A version of this article was originally published in Forbes.
The banking industry’s quest to cut its own Scope 3 greenhouse gas emissions is likely to help aviation in its decarbonization efforts. By increasingly tying financing cost and availability to emissions reduction, financial institutions would push airlines to retire old kerosene guzzlers in favor of more fuel-efficient aircraft models and ultimately turn to sustainable aviation fuel, despite its cost.
Airlines have pledged to cut emissions 5% by 2030 and reach net zero by 2050, but the low-carbon technology needed to replace current kerosene-powered commercial airliners will likely require more than two decades to get developed and deployed. By that time, given the growth in air travel demand, greenhouse gas emissions from aviation could have more than doubled, according to the International Civil Aviation Organization.
Many major banks, which count global and regional airlines among their clients and routinely finance the purchase or leasing of aircraft, have also made the same net-zero promise. Thus, airlines encountering difficulty cutting emissions because of the slow development of alternative propulsion technology is a problem for both aviation and banking.
The key to progress might be for the two sectors to work together to reduce aviation emissions intensity. As things work today, banks finance the aviation industry in two ways: through general purpose loans to airlines, lessors, and aerospace companies, and through dedicated loans that bankroll specific aircraft leases and purchases. If the goal is to decarbonize portfolios, dedicated lending would need to be directed toward purchases of the newest, most fuel-efficient classes of aircraft.
At the same time, general purpose loans would primarily be granted to airlines with the most credible transition plans. The new priority would also elevate the financing of sustainable aviation fuel (SAF) projects, because SAF is considered a bridge technology that will help aviation reduce emissions while it waits for the development of low-carbon propulsion tech, like green hydrogen. Both trends in lending would help airlines justify more aggressive climate transition plans and allow the industry to make a dent in its emissions.
Pushing the decarbonization lever of next-gen aircraft
For decades, the main criteria of banks for granting loans for the acquisition or lease of aircraft have been such factors as the solvency of airlines or lessors, the business model for aircraft usage, age of the asset, and the residual value. Now, banks are beginning to add new analytical capabilities that bring a greener perspective to financing decisions and require a calculation on the emissions intensity impact of each project. But even here, there are limited opportunities and the competition for the best projects could potentially affect the profitability of those deals in the short to medium term.
The other problem banks are encountering is manufacturing shortages of next-generation aircraft, limiting the supply available for purchase or lease. In the case of Boeing, aircraft production is being slowed by additional regulatory scrutiny on the 737 MAX assembly line and certification delays for the 737 MAX 7 and MAX 10. These extra hurdles, put in place after in-service defects were found, have forced airlines to alter fleet plans and have limited the aircraft supply that requires financing.
Airbus has also been unable to keep up with promises of increased narrowbody production because of continuing labour shortages, backlogged supply chains, and the grounding of hundreds of aircraft because of manufacturing problems involving a Pratt & Whitney engine. This year Airbus expects to produce 770 aircraft but had only delivered 323 to customers by the end of June.
We calculate that reaching net zero by 2050 will require aviation to get 25% of its needed decarbonization through fleet renewal. For instance, next-generation single-aisle narrowbody aircraft can emit up to 20% fewer greenhouse gases per passenger mile than earlier models. Single-aisle narrowbodies currently make up 61% of the global fleet and are expected to increase to 63% by 2034, according to our “Global Fleet And MRO Market Forecast 2024-2034.”
SAF holds the key to reaching net zero on time
The biggest lever that must be pushed if aviation is to reach net zero by 2050 is the use of SAF, which produces 50% to 80% fewer emissions than conventional Jet A-1 fuel. Commercial airlines will have to rely on SAF for more than 55% of their emissions reduction if they are to meet targets. While various SAF production technologies will be maturing through 2035, it will take an investment of more than $1 trillion to create enough production capacity to achieve this goal, by our calculations.
The two main sticking points are the economics and capacity. Currently, SAF is more than twice as expensive as kerosene-based fuel, and there is only enough produced annually to replace about 1% of total jet fuel consumption. The European Union Aviation Safety Agency (EASA) estimates that the EU would have to produce at least 2.3 million tonnes of SAF to reach 5% SAF-usage by 2030 for all flights departing from EU airports.
Given current pledges and a new willingness among banks to fund SAF projects, we expect it to be possible to reach about 5% to 7% SAF usage by 2030, just enough to help the European Union fulfil its mandated 6% SAF usage at EU airports by 2030.
Read the original piece here.