By Gus Majed, group CEO and founder of Paratus, the world’s first (re)insurance group underwriting energy price risk with innovative, commercially viable solutions accelerating the transition to net-zero.
Though sustainable aviation fuel (SAF) has become a priority over carbon offsets, the aviation industry faces a long-term and complex challenge of complying with mandates while maintaining profitability. Large-scale SAF adoption faces significant hurdles, including supply constraints, infrastructure gaps, and the need for stronger policy support to accelerate the transition toward sustainable, scalable, and commercially viable aviation fuels.
Regulatory mandates in the EU and UK are key demand drivers. By 2040, UK airlines must ensure that up to 22% of their fuel comes from sustainable sources, while the EU has set an even more ambitious target of 70% by 2050. These mandates send a clear signal: governments expect SAF to move from the fringes to the mainstream. However, the industry faces a steep and prolonged transition, given that SAF accounted for just 0.2% of total jet fuel consumption in 2023.
The primary challenge is the high cost of sustainable fuels. SAF production is estimated to be three to five times more expensive (synthetic e-fuels are even more expensive) than conventional jet fuel due to limited production capacity, reliance on agricultural and biomass feedstocks, and complex production processes which can have up to fifteen different pathways. Additionally, price volatility—driven by constrained supply and raw material fluctuations—makes long-term planning difficult for airlines.
Airlines are already passing on SAF costs to consumers as part of their surcharges. However, SAF mandates could disproportionately impact aviation activity in emerging markets, as it can be challenging for consumers in these areas to absorb higher costs. This creates a significant challenge: while mandates drive adoption, they also risk increasing fares and limiting passenger demand.
Another major hurdle is infrastructure inadequacy. Even if airlines are eager to adopt SAF, refuelling destinations often lack the storage and distribution capacity needed to handle sustainable fuels. This means retrofitting existing infrastructure and repurposing retired refinery facilities will be essential for scaling up SAF adoption.
Furthermore, the low supply of SAF exacerbates cost challenges. Though SAF represented just 0.2% of total jet fuel for the aviation sector, it is predominately bio-SAF from crop and plant feedstocks and waste cooking oil. While researchers are exploring ethanol-to-jet and synthetic e-fuels, these technologies remain in early development. This supply-demand mismatch results in a vicious cycle—limited availability drives up costs, high prices suppress demand, and limited demand discourages production scale-up.
With mandates now enforcing SAF adoption, airlines, fuel producers, and policymakers must act swiftly to expand supply, infrastructure, and technological innovation. The industry must also recognise the massive capital investment required, from retrofitting engines to expanding pipelines and production facilities. Older aircraft may not be compatible with SAF, further complicating adoption.
The key to accelerating adoption lies in strategic collaboration between airlines, airports, fuel producers, distributors, policymakers, and financial institutions. Strategic partnerships can help mitigate high infrastructure investment costs, while global standardisation of regulations will be essential for ensuring a seamless transition, especially given the cross-border nature of aviation.
For SAF to play a significant role in aviation’s decarbonisation, three critical factors must be addressed. First, legally binding mandates are essential to secure long-term investment in SAF production, providing the regulatory certainty needed for large-scale adoption. Second, repurposing existing refinery infrastructure will be crucial in scaling up SAF production, leveraging existing assets to reduce costs and accelerate deployment. Finally, upscaling feedstock supply—particularly from crops, plants, and waste cooking oils—is necessary to ensure a reliable and sustainable raw material base for SAF, helping to alleviate supply constraints and reduce production costs over time.
Some early progress is already evident. In California, the low carbon fuel standard (LCFS) has incentivised SAF production by assigning emissions-based credits, which has stimulated investment in feedstock development and infrastructure. A wider adoption of similar models across other regions could be instrumental in making SAF more financially viable.
Airlines can finance SAF investments through government incentives, tax credits, and grants and long-term offtake agreements with SAF producers – Delta, United and American Airlines have all signed offtakes. They can also issue green bonds, secure sustainability-linked loans, and leverage SAF-specific funds or private equity investments. Additionally, airlines may invest directly in SAF producers, and engage in carbon credit trading and corporate SAF contribution programs.
Blending mandates and regulatory incentives will further drive adoption, ensuring financial viability while meeting sustainability targets.
So, what do airlines and fuel producers need to do in the short term? Given fuel is the largest operating cost for airlines, maintaining consistent and stable pricing is essential for financial predictability and investment viability. This stability supports long-term decision-making while helping airlines keep ticket prices competitive. As the adoption of SAF expands, ensuring price consistency will be even more critical.
Traditional hedging with derivatives has been the go-to strategy for managing fuel price volatility, but it is complex, time consuming and carries significant financial risk—especially during crises, such as geopolitical conflicts, which can trigger margin calls, exposing airline balance sheets to heightened volatility.
A more effective solution is energy price risk insurance, which offers a simpler, more straight forward and accessible protection without requiring large upfront investment commitments by eliminating the need for specialised derivative teams. More importantly, energy price risk insurance shields airlines’ balance sheets, providing aviation companies with the financial stability needed to make other crucial investments to meet SAF adoption mandate compliance.
The adoption of sustainable aviation fuel (SAF) is undoubtedly a complex but necessary transition for the aviation industry. While high costs, infrastructure gaps, and supply constraints remain significant obstacles, the rising urgency of SAF mandates presents both a challenge and an opportunity to reshape aviation for the future.
To succeed, the industry must embrace collaboration, innovation, and financial solutions to ease the transition. Governments, investors, and aviation stakeholders must work together to build a resilient, scalable SAF ecosystem, ensuring that sustainable fuels move from a niche option to an industry standard.
As the push for SAF adoption intensifies, airlines must remain flexible and proactive, seizing opportunities for technological advancement and strategic partnerships to meet sustainability targets while ensuring long-term profitability.