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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Aviation Giants To Ramp Up Biofuels Usage

United EcoSkies

As if oil companies don’t have enough to worry about right now, they can now add the price of jet fuel in the future to their concerns.

United Airlines is taking the first steps towards building a biofuel-powered fleet. The airline is testing biofuel blends in place of conventional jet fuel on short hop flights between LA and San Francisco. United’s plan is to ultimately expand biofuel use to all domestic flights departing out of the LA hub, and from there presumably to roll out biofuel blends across all flights globally over time.

United’s blend is 30% biofuel/ 70% conventional fuel mix produced by California-based Alt Air Fuels. Alt Air operates a refinery near LA and the plan is to have Alt Air deliver about 15 million gallons of refined biofuel product to United over the next three years. The biofuel is doubly beneficial for United from a PR standpoint in that they get to claim environmental credit and “Made in the USA” credit since the biofuel is refined here and sourced from materials produced in the U.S.

United appears to have a broader interest in the biofuel space as evidenced by the $30 million investment that the airline put into Fulcrum BioEnergy in 2015. Fulcrum is focused on developing technologies to generate biofuel from municipal solid waste. United’s investment will be used to help construct Fulcrum Bio refineries near United hubs. In addition, United will get a discount on biofuel produced by Fulcrum. Related: Permian Springs To Life With $50 Oil

At current prices, it is highly unlikely that biofuels for United can compete with conventional jet fuels on price. A May 2016 Oilprice.com interview with Aeromexico CFO Ricarco Sanchez Baker confirms this fact, and concludes that while consumption is still limit, Aeromexico sees reasons to support the use of biofuels. It is however unlikely that current prices are the driving rationale for United’s interest. Instead airlines such as United probably see biofuel investments as a good risk mitigation option in addition to the obvious PR benefits. Biofuels are likely to have a more stable price than traditional jet fuels since they are a more conventional manufactured product rather than a direct natural resource derivative. By using some biofuels in their jet fuel blend then, United is effectively able to reduce the variation in its jet fuel costs over time. That in turn should lead to more consistent earnings, happier shareholders, and a higher stock price.

Biofuels can’t be used by jet engines in a pure blend because of the design of current jet engines, and the negative effects of biofuels on rubber hoses and gaskets. Blending biofuels helps to avoid this issue. Over the long run of course, blended biofuels would likely become increasingly weighted towards biofuel rather than conventional jet fuel, especially as jet engines are redesigned to accommodate those needs. The biofuel innovations are useful not only in planes, but in ships as well. The evolving attitudes towards biofuels are evidenced by the US Navy’s interest in adopting a biofuel blend for their ships. Related: Rebound In Oil Prices Changes Drillers’ Mindset

The market for bio-blend jet fuel is not trivial, which is why multiple firms like Fulcrum and Alt Air are pursuing it. In 2015, nearly 700 million passengers traveled in and out of U.S. airports leading to the consumption of 16.7 billion gallons of jet fuel. With United handling about 15 percent of U.S. air traffic, that suggests that the company needs just over 2.5 billion gallons of fuel a year, or about 800 million gallons of biofuel annually if the company wanted to use a 30/70 mix in all of its jets.

Obviously, the biofuel industry is not even close to being able to supply that much product yet, nor is United looking to buy that much. But the figures do point to an evolving market which is quite sizeable, and presents a real opportunity for the right firms.

By Michael McDonald of Oilprice.com

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  • Bill Simpson on April 10 2017 said:
    Does anybody know if producing this 'biofuel' is actually an energy positive process? It would be a shame if we were wasting fuel making and transporting it, in order to feel good. The fact that it cost more than straight kerosene isn't a good sign. At least it creates some jobs. But if it ends up being total energy negative, we are wasting finite resources. You need a team of scientists to figure that one out.

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