Yesterday, Virgin Atlantic (Virgin), the British airline, received approval by the UK Civil Aviation Authority (CAA) to use 100% Sustainable Aviation Fuel (SAF) for the first ever long-haul test flight across the Atlantic Ocean from London Heathrow to New York JFK on November 28, 2023. While there have been other flights that have successfully flown on 100% SAF, these have only been on short-haul routes. We are of the opinion that this long-haul transatlantic flight of a widebody Boeing 787 would represent an important milestone toward the ultimate long-term goal of SAF transition at scale, providing a highprofile demonstration of the viability of the technology.

Despite this positive development, broad 100% SAF usage at scale will take years as significant hurdles remain. Technology questions regarding whether modifications to current SAF properties and/or existing aircraft will be required remain unanswered at this stage. In addition, fuel infrastructure upgrades to accommodate 100% SAF might also be required. Higher cost of the fuel and production bottlenecks are also material challenges, as discussed in further detail below

As we discussed in our October 10, 2023, commentary, we believe SAF will play an important role in the airline sector’s strategy to achieve its long-term decarbonization targets. Credit implication for airlines will depend on the impact from the higher cost of SAFs on air travel demand and airlines’ margins.

Regulators are also likely to play an important role in determining the pace and cost of decarbonization.

Assuming the transition will be gradual, and the aviation and energy sectors continue to invest in scaling up production and reducing cost, the impact on airlines is likely to be manageable.

100% SAF in Existing Aircrafts Could Save Additional Capital Expenditure Requirements for
Airlines
Currently, the industry is only permitted to blend its fuel up to 50% SAF. This limits the full potential of carbon reduction that could be achieved through SAF usage. This is primarily because of safety concerns associated with using 100% SAF, which are feared to cause issues such as shrinking elastic tank seals leading to fuel leakage. If 100% SAF usage proves feasible and safe on the existing aircraft technology without material upgrades, then it would be positive for the sector because it would help accelerate decarbonization without material capital expenditure requirements.

Other Key Challenges for SAF Transition
Although 100% SAF usage is positive, the following are some other important challenges associated
with SAF that the industry must overcome to enable wider SAF usage:

1. High cost of production:
   SAF, despite being the most viable solution to decarbonize, is currently expensive to produce, while scalability of the relatively cheaper variants of SAF is also a challenge. SAF can cost anywhere from two to nine times more than the conventional kerosene-based jet fuel. As fuel cost is a major part of airlines’ operating cost, it is important for the sector to reduce the cost of SAF to enable wider adoption without a material impact on ticket prices and/or airlines’ margins.

2. Production needs to ramp up:
   Despite the significant uptick in SAF production globally over the past several years, growing to an estimated 300 million litres in 2022 from 38 million litres in 2019, a significant further ramp-up in investment and production is required in order to achieve SAF targets of up to 10% set by some major economies such as the U.S., Canada, the EU, and the UK by 2030. On a global scale, the International Air Transport Association (IATA) projects the world would need 23 billion litres of SAF by 2030. Coupling such high demand of SAF over the coming years with the time that it generally takes to build the SAF production infrastructure, the task at hand is very challenging, in our view.

Source : DBRS Morningstar