520
479
500 446
407
400 364

300
404 426 441
215 376
342
200 305
168
100
47 59 65 70 75 78 79
0
2020 2025 e 2030 e 2035 e 2040 e 2045 e 2050e
Cargo Passenger
Source: World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation estimates
Note: assumes Fuel efficiency improves by 1% annually through 2050, based on historical trends; Fuel mix of 100% kerosene (including blend-in fuels) in 2050, with no
commercial electric or hydrogen planes

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Global CO2 emissions

Equivalent global CO2 emissions
Fuel demand projections (Mton) assuming 100% fossil jet (bn tons)
2020 215 0.7
2025e 364 1.1
2030e 407 1.3
2035e 446 1.4
2040e 479 1.5
2045e 504 1.6
2050e 520 1.7
Source: World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation estimates

Airlines have committed to change

Clearly this scenario of increasing CO2 emissions is not tenable. Recognising the building
environmental pressure on aviation, the aviation sector has made a series of commitments
towards carbon neutrality, which are summarised below.

Airline net zero commitments and associated SAF agreements as at July 2021
Net-zero target Target SAF Target SAF Partnerships
Company Country announced year SAF Target Year /offtakes
Air Canada Canada Mar-21 2050 - - -
Air New Zealand New Zealand Nov-19 2050 - - -
Alaska Air U.S. Sep-20 2040 - - Neste, SkyNRG
All Nippon Airways Japan Apr-21 2050 - - Neste
Amazon U.S. Sep-20 2040 - - World Energy
American Airlines U.S. Oct-20 2050 - - Neste
Atlas Air U.S. Mar-21 2050 - - -
Cathay Pacific Airways Hong Kong Sep-20 2050 - - Fulcrum BioEnergy
Delta Air Lines U.S. Feb-20 2030 10% 2030 Gevo, Northwest
Advanced Biofuels
DHL Germany Mar-21 2050 30% 2030 -
EasyJet U.K. Nov-19 2050 - - -
Etihad Airways UAE Dec-20 2050 - - -
FedEx U.S. Mar-21 2040 30% 2030 Red Rock Biofuels
Fiji Airways Fiji Sep-20 2050 - - -
Finnair OYJ Finland Mar-20 2045 - - Neste, SkyNRG
Gol Airlines Brazil Apr-21 2050 - - -
Hawaiian Airlines U.S. Mar-21 2050 - - -
International Airlines Group U.K. Oct-19 2050 10% 2030 Velocys, LanzaJet
Japan Airlines Japan Jun-20 2050 10% 2030 Fulcrum BioEnergy
JetBlue Airways U.S. Apr-21 2040 10% 2030 Neste
Malaysia Airlines Malaysia Sep-20 2050 - - -
Qantas Airways Limited Australia Nov-19 2050 - - -
Qatar Airways Qatar Sep-20 2050 - - -
Royal Air Maroc Morocco Sep-20 2050 - - -
Royal Jordanian Jordan Sep-20 2050 - - -
S7 Airlines Russia Sep-20 2050 - - -
Singapore Airlines Singapore May-21 2050 - - -
Southwest Airlines U.S. Mar-21 2050 - - P66 Rodeo,
Marathon Martinez
Sri Lankan Airlines Sri Lanka Sep-20 2050 - - -
United Airlines Holdings U.S. Dec-20 2050 - - Fulcrum BioEnergy
UPS U.S. Mar-21 2050 30% 2035 -
Virgin Atlantic U.K. Jun-19 2050 - - LanzaTech
Source: BNEF

At the industry level, the global trade association IATA’s existing commitment is to reduce
industry emissions to 50% of 2005 levels by 2050, with associated commitments to deliver
annual fuel efficiency improvements of 1.5% to 2020 and carbon net neutral growth from 2020.
However, these commitments date from 2009. New IATA Ceo Willie Walsh has announced
plans to update industry commitments at this autumns IATA’s AGM (Flightglobal, 6 July 2021).
A move towards a net zero commitment would be consistent with the commitment made by IAG
when he was CEO, and by the oneworld alliance, of which IAG was a key member. On March
30 2021 the US aviation trade body A4A committed to work towards net zero by 2050.

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The commitments to net zero have accelerated through the pandemic. Yet distant goals of
airline decarbonisation appear challenging in the context of our forecast aviation industry growth
and the distant path to electrification and hydrogen propulsion.

Number of airlines with net zero commitments accelerate through the pandemic

35
30
25
20
15
10
5
-
Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21

Source: BNEF

How the industry plans to close the wedge between aviation growth and carbon emissions will
have to rely on a combination of offsetting and sustainable aviation fuels until the changes in
propulsion technologies are technically and commercially viable. We explore the transition
plans in the following section of this report.

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The hypothetical pathways to

decarbonise aviation by 2050

 Pre pandemic decarbonisation strategies focussed on offsetting

measures, with alternative fuels and propulsion seen as
distant propositions
 Through the pandemic, policy moves to support SAF, electric and
hydrogen aviation accelerate
 SAF and new propulsion technologies could drive aviation to
decarbonisation between 2030 and 2050

Decarbonisation pathways evolve

Prior to the pandemic decarbonisation efforts within the airline industry were most obviously
Pre-pandemic, offsetting was
focussed on offsetting structures. The industry was focussed on the forthcoming
core focus of
decarbonisation implementation of the ICAO CORSIA programme, extending the concept of carbon offsetting to
the full global international airline industry. This programmes starts with the voluntary phase in
2024 and develops to mandatory stage in 2027.

Plainly work was underway on the development of sustainable aviation fuels, electric and
Focus on technology
hydrogen aviation, but certainly the HSBC view, as discussed in The second frontier Why the
advances for decarbonising
flight accelerates transport sector is next in tackling climate change (15 January 2019), we created a Clean-
Power-and-Transport-2040 scenario, in which we looked at the potential for cleaner power
generation and transport to close the ‘emissions gap’, which exists between business-as-usual
GHG emissions and emissions consistent with global warming limitation targets. For the aviation
sector our focus was on aviation meeting the targets of the CORSIA plans. Moreover, some of
the higher profile environmental commitments pre pandemic, such as made by Jetblue and
easyJet, were focussed on fully carbon offsetting all flying.

However, through the course of the pandemic we have seen a very strong ramp-up in news flow
around sustainable aviation fuel and around technological advances by the OEMs. We have seen
airlines such as United, Finnair and Wideroe place letters of intent for short range electric aircraft.
We have seen Airbus disclose three project plans for hydrogen powered aircraft. We have seen
CFM launch a new project RISE to construct an open rotor technology engine for entry into service in
the 2030s. This technology has shown potential to significantly lower fuel consumption since the
1980s, but at a price of higher noise. OEMs have not committed to launch the concept.

Sustainable aviation fuels, electrification and hydrogen greatest promise

In terms of driving faster change to fuel efficiency and meaningful decarbonisation, it is clear
that the greatest potential lies in sustainable aviation fuels, and radical changes to propulsion,
notably using electric aircraft for regional flying and hydrogen powered aircraft for long haul.
The opportunities and challenges across these decarbonisation strategies are neatly
summarised in the table below.

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Most promising options to make aviation sustainable are new fuels and propulsion
technologies
1 2 3
Comparison vs Sustainable
fossil kerosene Battery-electric H2 fuel cell H2 turbine aviation fuel

Climate impact¹ 100% reduction² 75%-90% reduction 50%–75% reduction 30%-60% reduction³

Low-battery density Feasible only for Feasible for all

Aircraft design limits ranges to commuter to short- segments except for Only minor changes
500km–1,000km range segments flights >10,000km

2–3x longer
1-2x longer
Same or shorter refueling times for Same turnaround
Aircraft operations turnaround times
refuelling times for
medium and long times
up to short range
range

Fast-charging or Existing
Airport
battery exchange LH2 distribution and storage required infrastructure can be
infrastructure system required used

Major advantages Major challenges

Source: World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation: Clean Skies for Tomorrow
1 Including CO2, NOx, water vapour and contrails; 2 Assuming 100% renewable electricity; 3 For e-fuels with fully decarbonized supply chain

Estimated timelines for technology

It is undeniable that the decarbonisation strategy for aviation rests on technologies - with the
Technological leaps of faith
exception of SAF – that are not substantially in their infancy. Moreover, whilst the production of
first generation biofuels is well established globally, the development of second generation
biofuels, whose feedstocks do not compete with food production, is also in its infancy. As
discussed in the next section, some second generation biofuel technologies are technologically
proven, but their industrialisation is not.

These means that the estimated entry into service of the technologies is undoubtedly uncertain.
But what is clear is that there is a very clear acceleration of investment and political attention on
SAF, electric aviation and hydrogen aviation.

The table below illustrates an estimated timeline for technological implementation from ATAG.
Whilst zero emissions technology is expected to be relevant for regional and commuter flying in
the 2030s. This will mean that in the 2030s 97% of aviation CO2 emissions will rely on SAF to
decarbonise, excluding offsets.

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Where low- and zero-carbon energy could be deployed in commercial aviation

2020 2025 e 2030 e 2035 e 2040 e 2045 e 2050 e
Commuter
• 9-50 seats Electric Electric Electric Electric Electric Electric
SAF
• < 60 minute flights and/or SAF and/or SAF and/or SAF and/or SAF and/or SAF and/or SAF
• <1% of industry CO 2

Regional Electric or Electric or Electric or Electric or Electric or

• 50-100 seats Hydrogen Hydrogen Hydrogen Hydrogen Hydrogen
SAF SAF
• 30-90 minute flights fuel cell fuel cell fuel cell fuel cell fuel cell
• ~3% of industry CO 2 and/or SAF and/or SAF and/or SAF and/or SAF and/or SAF

Short haul Electric or Electric or Electric or

• 100-150 seats Hydrogen Hydrogen Hydrogen
SAF SAF SAF SAF
• 45-120 minute flights combustion combustion combustion
• ~24% of industry CO2 and/or SAF and/or SAF and/or SAF

Medium haul SAF

• 100-250 seats potentially
SAF SAF SAF SAF SAF SAF
• 60-150 minute flights some
• ~43% of industry CO2 Hydrogen

Long haul
• 250+ seats
SAF SAF SAF SAF SAF SAF SAF
• 150 minute + flights
• ~30% of industry CO2

Source: ATAG forecasts, % of industry as at 2018


in the 2030s 97% of aviation CO2 emissions will rely on
SAF to decarbonise, excluding offsetting

Working with such estimated entry into service dates for technology, various industry trade
bodies have modelled the decarbonisation pathway for aviation to 2050.

The chart below illustrates the A4E/ACI modelling for European aviation, including intra Europe
and services to and from the EU. It is notable that this modelling foresees the role of carbon
offsetting shrinking to 8% by 2050. Whilst offsetting does play a significant role in
decarbonising to 2030, this role then reduces very significantly to 2050. During the period from
2030 to 2050 the influence of SAF is expected to increase very significantly, as is the impact
from electric and hydrogen propulsion.

A4E/ACI vision of decarbonisation of European aviation

300
Decarbonisation Roadmap for European Aviation
EU+ aviation net CO2 emissions (Mt)

1 7%
250
2 0%
200
1%
6%
150
3 4%
100

50 12%
8%
0 2%
2018 2030 2050
Hypothetical reference scenario Net CO 2 emissions
Improved technology (kerosene) Improved ATM and operations Economic measures
Improved technology ( hydrogen ) Sustainable aviation fuels (SAF) Effect of economic measures on demand
Effect of hydrogen on demand Effect of SAF on demand
Source: ACI/A4E
Note: All flights within and departing EU

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The table illustrates the pathways to the decarbonisation of aviation envisaged by ATAG,
compared to ACI and A4E, both across multiple scenarios. It is clear that the key tools for
decarbonising lie in technology and SAF. For perspective the table also shows the IAG
pathway to decarbonisation from its pre pandemic 2019 Capital Markets Day, at which time the
focus was rather more heavily on carbon offsetting measures.

With SAF sitting at the heart of aviation’s efforts to decarbonise, the next section of this report
discusses what SAF is, how it can be made and the pathways to its industrialisation.

Carbon offsetting
Prior to the industrialisation of SAF, the aviation sector will continue to rely on offsetting. Pre-
Offsetting – a wild west of
pandemic, the focus of the aviation sector’s decarbonisation was very highly focused on
certification
offsetting. In recent months there has been widespread scrutiny of airline carbon offsetting
plans with the Guardian (5 May 2021) citing Stephen Smith, the executive director of the Oxford
Net Zero Initiative, recognising there had been progress on developing standards of what
counts as a high quality climate target, but cautioning the area was still a “wild west”.

In the context of doubts around offsetting, there is momentum towards explicit decarbonisation
Carbon capture at the most
of aviation. That said one path for offsetting that incurs less debate may also hold relevance for
credible end of offsetting
future offsetting. Direct air capture (DAC) and carbon capture technology is immature yet, but
could potentially be a tool to meet airlines’ net zero commitments – for more detail on carbon
capture, see Carbon Capture & Sequestration: Back in the debate, but no silver bullet
(23 March 2021). This strategy is being targeted by United Airlines which is investing in carbon
capture and sequestration instead of merely buying carbon offsets. United will partner with
1PointFive. The carbon capture plants, each about 100 acres, will use direct air carbon capture
to pull 1 million tons of carbon from the atmosphere, equivalent to the amount of carbon
captured by more than 40 million trees.

The risks

The path to decarbonising aviation does rely on technologies which are not proven, such as
Technological leap of faith
hydrogen and electric powered flight. The technology for the various SAF pathways are
generally proven at micro-scale in laboratories. But other than the HEFA process, the
industrialisation of SAF is unproven.

There are real concerns about the potential timing of technological advances, which may well
Entry to service delays would
not meet the anticipated timelines laid out above. For example, it is very normal for the entry
seem likely
into service of new aircraft to face delays: the challenges faced by the A380 or B787s entry to
service promoted delays of deliveries by several years, yet these aircraft offered modest
technological advances relative to the concept of a changed propulsion mechanism.

The provision of either electricity or hydrogen will compete for scarce resources with other
Competition for scarce green
sectors. Aviation batteries will compete for the precious metals for batteries across the
resources
economy, whilst both electric and hydrogen would compete for green electricity. The production
of SAF through the power-to-liquids pathway will also be a major user of green electricity.

The production of feedstocks for SAF will also be a major focus. First generation biofuels competed
Feedstocks for SAF invite
with food production, used water and even encouraged deforestation to produce palm oil. The
scrutiny
advanced biofuels that form the focus of the SAF research do specifically target feedstocks that are
either waste materials, or can be grown on poor quality land, in salt water or as rotation crops. The
potential for algae also offers a non-competing feedstock. However, the ability of these feedstocks to
deliver viable SAF is unproven on an industrial scale. There are also concerns that the scaling up of
certain feedstock supplies could also increase the methane emission, a potent greenhouse gas with
stronger heat trapping ability than carbon dioxide. Plainly these considerations need to be assessed
in the lifecycle analysis of the SAF production process.

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Transition plans to decarbonised aviation

Tech Kero Demand
Target Tech electricity Tech H2 Operations Offset SAF pressure
A4E/ACI 2050 net zero Intra from EU 2050 Net zero 17% 20% 6% 8% 34% 13%
A4E/ACI 2050 net zero Intra EU only 2050 Net zero 7% 52% 7% 0% 26% 7%

ATAG Status quo High SAF Status quo scenario 50% of 2005 emissions by 2050 13% 11% 72% 4%
ATAG Status quo Low SAF Status quo scenario 50% of 2005 emissions by 2050 13% 11% 50% 26%

ATAG Scenario 1 Tech advance 50% of 2005 emissions by 2050 27% 12% 61%
ATAG Scenario 2 SAF advance 50% of 2005 emissions by 2050 15 10% 76%
ATAG Scenario 1 Strong Tech advance 50% of 2005 emissions by 2050 42% 8% 50%

IAG CMD 2019 2050 Net zero 2050 Net zero 39% 43% 18%
Source: A4E/ACI, ATAG, IAG

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Sustainable aviation fuel

 We present an introduction to SAF, production options and

feedstock sources
 We present an HSBC model of supply and demand for SAF as well
as industry estimates of scale needed to decarbonise aviation
 We assess the current and future cost profile for SAF via the various
production technologies

Kim Fustier*
Sustainable Aviation Fuels
Analyst, Oil & Gas
HSBC Bank plc
kim.fustier@hsbc.com
This section of the report presents an over view of what Sustainable Aviation Fuels are, the
+44 20 3359 2136 current approved production techniques, the range of feedstocks and the production costs,
Vaishnavi Tadas* today, and in the future. We describe the current producers, their plans to expand production
Associate
Bangalore
and the existing commitments from airlines to purchase SAF.

* Employed by a non-US affiliate of HSBC

Securities (USA) Inc, and is not registered/ SAF 101
qualified pursuant to FINRA regulations

Sustainable aviation fuel captures alternative fuels other than fossil fuels that can safely and
effectively power aviation, replacing kerosene. SAF is broader than biofuel, encompassing fuels
from waste and power to liquid.

To be sustainable, the fuels must be produced from feedstocks which are themselves
sustainable. This can include crops which are grown for the purposes of energy, which absorb
CO2 during their growth. It is critical that the production of the crops does not compete with food
production for land use and does not create pressure on water resources. Other feedstocks
include waste, from agriculture, forestry or indeed municipal waste. Power to liquid technology
uses renewable energy to make hydrogen from water, which is then combined with industrial
CO2 emissions, or directly captured CO2 emissions, to create synthetic kerosene.

No SAF is completely free of emissions, as emissions will be created during the production,
processing and distribution of the fuel. However, the emissions associated with these steps can
be optimised by locating plants either close to feedstocks or end users.

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How SAF is sustainable

Carbon lifestyle diagram: fossil fuels Carbon lifestyle diagram: fossil fuels

CO2
Feedstock
grow th CO2

Flight
Flight

CO2

CO2 Distribution CO2

at airports Transport

Transport
CO2

Distribution
Processing at airports
Refining
CO2

CO2

Ex traction Transport
CO2 Refining

At each stage in the distribution chain, carbon dioxide is emitted through Carbon dioxide will be reabsorbed as the next generation of feedstock is
energy use by extraction, transport, etc. grown.

Source: IATA

To be a viable SAF, the fuel must be compatible with existing aircraft and engines and capable
of being integrated into the existing fuel infrastructure. The required specifications are
illustrated below.

Jet fuel specifications

Criteria Explanation Jet A-1 specification
Flash point The temperature at which the fuel ignites in the engine to 38° minimum
cause combustion to occur (°C)
Freezing point The temperature at which the fuel would freeze (°C) -47°
Combustion heat The amount of energy that is released during combustion, 42.8 MJ/kg minimum
per kilo of fuel (MJ/kg)
Viscosity The thickness of the fluid or ability to flow (mm2/s) 8.000 max
Sulphur content The amount of sulphur in the fuel (parts per million) 0.30
Density Weight of the fuel per litre (kg/m3) 775-840
Source: ATAG

First generation biofuels include fuels made from crops that competed with food, such as maize.
Some production of first generation biofuels uses palm oil and is seen as contributing to
deforestation, which is associated with adverse climate change. The focus on second
generation fuels sees an intense focus on the sustainability of feedstocks. This is not without its
challenges. One available feedstock is the residue from processing palm oil. This feedstock
would otherwise be disposed of, and yet it could generate SAF. However, it is a bi-product of
palm oil production which is environmentally damaging. Debates over the degree of
sustainability of feedstocks abound.

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How renewable jet fuel is produced

Renewable jet fuel or sustainable aviation fuel (SAF) can be produced using several processes,
all of which must be certified by the American Society for Testing and Materials (ASTM) before
they can be used in commercial airlines.

At present, seven SAF production pathways have been certified for blending with fossil jet
kerosene, and more are in the process of being certified. The main processes are:
 Hydro processed Esters and Fatty Acids (HEFA) which uses fatty feedstocks such as
vegetable oils or waste fats. Currently, the majority of commercial volumes of SAF fuels are
produced through the HEFA pathway. The HEFA process produces Hydro treated
Vegetable Oils (HVO) biofuels, which are distinct from Fatty Acid Methyl Ester (FAME)
biodiesel, a lower-quality product which cannot be used as a “drop-in” fuel. By far the
largest part of current renewable fuel production is through the HEFA pathway. The two
main commercially available technologies to make HEFA are Neste’s NEXBTL and
UOP/ENI’s EcofiningTM processes – the latter has been licenced to a number of companies.
 Gasification through the Fischer-Tropsch method (FT) which uses renewable biomass
or municipal solid waste as its feedstock. The FT route is considerably more capital-
intensive than the HEFA process.
 Alcohol-to-jet (ATJ) converts alcohols like ethanol or iso-butanol to hydrocarbons. Ethanol
and iso-butanol are usually produced by the fermentation of sugar and starch crops
(carbohydrates), which is then further processed and upgraded to produce hydrocarbons
including diesel and jet fuel.
 Power-to-liquids (PtL), based on Fischer-Tropsch. PtLs are also known as synthetic fuels
(synfuels) or e-fuels. This pathway has not yet been flight tested and approved. Similar to
the Fischer-Tropsch method using biomass, synthetic gas is generated from water
electrolysis using renewable electricity, and combined with captured carbon to produce a
feedstock for FT synthesis. The PtL route is currently much more expensive than other
pathways, and there is currently no PtL production other than small-scale demonstration
plants. Power-to-liquids could make a significant contribution to aviation decarbonisation in
the long term since they do not rely on biomass or waste feedstocks, supply is theoretically
unlimited (NB: it’s limited only by the amount of renewable power generation capacity), and
it is the closest to being a truly zero-carbon fuel.

The quality of these renewable fuels equals or surpasses the specifications for equivalent
petroleum fuels. In order to meet all performance specifications, these two pathways have an
upper blend limit of 50% while most of the other certified pathways have a lower blend limit.

Almost all plants that produce renewable jet fuel mostly produce renewable diesel; only a
couple of commercial plants today are dedicated renewable jet fuel facilities.

The chart below shows simplified production pathways for the main SAF technologies.

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Simplified production pathways

Hydroprocessed
Vegetable Oils Easters and Fatty Acids (HEFA)
Neutralization Lipids
Used cooking oil Oil extraction Catalytic
Rendering Hydrothermolysis

Tallow

Hydroprocessed
Fermentation Hydrocarbons
Sugar crops Fermented Sugars (HFS)

Starch crops
Extraction Alcohol
Fermentation (Ethanol / isobutanol)
Agriculture/forestry Alcohol to Jet
residues
Municipal solid
Gasification
waste
Syngas
Hydrogenation Fischer-Tropsch
CO2

Feedstock Process Intermediate Pathway

Source: BNEF

Each SAF pathway presents specific opportunities and challenges depending on

feedstock and technology maturity
Alcohol-to-jet
HEFA (Ethanol route) Gasification/FT Power-to-liquids
Proof of concept 2025+,
Safe, proven, and Potential in the mid-term, however significant primarily where cheap
Opportunity description
scalable technology techno-economical uncertainty high-volume electricity is
available
Technology maturity Mature Commercial pilot In development
Waste and residue lipids,
purposely grown oil
energy plants CO2 and green electricity
Agricultural and forestry residues, municipal solid
Unlimited potential via
waste, purposely grown cellulosic energy crops
Transportable and with direct air capture
Feedstock
existing supply chains
High availability of cheap feedstock, but fragmented
Point source capture as
collection
Potential to cover 5%- bridging technology
10% of total jet fuel
demand
% LCA GHG reduction
73-84%¹ 85-94%² 99%³
vs. fossil jet
Source: World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation
1 Excluding all edible oil crops; Excluding all edible sugars; 3 Up to 100% with a fully decarbonized supply chain

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Production pathways
Producers using the Date of ATSM Current
Pathways and processes Feedstock options pathway approval blending limit
FT-SPK biomass (forestry residues, 2009 up to 50%
grasses, 3municipal solid waste)
Fischer-Tropsch Synthetic Paraffinic
Kerosene
HEFA-SPK algae, jatropha, camelina World Energy / Neste / 2011 up to 50%
SkyNRG
Hydroprocessed Esters and Fatty Acids
HFS-SIP microbial conversion of sugars to Amyris / Total 2014 up to 10%
hydrocarbon
Hydroprocessed Fermented Sugars to
Synthetic Isoparaffins
FT-SPK/A renewable biomass such as Fulcrum / Velocys 2015 up to 50%
municipal solid waste, agricultural
wastes and forestry residues, wood
and energy crops
Fischer-Tropsch Synthetic Paraffinic
Kerosene with aromatics
ATJ-SPK agricultural waste products (stover, Gevo / Red Rock 2016 up to 50%
grasses, forestry slash, crop
straws)
Alcohol-to-Jet Synthetic Paraffinic Kerosene
[isobutanol]
ATJ-SPK Industrial waste gases, agricultural LanzaTech 2018 up to 50%
waste products (stover, grasses,
forestry slash, crop straws)
Alcohol-to-Jet Synthetic Paraffinic Kerosene
[ethanol]
CHJ Triglyceride-based feedstocks ARA / Euglena 2020 up to 50%
(plant oils, waste oils, algal oils,
soybean oil, jatropha oil, camelina
oil, carinata oil and tung oil)
Catalytic hydrothermolysis synthetic jet fuel
HHC-SPK Biologically-derived hydrocarbons IHI World 2020 up to 10%
such as algae
High Hydrogen Content Synthetic Paraffinic
Kerosene
Source: Source: ATAG

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Current and potential feedstocks for SAF

Advanced and waste feedstock alone could supply almost 500 Mt of SAF per year
Share of
Practical SAF in jet
feedstock fuel
availability Pathway demand
Feedstock type Feedstock category Mt/year assumed Output Mt/year oil equivalent 2030
1st gen / crop-
Edible oil crops
based
Sustainability concerns
Edible sugars

Advanced and Waste and residue

40 HEFA 5%
waste lipids
Oil trees on degraded
85 HEFA 9%
land

Oil-cover crops 70 HEFA 7%

50% gas./FT
Cellulosic cover crops 1,100 29%
50% AtJ
50% gas./FT
Agricultural residues 660 17%
50% AtJ
50% gas./FT
Forestry residues 580 16%
50% AtJ
Wood-processing 50% gas./FT
320 9%
waste 50% AtJ

Municipal solid waste 960 Gas./FT 28%

Recycled
Reusable plastic waste Sustainability concerns
carbon
CO2 from point source
capture (CCS)
Considered as bridging feedstock until more sustainable options become available
Other industrial waste
gas
Non-biomass- CO2 from direct air
Unlimited PtL Unlimited
based capture (DAC)

Source: World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation: Clean Skies for Tomorrow
HEFA: 90% output yield, 46% SAF share; FT: 20% output yield, 60% SAF share; AtJ: 13% output yield, 77% SAF share

Pathways to deliver sufficient SAF in 2050 to decarbonise

SAF in the next years

Year 2011-2018 2019 2020 2021e 2022e 2023e 2024e 2025e
High scenario 34,000 51,000 96,000 562,000 1,632,000 2,806,000 3,571,000
SAF (Metric tonnes) 30,000 23,000 34,000 64,000 376,000 1,092,000 1,877,000 2,388,000
Central scenario (40.4m litres) (28m litres) (42m litres) (80m litres) (470m litres) (1,365m litres) (2,346m litres) (2,986m litres)
Low scenario 6,000 9,000 16,000 69,000 278,000 479,000 609,000
Tonnes of CO2 reduced 67,000 49,900 74,900 141,400 831,700 2,415,200 4,151,000 5,283,100
(at 70% ERF)
Production facilities Neste Fulcrum (US) Neste (Singapore SkyNRG Velocys (UK)
(Singapore) —expansion) (Netherlands)
Gevo (US) World Energy LanzaTech Red Rock (US) Total (France)
(US — (North Asia /
expansion) Europe)
Amyris (Brazil) UPM (US) Diamond Green Preem (Sweden)
(US)
World Energy REG (US)
(US)
Source: ATAG

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Sustainable aviation fuel production technologies

______ 2035 global sustainable aviation fuel production capacity (kt/y) _______
Route Slow Growth, Aviation Optimised Fast Growth, Aviation Optimised
Hydrotreated oils/fats 9,577 17,642
Alcohol to jet 2,443 6,884
Gasification + FT 727 1,839
Pyrolysis 728 1,765
Other thermochemical 371 950
Sugars to hydrocarbons 268 815
PtL: FT 255 875
Source: Sustainable Aviation Fuels Road-map

Product yields vary across fuel conversion pathways: for instance, default jet yields in the HEFA
process range from 10-15% to a maximum of ~55% and from ~25% to 50% in the case of the
FT method. The remaining output is made up of renewable diesel and light ends, such as
naphtha. It is possible to maximise the yield of jet fuel to reach the upper end of these ranges.
However, it increases operating expenses relative to a default configuration through the use of
additional hydrogen for further hydrocracking, since jet fuel is a slightly lighter product than
diesel. For reference, BNEF estimates that HEFA is 6-8% more expensive to produce than
renewable diesel.

Comparison of product slates across fuel conversion pathways (%)

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
HEFA (default) HEFA (max jet) Gasification-FT Gasification-FT ATJ SIP
(default) (max jet)
Jet Diesel Light ends
Source: International Council on Clean Transportation, 2019

Approximate output shares of jet-optimized production processes

Conversion
Feedstock Pathway rate³ Product slate optimized for jet fuel

Lipids HEFA 90% 46% 46% 8%

Biomass (mainly Alcohol-to-jet 77% 6% 17%

13%
ligno-cellulosic) (Ethanol route)

Biomass Gasification/FT 20%

60% 22% 18%
CO2 Power-to-liquid 17%
Jet fuel Road fuel¹ Light ends²

Source: World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation: Clean Skies for Tomorrow
1 Gasoline or diesel; road fuel resulting from HEFA process is called hydrotreated renewable diesel (HRD); 2 Light hydrocarbon gases and liquids, e.g., LPG or naphtha; 3 Yield of total
output (including aviation and road fuel) relative to feedstock

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The pace of technical advance

The chart below compares the pace of SAF development that would be required to develop the
range of scenarios in ATAG’s pathway to decarbonisation (F1-F4) with the pace of growth of
other green-tech growth sectors.

The industrial challenge of scaling up

Source: ATAG
Note: Scenario F1 is ATAG’s base case scenario without major technological changes, one with higher SAF development. F2 is a scenario with balanced development of SAF
and propulsion technology, F3 is the scenario where SAF development is prioritised, F4 the scenario where propulsion technology is prioritised.

SAF emissions benefits vary – but no SAF pathway is “zero-carbon”

SAF (and biofuels in general) emits carbon dioxide during the combustion process – these
emissions cannot be eliminated. But SAF and biofuels are considered to have negative
emissions in the fuel production chain (“Well-To-Tank”): biomass-based feedstocks absorb CO2
as they grow, offsetting the CO2 released into the atmosphere during combustion. For non-food
crop based feedstocks such as waste or agricultural residues, GHG emissions from the
alternative fate of the feedstocks (i.e. incineration, decay or landfill which produce methane) are
considered to be avoided, and therefore count as negative emissions.

On a lifecycle basis, SAF can reduce CO2 emissions by a range of 25% to 80%, depending on
various factors including feedstocks used and the conversion process. For example, vegetable
oils (palm oil, rapeseed oil, corn, soybean) are more carbon-intensive than animal fat/tallow due
to the amount of land they require. Used cooking oil (UCO), waste and residues have the lowest
carbon intensity.

Fuel carbon intensity matters for several reasons: all SAF pathways approved by CORSIA have
to lead to a net lifecycle GHG reduction of at least 10% compared to fossil fuel jet (which has a
carbon intensity of 89 gCO2/MJ). US and European policy schemes are stricter: in the US,
renewable fuels have to reduce GHG emissions by 20-60%. In the EU under the EU RED II
scheme, renewable fuels have to meet a 65% emissions threshold from 1 January 2021.

The use of crop-based biofuels (usually referred to as “first-generation biofuels”) can lead to
problems which can offset some of the GHG emissions benefits, such as indirect land-use
change (ILUC) i.e. deforestation, land degradation and upward pressures on food prices.

The SAF pathway with the highest emissions reductions is Power-to-liquids. Compared to fossil
jet fuel, synthetic fuels can reduce emissions by 99% assuming electricity is produced by
renewables. They can even theoretically have negative emissions if the carbon used to produce
them comes from direct air capture (DAC).

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SAF: Lifecycle emissions of different feedstocks and technologies (gCO2/MJ)

90
80
70 conv entional jet fuel: 89 gCO2/MJ
60
50
40
30
20
10
0

ATJ-ethanol ATJ isobutanol HFS HEFA FT

Feedstock cultivation and collection Feedstock transportation Conversion Fuel transport
Source: BNEF

Costs of SAF now and cost projections

SAF is multiple times more expensive than fossil jet fuel

The high production cost of SAF compared to conventional jet fuel and limited availability are
key impediments to its widespread use. The price and availability of feedstock and small
production volumes (which prevent economies of scale) contribute to a much higher price for
SAF compared with fossil-based jet fuel.

Unit production costs of SAF are around 2-10 times more expensive than fossil based jet
fuel, according to estimates by the IEA and BNEF (Bloomberg New Energy Finance). Costs for
fossil-based jet fuel are ~USD400-800/ton at oil prices ranging from USD40/b to USD80/b, and
are currently around USD600/ton. SAF costs range from ~USD900/ton to ~USD2,000/ton for
HEFA, or 2-3x times higher, and USD1,300-4,500/ton for advanced SAF using other pathways.

SAF Production cost comparison (USD/ton and USD/b, RHS)

5,000 600
4,500
4,000 500
3,500 400
3,000
2,500 300
2,000
1,500 200
1,000 100
500
0 0
Fossil-jet fuel price HEFA Gasification Power-to-liquids Alcohol-to-jet HFS
Cost range (USD per ton) Current price
Source: BNEF, HSBC

Limited potential to lower SAF production costs, except for Power-to-liquids

Raw materials make up the vast majority (~80%) of SAF production costs. The proportion is
highest in the case of technologies dependent on animal fat, used cooking oil, crop or plant-
based oils, and other lipids-based renewable materials.

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Lowering and diversifying feedstocks is therefore key to reducing production costs of SAF. A
higher share of waste/residue in feedstock along with the development of robust supply chain
logistics and optimised feedstock sourcing can all contribute to bringing down production costs
over time. Indeed, market leaders such as Neste continue to increase the share of waste and
residue (80-85%) in their total feedstock, using over 10 different types of waste and residue.

Scaling up feedstock supply – whether vegetable oils or waste – presents two main issues, however:
 There is competition for vegetable oil feedstocks from the FAME biodiesel industry, where
there is more demand and better developed supply chains.
 Building up efficient supply chain logistics to source lower-cost alternative feedstocks is
challenging and time-consuming. Neste considers the scale of its supply chain one of its
key competitive advantages which cannot be easily replicated.

So-called “third-generation” feedstocks such as algae or lignocellulosic biomass are still at the
pre-commercial stage and possibly 5-10 years away from commercial maturity.

The only SAF pathway where significant cost reductions could potentially be achieved is the
Power-to-liquids route, as the graph below shows. This is because e-fuels do not rely on bio-
based feedstocks, while rapid growth in global renewable power and electrolysis capacity is
expected to drive down costs.

SAF production costs vary significantly by pathway

SAF production cost (USD/ton)

6000
5500
5000
4500
4000
3500
3000
2500
2000
1500
1000
500 Jet fuel price
0
2020 2030 e 2040 e 2050 e
HEFA Alcohol-to-jet

Gasification/FT Pow er-to-liquid

Source: World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation: Clean Skies for Tomorrow

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HEFA: SAF production cost (USD/ton of jet fuel)

Feedstock: Used cooking oil

1500 1,375 -22%

1,234
1300 1,159 1,126
337 1,101 1,084 1,070
1100 212 153 127 108 95 86
900
700 778 778 778 778 778 778 778
500
300
149 141 133 130 127 124 122
100 112 104 95 92 89 86 84
-100
2020 2025 e 2030 e 2035 e 2040 e 2045 e 2050 e
Capex Opex Feedstock Hydrogen
Source: World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation: Clean Skies for Tomorrow
Hydrogen: Solar power-based H2 used at USD7.5 and USD1.90 per kilo in 2020 and 2050, respectively. Feedstock: Costs can vary greatly depending on feedstock type –
typically from USD600-950 per ton. Shown for used cooking oil at USD700. Capex:15% decline by 2030 and about 12% more by 2050. Yield and jet output: Yield for total
product output: 90% Share of jet in product output: 46%

Gasification/FT: SAF production cost (USD/ton of jet fuel)

Feedstock: Municipal solid waste

2,000 1,866 1,853

0 -24%
1,800 0
317 304 1,603 1,558
1,600 1,518 1,470
44 67 1,426
295 89 100
1,400 290 111
287 284
1,200 282
1,000
800 1,549 1,549
600 1,263 1,201 1,142 1,086 1,033
400
200
0
2020 2025 e 2030 e 2035 e 2040 e 2045 e 2050 e
Capex Opex Feedstock
Source: World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation: Clean Skies for Tomorrow
Feedstock: Cost of MSW assumed to be 0 USD/t, which could change over time. Capex: 4% per annum decline between 2025-2030, 1% decline post 2030. Yield and jet
output: Yield for total product output: 20% Share of jet in product output: 60%

Alcohol-to-jet: SAF production cost (USD/ton of jet fuel)

Feedstock: Sugarcane bagasse

Source: World Economic Forum: Clean Skies for Tomorrow

Feedstock: Costs can vary greatly depending on the feedstock type used – from 33 to 220 USD/t Shown for sugarcane bagasse at 33 USD/t. Capex: AtJ – 35% decline by
2030, later 1% per annum Ethanol production at 1% decline per annum. Yield and jet output: Yield for total product output: 13% Share of jet in product output: 77

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Power-to-liquid: SAF production cost (USD/ton of jet fuel)

Feedstock: Industrial CO2, solar power-based H2
3,847
4000
3500
3000 2,575
2500 1,529
1,967
2000 946 1,681
1,488 1,358
1500 673 1,259
1719 553 466 411 368
1000 1063
757 622 524 461 413
500 264 240 215 215 215 215 215
76 67 62 59 57 55 54
0 260 260 260 232 225 215 209
2020 2025 e 2030 e 2035 e 2040 e 2045 e 2050 e
Capex (FT+RWGS) Opex (FT+RWGS) Feedstock Hydrogen Capex Hydrogen Opex
Source: World Economic Forum (2020), Clean Skies for Tomorrow: Sustainable Aviation Fuels as a Pathway to Net-Zero Aviation: Clean Skies for Tomorrow
Water electrolysis + RWGS: H2 costs can vary greatly by power source and region, shown for solar power-based H2 at 7.3, 3.2 and 1.7USD/kg in 2020, 2030 and 2050
respectively. Feedstock: Industrial CO2 at 81 USD/t, dropping to 66 USD/t by 2030. FT & RWGS capex: 1% decline per annum post-2030. Yield and jet output: Yield for CO2:
17% Share of jet in product output: 60%

Ensuring feedstock availability will be key

As global biodiesel production increases and crop-based feedstocks are gradually phased out,
the pace of SAF production ramp-up hinges in large part on the availability of advanced (non-
crop based) feedstock.

Estimates on the pool of globally available wastes and residues (W&R) vary considerably,
highlighting the considerable uncertainty over the renewable fuel industry’s ability to scale up.
Neste estimates that the global pool of waste fats, oil and greases (FOGs) feedstock could grow
around 35 mtpa by 2030, a more than 10-fold increase compared to c3 mtpa processed in
2019. Consultancy Greenea estimates the pool of FOGs to be even lower at 25 mtpa by 2030.

There is enormous potential from other types of wastes and residues beyond waste oils, such
as municipal solid waste (MSW), agricultural residues and forestry residues. According to
BNEF, global W&R feedstocks add up to about c.260 mtpa currently, rising to c.280 mtpa by
2030. For context, we estimate global renewable fuels production capacity (including renewable
diesel and SAF) in a range of 28-43 mtpa by 2030.

The problem is that the market currently lacks the capacity to convert most of these types of
waste into fuel. The HEFA / HVO pathway converts oil-based feedstocks and hence would be
limited to the waste fats and oils category. For the remaining three types of feedstocks, other
technologies like gasification + Fischer-Tropsch (FT), and alcohol-to-jet (ATJ) would be needed.

These alternative pathways are nearing commercialisation with projects undertaken by

companies such as Fulcrum BioEnergy and Velocys for FT, and LanzaTech and Gevo for ATJ.
Neste currently produces SAF from waste FOGs via the HEFA pathway, and recently started
looking at a potential project in Quebec using forestry residue as feedstock. To help increase
capacity and to allow diversification of feedstock, projects like these would need greater support
by policymakers.

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Potential SAF supply by feedstock group Demand scenarios vs waste FOGs supply
(mtpa)

300 50

250 40

200 30
150
20
100
10
50
-
- 2020 2022e 2024e 2026e 2028e 2030e
2020 2022e 2024e 2026e 2028e 2030e FOGs BNEF Low
BNEF Medium BNEF High
FOGs MSW Ag residue Forestry residues
HSBC capacity Neste W&R est
Source: BNEF Source: BNEF

SAF partnerships and offtake agreements

Off-take agreements between aviation sustainable fuel producers and suppliers

_____ Offtake yearly production _______
Producer(s) Purchaser(s) Gallons (m) Mt Start Year Length (years)
Air Total Airbus/China Airlines 5 A350-900 deliveries at 10% blend 2017 –
AltAir United Airlines 5 0.015 2016 3
Gulfstream/World Fuel – – – 3
SkyNRG/KLM 30% blend target 2016 3
AltAir/Neste KLM/SAS/Lufthansa/AirBP 0.33 0.001 – 3
Amyris/Total Airbus/Cathay Pacific 48 A350-900 deliveries at 10% blend 2016 –
Fulcrum Cathay Pacific 35 0.106 – 10
United Airlines 90-180 0.274-0.547 – 10
Air BP 50 0.152 – 10
Gevo Lufthansa 8 0.024 – 5
RedRock Southwest 3 0.024 – -
FedEx 3 0.009 – 7
SG Preston Jet Blue 10 0.030 2019 10
Qantas 8 0.024 2020 10
Total 212 to 302 0.645 to 0.918
Source: ICAO, 2018, Sustainable Aviation Fuels Guide

Airports refuelling regular flights with sustainable aviation fuel

Refuelling with sustainable
Airport Country aviation fuel since
Karlstad Sweden 2015
Oslo Norway 2015
Los Angeles International US 2016
Stockholm Arlanda Sweden 2017
Bergen Norway 2017
Stockholm Bromma Sweden 2017
Are Ostersund Sweden 2017
Goteborg Landvetter Sweden 2017
Halmstad Sweden 2017
Chicago O’Hare International US 2017
Brisbane Australia 2018
Visby Sweden 2018
San Francisco US 2018
Luleå Sweden 2019
Source: Sustainable Aviation Fuels Road-map, Sustainable Aviation

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SAF supply outlook

In this section, we examine the outlook for SAF supply out to 2030, mainly based on the HEFA,
Fischer-Tropsch and alcohol-to-jet pathways. We do not include potential supply from e-fuels /
power-to-liquids given their early stage of development.

Renewable aviation fuel can either be produced in standalone renewable fuel plants (85% of
current global capacity), or “co-processed” in existing petroleum refineries (15% of capacity).
The majority of standalone plants are dedicated greenfield facilities, making up two thirds of
capacity. Looking ahead, the majority of incremental capacity will come from converted bio-
refineries – conventional petroleum refineries which are entirely re-purposed to “green
refineries”, or partially retrofitted to produce renewable fuels in additional to petroleum fuels.

Total renewable fuel capacity was c7 mtpa as of 2020. We expect renewable fuels capacity
to at least quadruple in the next four years, with 17-28 mtpa of capacity coming on stream.
The low end of the range represents projects currently under construction, and the high end of
the range assumes that all proposed projects come to fruition. By 2025, total capacity of 27-37
mtpa is set to be around 3.5-5x higher than current levels, and implies a CAGR of c30-40% pa.

The sudden spurt in capacity growth around the 2022-25 timeframe comes after a spate of
investment decisions announced in the last two years. The COVID-19 pandemic and resulting
drop in transport fuels demand has made considerable portions of world refining capacity
uneconomic, particularly in the OECD countries of Europe and North America. As a result,
planned bio-refinery capacity has roughly doubled from a year ago from 10 mtpa of additions to
over 20 mtpa.

Capacity growth is coming from over 70 individual projects. Of these, we have identified over 30
standalone renewable plants and around the same number of bio-refinery conversion projects
under construction or in the planning stage, plus a small number of expansion projects of
existing plants.

The US is set to dominate capacity additions with two thirds of incremental capacity, vs less
than 20% for Europe and 15% for Asia and Latin America. Europe currently represents just
under 50% of current capacity but it will lose its leadership next year when its share drops to
~30%. The US will grow from ~30% to over half of world capacity.

Renewable fuel capacity by region (mtpa) Renewable fuel capacity by type (mtpa)

45 45
40 40
35 35
30 30
25 25
20
20
15
15
10
10
5
5
0
0 2019 2021e 2023e 2025e 2027e 2029e
2019 2021e 2023e 2025e 2027e 2029e Standalone Expansions
Europe US Asia Latin America Conversions Co-processing
Source: HSBC estimates, company reports Source: HSBC estimates, company reports

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List of companies with plans for SAF production in Europe

Production volume
Company Country Production start year (tonnes/year)
Repsol Spain Mid 2020s 250,000¹
Swedish Biofuels Sweden Not available 5,000
LanzaTech UK Not available Not available
Quantafuel Norway Not available 5,600 – 7,200
Total France 2019 5,000²
Preem Finland 2022 1,000,000¹
Altalto UK Mid 2020s 60,000¹
SkyNRG Netherlands 2022 100,000
Neste Finland 2022 400,000³
Source: EASA report SAF ‘Facilitation Initiative’
1 Total renewable fuel capacity, SAF fraction unknown
2 One-off target as part of Bio4 project
3 Production spread between Europe and US

On average, it takes around three to four years to build a standalone renewable plant from the
point of FID (Final Investment Decision), but front engineering and permitting can add years to
this timeline. Converting a conventional refinery to a “green” refinery is quicker at around one to
three years depending on the complexity of the conversion, notably around feedstock flexibility.
Adding co-processing capabilities is the fastest production route at less than a year. As such,
there is relatively good visibility on the supply side for the next four or five years, but little
visibility beyond the middle of this decade.

Actual supply of SAF is only a fraction of headline production capacity

All of SAF production comes from plants that primarily produce renewable diesel. This puts SAF
in competition with renewable diesel when it comes to optimising product yields. Renewable fuel
plants currently produce only a small proportion of renewable jet as regulatory incentives are
primarily targeted towards transport fuels including biodiesel. The exact proportion is difficult to
estimate: while the “default” jet fuel yield under the HEFA pathway is around 15% of plant
capacity, we believe the average actual yield is far lower than this as producers are incentivised
to maximise renewable diesel output.

For example, market leader Neste has chosen to produce only minimal amounts of renewable
jet fuel from its facilities in recent years (around 100 ktpa, or 3% of total production capacity) in
order to maximise diesel production and optimise economics. At present, there are only two
dedicated renewable jet fuel plants in operation (in California and Texas), but the plants
produce only around 50% SAF.

SAF yields expected to increase

More dedicated SAF plants being built and existing plants are undergoing modifications to
enable higher yields of jet fuel. Therefore, we expect SAF to grow as a proportion of global
renewable fuel capacity, and expect average SAF yields to rise going forward. On our
estimates, the average SAF yield (= SAF output as a share of renewable fuel capacity) should
rise from the current 3-4% of total renewable fuels capacity to around 10% by 2025 and 15-20%
by 2030. We think that SAF yields could rise even faster if demand materialises.

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SAF as a proportion of renewable fuel SAF production capacity and SAF demand
capacity (mtpa) (mtpa)

50 20% 10

40 8
15%
30 6
10%
20 4
5%
10 2

0 0% 0
2017 2019 2021e 2023e 2025e 2027e 2029e 2018 2020 2022e 2024e 2026e 2028e 2030e
Non-SAF capacity SAF capacity All other plants Dedicated SAF plants
SAF yield (%, RHS) Neste SAF capacity SAF demand (mtpa)
Source: HSBC estimates, BNEF Source: HSBC estimates, BNEF

SAF capacity remains tiny in the context of a ~300 mtpa global jet fuel market, pre-pandemic.
Current SAF production of 0.2-0.3 mtpa represents around 0.1% of global jet fuel requirements.

In the next few years, SAF supply could potentially become available before demand
materialises. On our estimates, SAF production could rise to >3 mtpa by 2024 as a result of
capacity additions, around 1% of the global jet fuel market. This compares to demand estimates
of 1-3 mtpa according to BNEF.

However, with demand expected to increase sharply from 2024-25 onwards, more SAF capacity
will be required by the end of the decade. By 2030 we expect SAF production capacity to be
around 7-8 mtpa (or 2% of the global market) based on existing project announcements, which
would not be enough to meet potential global SAF demand, estimated by BNEF to be in a range
of 7-21 mtpa. Actual SAF capacity could well be higher than this if more projects are announced
in the next few years.

Demand growth trajectory for SAF

Global jet fuel demand plunged by around 40% in 2020 due to the COVID-19 travel restrictions.
We expect global jet fuel demand to recover gradually in 2021 and 2022 as restrictions ease,
and return to its pre-pandemic 2019 level of 330-340 mtpa (or ~7.3mbd) by 2025-26.

Once travel and jet consumption has normalised in the middle of this decade, Bloomberg New
Energy Finance (BNEF) expects demand to grow at a “normalised” rate of around 2.6% p.a. to 2035.
We note that this rate already includes assumptions on modest fuel efficiency gains in jet engines
(<1% p.a.), since the rate of increase in passenger kilometres is slightly higher than this.

SAF demand will depend on factors including:

1. Mandates driving renewable jet fuel blend, similar to existing mandates for road fuels.
Mandates are crucial as they drive considerably higher implied demand than voluntary opt-in

2. Taxes on fossil fuel kerosene

3. The level of opt-in from airlines and airports

4. The level of voluntary passenger opt-in

5. The level of SAF blending into the jet fuel pool – which is likely to be less than the
authorised upper limit of 50% and realistically closer to 10-15% (according to Neste).

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The chart below shows our central estimates for SAF demand by region. The two main SAF
demand centres are expected to be Europe and North America. Demand in other regions (Asia
Pacific, Middle East and Latin America) could appear in the second half of this decade, once
supportive policies are put in place.

Potential SAF demand by region, based on current policies and mandates (kboed)

200
180
160
140
120
100
80
60
40
20
0
2020 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e
Europe North America APAC Other
Source: BNEF, HSBC estimates

The uncertainty on SAF demand is reflected in the wide range of estimates. BNEF estimates
that SAF could make up 0.4-0.8% (1-3 mtpa) of global demand by 2025, rising to 2-5.5% (7-21
mtpa) by 2030. Neste estimates SAF demand at 5-10 mtpa by 2030. Our own base case
estimates are close to BNEF’s mid case, which reflects current policies and mandates
announced by the EU, individual European countries and North America.

SAF demand as % of global market, HSBC and BNEF estimates

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%
2018 2019 2020 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e
HSBC SAF demand as % of global market BNEF Low BNEF Mid BNEF High

Source: HBSC estimates

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Airline emissions data

 Appendix of fuel and CO2 emissions of HSBC global airline coverage

and the US major airlines
 We present traffic data, fuel consumption and CO2

European Airlines

AF-KLM fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 299,331 304,568 314,646 323,033 332,491 151,479
RPK (m) 255,884 261,166 274,268 283,797 293,807 91,040
Load Factor 85.5% 85.7% 87.2% 87.9% 88.4% 60.1%

ATK 44,841 44,685 45,817 46,668 47,858 25,269

CO2 emission (metric tonnes) – 27,407,255 27,619,555 27,679,500 28,296,300 14,054,800

Fuel Consumption (tonnes '000) – 8,681 8,733 8,681 8,961 4,430

Emission/RPK (g) – 104.9 100.7 97.5 96.3 154.4

Source: company data, ATM = 0.1*ASK + ACTK

easyJet fuel and emission data

FY15 FY16 FY17 FY18 FY19 FY20
ASK (m) 83,846 87,724 95,792 104,800 116,056 62,380
RPK (m) 77,619 81,496 89,685 98,522 107,741 58,914
Load Factor 92.6% 92.9% 93.6% 94.0% 92.8% 94.4%

ATK (m) 8,385 8,772 9,579 10,480 11,606 6,238

CO2 emission (metric tonnes) 6,291,020 6,518,050 7,051,035 7,730,036.1 8,325,981 4,248,135

Fuel Consumption (tonnes '000) 2,168 2,326 1,782 2,007 3,092 1,474

Emission/RPK (g) 81.1 80.0 78.6 78.5 77.3 72.1

Source: company data, ATM = 0.1*ASK + ACTK

Finnair fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 31,836 33,914 36,922 42,386 47,188 12,937
RPK (m) 25,592 27,065 30,749 34,660 38,534 8,150
Load Factor 80.4% 79.8% 83.3% 81.8% 81.7% 63.0%

ATK (m) 4,633 5,020 5,315 6,034 6,784 1,844

CO2 emission (metric tonnes) 2,638,978 2,755,578 2,922,673 3,262,557 3,578,242 1,160,216

Fuel Consumption (tonnes '000) 833 874 922 1,031 1,132 365

Emission/RPK (g) 103.1 101.8 95.0 94.1 92.9 142.4

Source: company data, ATM = 0.1*ASK + ACTK

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IAG fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 272,702 298,431 306,185 324,808 337,754 113,195
RPK (m) 221,996 243,474 252,819 270,657 285,745 72,262
Load Factor 81.4% 81.6% 82.6% 83.3% 84.6% 63.8%

ATM 36,084 39,157 40,459 42,237 43,470 16,351

CO2 emission (metric tonnes) 26,517,700 28,363,100 28,852,600 30,060,400 30,848,600 11,072,600

Fuel Consumption (tonnes '000) 8,280 8,860 9,020 9,410 9,650 3,450

Emission/RPK (g) – 116.5 114.1 111.1 108.0 153.2

Source: company data, ATM = 0.1*ASK + ACTK

Lufthansa fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 273,975 286,555 322,875 349,391 358,803 109,828
RPK (m) 220,396 226,639 261,149 284,639 296,217 69,462
Load Factor 80.4% 79.1% 80.9% 81.5% 82.6% 63.2%

ATM (m) 42,534 43,945 48,101 51,499 50,604 20,399

CO2 emission (metric tonnes) 28,944,785 29,525,982 29,205,377 32,984,837 33,549,110 11,644,939

Fuel Consumption (tonnes '000) 8,948 9,056 9,618 10,254 10,435 3,507

Emission/RPK (g) 131.3 130.3 111.8 115.9 113.3 167.6

Source: company data, ATM = 0.1*ASK + ACTK

Ryanair fuel and emission data

FY16 FY17 FY18 FY19 FY20
ASK (m) 139,774 158,195 170,675 184,249 192,086
RPK (m) 129,990 148,703 162,141 176,879 182,481
Load Factor 93.0% 94.0% 95.0% 96.0% 95.0%

ATK 13,977 15,819 17,067 18,425 19,209

CO2 emission (metric tonnes) 8,638,838 9,762,783 10,765,881 11,710,635 13,080,000

Fuel Consumption (tonnes '000) 2,742 3,099 3,418 3,718 4,152

Emission/RPK (g) 66.5 65.7 66.4 66.2 71.7

Source: company data, ATM = 0.1*ASK + ACTK

SAS fuel and emission data

FY15 FY16 FY17 FY18 FY19 FY20
ASK (m) 44,288 48,620 52,217 52,781 52,371 23,365
RPK (m) 33,780 36,940 40,078 39,946 39,375 14,127
Load Factor 76.3% 76.0% 76.8% 75.7% 75.2% 60.5%

ATK 4,429 4,862 5,222 5,278 5,237 2,337

CO2 emission (metric tonnes) 4,156,875 4,512,817 4,814,793 4,754,933 4,621,667 2,003,797

Fuel Consumption (tonnes '000) 1,213 1,309 1,389 1,369 1,337 573

Emission/RPK (g) 123.1 122.2 120.1 119.0 117.4 141.8

Source: company data, ATM = 0.1*ASK + ACTK

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Wizz Air fuel and emission data

FY16 FY17 FY18 FY19 FY20 FY21
ASK (m) 34,844 41,691 51,537 60,284 69,973 25,552
RPK (m) 30,786 37,628 47,210 55,994 65,680 16,692
Load Factor 88.4% 90.3% 91.6% 92.9% 93.9% 65.3%

ATK 3,484 4,169 5,154 6,028 6,997 2,555

CO2 emission (metric tonnes) 1,970,311 2,314,112 2,827,860 3,310,219 3,788,571 1,305,593

Fuel Consumption (tonnes '000) 657 737 828 1,108 1,275 423

Emission/RPK (g) 64.0 61.5 59.9 59.1 57.7 78.2

Source: company data, ATM = 0.1*ASK + ACTK

China and Hong Kong Airlines

China Southern Airlines fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 235,616 255,992 280,646 314,421 344,062 214,722
RPK (m) 189,588 206,106 230,697 259,194 284,921 153,440
Load Factor 80.5% 80.5% 82.2% 82.4% 82.8% 71.5%

ATK (m) 32,205 34,980 38,332 42,728 46,434 33,892

CO2 emission (metric tonnes) 23,028,300 25,279,400 26,901,400 28,360,300 19,318,000

Fuel Consumption (tonnes '000) 7,311 7,940 8,540 9,003 6,133

Emission/RPK (g) - 111.7 109.6 103.8 99.5 125.9

Source: company data

China Eastern Airlines fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 181,793 206,249 225,996 244,841 270,254 152,066
RPK (m) 146,342 167,529 183,182 201,486 221,779 107,273
Load Factor 80.5% 81.2% 81.1% 82.3% 82.1% 70.5%

ATK 25,203 28,002 27,137 29,936 33,456 20,632

CO2 emission (metric tonnes) 16,740,000 18,714,200 19,528,730 21,003,000 22,743,600 13,947,200

Fuel Consumption (tonnes '000) 5,314 5,941 6,217 6,610 7,160 4,380

Emission/RPK (g) 114.4 111.7 106.6 104.2 102.6 130.0

Source: company data

Air China fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 214,829 233,218 247,815 273,600 287,788 156,061
RPK (m) 171,714 188,158 201,078 220,528 233,176 109,830
Load Factor 79.9% 80.7% 81.1% 80.6% 81.0% 70.4%

ATK 31,368 33,774 35,673 38,920 36,918 23,686

CO2 emission (metric tonnes) 19,312,400 20,059,000 21,433,000 23,543,000 23,248,000 15,044,000

Fuel Consumption (tonnes '000) 6,131 6,368 6,804 7,385 7,289 4,693

Emission/RPK (g) 112.5 106.6 106.6 106.8 99.7 137.0

Source: company data

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Cathay Pacific fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 142,680 146,086 150,138 155,362 163,244 34,609
RPK (m) 122,277 123,443 126,663 130,630 134,397 20,079
Load Factor 85.7% 84.5% 84.4% 84.1% 82.3% 58.0%

ATK 30,048 30,462 31,439 32,387 33,077 15,587

CO2 emission (metric tonnes) 17,087,000 17,222,000 18,076,450 18,480,735 18,499,217 7,588,717

Fuel Consumption (tonnes '000) 5,425 5,467 5,702 5,830 5,837 2,385

Emission/RPK (g) 139.7 139.5 142.7 141.5 137.6 377.9

Source: company data

LatAm Airlines

Volaris fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 22,615 26,882 30,354 33,812 39,427 29,411
RPK (m) 18,607 23,055 25,616 28,563 33,848 23,491
Load Factor 82.3% 85.8% 84.4% 84.5% 85.9% 79.9%

ATK 2,261 2,688 3,035 3,381 3,943 2,941

CO2 emission (metric tonnes) 1,522,943 1,815,944 - 2,332,815 2,481,075 -

Emission/RPK (g) 81.8 78.8 - 81.7 73.3 -

Source: company data

Gol fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 49,744 46,329 46,694 48,058 51,065 25,142
RPK (m) 38,410 35,928 37,230 38,423 41,863 20,126
Load Factor 77.2% 77.5% 79.7% 80.0% 82.0% 80.0%

ATK
CO2 emission (metric tonnes) 3,709,277 3,349,878 3,318,127 3,395,464 3,525,682 -

Emission/RPK (g) 96.6 93.2 89.1 88.4 84.2 -

Source: company data

CEEMEA Airlines

Aeroflot fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 124,700 137,700 157,200 173,100 190,900 92,300
RPK (m) 97,600 112,100 130,200 143,200 156,300 68,000
Load Factor 78.3% 81.4% 82.8% 82.7% 81.9% 73.7%

ATK 15,073 16,747 18,843 20,476 22,722 11,876

CO2 emission (metric tonnes) 7,804,094 8,882,843 11,072,871 12,122,760 13,106,618 6,815,000

Fuel Consumption (tonnes '000) 2,881 3,153 3,584 3,895 4,257 2,141

Emission/RPK (g) 80.0 79.2 85.0 84.7 83.9 100.2

Source: company data

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Turkish Airlines fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 153,209 170,092 173,073 182,031 187,696 74,960
RPK (m) 119,372 126,815 136,947 149,169 153,186 53,249
Load Factor 77.9% 74.6% 79.1% 81.9% 81.6% 71.0%

ATK
CO2 emission (metric tonnes) 13,545,000 14,490,000 15,581,530 17,028,599 17,866,541

Fuel Consumption (tonnes '000) 4,300 4,600 4,900 5,300 5,600

Emission/RPK (g) 113.5 114.3 113.8 114.2 116.6 -

Source: company data

Pegasus fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 27,969 30,510 32,718 35,543 43,947 22,278
RPK (m) 22,096 23,981 27,679 30,389 38,937 17,756
Load Factor 79.0% 78.6% 84.6% 85.5% 88.6% 79.7%

ATK
CO2 emission (metric tonnes) 1,867,080 2,088,106 2,115,670 2,365,907 2,496,935

Emission/RPK (g) 84.5 87.1 76.4 77.9 64.1 -

Source: company data

Top 4 US carriers

Delta fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 397,127 405,340 409,295 423,844 443,178 216,197
RPK (m) 337,358 342,947 350,373 362,493 382,508 118,145
Load Factor 84.9% 84.6% 85.6% 85.5% 86.3% 54.6%

ATM 47,930 48,447 49,156 50,803 52,572 27,020

CO2 emission (metric tonnes) 35,352,570 35,755,484 36,078,118 37,301,128 38,452,620 17,815,645

Fuel Consumption (tonnes '000) 12,942 13,029 13,081 13,335 13,673 6,286

Emission/RPK (g) 104.8 104.3 103.0 102.9 100.5 150.8

Source: company data

American Airlines fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 432,488 440,010 444,971 453,921 458,804 230,404
RPK (m) 358,899 359,650 364,268 372,015 388,256 147,778
Load Factor 83.0% 81.7% 81.9% 82.0% 84.6% 64.1%

ATM 48,607 49,453 50,010 51,132 50,650 -

CO2 emission (metric tonnes) 42,038,000 39,254,000 39,388,000 40,604,000 41,439,000 -

Fuel Consumption (tonnes '000) 14,050 14,128 14,144 14,453 14,745 7,465

Emission/RPK (g) 117.1 109.1 108.1 109.1 106.7 -

Source: company data

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United Airlines fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 402,340 408,113 422,268 442,990 458,660 197,633
RPK (m) 335,726 338,459 348,037 370,398 385,212 118,903
Load Factor 83.4% 82.9% 82.4% 83.6% 84.0% 60.2%

ATM 45,276 46,254 48,702 50,891 52,245 27,015

CO2 emission (metric tonnes) - - 32,760,790 33,439,959 34,596,623 -

Fuel Consumption (tonnes '000) 12,630 12,688 12,919 13,445 13,949 6,513

Emission/RPK (g) - - 94.1 90.3 89.8 -

Source: company data

Southwest fuel and emission data

2015 2016 2017 2018 2019 2020
ASK (m) 226,114 239,022 247,534 257,164 253,075 166,496
RPK (m) 189,097 200,842 207,671 214,560 211,379 87,260
Load Factor 83.6% 84.0% 83.9% 83.4% 83.5% 52.4%

ATM 22,900 26,622 27,623 28,548 28,131 18,731

CO2 emission (metric tonnes) 18,779,872 19,717,886 20,200,544 20,584,682 20,577,106 12,630,318

Fuel Consumption (tonnes '000) 6,178 6,487 6,646 6,806 6,750 4,137

Emission/RPK (g) 99.3 98.2 97.3 95.9 97.3 144.7

Source: company data

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Appendix: SAF mandates by country

SAF mandates by country

Country / Region Mandate / Plans
Europe The ReFuelEU Aviation initiative will impose a SAF blending mandate, with the EU executive suggesting it will
apply to all flights taking off from European airports, regardless of whether their destination is inside the bloc.
The requirement will come in the form of a regulation, meaning it will immediately apply across member states
once adopted. The EU is planning to gradually scale up the use of SAFs, with a starting point of 2% in 2025,
moving to 5% in 2030, 20% in 2035, 32% in 2040, and 63% in 2050. The “Fit for 55” unveiled on 14 July 2021,
targeting to reduce net GHG emissions by 55% from 1990 levels by 2030, includes the ReFuelEU and a tax
overhaul that will impose an EU-wide tax on polluting aviation fuels. The European Union also wants to work
with the US government to curb aviation’s contribution to climate change, including through possible pollution
standards on jet fuel.
Finland Finland’s government introduced its Government Programme which includes ambitious climate targets and a
goal for carbon neutral Finland in 2035. As part of reducing transport-related emissions, the share of biofuels in
aviation is targeted at 30% through a blending obligation. A legislative proposal might be developed in 2021
with a start date around 2023, regulating fuel suppliers
France France will have a SAF mandate for aviation in force from January 2022, regulating fuel suppliers. The
mandate presents energy-based targets which will probably only include advanced biofuels, standing at 1%
(2021) and an expected 2% (2025) and 5% (2030).
Germany German Chancellor Angela Merkel's government has agreed with the aviation industry and regional authorities
on a roadmap for the development and use of "green" aviation fuel. The aim is to ensure at least 200kt of the
synthetic fuel is used per year from 2030, equivalent to c.1/3rd of the current fuel requirements of air traffic
within Germany. The idea is to produce synthetic "Power to Liquid" (PtL), whereby kerosene is generated using
renewable energies, hydrogen and CO2. The transport and environment ministries will work on ways to ramp
up fuel production on an industrial scale. A binding minimum quota on the fuel and a purchase obligation are
designed to guarantee that demand is created despite higher costs.
Netherlands The Netherlands does not currently have a SAF mandate for aviation, although there will be one in force by
2023, which would regulate fuel suppliers. At this early stage, the political objectives for the volume of SAFs to
be used stand at 14% (2030) rising to 100% (2050).
Norway Airlines operating in Norway must use more environmentally friendly jet fuel mixed with biofuel from 2020, as
per the Ministry of Climate and Environment. The aviation fuel industry must mix 0.5% advanced biofuel into jet
fuel from 2020 onwards.
Sweden Sweden has an ambitious target of being fossil-free by 2045. As a part of the initiative, the Swedish
Government announced on 11 September 2020, to introduce a GHG reduction mandate for aviation fuel sold in
Sweden in 2021. The prospective targets are based on annual levels of emission reduction for aviation through
alternative fuels and are as follows: 0.8% (2021), 4.5% (2025) and 27% (2030). This is expected to imply
energy-based targets of 1% (2021), 5% (2025) and 30% (2030) for SAFs, without specific sub-targets for any
fuel type.
United Kingdom The draft Carbon Budget Order 2021 sets a climate change target of cutting emissions by 78% compared to
1990 levels by 2035, which incorporates the UK’s share of international aviation and shipping emissions into a
carbon emissions target for the first time. The Policy Report also recommends transitioning longer-term support
for SAF into more bespoke policy such as a blending mandate and support near-term construction of
commercial SAF facilities in the UK.
United States US lawmakers introduced a bill (“Sustainable Skies Act”) that would create a tax credit for lower-carbon SAF,
which they hope will slash emissions of GHGs from the aviation industry. The legislation would impose a tax
incentive of up to USD2/gallon produced of SAF, which can be made from feedstocks such as grease, animal
fats and plant oils. Producers of SAF can earn the tax credit if the fuel achieves at least a 50% lifecycle GHGs
reduction compared with petroleum-based jet fuel, according to the legislation. The credit would expire at the
end of 2031.
Source: Press releases, News reports

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Notes

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Notes

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Disclosure appendix
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)
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recommendation(s) or views contained in this research report: Andrew Lobbenberg and Kim Fustier

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Additional disclosures
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Main contributors
Andrew Lobbenberg* Andrew Lobbenberg joined HSBC in 2012 as Head of the European Transport team, focusing
Analyst on airlines. He has worked as an equities analyst since 2000, before which he worked for
HSBC Bank plc 10 years in and around the airline industry, as an economic regulator, a paralegal, an academic
andrew.lobbenberg@hsbcib.com and in corporate planning for a major network airline. He has an MSc in Economics from the
+44 20 7991 6816 LSE and a BA Hons in PPE from Balliol College, Oxford.

Kim Fustier* Kim Fustier joined HSBC’s Oil & Gas equity research team in London in September 2015. She
Analyst, Oil & Gas has covered the European integrated oils sector since 2007, working previously at several
HSBC Bank plc international investment banks as an Extel-ranked analyst. Kim has an MSc in Management
kim.fustier@hsbc.com and Finance from HEC Paris and a BSc in Applied Mathematics from the University of Paris-XI.
+44 20 3359 2136

Shadab Ashfaq*
Associate
Bangalore

* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered / qualified pursuant to FINRA regulations

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