This article first appeared in The Edge Financial Daily on December 17, 2019

Aviation sector
Maintain positive: Asia-Pacific has seen an uptrend in passenger load factors in the past few years. The strong travel demand is evident in the five-year compound annual growth rate of at least 3% in passenger traffic for Asean countries such as Malaysia, Thailand, Indonesia and the Philippines, underpinned by an increasing consumer affluence especially in Asean. The region’s mass affluence is expected to grow from 57 million to 137 million people by 2030 — 21% of Asean’s combined population by the same year.

Throughout 2019 to 2029, narrow-body aircraft are expected to make up most of the maintenance, repair and overhaul (MRO) market share at more than 50%, followed by wide-body, regional and turboprop planes. The trend for narrow-body planes is already prevalent in Asean with AirAsia Group Bhd — with a “buy” call and a target price of RM2.04 — targeting to expand its fleet to 519 in 2028 from 226 in 2018. Narrow-body jets are preferred because of an expectation of higher air travel demand within Asia especially in Asean, prompting low-cost carriers to bump up capacity.

Just like all industrial sectors such as shipping and manufacturing, air travel must be environmentally sustainable. With demand for air transportation set to double over 20 years, the pressure on the industry to minimise its environmental footprint will only intensify. The cumulative impact of aviation on man-made climate change in 2005 was estimated at 4.9%, comprising greenhouse gas emissions including carbon dioxide (CO2) and non-CO2 effects such as nitrogen oxides, vapour trails and cloud formations triggered by the altitude at which aircraft operate.

In 2018, aircraft’s CO2 emissions reached 918 tonnes and are expected to triple by 2050, according to the United Nations’ (UN) aviation body. With this, aircraft emissions may account for 25% of the 1.5°C global carbon budget. Most of the emissions were by narrow-body aircraft at 43%. However, the International Council on Clean Transportation, in another study, found global air travel’s emissions may be increasing more than 1.5 times faster than the UN’s estimate.

Flights within Asia-Pacific emitted the most passenger transportation-related CO2 at 25% of the global total. This region has four of the 10 nations with the most aviation revenue per kilometre (RPK). Notwithstanding this, the intra-Asia Pacific route group had a carbon intensity — defined as grammes (gm) of CO2 emitted per RPK — of less than the 88gm average in 2018. In contrast, route groups within the Middle East and Africa had a higher-than-average carbon intensity primarily due to using older fuel-inefficient aircraft and low passenger load factors in these markets.

In an attempt to cap the aviation industry’s carbon emissions at 2020 levels and reduce 50% of net aviation carbon emissions by 2050 relative to 2005 levels, the International Civil Aviation Organization (ICAO) adopted the Carbon Offsetting and Reduction Scheme for International Aviation (Corsia). Under the Corsia, emissions from all international flights must be monitored, verified and reported by airlines effective Jan 1, 2019.

Emissions units must be purchased by airline operators to offset rising CO2 emissions. In short, Corsia principally enables a company to compensate its emissions by financing a reduction in emissions elsewhere. The scheme is also more effective than a carbon tax merely requiring a company to pay for emissions without guaranteeing the payment will lead to reducing emissions.

Malaysia is among the initial countries to volunteer for the Corsia before the measure becomes mandatory in 2027. Besides using the carbon offsetting mechanism to tackle emissions, bio-jet fuels derived from palm oil is another alternative. The Corsia has accepted using palm oil biofuel for the aviation industry, according to the primary industries minister. The ICAO suggested biofuels can ensure carbon emissions do not exceed 2020 levels, and noted replacing fossil with bio-jet fuels completely by 2050 requires about 170 new large refineries to be built annually from 2020 to 2050 at US$15 billion to US$60 billion per year.

Sustainable aviation fuel, including biofuels, is currently more expensive than jet fuel — this cost premium is a key barrier to their wider use. Fuel cost is the single largest overhead expense for airlines — 22% of direct costs on average, and covering a significant cost premium to jet kerosene varying with the crude oil price. For all biofuels, obtaining an economic feedstock supply is fundamental to achieve competitiveness, as feedstocks are a major determinant of production costs.

A RM30 million allocation in Malaysia’s Budget 2020 is for research and development (R&D) matching grants for collaborations with industry and academia to develop a higher value-added downstream usage of palm oil specifically tocotrienols in pharmaceuticals and bio-jet fuels. Currently, the palm fatty acid distillate is only accepted as a feedstock for a sustainable aviation fuel, therefore further studies are needed for palm oil to be accepted.

The beneficiaries include the Malaysian Palm Oil Board (MPOB) expecting to start developing palm-based jet fuel with overseas partners in the first half of 2020, including a pilot plant for the fuel. The MPOB pointed out a Malaysia-based airline requires 60,000 tonnes per year of bio-jet fuels to meet the 2% blending ratio requirement as the Corsia had outlined. We opined that the overseas partner could be from China as the country has plans to invest at least RM2 billion in a bio-jet fuel plant in addition to purchasing a further 1.9 million tonnes of palm oil from Malaysia over five years.

In the private sector, AirAsia has signed a memorandum of agreement to support the Malaysian aerospace industry’s development. The agreement entails an expansion of Airbus planes in its MRO in Malaysia and establishing the Airbus Malaysia Digital Initiative to enhance the local aerospace industry’s competitiveness to make the country a regional aerospace hub.

Concurrently, Airbus will increase cooperation with the Aerospace Malaysia Innovation Centre (Amic) by providing more funds for R&D programmes including bio-jet fuels in Malaysia. Airbus has allocated some US$120 million (RM505 million) for the said initiatives. We opined that a potential restriction of palm oil imports by the Indian government to help its local farmers may result in tapering demand from the region, stifling demand growth.

More recently, an upward trend in palm oil prices has forced buyers in India to the sidelines in November with shipments shrinking almost 11% to a five-month low of 696,000 tonnes. An accumulation of inventories in Malaysia is likely with lower shipments to India. Nonetheless, the Amic and other parties could take advantage of Malaysia’s abundance of biomass availability in their search for suitable feedstocks for potential applications in aerospace such as bio-aviation fuel production and biocomposite material manufacturing, while observing strict sustainability factors. On the macroeconomic front, we expect this to increase the palm oil industry’s contribution to the nation’s gross domestic product currently at about 3%. — MIDF Research, Dec 16