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October 24th, 2011:

Cathay pins hopes on biofuels

South China Morning Post – 24 Oct. 2011

Airline could save billions of dollars a year while also satisfying requirements to reduce its emissions and offset costs of EU’s carbon tax scheme

As airlines mull their options after a European Court upheld the European Union’s carbon tax scheme, Cathay Pacific Airways (SEHK: 0293) says it is pinning its hopes on biofuels. It says biofuels could be the answer not just to tighter emission requirements but, eventually, as a fuel much cheaper than kerosene, when production is scaled up significantly.

While it could take two decades before biofuels trade at half the price of kerosene, Cathay said both fuels should trade at the same price by the end of this decade, given the rapid development of alternative energy sources in the past few years.

The airline is considering developing a biofuels supply chain in Asia for itself and its subsidiary Dragonair.

“If you look at the real cost of growing the [biofuels] feedstock, refining it and transporting it, there is a real good possibility that it could cost 30 to 50 per cent less than today’s jet fuel,” Cathay fuel purchasing head Gavin Fernandez said. “If we are involved in production, and we reach a good scale, I don’t see why the savings cannot go over 50 per cent or even more.”

Fuel accounts for more than 35 per cent of Cathay’s operating expenses. Cutting that cost in half means the airline could save more than HK$14 billion a year, based on the airline’s figures for last year.

Fernandez (pictured) said that although most of the savings were likely to be offset by the cost of carbon credits under the EU’s new emission scheme, as well as investments in biofuels facilities, passengers would also benefit.

“The airline business is one of the most competitive businesses,” he said. “The margins are so small, and others will undercut you as soon as they can with cheaper fuels, cheaper tickets. The travelling public will be one of the first consumer groups to get a price advantage.”

Last Thursday, three US airlines lost a lawsuit against a new EU regulation, which requires all airlines entering European airspace to buy carbon credits if they fail to meet a new emission cap that takes effect in January. The cap will be tightened annually.

Cathay – with almost 20 per cent of its flights in Europe last year – stands to lose the most among Hong Kong’s airlines. Apart from volatile oil prices, the new emission scheme gives airlines another reason to accelerate the commercialisation of cleaner fuels.

Instead of simply launching a research and development joint-venture project on biofuels, Fernandez said Cathay was looking at a larger commitment. That would include the production of feedstock, refining, oil storage and fuel transport to its base in the city for blending with kerosene.

Currently, airlines can only use a 50-50 blend of biofuels and kerosene on commercial and military aircraft.

“To get involved in growing [fuel crops] would cut the middleman out,” Fernandez said.

Apart from jatropha, camelina and algae – plants commonly considered as sources of aviation biofuels – Cathay is looking at a fourth option – a jungle plant that does not compete with any food crop.

If Cathay gets involved in upstream production, it could be a multibillion-dollar investment because a single refinery plant costs between US$300 million and US$500 million. The carrier will spend the next six months finalising its strategies and investment plans.

It is considering whether to invest only when the most promising feedstock emerges, or invest in less efficient feedstock along the way.

Meanwhile, Hong Kong Airlines – in the midst of expansion – is taking a wait-and-see attitude towards biofuels. “We don’t have the means and resources of Cathay to develop our own supply chain, but of course when the technology is mature, we would love to use it on our planes,” said Eva Chan Yuen-kwan, the carrier’s spokeswoman.

Last month, KLM Royal Dutch Airlines began to apply used oil- derived biofuels on some 200 flights between Amsterdam and Paris.