Oliver Taslic
The Iran war has blown European airlines’ plans well off course. While curtailed flights to the Middle East have a limited impact on carriers like IAG and Air France-KLM that fly more west than east, a near-doubling of jet fuel prices – and potential shortages unless the Strait of Hormuz reopens – could whack their earnings. What the conflict has done is markedly shrink the relative cost of so-called sustainable aviation fuel (SAF) from a pre-war level that was almost three times that of its fossil-based counterpart. Yet to really change the game, it needs to fall a lot more.
Compared to other sectors, decarbonising aviation is tricky. Batteries weigh too much to be practical in large jets, while liquid hydrogen is too voluminous and requires super-cool storage. SAF works with current engine technology but switches the provenance of the fuel. Emissions reductions – which airline trade association IATA says can be up to 80 percent – come from the fact that SAF recycles the carbon absorbed by the biomass used in the feedstock, such as used cooking oil. Fossil fuels, in contrast, emit carbon that was previously trapped underground.
SAF’s problems are availability, and price. IATA estimated in December that last year’s output would amount to 1.9 million metric tons, or less than 1 percent of total jet fuel consumption. Such small quantities, as well as having to compete for feedstock with other biofuel industries, keep costs elevated.
To stimulate production and try to bring down prices, the European Union and the UK introduced mandates that require jet fuel supplies to contain certain amounts of SAF, starting with 2 percent in 2025 and increasing out to 2050 in the EU’s case. At an industry confab in Brussels last month, European airline executives agreed there would probably be enough SAF available to hit near-term requirements, but were concerned about supplies further out as the likes of Shell cancel planned facilities. CEOs also called for a postponement of a 2030 mandate for “e-SAF” – where fuel is created using green hydrogen and technology that captures emitted carbon – on the grounds that the roughly four-year timeline for getting e-SAF plants up and running meant it was already clear the requirements couldn’t be hit.
Europe’s current jet fuel situation clears some of this gloom – but only up to a point. Given IATA says up to 30 percent of European jet fuel demand originates from the Gulf, prices for the conventional stuff have jumped from around $800 a ton pre-war to over $1,500 as of Tuesday. With a ton of SAF in Northwest Europe worth just under $2,700 as of last Friday, using data from Platts at S&P Global Energy, the cleaner variant is now less than double the cost. But it’s still relatively high.
That’s not the only issue. Feedstocks are a particular bottleneck: Europe doesn’t produce enough used cooking oil and other inputs to make sufficient quantities of SAF without creating new energy security headaches. An October report from EU aviation regulator EASA found that, in 2024, 69 percent of the feedstock for the bloc’s SAF supply came from non-EU countries, with China contributing 38 percent.
The energy security workaround is e-SAF. This involves using massive amounts of green energy to yield hydrogen from water. Mixing this with captured carbon, ideally from the air but also from the likes of industrial exhaust gases, can create cleaner hydrocarbons. Fortunately, Europe has several countries with abundant renewable energy, including Norway, Iceland, Spain and Portugal. However, with e-SAF facing a cost base potentially up to 12 times that of conventional jet fuel, according to IATA, airlines have been reluctant to commit to long-term offtake agreements, given that prices could fall later as the technology matures. High European power costs pose another headwind.
Even so, fossil fuel price movements still mean something. One tangible upshot of the Iran war, one energy banker told Breakingviews, is that a significant chunk of investment will now flow into existing companies and startups focused on ways to bring down the price premium of biofuels relative to their fossil-fuel equivalent. That might focus on areas like biodiesel, certain grades of which in Europe briefly priced below that of the conventional stuff in early April, according to data from Argus Media. But technological breakthroughs may also enable the relative cost of SAF and e-SAF to fall further.
The EU and national governments can also help. They can divert more proceeds from the likes of the Emissions Trading System (ETS) into helping get e-SAF projects off the ground. They can also try to somehow stand in between e-SAF producers who favour long-term contracts and airlines who generally prefer shorter-duration ones. One way is through a so-called double-sided auction, aiming to be piloted this year. Under a DSA mechanism, commitments from state-backed vehicles to buy certain amounts of e-SAF could help aspiring producers unlock bank financing. The vehicles can then agree to sell the product to airlines and fuel suppliers, aware that, at least as the technology matures, they will probably be making a loss on each deal, but helping develop a promising industry in the process.
As long as relative prices stay where they are, it’s hard to see green jet fuel achieving real liftoff. Still, the longer the Strait of Hormuz remains effectively shut, the more plan Bs will gain traction. At the very least, SAF and e-SAF have moved from being a source of eye-rolling to potentially part of the solution.
