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How will the energy transition impact the aviation industry?

It is now more critical than ever for the aviation industry to recognize the risks and opportunities presented by sustainability and the energy transition in order to safeguard its long-term viability and resilience.

Aviation accounts for a relatively small share of global emissions but is one of the most challenging sectors to decarbonize. Nevertheless, the sector has committed to achieving net-zero emissions by 2050. As a global industry, aviation is exposed to various regulatory regimes, many of which bring markedly different approaches to decarbonization and sustainability reporting. Adding to this complexity is the fact that emissions reduction measures implemented to date have been outstripped by passenger demand growth. As a result, significant efforts will be required to decarbonize in the years ahead. Today, companies across the aviation sector differ notably in their preparedness for climate change and the transition to a more sustainable economy.

At Marsh’s inaugural aviation summit, speakers discussed the latest improvements in aviation sustainability and possible pathways for the industry to achieve net-zero emissions by 2050.

Lift off

The aviation sector’s low-carbon transition must be understood in the context of its growth trajectory. Demand for air travel continues to rise, driving growth in global fleet and in the industry’s absolute emissions (Figure 1). The growth trend is a significant counterweight to the sector’s decarbonization ambitions. Much of the sector’s future growth is expected to come from emerging markets, particularly in Asia and Africa, where rapid economic growth and urbanization are driving a significant increase in air travel demand (Figure 2).

^{Figure 1}

Global commercial fleet growth and associated CO2 emissions growth to 2030

Source: Oliver Wyman Fleet and MRO Forecast, Oliver Wyman Aviation Sustainability Report.

While growth presents significant opportunities for airlines, airports, aircraft manufacturers, and aviation finance providers, it is imperative that growth strategies factor in the evolving sustainability risk environment. Investors, lenders, and insurers are increasingly viewing sustainability as integral to financial risk assessment and capital allocation decisions. Sustainability concerns will likely play a greater role in driving investment decisions, with the potential to act as a powerful lever to accelerate the aviation industry’s net-zero ambitions. Equally, many analysts predict sustainability issues becoming a more important factor in consumers’ decision-making, including in terms of their decisions on travel and their choice of airline. One speaker from a major original equipment manufacturer (OEM) acknowledged this fact, saying that “sustainability is the best business case.”

^{Figure 2}

2023 to 2033 projections for traffic growth and gross domestic product

Source: Oliver Wyman Global Fleet and MRO Market Forecast 2023-2033.

How airlines are approaching sustainability

A challenge and opportunity will be to ensure that aviation can facilitate travel and societal needs while doing what’s good for the environment. Austria and France have introduced legislation banning short-haul flights where feasible train alternatives exist, and other EU countries are expected to follow suit. However, much of the growth in demand for air travel is in emerging markets that are typically larger and more sparsely populated than established markets. This presents an additional challenge for the aviation sector, given that long-haul flights are considered to be harder to decarbonize and less suited to innovative technologies such as hydrogen and electric power.

Medium and long-haul flights account for 73% of the aviation industry’s carbon emissions and fuel is the most significant contributor to the sector’s carbon footprint. Sustainable aviation fuel (SAF) is likely to be the primary driver of emissions reduction for long-haul flights through 2050, with hydrogen and electric power expected to have a limited role (Figure 3). Yet, despite dozens of new production facilities and billions of dollars of investment, there is not nearly enough SAF to reduce rising emissions from increasing air travel. Furthermore, SAF currently bears a higher cost than traditional jet fuel. Many aircraft manufacturers have completed compatibility testing of SAF on their engines. However, they cite the immaturity of the market for SAF and its price as barriers to boosting the blend rate of SAF between now and 2030. How fast and how much the industry can scale over the next few decades will be a major component of aviation decarbonization.

^{Figure 3}

Indicative overview of where low- and zero-carbon energy could be deployed in commercial aviation

Source: Air Transport Action Group, “Waypoint 2050,” 2nd Edition, 2021.

How airports are approaching sustainability

Though airports are directly responsible for just 2% of the aviation industry’s overall emissions, they will have an important role to play in facilitating the decarbonization of the wider sector. This includes embracing electrification choices (such as solar or battery storage) to power on-the-ground operations and new infrastructure to support the use of low-emission power sources (such as hydrogen).

In response to air passenger demand, airports are outlining ambitious and innovative plans to increase passenger numbers, schedule more flights, and relaunch long-term renovation and expansion projects. This includes features to increase the speed of airport throughput (such as improved passport handling speeds) and optimize ground operations and air traffic management. Airports’ ability to maintain their social license to operate and grow in line with forecasted demand will depend on their ability to meet the evolving needs of passengers while prioritizing sustainability.

Reducing aviation’s carbon footprint

Reductions in the emissions profile of the aviation industry will depend upon two key factors – successful replacement of traditional aviation fuels with lower carbon energy sources and improvements in the energy efficiency of aircraft.

To date, growth in aviation activity has outpaced the current rate of scalable change for alternative energy sources. For instance, current projections suggest that SAF, as a portion of all renewable fuel production, is growing at an annual rate of 3%, but to reach emission reduction targets by 2050, this rate will need to accelerate to 8% per year. If the current window of opportunity is missed, the industry may find itself far behind its emission reduction targets (Figure 4).

^{Figure 4}

Aviation carbon emissions forecast by scenario

Source: ALI, Oliver Wyman and University of Limerick analysis.

Policy and fiscal support measures are needed to support the transition towards new and innovative energy sources. For instance, the US Inflation Reduction Act includes provisions aimed at reducing the cost of producing SAF and stimulating supply. Developing other practical and scalable alternatives to jet kerosene, such as electric-powered or hydrogen-powered aircraft for short-haul flights, will also require significant fiscal support.

Emissions reduction is not just about new energy sources — improvements in energy efficiency will also be critical to reducing the energy consumption and emissions profile of the aviation sector. For example, micro-efficiency measures, such as using lighter and stronger aluminum, can make the aircraft more energy efficient. Circularity in manufacturing should be embraced, with aircraft OEM spares being recertified rather than scrapped. Computing innovations such as AI can also be used to optimize flight paths (leveraging real-time meteorological data to plot and control aircraft) and ground handling (turnaround checks and people flow-through). All these innovations will be key in improving energy efficiency and reducing the quantum of new and sustainable energy sources required.

Sustainability has landed

Like many other sectors needing to curb emissions, it is important to recognize the opportunities and challenges that lie ahead for the aviation industry. As the sector creates more sustainable business models with improvements to engines, materials, aerodynamics, operation optimization, and demand solutions, and also responds to societal expectations and regulations, new types of risk will likely emerge. Companies need to identify and quantify the impact climate change will have on their businesses in the near and distant future, while also having a solid understanding of the change in risk profile caused by the low-carbon transition.

A combination of decarbonization pathways will be required by the key industries of passenger airlines, airport services, flight operations, and aerospace and defense manufacturers. Stabilizing emissions and then reaching net zero by 2050 is dependent on the actions the industry takes now.

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