EU SAF Regulation reduces arbitrage, adds complexity

The new EU rule on SAF will impact any airline operating from the region. Starting in 2025, fuel uplift at EU airports must contain at least 2% SAF. That percentage will gradually increase each year, with mandates including 6% by 2030, 20% by 2035, and 70% by 2050. These requirements will apply to all flights originating in the EU, regardless of destination. Reaction has been mixed. SAF producers are pleased they have a framework to plan and build, but airlines are less pleased. Airlines will receive approximately €2 billion in funding from the EU carbon market to assist with the transition. Despite this, several airlines expressed frustration that the legislation does not provide enough short-term relief from the additional cost burden. Moreover, SAF and "green aviation" are increasingly being questioned. Additionally, the details of how this works in practice find growing skepticism. For example, airlines mention the "book and claim system," which allows airlines flying from an airport without SAF to purchase SAF for use by other operators elsewhere. This way, airlines still pay the extra cost of the SAF without physically using the fuel on flights. A similar system has been used in the green electricity market since the 1990s. The airline industry argues that disconnecting the purchase of SAF from its actual use will address the anticipated supply problems while helping the SAF industry grow. Perhaps, but one has to be wary of the impacts of broad-brush legislation. For example, the European Commission will deliver a feasibility report on book-and-claim as a transition mechanism by July 2024, just over 60 days from now. But with European Parliamentary elections in June, then the process of appointing the new Commission after the summer recess leaves, the airline industry is concerned that the timeline is insufficient to enable time to implement a book-and-claim system before the regulation’s requirements become binding in 2025. This is a fair point. There's a less discussed item on the EU's agenda that bears serious consideration. Airlines are global enterprises. This means they are rational actors deploying arbitrage—currencies, labor, or any other cost input. Item 2 of the EU rule states: The obligation for aircraft operators to ensure that the yearly quantity of aviation fuel uplifted at a given EU airport is at least 90% of the yearly aviation fuel required, to avoid tankering practices which would bring additional emissions from extra weight. Think about the implications of this. All airlines operating a flight from the EU must refuel 90% of their needs at the departing EU airport if your aircraft is fuel-efficient and has great tailwinds across the Atlantic from North America, tough. That saved fuel won't help—you still need to upload 90% of your departing flight. Since goals are focused on yearly, there is some flexibility, but not much. The Airline industry needs maximum flexibility to optimize its operations. Airline Tankering is an old and well-established process. Removing this flexing tool means finding new ways to optimize operational costs. The new rule essentially reduces an arbitrage tool that has proven itself over time. Item 6 on the agenda is also telling: Data collection and reporting obligations for fuel suppliers and aircraft operators enabling to monitor the effects of this regulation on the competitiveness of EU operators and platforms. The EU means to track fuel use closely. They would because it has tax revenue implications, and there's nothing a government likes better than taxes. There's a business opportunity here.

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