The commercial aerospace business case for 2050
The aviation net-zero aspiration
The civil aviation industry has set an ambitious target of achieving net-zero emissions by 2050 while the fleet is expected to double. Industry stakeholders have proposed several pathways and scenarios to achieve net-zero from the projected baseline. A consistent theme in all these scenarios is the expectation that over two-thirds of the reduction will come from drop-in sustainable aviation fuel (SAF), with aircraft technology improvements contributing an additional 15% to 30% of the reduction and the rest from air traffic operational improvements, carbon credits and offsets.
The challenge
Achieving net-zero will require industry and government stakeholders to invest over a trillion dollars during the next two decades. The transition technologies required to achieve the aspiration are either in early stages of readiness or scalability with barriers to be overcome.
SAF capacity, which is at 0.3% of all jet fuel used today, needs to exponentially scale to meet the demand. Regulatory mechanisms, policies and incentive structures will be required along with global collaboration among stakeholders to enable the availability and economic viability of SAF.
Key transition aircraft and propulsion technologies like hydrogen, electric and hybrid electric are in early stages. Hence, industry will likely have to rely on improvements within the confines of conventional architecture now, while maturing new architectures over the next decade and a half. Over the past 60 years, current aircraft and propulsion technologies have enabled considerable improvements in emissions, durability, and safety. Specifically, each new clean sheet or major new program has improved fuel burn by 15%. Industry is optimistic to realize a similar level of improvement in the next clean sheet platform in spite of pushing the efficiency frontier of conventional architecture and the Brayton cycle. Development of new clean sheet aircraft typically takes eight to ten years from announcement to entry into service, and five to seven years after that to ramp up production. In addition, the business model for several aircraft systems and notably propulsion is such that over 75% of lifecycle revenue comes from aftermarket, and peak aftermarket revenue happens 10 to 15 years after entry into service. If a new clean sheet platform were to be announced today (2024), entry into service will likely be around 2034, and peak aftermarket for propulsion would fall around 2045–50. Given the business model for both OEMs and airlines, it is inconceivable for these aircraft to be replaced in 2050 by new aircraft with transition technologies to meet net-zero targets.
*The trade space and implications
The path to achieve net-zero is fraught with uncertainty with several unknowns involving technology, regulatory, government policies, and geopolitics. While no one has a crystal ball on the path and timeline to achieve net-zero, the pathways create a trade space involving at least five elements. Each of these have implications – good, bad, or otherwise, for the stakeholders involved.
- Availability of SAF: The supply of SAF grows exponentially to meet the demand for being used as drop-in fuel at 50% blend or even 100%. Of course, this would require a combination of government incentives, fiscal policies, and regulation. Incentives and subsidies to incentivize SAF production, taxes to increase the price of fossil fuel, and regulations to drive adoption. The aircraft fuel value chain and market could be disrupted, enabling opportunities for new players and challenges for incumbents, radical changes to airport operations, and possibly higher cost for airlines reducing their profitability.
- Traffic demand: Historically, market drivers and competition have enabled the flying public to benefit from declining air fares over time. Industry narrative can shift to include the individual – the flying public – to take responsibility for achieving net-zero. In which case, policies and mandates can enable, or even require, airlines to pass the cost of expensive jet fuel (due to government policies and taxes) to consumers. This could dampen air traffic growth lowering airline profitability, payload efficiency and aircraft technical efficiency.
- Accelerated development of transition technologies: Industry and air traffic stakeholders take on the net-zero 2050 challenge to accelerate development of new design, materials, manufacturing and production system through a combination of conventional and new architecture aircraft. This would require industry and government to considerably increase R&D investment, establishment of more technology and infrastructure partnerships, and different type of talent and employee value proposition. Air traffic organizations will require considerable investment to digitize their capabilities to enable the incremental operational improvements from both conventional and newer architecture aircraft.
- Business model changes: Providers of propulsion and aircraft systems seek alternate business models to make the economics viable to support new clean sheet platforms that may have to be retired sooner to be replaced by alternate transition technologies. Manufacturers could be compensated with a large portion of the lifecycle revenue upfront in addition to designing the system for shorter lifecycle and economic life. This will have major implications to airlines’ economics, cash flow, cost structure, and risk profile impacting fares.
- Inaction: Lack of action on the above becomes a decision. In 2050, civil aviation CO2 emissions are approximately two billion tons. A US$200 per ton carbon price (in real dollars) weighs on the industry in the form of US$400 billion annually.
The above highlights some extremes for a few elements in the trade space. In reality, changes to each element have implications and impacts on numerous other creating a complex challenge. This is an inflection point for the aviation industry. The market will clear as it always has. Winners and losers will be decided based on their ability to place informed bets, investments, and creating the right optionality to exercise and adapt as the ecosystem evolves. In the past, the failure to produce a substantially more fuel-efficient aircraft is net negative, but not insurmountable; however, failing to produce a 2050 technology that narrows the gap to net-zero is going to pose an existential threat to the industry.
*Sources: EY analysis: https://www.iata.org/contentassets/8d19e716636a47c184e7221c77563c93/executive-summary—net-zero-roadmaps.pdf, https://www.iata.org/contentassets/8d19e716636a47c184e7221c77563c93/aircraft-technology-net-zero-roadmap.pdf, https://aviationbenefits.org/media/167417/w2050_v2021_27sept_full.pdf, Global Energy and Climate Model Documentation 2023 (iea.blob.core.windows.net)
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