Redefining the skies: How sustainable aviation fuel alters airline cost structure and market dynamics

Abstract

Forecasts by the FAA in 2022 suggest that air travel will consistently increase over the next two decades, further escalating greenhouse gas emissions. Sustainable Aviation Fuel (SAF) is pinpointed as a potent solution for greenhouse emissions. However, its higher costs compared to conventional fuels present a challenge for its adoption. We examine the economic ramifications of SAF adoption on U.S. airlines by simulating two distinct scenarios. Our results reveal a 5.9% rise in the marginal costs (MC) of Full-Service Airlines (FSAs) with a 20% SAF blend while Low-Cost Carriers (LCCs) experience only a 1% increase under the same scenario. Alternatively, using a SAF blend that is 20% cheaper in a 50–50 ratio results in an 8.8% increase in the MC of FSAs, compared to just a 2% rise for LCCs. These scenarios suggest that the cost convergence of business models observed in recent years is unlikely to be achieved.