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European airlines enter the biofuels market Business Project Report
2
European airlines enter the biofuels market Business Project Report
June 2011
Eric van den Heuvel
+31-30-6623851
+31-6-52522166
This Business Project Report has been submitted as final assignment for the Post-
graduate Diploma Programme on Strategy and Innovation of the Saïd Business
School, University of Oxford, UK. The programme (April 2010 to June 2011)
consisted of four modules on Business Strategy, Innovation, Globalisation and
Strategy in action.
ECOFYS Netherlands B.V. | Kanaalweg 15G | 3526 KL Utrecht| T +31 (0)30 662 33 00 | F +31 (0)30 662 33 01 | E [email protected] | I www.ecofys.com
Chamber of Commerce 30161191
4
Abstract Biofuels might offer opportunities for achieving improved balance of power to the
European airlines in their market environment. The aviation sector in Europe is a
high competitive market. It faces high rivalry and increasing fuel costs due to rising
oil prices. Moreover, from 2012 the sector will be subject to stringent rules with
respect to maximum allowed carbon emissions.
Investigating the competitive forces in the aviation sector and executing a strategic
group analysis maps the competitors and the major players in the supply chain and
the options they have for using alternative fuels for low carbon performance.
Both the market and non-market strategies of several European airlines have been
studied. It appears that airlines are aiming at first mover advantage by moving
upstream in the biofuel value chain. They search for collaboration with other
stakeholders to change government regulation to their benefit and influence public
opinion and research agendas.
Airlines are late entrants in the biofuels market. This research has shown that
biofuels can improve the market power balance for European airlines. Biofuels are
key to improve the carbon performance of airlines. However, this implies that
airlines take position at the resource side of the value chain for biojetfuels. This has
the advantage of controlling the security of supply and managing biofuels production
complying to ruling sustainability criteria.
ECOFYS Netherlands B.V. | Kanaalweg 15G | 3526 KL Utrecht| T +31 (0)30 662 33 00 | F +31 (0)30 662 33 01 | E [email protected] | I www.ecofys.com
Chamber of Commerce 30161191
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Table of contents
1 Introduction 9
2 Research question 11
2.1 Introduction 11
2.2 Research question 13
2.3 Research method 13
3 Relevant literature review 15
3.1 Analysis of the current industry environment of European airlines 15
3.2 Airlines are influenced by the non-market environment 15
3.3 Analysis of the biofuels technology innovation 16
4 Industry analysis of the airlines in Europe 17
4.1 The aviation sector in Europe 17
4.2 Rivalry 17
4.3 Supplier power 19
4.4 Strategic Group Analysis 23
4.5 Conclusion 25
5 What are the options and issues for airlines 27
5.1 Introduction 27
5.2 Options and issues 27
5.3 Market strategies 28
5.4 Strategic alliances for dealing with non-market issues 29
5.5 Conclusion 31
6 Current market and technology developments in the biofuels arena 33
6.1 Introduction 33
ECOFYS Netherlands B.V. | Kanaalweg 15G | 3526 KL Utrecht| T +31 (0)30 662 33 00 | F +31 (0)30 662 33 01 | E [email protected] | I www.ecofys.com
Chamber of Commerce 30161191
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6.2 Brief policy history 33
6.3 Innovation in the biofuel conversion routes 33
6.4 Alliance-based competition in the biofuels domain 36
6.5 Conclusions 37
7 Conclusions and recommendations for the European airlines 39
7.1 Conclusions 39
7.2 Recommendations 40
8 References 41
1 Introduction The aviation sector is responsible for 2% of global CO2 emissions (IATA, 2011b).
With expected global market growth of 4 to 5% per year, the total emissions would
increase significantly in the coming decades. In 2009 the International Air Transport
Association1 (IATA) took its responsibility and presented plans to combat carbon
emissions at the Climate Conference in Copenhagen in 2009 (IATA, 2009), aiming
at:
• 1.5% fuel efficiency improvement per year, up to 2020
• Carbon neutral growth from 2020 onwards,
• 50% less emissions in 2050 as compared to the 2005 levels.
Governments develop regulations to combat climate change. From 2012, the
European aviation sector will be part of the European Union’s Emission Trading
Scheme. This implies limited allowed carbon emission rights (EC, 2008).
For airlines this will result in additional cost for carbon emissions. Airlines in Europe
are already for some time confronted with rising fuel prices, pressuring profit
margins down. Strategic carbon (cost) management and pro-active innovation
activities to find low cost, low carbon alternatives for current used fuels are of high
importance to maintain a sustainable economic market position. Due to EU
mandates for biofuel set by the EU Renewable Energy Directive (EC, 2009) the
biofuels market is rapidly developing.
This research focuses on the opportunities that biofuels offer for achieving improved
balance of power of the European airlines in their market environment. Chapter 3
presents the research question, followed by a review of relevant literature in Chapter
4. In Chapter 5 the competitive forces in the European airlines industry are
analysed. Chapter 6 discusses the individual and joint activities of airlines in the
biofuels domain. In Chapter 7, the market and technology innovation dynamics are
discussed in detail. In Chapter 8 the major conclusion are drawn and
recommendations are provided.
1 IATA represents some 230 airlines and 93% of scheduled international air traffic.
European airlines enter the biofuels market 9
10
2 Research question
2.1 Introduction
The airlines market is characterised by strong competitive forces, with resulting low
margins. Michael Porter (2008) argues that the airline industry is one of the least
profitable industries because all competitive forces are strong. In an overview
ranking of the profitability (on basis of average of Return on Invested Capital) of
selected US industries, airlines appear at the low end. US security brokers and
dealers, and the soft drinks industry have a nearly six times higher average ROIC
(seeFigure 1).
Figure 1. Profitability of selected US industries. (Porter, 2008).
Within the European airlines market the competitive forces may also be expected to
be strong, given that Europe houses as much as 150 passenger airlines, of which 62
are relatively recent cost carriers entrants (EC, 2011a, page 5; Wikitravel, 2011).
The European Commission expects in its “Flightpath 2050” report a continued
growth of up to 5% per year for worldwide traffic. Nevertheless they see intensified
intercontinental competition, both from tradition rivals from the US and from new
players entering from the Middle-East and new industrializing countries Brazil,
Russia, India and China. (EC, 2011a, page 6). At a recent annual meeting of IATA,
the International Air Transport Association, Peter Hartman, newly installed Chairman
European airlines enter the biofuels market 11
of the IATA Board of Governors, addresses the same issue of increased competition
from other regions, stating that airlines in Asia produce the best margins and order
most new aircrafts (het Parool, 2011).
Airlines are also facing increasing fuel prices as is illustrated by British Airways CEO
Jimmie Walsh.” While in recession, average oil price went up from 48 to 83 dollar
per barrel. […] The fact that it’s done that during a recession tells you one thing and
one thing alone – high oil prices are now a fact of life” (British Airways, 2010, page
11).
At the same time the European airlines are confronted with the upcoming inclusion
in the European Union’s Emission Trading Scheme, from 2012 onwards. This trading
scheme caps the maximum allowed emissions, requiring airlines to purchase
emission rights for eventual surplus emissions (EC, 2008). The emissions for 2012
are capped to 97% of the average emissions level of the period 2004-2006. From
2013 to 2020 it will be capped to 95% of the 2004-2006 emissions and airlines
receive 85% of the 97%-cap volume as free allowances (EC, 2011b). This downward
emission allowance ceiling, combined with the expectations on continued growth of
operation puts high pressure and costs on the carbon emissions of airlines. Airlines
have limited options to reduce carbon emissions on the short term. The above
describe IATA targets for 2050 rest on four pillars:
• technology improvements (fleet renewal and modifications to engine and
airframe),
• improved operational practices,
• implementation of more efficient air traffic management and airport
infrastructure and
• use of biofuels as low carbon alternative (IATA, 2009).
Of those four only biofuels are expected to bring short term opportunities (as they
can immediately replace fossil fuels) and offer long term solutions to lower carbon
emissions, given the carbon life cycle basis for biofuels compared to fossil jet fuels.
Figure 2 summarises this clearly: with no actions emissions will grow enormously,
whereas biofuels are needed to bring emissions levels by 2050 at half of 2005 levels
(AEA, 2010).
12
Figure 2. Mapping out the industry commitments (AEA, 2010).
2.2 Research question
It is no wonder that European airlines are exploring the opportunities of biofuels
because of the assumptions that they:
• Operate in an market with strong competitive forces, with margins under
pressure,
• Face increasing fuel prices, and
• Are challenged to curb carbon emissions and its associated costs.
The question in this business project therefore is the following:
Can the focus on biofuels improve the market power
balance for European airlines?
2.3 Research method
This research has been focused on policy, market and technology information on the
aviation sector (in particular the aircraft manufacturers Boeing and Airbus and the
European passengers airlines) and the biofuel sector (mainly focusing on the biofuel
producers and providers and developers of biofuel conversion technology). The
research has been carried out through:
European airlines enter the biofuels market 13
• Desk research of public available sector-related information: available reports
(often downloadable in PDF-form), press releases, visits to websites,
subscription to electronic newsletters etc.
• Notes from discussions with selected players in the field. In my professional
activities I have been in the opportunity to discuss the issue of biofuels in the
aviation sector with representatives of both the biofuels sectors and the aviation
sector, mainly limited to European players. The following representatives I have
interviewed and discussed with: KLM, British Airways, UOP, Association of
European Airlines, Lufthansa, Boeing, CHOREN, SkyNRG, EC/DG Energy, Dutch
Ministry of Infrastructure and Environment.
• Review of, reflection on application of the concepts and theories provided during
the Diploma in Strategy and Innovation Programme: i) during the modules
lectures (and the related ppt-presentations) and discussions as well as ii) from
the provide set of literature (books and other sources).
• Analysis of collected information using concepts like Strategic Group Analysis,
‘entrants analysis’ of new companies in the algae for biofuels industry, as well as
a detailed study of European airlines experimenting with biofuels.
14
3 Relevant literature review In this research the following relevant literature has been studied for analysing the
developments in the European airlines market and in the biofuels market.
3.1 Analysis of the current industry environment of European airlines
To understand the quest for competitive advantage in the airline sector the concepts
of Industry Analysis (Porter, 2008) and of Strategic Group Analysis (Grant, 2010)
have been applied.
The Industry Analysis based on Michael Porter’s Five Forces has been applied to map
the competitive powers of the European airlines sector.
I have applied Strategic Group Analysis in two ways:
• To investigate differences between full service airlines and low cost carrier, and
• Dominance of Airbus or Boeing to the airlines in relation to average fleet age (as
indicator to fuel efficiency)
In the aviation world network relationships are very common. The individual biofuel
activities of European airlines activities are reviewed, as well as the network building
via consortia. In the biofuels market arena we also see network building. The
innovation related literature is useful to understand these value chain wide linkages
(Ventresca, 2010).
3.2 Airlines are influenced by the non-market environment
Airlines are to a great extend influenced by the non-market environment. Sako
(2010) describes how non-market strategies can designed by using the 4 I’s model -
investigating Issues, Institutions, Interests and Information. As an example: policy
makers have developed regulations - like the EU-ETS and mandates for biofuels use
in the European transport sector - to achieve lower carbon emissions (EC, 2009;
Lamers et al., 2011). Biofuels regulations lead to further sustainability concerns,
voiced by NGO’s. Pilgrim and Harvey (2010) use the concept of ‘politically instituted
markets’ to demonstrate how governments shape markets by “the political
construction of specified products or services to be provided by market actors for
consumers through the market organization of exchange”. They also discuss the role
of NGO’s in bringing issues and actors to the public agenda. Airlines stepping into
biofuels have to consider these issues and develop a non-market approach to them.
The PESTEL analysis also serves as a helpful tool for sketching the major factors in
the non-market environmental context (Withington, 2010; Ventresca, 2010; Seidel,
2010).
European airlines enter the biofuels market 15
3.3 Analysis of the biofuels technology innovation
The TMO Technology-Markets-Organizational Capabilities Framework (Seidel, 2010),
Geroski’s (2003) view on the evolution of new markets and the theories on system
building (Ventresca, 2010) are valuable background for understanding the emerging
market developments in the biofuels production technologies market.
Geroski (2003) describes the entry and exit pattern of firms in an industry. An
analysis on algae biofuels industry has been executed to discover similar patterns.
This results to concluding the algae biofuels market in an “era of ferment”. The
concepts of sustaining (incremental) and discontinuous (radical) innovation are
relevant in these markets as certain biofuel technologies can be upgraded, others
technologies just replace older technologies (Seidel, 2010). Geroski (2003) makes a
distinction between product and process innovation while progressing on the market
and technology S-curve.
Geroski (2003) indicated that the emergence of a new market often starts not from
a clear defined market need expressed by customer, but through dynamic and
turbulent activities of entrepreneurship. In the S-curve for market development four
stages are be identified: the era of ferment, the take-off phase (ending with
established dominant design), the phase of incremental stage and the moment
where discontinuity can occur, where one technology S-curve faces its physical limits
and my by overtaken by another technology S-curve, at that time perhaps still
inferior in performance to the first one, but with potential to outgrow. This model will
be used to assess the status of various biofuel technology developments.
16
4 Industry analysis of the airlines in
Europe
4.1 The aviation sector in Europe
The European Commission views the aviation sector as a crucial sector for Europe
for contributing to the “European integration and cohesion” and for bringing
“prosperity and wealth creation for the Member States and their peripheral regions
by stimulating development, opening new markets, boosting international trade and
encouraging companies to invest” (EC, 2011a, page 5).
The relevance to Europe’s economy is presented by the Air Transport Action Group
(ATAG, 2008): In 2006 generated $118 billion (€75 billion) direct revenues and
provided 1.5 million direct jobs in the aviation sector in Europe.2 In 2009, in the
midst of the economic crisis, the European airlines sector transported about 580
million passengers (Datamonitor, 2011, page 11).
To analyse the level of competition in the European analysis the Five Forces of
Competition Framework of Michael Porter (2008) is applied. In the next sections, the
two most relevant issues of the five forces are briefly discussed, followed by a
discussion.
4.2 Rivalry
As stated in section 2.1, the European aviation sector currently houses about 150
airlines. A majority of those are full service carriers, or so-called flag-carriers,
originally national-origin airline companies (e.g. Lufthansa, British Airways, Air
France, Royal Dutch KLM). In 1992 the European Open-Skies Treaty placed an end
to existing restrictions by which nations could allow airspace to a limited number of
airlines. The Open Skies Treaty eliminated barriers of entry and since then many
new airlines stepped into the market. Currently about 60 of those are low-cost
carriers (Wikitravel, 2011). Ryanair and easyJet are the largest of those low cost
carriers and reached in the 2010 ranking of largest airlines position no. 2 and no. 4
(see Table 1). These ten airlines transported three quarters of total scheduled
passengers in Europe in 2009 (total of ten airlines was 430 million passengers,
compared to total figure of 580 million – see previous section).
2 4The ATAG report also assessed the indirect (the supplying industry to aviation sector) as the induced (as a res5ult of spending of those directly or indirectly employed) revenues and jobs: total of direct, indirect and indu6ced revenues is $331 billion (€215 billion) and total jobs is 4.2 million (ATAG, 2008).
European airlines enter the biofuels market 17
Table 1. Total scheduled passengers 2007-2010 (Wikipedia, 2011a).
Rank Airline Company 2010 2009 2008 2007
1 Lufthansa 90.2 76,5 70.5 56.4
2 Ryanair 72.7 65.3 57.7 49.0
3 AirFrance/KLM 70.8 71.4 73.8 74.8
4 British Airways/Iberia 57.3 56.7 56.4 59.8
5 easyJet 49.7 46.1 44.6 38.2
6 AirBerlin 31.8 27.9 27.1 24.0
7 Turkish Airways 29.1 25.1 22.6 19.6
8 SAS Group 25.2 24.9 29.0 29.2
9 Alitalia 23.4 22.0 18.0 24.4
10 Swiss International Airlines 14.2 13.8 13.3 12.0
The profit margins in the European airlines are low, similar to the US market
situation (see Figure 1, page 11), as can be concluded from information from the
Association of European Airlines (AEA, 2011). AEA represents with its 36 members
(mainly full service carriers) about two third of the European market. Analysing the
information on the member airlines in the Profile AEA 10 report (AEA, 2011) the
aggregated profit margins of its members have been moderate (prior to the financial
crisis) and negative during the financial crisis.
Table 2. Profit margin of AEA members (own calculation, based on AEA, 2011)
2009 2008 2007
Aggregated profit margin -3.8% -0,4% +6,0%
Numbers of members with positive margin 11 14 27
Number of members with negative margin 19 18 5
The margins are low because during the crisis the number of sold seats went doing
and during and after the crisis the fuel prices went up (from $48 to $83 per barrel in
18
2009), as was stated by British Airways’ CEO (see section 2.1). At the recent 67th
IATA Annual General Meeting in Singapore Giovanni Bisignani (at the time General
Director and CEO) estimated the 2011 average fuel price to have risen to $110 per
barrel (IATA, 2011c). In a high rivalry and thus high competition market the
increase of fuel prices cannot be forwarded to the buyers. Upcoming carbon costs as
result of the inclusion in European Emissions Trading Scheme will put margins even
further down. How can airlines overcome this?
4.3 Supplier power
European Airlines are confronted with two major sources of supplier power:
• The aircraft manufacturers. Airlines have to purchase or lease an aircraft to be
able to transport passengers and/or cargo. Different to the car industry the
number of competing companies and the number of different models are limited.
In this section it will be shown that Boeing and Airbus jointly have established a
so-called ‘duopoly’ position in which there are significant barriers for airlines to
select other supplies (Grant, 2010, page 69).
• The fuel suppliers. Without fuel no aircraft can fly. There are only a limited
amount of fuel suppliers in the European market, an up to now no short term
alternatives for fuel were available. Fuel costs have risen steeply in the last
couple of years as will be shown via an example of British Airways.
The aircraft manufacturers
To understand the power of the aircraft manufacturers the composition of the fleets
of a selection of the European airlines has been analysed. Airline fleet data3 has
been collected from information of two European airline associations:
• The Association of European Airlines (AEA), which mainly consists of full service
airlines (and include all major European flag-airlines);
• The European Low Fares Airline Association (ELFAA), which consists of nine
members, among which the two largest Ryanair and easyJet – ELFAA claims that
its members are responsible of 35% of European passenger traffic, thus arguing
that the association represents an influence group of airlines (ELFAA, 2011b).
It is assumed here that AEA represents the full service airlines and ELFAA the low
fare airlines in Europe. Information about the members of both associations is
available on their websites (www.aea.be; www.elfaa.com).
The details of the fleet composition analysis are presented in Table 3. In total Boeing
and Airbus are equal in power (41 vs. 40%) and together they fully dominate the
market. From a segmentation point of view it can be seen that Boeing has clear
dominance among the ELFAA airlines – mainly due to the 256 aircrafts of Ryanair
3 All collected data concern ultimo 2010 information.
European airlines enter the biofuels market 19
(see ELFAA, 2011a). Airbus has a slight dominance among the members of AEA
(41% over 37% of Boeing).
Table 3. Aircraft composition among European airlines, by end of 2010 (AEA, 2010; ELFAA,
2011a).
Total number of aircrafts
Relative share
(%)
Boeing Airbus Others*)
AEA 2642 78% 980
(37%)
1087
(41%)
575
(22%)
ELFAA 734 22% 396
(54%)
260
(35%)
78
(11%)
Total AEA and ELFAA 3376
100% 1376
(41%)
1347
(40%)
653
(19%)
*) Other aircraft manufacturers are: Bombardier, Embraer, Fokker, Canadair, Avro, ATR, British Aerospace, Beechcraft and Saab.
It is interesting to see that, compared to the battle for power with the fuel suppliers
(see next section), the airlines do not aim to reduce the power of aircraft
manufacturers. This might be caused by the clear dominance of Boeing and Airbus.
Jointly they control 80% of the market and there are no alternative suppliers
available. In investigating the opportunities of biofuels both Airbus and Boeing
closely work together in vertical integrated value chain networks with airlines and
biofuel producers, as will be shown in the examples in section 5.4. Both Airbus and
Boeing see themselves as catalysts or agents of change for the transition to
sustainable aviation.
Airbus is one of the initiators within the European context to set industry wide
targets on biofuels in 2020. As a systems builder Airbus has in the recent months
teamed up with representatives of the energy directorate-general of the European
Commission, brought together European airlines aviation experts and biofuels
production industry to launch at the 2011 Paris Air Show end of June an ambition to
use 2 million tonnes of sustainable biofuels in the European aviation sector. (Airbus,
2011a). This is much in line with its messages on its website: “Airbus is pioneering
the introduction of sustainable biofuels, which will make a major impact on CO2
emissions from aviation. […] Biofuels are an attractive alternative to standard
kerosene because it requires neither aircraft not engine modifications” (Airbus,
2011b) Airbus further indicates that its focus on biofuels and other alternatives is
part of its preparation for a future in which current fossil based fuels may not be
available anymore (Airbus, 2011c).
Boeing’s EU president, De Palmas, expresses the same views as Airbus: Boeing
takes up “a kind of catalyst role [...] to accelerate the adoption of sustainable
20
biofuels for aviation” (Euractive, 2011). De Palma stresses the “sector’s
commitments to achieve carbon neutral growth by 2020. And the other goal – this is
more aspirational – which is to reduce carbon emissions from aviation by 50% by
2050” (Euractive, 2011).
The fuel suppliers
Traditionally the position of fuel suppliers has been strong. No (short term)
alternatives existed for the fossil jet-fuel to be used by airline companies. Only
standardized and certified jet-fuels are allowed for use in jet-engine powered
aircrafts (the dominant type of aircrafts used internationally) (ExxonMobil, 2005).
Any other than the standardized and certified jet fuel is not allowed to be used and
has to undergo a long certification process, one of the reasons why hydrogen based
aviation fuels had difficulties to be adopted as a serious alternative fuel.
As a result, airlines have limited opportunities to battle the position of fuel suppliers.
By raising the occupancy rate in flights they can marginally bring down the relative
fuel consumption per sold ticket. Over a long period of time the fuel efficiency of
flights went up significantly, illustrated by the fact that in a period of twenty years
that passenger traffic doubled, resulting carbon emissions only grew 50%. This
equals to an efficiency improvement of 1.5 to 2% per year (World Economy Forum,
2011). This also indicates that younger aircrafts on average have a higher fuel
efficiency performance than older aircrafts. As part of one of the four IATA pillars to
combat carbon emissions airlines try to sooner replace their current aircrafts for
newer ones (IATA, 2011a).
These improvements are not able to counterbalance the increased influence of the
fuel costs to the total operation costs as a result of rising fuel prices. At the 67th IATA
Annual General Meeting and World Air Transport Summit Singapore, IATA’s General
director and CEO Bisignani mentioned the strong influence of fuel price on the
sector’s profitability: “We have built enormous efficiencies over the last decade. In
2001, we needed oil below $25 per barrel to be profitable. Today, we are looking at
a small profit with oil at $110 per barrel […]But with a dismal 0.7% margin, there is
little buffer left against further shocks” (IATA, 2011c).
To illustrate how the revenues of airlines are ‘eaten’ by rising fuel prices, Table 4.
presents the fuel costs development at British Airways of the last five years. In year
2005/06 the fuel costs were 19% of total revenues, in 2009/2010 they climbed to
nearly 30%.
European airlines enter the biofuels market 21
Table 4. Fuel costs development at British Airways (British
Airways, 2010).
year Revenues
(million GBP)
Fuel cost
(million GBP)
Fuel/revenue ratio (%)
2005/06 8,213 1,581 19.2
2006/07 8,492 1,931 22.7
2007/08 8,758 2,055 23.4
2008/09 8,992 2,969 33.3
2009/10 7,994 2,372 29.7
BA CEO Walsh estimated that in the 2009 recession the global revenues went down
with 15% or $85 billion (BA, 2010, page 11). From those figures it can be concluded
that the 2009 global airlines revenues equalled $570 billion. Assuming the 2009/10
BA share of fuel costs representative for the sector fuel costs (30%) equal a $170
billion global fuels market. According to the global standard developer ASTM
currently a maximum share of 50% of biofuels in jet fuels is allowed (if biofuels is
according to ASTM D1655 standards). Estimated growth in global aviation is 4-5%
per year in the coming decades (WEF, 2011; EC, 2011a). These figures, combined
with the expected continued rise of fossil fuel prices as well as rising carbon costs
(see Figure 3), make biofuels an option. Biofuels offer the European airlines on the
one hand a means to bypass the current fuel suppliers and on the other hand an
attractive multibillion dollar global market. Can airlines grab these opportunities and
how should they go forward?
The economic case for biofuels is schematically presented in Figure 3, where the
price developments of jet kerosene and the additional cost of carbon are plotted
against the current and projected costs of biofuels. Though current biofuels costs are
above the accumulated jet fuel and carbon prices by stepping early in the biofuels
market airlines may secure a better position for the long run.
In the next chapter the approaches of some European airlines to gain experience in
using biofuels will be discussed. First, a strategic group analysis will be applied to
the sector, to deepen insights of the position of European airlines (flag carriers
versus budget carriers) and the dependence to the aircraft manufacturers Boeing
and Airbus.
22
Figure 3. Jet fuel and carbon prices (ATAG, 2011)
4.4 Strategic Group Analysis
The previous section showed the strong dominance of the aircraft suppliers Boeing
and Airbus. For both the full service airlines as the low cost carriers these two
aircraft manufacturers dominate the European airlines market with a joint 80%
market share. A point was made that airlines do not seem to combat those
manufacturers. It was also shown that fuel costs increasingly impact the possibilities
for proper margin generation in highly competitive market. These conclusions are
the basis to further explore the position of the full-service providers towards their
low cost rivals.
Therefore, two aspects of European airlines have been investigated via a strategic
grouping analysis. The members of the AEA and ELFAA have been subject to this
research. Information originates from a AEA 2010-report and the ELFAA website. As
stated before, the AEA members can be viewed as representing the full-service
providers, even though three of its members are in fact low cost carriers. ELFAA only
contains low cost carriers as members. Two key characteristics have been analysed:
• Average fleet age:
The information is based on average fleet age information per airline as available
at the webpage of Airfleet.net (Airfleet, 2011). Average fleet age is an indication
of the fuel efficiency of aircrafts. In the previous section the relation between
fleet age and fuel efficiency was argued. Airlines with a low average fleet age are
in advantage to those with high average fleet age. They bear higher fuel costs.
The relation between fuel costs and profitability has been discussed in the
previous section.
European airlines enter the biofuels market 23
• Dominance of the aircrafts producers - Airbus and Boeing.
In the analysis of the fleet composition of an airline only the shares of Boeing
and Airbus aircraft were taken into account, even if the airline used aircrafts
from other aircraft manufacturers. In Figure 4 the position on the X-axis is based
on the resulting equation of ‘%-Airbus’ minus ‘%-Boeing’. In the few cases that
an airline has no Airbus or Boeing aircrafts or exactly the same amount , their
fleet age figure appears at the point 0% o the X-axis in the graph.
A distinction has been made between low cost carriers (marked with the red square
in the graph – even if AEA member) and the full service providers (marked with the
blue squares). Airlines that are actively involved in biofuels activities are in green-
lined boxes.
The following can be concluded from the strategic group analysis:
• Ryanair is the airline with the lowest average fleet age: 3.1 years, even while
having a large fleet of 256 aircrafts. This illustrates its rapid recent growth.
• Low cost carriers have on average a lower average fleet age: 5.9 versus 10,9
years for full service providers. Relative recent entrance into the market might
be an explanation. Boeing has (seeFigure 4) a leading position in the low cost
carrier segment.
• Most airlines have either Boeing or Airbus planes (though they often have as
well planes from other manufacturers, that was not included in the analysis).
Only the major airline companies like Lufthansa, Air France and British Airways
have Airbus and Boeing representation in their fleets.
• Airbus seems to dominate in airlines with lower average fleet ages than Boeing.
Airbus has two third of its planes in airlines with less than 10 years average age,
Boeing has two third of its airplanes in airlines with average fleet age of more
than 10 years.
• The median is 9.6 years, represented by the horizontal line in the graph. Above
and below the line there are the same amount of airlines.
• KLM, British Airways and Tarom Airlines ‘on the Boeing side’ and Virgin Atlantic,
Air France and Lufthansa at the ‘Airbus side’ are actively involved in biofuels
experiments and practices. Al these parties have more or less similar average
fleet ages. None of the low cost carriers included in the analysis do have biofuel
related activities ongoing, as far as .
The initiatives of each of the biofuel-active airlines are discussed in the next chapter.
24
0
5
10
15
20
25
‐100% ‐80% ‐60% ‐40% ‐20% 0% 20% 40% 60% 80% 100%Share of Boeing planes in Boeing-dominated airlines Share of Airbus planes in Airbus-dominated airlines
100%100% 50%50%
Figure 4. Strategic Group Analysis of AEA and ELFAA members (own analysis on basis of AEA,
2010, ELFAA, 2011)
4.5 Conclusion
European full service airlines operate in a highly competitive market with low profit
margins. Rivalry is high. Low cost carriers have entered relative recently and operate
with younger aircrafts, providing them with some lower fuel cost sensitivity as
compared to the full service carriers. Boeing and Airbus are the dominating aircraft
manufacturers. Airlines can be grouped as ‘Boeing-addicts’ or ‘Airbus addicts’.
Collaboration is the best option for airlines for future challenges as lowering carbon
emissions. Fuel costs are highly influencing operating margin. Biofuels are an option
to surpass traditional fossil jet fuel suppliers and an option to open a multibillion
biofuels market, if vertical upward integration steps can be taken.
RyanAir
Norwegian Air ShuttleTransavia
AirBaltic BrusselsAirlines
Flybe
SverigeFlyg
WizzAir
Aegean Airlines
Easyjet
AirMaltaOlympicAir
VuellingTurkishAirlines
Finnair
BMI
TAP Portugal
SwissAirlines
abcd
a= Adriab= Iberiac= CroatiaAirlinesd=CyprysAirways
Lufthansa
AirFranceVirgin Atlantic
AlitaliaCzechAirlines
AustrianAirlines
MontenegroAirlines
LuxAirMALEV
Jet2
KLMCargolux
SASUkraineAirlines BritishAirways
IcelandAir
AeroSvit
TNT
DHLJAL Airways
Average fleet age (years)
Full service carrier
Low cost carrier
Airline active in biofuels activities
LOT Airlines
TAROM Airlines
European airlines enter the biofuels market 25
26
5 What are the options and issues for
airlines
5.1 Introduction
High rivalry, increasing fossil fuel prices and upcoming constraints with respect to
the carbon emissions have brought the option of biofuels on the radar of the
European airline companies. In this chapter it is explored what the options and
issues are related to biofuels and which activities airlines undertake to bring those
issues to their benefit.
5.2 Options and issues
Representatives of several European airlines point uniformly to the following issues
when talking about biofuel: they should be (British Airways, 2011; Lufthansa,
2011a, KLM, 2011):
• “Drop-in” fuels (i.e. fully up to specification of standard jet fuel and can use
existing fuelling infrastructure at the airport),
• From sustainable resources,
• Available at larger scale, and,
• In the long run available at competitive prices.
The first two are most relevant at the moment and will therefore be discussed in
more detail. Each airline uses both market strategies to achieve competitive and first
mover advantage, and at the same time, on pre-competitive level seek collaboration
for tackling issues via a non-market strategy.
Drop in requirements
Biofuels can only be used as aviation fuel when complying to jet fuel standards
(ExxonMobil, 2005). For that reason airlines request fuel producers to develop so-
called ‘drop-in’ fuels, that are inter-exchangeable with the fossil jet fuels. Drop-in
also enables using existing fuelling infrastructure at airport, avoiding additional
investments. Currently, only two biofuel production processes4 have been approved
by the US standardisation organisation ASTM for producing bio-based jet fuel (ASTM,
2011). The so-called 2nd and 3rd generation biofuels (see Chapter 6) are
commercially the least demonstrated and in an early innovation stage. Large-scale
production, therefore, has not yet started.
4 Fischer-Tropsch (FT) based Biomass to Liquid biofuel and Hydrogenated Vegetable Oil (HVO) based biofuel.
European airlines enter the biofuels market 27
Sustainability
Policies to sustain road transport fuels have been an important driver for the
development of biofuels. For more than one decade, both the US and European
governments have developed regulation and continuously support the development
of a biofuels market (Lamers et al., 2011). Parallel to these policy developments, the
proof for claims on the environmental benefit has been questioned by environmental
NGO’s (initially on the lifecycle greenhouse gas balance) and in later stage also by
sustainable development NGO’s (taking also socio-economic issues into account)
(Pilgrim and Harvey, 2010). Raised issues include among others: the potential
competition between resources to be used either for fuel and for food; impact on
rising food prices possibly causing hunger and starvation; potential deforestation
(especially in tropical regions) due to increases in demand of resources. The
European Union has included strict sustainability criteria in its regulation for the use
of biofuels in transport (EC, 2009). As a result, sustainability schemes have been
developed. A large group of industrial players has adopted the principles and criteria
of the Roundtable for Sustainable Biofuels, a world-wide multi-stakeholder
organisation with “120 members varying from farmers, oil companies, investors,
NGO’s, UN agencies, governments and research institutes (RSB, 2010; RSB, 2011).
Several European airlines have adopted sustainability and environmental
performance at the core of their business activities. The AirFrance KLM group e.g. is
ranked several times no. 1 in the Dow Jones Sustainability Index and will be very
keen to protect their environmental reputation (AirFrance, 2011a).
5.3 Market strategies
In Europe, British Airways, KLM, Tarom, Lufthansa, Virgin Atlantic and Air France
have executed experiments, test flights or are in other ways involved in biofuels
activities. They apply alternative strategies to explore the opportunities in the new
domain. In Table 5 the various initiatives are summarized.
Analysing these strategies, it appears that:
• None of these parties have included their traditional fuel suppliers as partner in
the biofuels development.
• Both British Airways and KLM opt for a joint venture strategy to explore the
opportunities for building a position upstream in the value chain: British Airways
in the fuel production and KLM in the sourcing.
• Lufthansa, in its current project, does not aim for upstream position and just
contracts the biofuel.
28
Table 5. Biofuel initiatives of various airlines (own analysis).
Airline Description of activities Partners Market Strategy
British Airways1 Joint investment in FT biojetfuel production facility located east of London, using 500 ktonne municipal solid waste of London. Planned annual capacity 60 million litres of fuel (double the amount BA fuels at London city airport). plant expected to be operational in 2014.
Solena (USA),
Rentech (USA)
City of London (UK)
Joint venture for biofuel production
KLM2 November 2009 executed the first ever biofuels (50% in one engine of the Boeing aircraft) flight with observers on board. Following successful test flight KLM founded SkyNRG, a JV for sourcing sustainable biofuels for planned biofuels flights starting in 2011. SkyNRG established a sustainability advisory board.
JV-partners: North Sea Petroleum (NL) Spring Associates (NL) Sust. board SkyNRG: WWF (NL) Solidaridad (NL) University of Utrecht (NL)
Joint venture for biofuel sourcing.
Lufthansa3 Lufthansa is about the start a 6 months trial with biofuels (50% in one engine of Airbus A321) on regular flight (4 per day) between Frankfurt and Hamburg, with Federal Government subsidy. Originally German based fuel conversion technology, company CHOREN was selected for supplying FT-biofuels, but could not deliver. Now Neste Oil will provide the recent ASTM approved HVO fuel.
Airbus Neste Oil German Aerospace Center (DLR)
Purchasing of the fuels from fuel provider
TAROM Romanian Airlines4
Airbus and Tarom Romanian Airlines set up a consortium to explore the biofuels value chain in Romania, using non-edible oil from the Camelina crop. Project is in start-up stage and exploring feasibility studies and sustainability analyses
Airbus (FR) UOP (USA) Camelina Company Espana (ES) Bucharest University of Agronomical Sciences Veterinary Medicines Centre of biotechnology
Not clear yet. Still in feasibility stage
Air France5 Plans to explore opportunities for FT biofuel production
CEA (FR) No detailed information provided
Virgin Atlantic6 In 2008 Virgin Atlantic flew with biofuels made from Brazilian babassu nuts and coconuts in a Boeing from London Heathrow to Amsterdam. June 2011 the Virgin Group announced joint biofuel development actions of some of its group members at Los Angeles Int. Airport.
Boeing (USA) V-Australia (AUS) Virgin America (USA)
No detailed information found
1 (BBC, 2010; British Airways, 2010; British Airways, 2011) 2 (KLM, 2009; Reuters, 2010; KLM, 2011, SkyNRG, 2011) 3 (Lufthansa, 2010) 4 (Airbus, 2011b) 5 (Air France, 2011b) 6 (BBC News, 2008; Flightglobal, 2011)
5.4 Strategic alliances for dealing with non-market issues
The studied airlines are member of one or more strategic alliances through which
collaborative actions are taken. Table 6 (next page) provides an overview of current
existing alliances and includes the major issues. Purpose of these alliances is to
European airlines enter the biofuels market 29
influence regulators and the public agenda in favour of their activities for sustainable
fuels for aviation. The airlines use the strategic alliances to:
• Jointly explore the most important issues and the various interest,
• Include within the alliances the relevant different stakeholders or specifically
direct the alliance’s activities towards influencing organisations and institutes,
and
• Provide the stakeholders and involved parties with relevant, details and up to
date information, via publications reports and press releases accessible a their
website.
All alliances aim to influence the non-market environment with the objective to get
favourable regulations in place. The alliances target relevant stakeholders through
alliance controlled communication about environmental, technical, financial and
economic aspects of the sustainable aviation fuels. It is remarkable that various
national oriented alliances are formed as a means to secure the national aviation
industry. E.g. the UK and German based consortia co-exist with European level
alliances.
Table 6. Sustainable aviation fuel alliances (own analysis).
Alliance Description of activities Description of members Major issues tackled
SAFUG - Sustainable Aviation Fuel Users Group1
Support and advise members in the “commitment to advance the development, certification, and commercial use of drop-in sustainable aviation fuels”, under specific sustainability criteria
21 airlines, 3 aircraft manufacturers, 1 biofuel conversion technology provider
Information building on biofuels. Raising awareness on sustainability focus.
SWAFEA - Sustainable Way for Alternative Fuel and Energy in Aviation2
“SWAFEA is a study for the Energy DG of the European Commission to investigate the feasibility and the impact of the use of alternative fuels in aviation”.
20 European and international organizations, representing all players in alternative aviation fuels: aircraft and engine manufacturing, air transport, oil industry, research and consulting organizations.
Providing up-to-date scientific and business information
SA Sustainable Aviation and SURF – Sustainable Use of Renewable Fuels3
SURF is a UK-oriented project aiming at “addressing five major consideration for the successful use of fuels from a renewable source like microalgae. These will include: environmental impact, processing, capacity and distribution, commercial and legislation and regulation, sustainability modelling and environmental life cycle assessment. SURF is build on the members of the 2005 founded Sustainable Aviation and Cranfield University.
39 UK aviation industry organisations.
Providing information on the challenges to ensure a sustainable future for UK aviation sector. Providing information, influencing legislation.
AIREG Aviation Initiative for Renewable Energy in Germany4
“Aim is to promote the use of regenerative energy sources in aviation in Germany and create a sound basis for political decision making” on sustainable aviation fuels.
20 German parties, including airlines, universities, research institutes, airports, aircraft and engine manufacturers
Information generation. Influencing policy making.
30
Alliance Description of activities Description of members Major issues tackled
SAFN Sustainable Aviation Fuels NorthWest5
Publication of June 2011 Report ‘Powering the next generation of flight” on opportunities for aviation biofuel production in Northwest region of USA
US consortium of Alaska Airlines, Boeing, airports of Seattle, Portland and Spokane and Washington State University
Providing economic perspectives for biofuel production
European Consortium6
European consortium of airlines and biofuel conversion technology providers lead by Airbus teamed up to set targets for biofuel use in aviation in Europe in 2010
Airbus, DG Energy of European commission, CHOREN, UOP, Neste Oil, Lufthansa, AirFrance, KLM, British Airways
Setting innovation agenda. Preparing for regulatory frameworks. Requesting for R&D budgets
ABRABA Brazilian Alliance for Aviation Biofuels7
“ABRABA, will act as a flagship institution integrating the efforts of the members and will support the use of sustainable fuels as one of the growth factors for the aviation industry”. ABRARA was founded in May 2010.
Brazilian members of aviation, fuel technology and agriculture.
Support established of legal framework. Provide information to stakeholders. Develop financing mechanisms. Technological evaluation.
Australian consortium8
Development of a roadmap for Australian and New Zealand aviation industry. June 2011 published report ‘Flightpath to Sustainable aviation’ predicts that “over the next 20 years a new, sustainable Australia-New Zealand aviation fuels industry could cut greenhouse gas emissions by 17%, generate more than 12,000 jobs and reduce Australia’s reliance on aviation fuel imports by $2 billion per annum”.
Qantas, Air New Zealand, Boeing, Virgin Australia, Defence Science and Technology Organisation, Climate Group, Commonwealth Scientific and Industrial Research Organisation (CSIRO)
Framing the sustainable, environmental, technical and economic challenges. Providing information for awareness building. Preparing for innovation and regulation support
1 (SAFUG, 2011) 2 (SWAFEA, 2011) 3 (Sustainable Aviation, 2011; Go Green, 2011) 4 (Lufthansa, 2001b) 5 (Climate Solutions, 2011) 6 (Implementation Plan, 2011) 7 (Enviro Aero, 2011) 8 (CSIRO, 2011)
5.5 Conclusion
It is clear that:
• The requirements for ‘drop-in’ fuels complying to sustainability criteria make
airlines focus on newer generation biofuels.
• Conform globalisation theory, airlines align both market strategies and non-
market strategies to understand the options and issues in the market
environment and non-market environment (Sako, 2010).
• Alliances focusing on the pre-competitive, non-market issues vary in their
activities. Some seem to concentrate on technical and financial issues, others
strongly operate from the sustainability issues perspective.
• The alliances are characterized by a wide variety of involved stakeholders, which
is expected in a non-market strategy (Sako, 2010). In the actual market
initiatives however, the partnerships are business oriented and collaboration
between competitors is avoided.
European airlines enter the biofuels market 31
The conclusion can be drawn that both market and non-market activities of airlines
are necessary steps to prepare decisions where in the value chain to locate
investments in the biofuel value chain.
32
6 Current market and technology
developments in the biofuels arena
6.1 Introduction
What will airlines encounter when they step into the biofuels sector? At first, for
more than a decade, policy developments have focused on supporting biofuels use in
road transport. There is no regulation in place for sustainable aviation biofuels.
Secondly, the aviation sector focuses on ‘drop in’ fuels, therefore the innovation
developments in the various biofuel production technologies are discussed (using the
TMO-framework). A following section discusses the current battle among major oil
companies that aim to gain market dominance in the new biofuels field. This
indicated that airlines entering this market are late entrants and might experience
challenges in building vertical integration positions.
6.2 Brief policy history
Lamers et al. (2011) provides a good summary of the policy context on biofuels.
Both in the EU and in the USA biofuel policies emerged from the early 1990’s, mostly
as a means to support the agricultural sector. Brazil had a strong support
programme from the ‘70s onwards to produce sugar cane based ethanol to avoid
expensive oil imports. In these three regions the climate related issues were
incorporated in the middle of the 90’s. In 2003 Europe adopted the Biofuels Directive
setting indicative targets for biofuels in road transport, climbing to 5,75% by 2010
(EC, 2003). Partly due to the pressure on sustainability issues the commission
revised its policy towards 10% biofuels in transport by 2020, with mandatory
sustainability criteria, reflected in the Renewable Energy Directive (Pilgrim and
Harvey, 2010; EC, 2008) EU and other policy developments has resulted in a stark
growing global operating market for biofuels, with world-wide production growing
from 360 PJ (17 billion litres) in less than ten years to 2100 PJ (approx. 90 billion
litres) in 2009 (Lamers et al., 2011).
6.3 Innovation in the biofuel conversion routes
The current biofuels for road transport are largely still based on so-called 1st
generation biofuels, biodiesel from rapeseed oil and ethanol from sugar or starch
(Lamers et al., 2010). Policy regulations stress improvements in sustainable
performance to boost greenhouse gas emission reduction and maximise yield to limit
the hectares of land needed (EC, 2008). As a result of the policy regulations and the
efforts to close the gap with fossil fuel prices, the biofuels production technologies
are continuously improving. The TMO framework proves a valuable tool to analyse
the innovations in the biofuels sector, as three waves of technological development,
European airlines enter the biofuels market 33
typically following the technology S-curves, can be seen (Seidel, 2010, Geroski,
2003).
At the moment the first generation biofuels, (ethanol from sugar beet, sugar cane,
corn, wheat, , or other forms of starch; biodiesel from rapeseed oil, sunflower oil or
other vegetable oil) are fairly at the end of the S-curve. Their performance in yield
per hectare (for the resources), or the volume of biofuels generated from 1 tonne of
resource cannot much be improved. These technologies are commercially in
operation for several years (UNCTAD, 2007).
The second generation biofuels (lignocellulosic-based ethanol; thermochemical
gasification-based biomass to liquid; biodiesel and drop-in fuels from hydrogenated
vegetable oil) are still in or close to the take-off phase / process of reaching
dominant design, and the industry expects further product and process
improvements. (UNCTAD, 2007; CHOREN 2011).
Third generation biofuels (biochemical, enzyme-based biofuels, micro- and
macroalgea are very emerging technologies and still in the ‘era of ferment’ (Geroski,
2003).
Figure 5 presents the S-curves of the various technology developments. For each
generation biofuels the current status of technology is indicated.
1st generation biofuels:•Corn based ethanol•Sugar cane based ethanol•Vegetable oil based biodiesel
Yie
ld
(dry
mat
ter/
ha,
not
linea
r pre
sente
d)
2nd generation biofuels:• lignocellulosic ethanol•Fischer-Tropsch biomass to liquid
•Hydrogenated vegetable oil based biodiesel
3rd generation biofuels:•Algae based oil for biodiesel and bio-jetfuel
•Biochemical enzyme based, sugarbased drop-in alternative for gasoline, diesel, kerosene
time
Figure 5. the technology S-curve of three generations of biofuel conversion rotues (own
analysis).
34
In the last five to six years the attention for algae based fuels (3rd generation) has
increased enormously as can be concluded from an analysis of founding and exit
dates of the companies that have been active in the US and Europe. The discovered
trend line (see Figure 6) is very similar to that of other industries (natural ice
making, car industry) with long lead time after initial technology invention, a rapid
growth of the number of entrants, followed by consolidation and high exit numbers
(Ventresca, 2010).
Figure 6. entry and exit in the algae-based fuel market5
Figure 6 shows that following an initial request to start investigating algae-based
biofuels, a long period of non-activity occurred. As early as 1985, US-based Martek
started investigating algae as fuel for long-term space flight, as requested by
defence and aerospace contractor Martin Mariette (Martek, 2011). In the 1990’s only
one company per year stepped in to do research. But from 2005 onwards the
number of entrants increased sharply, following the stronger policy incentives for
sustainable biofuels by US and EU governments. After 2009 no new entrants
stepped into the market. From 2007 onwards the exit of parties has been found as
well, with as result that the number of total players is now slightly decreasing, while
the major players receive strong financial support in various IPO’s
5 Own analysis using various company websites, other sources: Wikipedia, 2011b; Algae University, 2011; Algal Biomass Organisation, 2011; European Algae Biomass Association, 2011; AlgaeBiotech, 2011; BioProdukte Steinberg, 2011; Solarix, 2011.
European airlines enter the biofuels market 35
(WorldBiofuelsMarkets News, 2011a, 2011b). The last 18 months saw eight IPO’s
(Biofuels Digest, 2011a). This is a signal that the algae based biofuel development is
in its era of ferment. The take off face will start when a major shake out of players is
occurring, an indication of consolidation. In one of the latest IPO’s US-based
Solazyme collected $227 million, sufficient to build a first commercial plant (Biofuels
Digest, 2011b). This may be one of the signals that the take-off face is about to
start. Connecting with these early stage biofuel technology providers, however does
not bring sufficient security to airlines.
6.4 Alliance-based competition in the biofuels domain
The technology development of biofuels relevant for biofuels represents risks for
airlines. Various biofuel value chain network alliances have formed to combat
dominance in that early market. The central players in those network alliances are
the traditional fuel suppliers. Airlines, aiming at bypassing their fuel suppliers by
switching to biofuels, now experience again the competitive power of these parties in
the biofuels domain. Each consortium described below contains representatives of oil
majors, (bio)chemical industries, agro-industrial processor, resource providers,
biotechnology companies, biofuel producers, distributors and end users. Only in few
consortia aviation companies (underlined) are represented (Biofuels Digest, 2011c).
• Shell – Cosan –Codexis – Iogen – PetroCanada – Virent – Dyadic – Abengoa –
Honda – Cargill
• BP – Verenium – DuPont – Danisco – Bio Architecture Lab – Qteros – Statoil –
British Sugar
• Total – Amyris – Gevo – Cobalt Technologies
• Chevron – Solazymes – NREL – UOP – Sustainable Oils – Targeted Growth – LS9
– P&G – Unilever – Bunge – Boeing – Masdar
• Waste Management – Terrabon – Enerkem – Valero – InEnTech – ZeaChem –
Solix – Darling - Linde – Algenol – Dow
• Marathon, Mascoma, Coskata – General Motors – SunOpta.
• Airbus – CHOREN – Neste Oil – BTG – UOP – KLM – Lufthansa – British Airways
– Air France (this consortium is recently established in Europe)
The network alliances seem to have a strong technology focus and in most cases,
resource providers are absent too. This provides opportunities for airlines to jump
from the downstream end of the supply chain as fuel consumer, directly to the most
upstream position and build position in the resources production. This could be
beneficial for both security and sustainability of supply.
36
6.5 Conclusions
To sum up, governments have not yet adopted their policies to biofuels for aviation.
The fuel requirements force airlines to investigate the commercially least developed
biofuel production technologies, still surrounded with high market risks. Fuel
suppliers have created better positions than airlines in biofuel production value chain
networks. The only option in the biofuel value chain to improve the power balance
for airlines seems to be to build position in the utmost upstream position: in
resource production and thus securing the availability and sustainability of their
future fuel supply.
European airlines enter the biofuels market 37
38
7 Conclusions and recommendations for
the European airlines
7.1 Conclusions
The European airlines sector is characterised by high rivalry and competition and
supplier power is high. Aircraft manufacturers Boeing and Airbus form a duopoly,
therefore the best strategy for airlines is to align with them. Fuel costs are rising and
put increasing pressure on revenues and profit. Upcoming carbon regulation brings
additional costs and more pressure on profit. Full service airlines feel this stronger
than low costs carriers as they have older (les fuel efficient) fleets.
Biofuels are the most important option to sustain growth in aviation sector under
carbon constraints for coming decades. Focus on biofuels provide airlines an
opportunity to by-pass traditional fuel suppliers and to opt for vertically backward
(upstream) integration. Biofuels may provide ‘premium’ for green/sustainable
operation, which is less possible for low cost carriers.
Several full service airlines develop biofuels programmes, applying market
(investments in joint ventures) and non-market strategies (forming aviation value
chain wide alliances for influence on pre-competitive issues). Safety and fuel quality
regulations force airlines to focus on ‘drop-in’ fuels. The TMO-Framework and S-
curve analysis of three generations of biofuel conversion technology help to make
clear that ‘drop-in’ biofuels are not yet commercially available.
Government regulation on biofuels has ignited innovation towards newer generation
biofuels production technology. Market entry and exit analysis of newest algae-to-
fuels technology illustrates that the technology currently is in an ‘era of ferment’
stage.
However, airlines are late entrants in the biofuel domain. Major oil companies (the
traditional fuel suppliers to airlines) have already built network alliances. They aim
for early market dominance in the new generation biofuels market. This research
has shown that airlines are in most cases not member of such alliances. This causing
barriers for entry. Also, resource providers (except for algae-based companies) are
often absent these network alliances. Airline have an opportunity to build position in
the resource production to secure supply and secure sustainability of the resources.
To sum up, this research has shown that biofuels can improve the market power
balance for European airlines. Biofuels are key to improve the carbon performance of
airlines. The best opportunities for airlines are at the most upstream end of the
value chain for biojetfuels. This implies taking position in the production of
sustainable resources. In this way security of supply is organised. Furthermore, this
European airlines enter the biofuels market 39
offers the possibility to manage biofuels production complying to ruling sustainability
criteria.
7.2 Recommendations
British Airways and KLM take the right direction by experiment with investments in
joint ventures for the production of respectively biofuel conversion and biofuel
sourcing. However, these experiments are necessary but not yet sufficient.
At first, airlines should consider to expand their impact in the value chain by taking
position in biofuel resource production.
Secondly, airlines are strongly recommended to explore the agricultural and forestry
sectors, to understand the business of producing resources.
A third recommendation for airlines is to explore relationships with development
agencies and NGO’s. most of the potential land might be available in less developed
regions to secure social sustainability.
To conclude, for companies that are used to operate in the sky, it is recommended
to develop a ground-operation business strategy: The sky is the limit, now it is time
to plant seeds.
40
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European airlines enter the biofuels market 41
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