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European airlines enter the biofuels market

Business Project Report



2



June 2011

Eric van den Heuvel

+31-30-6623851

+31-6-52522166

[email protected]

This Business Project Report

graduate Diploma Programme on Strategy and Innovation

School, University of Oxford

consisted of four modules on Business Strategy, Innovation, Globalisation and

Strategy in action.



[email protected]

Business Project Report has been submitted as final assignment for the Post

Diploma Programme on Strategy and Innovation of the Saïd Business

University of Oxford, UK. The programme (April 2010 to June 2011)

four modules on Business Strategy, Innovation, Globalisation and

European airlines enter the

has been submitted as final assignment for the Post-

of the Saïd Business

(April 2010 to June 2011)

four modules on Business Strategy, Innovation, Globalisation and

4

Abstract

Biofuels might offer opportunities for achieving improved balance of power to the

European airlines in their

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 carb

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 performan

Both the market and non-

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. Biofuel

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 productio

complying to ruling sustainability criteria.


in their market environment. The aviation sector in Europe is a



respect to maximum allowed carbon emissions.



the options they have for using alternative fuels for low carbon performance.

-market strategies of several European airlines have been



to change government regulation to their benefit and influence public

opinion and research agendas.


biofuels can improve the market power balance for European airlines. Biofuel



the advantage of controlling the security of supply and managing biofuels productio

complying to ruling sustainability criteria.


market environment. The aviation sector in Europe is a





market strategies of several European airlines have been



to change government regulation to their benefit and influence public


biofuels can improve the market power balance for European airlines. Biofuels are



the advantage of controlling the security of supply and managing biofuels production

6

Table of contents

1 Introduction

2 Research question

2.1 Introduction

2.2 Research question

2.3 Research method

3 Relevant literature review

3.1 Analysis of the current industry environment of European airlines

3.2 Airlines are influenced by the non

3.3 Analysis of the biofuels technology innovation

4 Industry analysis of the airlines in Europe

4.1 The aviation sector in Europe

4.2 Rivalry

4.3 Supplier power

4.4 Strategic Group Analysis

4.5 Conclusion

5 What are the options and issues for airlines

5.1 Introduction

5.2 Options and issues

5.3 Market strategies

5.4 Strategic alliances for dealing with non

5.5 Conclusion

6 Current market and technology developments in the biofuels arena

6.1 Introduction

Table of contents

Research question

Research method

Relevant literature review

Analysis of the current industry environment of European airlines

Airlines are influenced by the non-market environment

nalysis of the biofuels technology innovation

Industry analysis of the airlines in Europe

The aviation sector in Europe

Supplier power

Strategic Group Analysis

What are the options and issues for airlines

Options and issues

Market strategies

Strategic alliances for dealing with non-market issues

Current market and technology developments in the biofuels arena

9

11

11

13

13

15

Analysis of the current industry environment of European airlines 15

15

16

17

17

17

19

23

25

27

27

27

28

29

31

Current market and technology developments in the biofuels arena 33

33

8

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

With expected global market growth of 4 to 5% per year, the total emissions would

increase significantly in the coming decades. In 2009

Association1 (IATA) took its responsibility and

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 th

Governments develop regulations to combat climate change.

European aviation sector will

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

margins down. Strategic carbon (cost) management and pro

activities to find low cost, low carbon alternatives for current used fuels are of high

importance to maintain a sustainable economic market position.

mandates for biofuel set by the EU Renewable Energy Directive (EC, 2009)

biofuels market is rapidly de

This research focuses on the opportunities that biofuels offer for achieving improved

balance of power of the European airlines in their market environment.

presents the research question, followed by a review of relevant literature in

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.

Introduction

The aviation sector is responsible for 2% of global CO2 emissions (IATA, 2011b).


increase significantly in the coming decades. In 2009 the International Air Transport

(IATA) took its responsibility and presented plans to combat carbon


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, t

European aviation sector will be part of the European Union’s Emission Trading

limited allowed carbon emission rights (EC, 2008).


time confronted with rising fuel prices, pressuring profit

margins down. Strategic carbon (cost) management and pro-active innovation

to find low cost, low carbon alternatives for current used fuels are of high

importance to maintain a sustainable economic market position. Due to

set by the EU Renewable Energy Directive (EC, 2009)

developing.


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




ssed in detail. In Chapter 8 the major conclusion are drawn and

recommendations are provided.

IATA represents some 230 airlines and 93% of scheduled international air traffic.

% of global CO2 emissions (IATA, 2011b).


nternational Air Transport

presented plans to combat carbon


From 2012, the

Emission Trading


fuel prices, pressuring profit

active innovation

to find low cost, low carbon alternatives for current used fuels are of high

ue to EU

set by the EU Renewable Energy Directive (EC, 2009) the


Chapter 3

presents the research question, followed by a review of relevant literature in Chapter




ssed in detail. In Chapter 8 the major conclusion are drawn and

10

2 Research question

2.1 Introduction

The airlines market is characterised by strong competitive forces, with resulting low

margins. Michael Porter (2008) argues

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

dealers, and the soft drinks industry have a nearly six times higher average ROIC

(seeFigure 1).

Figure 1. Profitability of

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 carr

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 tr

players entering from the Middle

Russia, India and China. (EC, 2011a, page 6). At a recent annual meeting of IATA,

the International Air Transport Association, Peter Har

Research question


margins. Michael Porter (2008) argues that the airline industry is one of the least



selected US industries, airlines appear at the low end. US security brokers and


. Profitability of selected US industries. (Porter, 2008).



are relatively recent cost carriers entrants (EC, 2011a, page 5; Wikitravel, 2011).



intercontinental competition, both from tradition rivals from the US and from new

players entering from the Middle-East and new industrializing countries Brazil,


the International Air Transport Association, Peter Hartman, newly installed Chairman


that the airline industry is one of the least



low end. US security brokers and




iers entrants (EC, 2011a, page 5; Wikitravel, 2011).



adition rivals from the US and from new

East and new industrializing countries Brazil,


tman, newly installed Chairman

12

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).

Figure 2. Mapping out the industry commitments (AEA,

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:

. Mapping out the industry commitments (AEA, 2010).

Research question


because of the assumptions that they:

Operate in an market with strong competitive forces, with margins under

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?

Research method

h has been focused on policy, market and technology information on the



oviders and developers of biofuel conversion technology). The

research has been carried out through:


Operate in an market with strong competitive forces, with margins under

h has been focused on policy, market and technology information on the



oviders and developers of biofuel conversion technology). The

14

• 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.

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 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

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

Airlines are to a great extend influenced by the non

(2010) describes how non-

investigating Issues, Institutions, Interests and Information. As an example: policy

makers have developed regulations

in the European transport sector

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 ma

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

The PESTEL analysis also serves

the non-market environmental context

2010).

Relevant literature review


developments in the European airlines market and in the biofuels market.

Analysis of the current industry environment of irlines



s 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)


activities of European airlines activities are reviewed, as well as the network building



Airlines are influenced by the non-market environment

Airlines are to a great extend influenced by the non-market environment. Sako

-market strategies can designed by using the 4 I’s model


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;

, 2011). Biofuels regulations lead to further sustainability concerns,

NGO’s. Pilgrim and Harvey (2010) use the concept of ‘politically instituted



consumers through the market organization of exchange”. They also discuss the role


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

market environmental context (Withington, 2010; Ventresca, 2010;


current industry environment of



s based on Michael Porter’s Five Forces has been applied to map

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


well as the network building



nvironment

market environment. Sako

market strategies can designed by using the 4 I’s model -


ETS and mandates for biofuels use

to achieve lower carbon emissions (EC, 2009;

, 2011). Biofuels regulations lead to further sustainability concerns,

NGO’s. Pilgrim and Harvey (2010) use the concept of ‘politically instituted



rket organization of exchange”. They also discuss the role


market approach to them.

as a helpful tool for sketching the major factors in

; Seidel,

16

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.

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 b

“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 eco

(ATAG, 2008): In 2006 generated $118 billion (

provided 1.5 million direct jobs in the aviation sector in Europe.

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 Mic

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

airlines. A majority of those are full service carriers, or so

originally national-origin airline companies (e.g. Lufthansa, British Airways, Air

France, Royal Dutch KLM). In 1992 the European Open

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

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 passenger

compared to total figure of 580 mill

2 4The ATAG report also assessed the indirecof spending of those directly or indirectly employed

revenues is $331 billion (€215 billion) and total jobs is 4.2 million

Industry analysis of the airlines in

The aviation sector in Europe


for contributing to the “European integration and cohesion” and for b



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


million passengers (Datamonitor, 2011, page 11).


Competition Framework of Michael Porter (2008) is applied. In the next sections, the


, the European aviation sector currently houses about 150

airlines. A majority of those are full service carriers, or so-called flag-

origin airline companies (e.g. Lufthansa, British Airways, Air

l Dutch KLM). In 1992 the European Open-Skies Treaty placed an end



nto the market. Currently about 60 of those are low



). These ten airlines transported three quarters of total scheduled

passengers in Europe in 2009 (total of ten airlines was 430 million passenger

compared to total figure of 580 million – see previous section).

4The ATAG report also assessed the indirect (the supplying industry to aviation sector) as the induced (as a res5ult spending of those directly or indirectly employed) revenues and jobs: total of direct, indirect and indu6ced

€215 billion) and total jobs is 4.2 million (ATAG, 2008).

Industry analysis of the airlines in


for contributing to the “European integration and cohesion” and for bringing



nomy is presented by the Air Transport Action Group

€75 billion) direct revenues and

In 2009, in the



hael Porter (2008) is applied. In the next sections, the


aviation sector currently houses about 150

-carriers,

origin airline companies (e.g. Lufthansa, British Airways, Air

Skies Treaty placed an end



nto the market. Currently about 60 of those are low-cost



). These ten airlines transported three quarters of total scheduled

passengers in Europe in 2009 (total of ten airlines was 430 million passengers,

t (the supplying industry to aviation sector) as the induced (as a res5ult ) revenues and jobs: total of direct, indirect and indu6ced

18

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

2009), as was stated by British Airways’ CEO (see section

IATA Annual General Meeting in Singapore Giovanni Bisignani (at the time General

Director and CEO) estimated the 201

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 confro

• 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 di

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 vi

The aircraft manufacturers

To understand the power of the aircraft manufacturers the composition of the fleets

of a selection of the European airlines

been collected from informat

• The Association of European Airlines (AEA), which mainly consists of full service

airlines (and include all major European flag

• The European Low Fares Airline Association (ELFAA), which consists of nine

members, among which the two largest Ryanair and easyJet

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 present

and Airbus are equal in power (41 vs. 40%) and together they fully dominate the

market. From a segmentation point of vie

dominance among the ELFAA airlines

3 All collected data concern ultimo 2010 information.

2009), as was stated by British Airways’ CEO (see section 2.1). At the recent 67


ector and CEO) estimated the 2011 average fuel price to have risen to $110 per




further down. How can airlines overcome this?

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


number of competing companies and the number of different models are limited.


called ‘duopoly’ position in which there are significant barriers for airlines to

select other supplies (Grant, 2010, page 69).

iers. Without fuel no aircraft can fly. There are only a limited



couple of years as will be shown via an example of British Airways.

The aircraft manufacturers


of a selection of the European airlines has been analysed. Airline fleet data

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



hat AEA represents the full service airlines and ELFAA the low


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


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

All collected data concern ultimo 2010 information.

the recent 67th


1 average fuel price to have risen to $110 per




The aircraft manufacturers. Airlines have to purchase or lease an aircraft to be


fferent models are limited.


called ‘duopoly’ position in which there are significant barriers for airlines to

iers. Without fuel no aircraft can fly. There are only a limited




. Airline fleet data3 has

The Association of European Airlines (AEA), which mainly consists of full service

The European Low Fares Airline Association (ELFAA), which consists of nine

ELFAA claims that



hat AEA represents the full service airlines and ELFAA the low


. In total Boeing


w it can be seen that Boeing has clear

mainly due to the 256 aircrafts of Ryanair

20

(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

biofuels for aviation” (Euractive, 2011). De Palma stresses the “sector’s

commitments to achieve carbon neutral growth by 2020. And the other goal

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

alternatives existed for the fossil jet

standardized and certified jet

aircrafts (the dominant type of aircrafts used internationally)

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

As a result, airlines have limited opportunities to battle the position of fuel suppliers.

By raising the occupancy rate in flights they can

fuel consumption per sold ticket. Over a long period of time the fuel

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 Fo

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

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

Annual General Meeting and World Air Transport Summit Sin

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

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,

presents the fuel costs development at British Airways of the last five years. In year

2005/06 the fuel costs were 19% of total

nearly 30%.


commitments to achieve carbon neutral growth by 2020. And the other goal

which is to reduce carbon emissions from aviation by 50% by

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).



aviation fuels had difficulties to be adopted as a serious alternative fuel.

limited opportunities to battle the position of fuel suppliers.

pancy 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



equals to an efficiency improvement of 1.5 to 2% per year (World Economy Fo



combat carbon emissions airlines try to sooner replace their current aircrafts for

newer ones (IATA, 2011a).


fuel costs to the total operation costs as a result of rising fuel prices. At the 67

Annual General Meeting and World Air Transport Summit Singapore, IATA’s General



2001, we needed oil below $25 per barrel to be profitable. Today, we are looking at


little buffer left against further shocks” (IATA, 2011c).

To illustrate how the revenues of airlines are ‘eaten’ by rising fuel prices, Table


2005/06 the fuel costs were 19% of total revenues, in 2009/2010 they climbed to


– this is

which is to reduce carbon emissions from aviation by 50% by

been strong. No (short term)

fuel to be used by airline companies. Only

engine powered

(ExxonMobil, 2005).



limited opportunities to battle the position of fuel suppliers.

marginally bring down the relative

efficiency of



equals to an efficiency improvement of 1.5 to 2% per year (World Economy Forum,



replace their current aircrafts for


67th IATA

gapore, IATA’s General



are looking at


Table 4.


climbed to

22

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.

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

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

stated before, the AEA members can be viewed as representing the full

providers, even though three of its members are in fact low cost carriers. ELFAA only

contains low cost carriers as

• Average fleet age:

The information is based on average fleet age information per airline as available

at the webpage of Airfleet.net (Airfleet, 2011).

of the fuel efficiency of aircrafts. In

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

previous section.

. Jet fuel and carbon prices (ATAG, 2011)

Strategic Group Analysis

ection showed the strong dominance of the aircraft suppliers Boeing



A point was made that airlines do not seem to combat those



the basis to further explore the position of the full-service providers towards their



n originates from a AEA 2010-report and the ELFAA website. As

stated before, the AEA members can be viewed as representing the full


contains low cost carriers as members. Two key characteristics have been analysed:


at the webpage of Airfleet.net (Airfleet, 2011). Average fleet age is an indication

ciency of aircrafts. In the previous section the relation between



The relation between fuel costs and profitability has been discussed in the

ection showed the strong dominance of the aircraft suppliers Boeing



A point was made that airlines do not seem to combat those



service providers towards their



report and the ELFAA website. As

stated before, the AEA members can be viewed as representing the full-service


members. Two key characteristics have been analysed:


Average fleet age is an indication

section the relation between



costs and profitability has been discussed in the

24

• 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.

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

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.

manufacturers. Airlines can be grouped as ‘Boeing

Collaboration is the best option for airlines for future challenges as lowering carbon

emissions. Fuel costs are highly influencing operating margin. Biofuels are a

to surpass traditional fossil jet fuel suppliers and an option to open a multibillion

biofuels market, if vertical upward

-100% -80% -60% -40%

Share of Boeing planes in Boeing-dominated

100% 50%

RyanAir

Norwegian Air ShuttleTransavia

AirBaltic BrusselsAirlines

LuxAirMALEV

Jet2

KLM

CargoluxSAS

UkraineAirlines BritishAirways

IcelandAir

AeroSvit

TNT

DHL

JAL Airways

LOT Airlines

TAROM Airlines

. Strategic Group Analysis of AEA and ELFAA members (own analysis on basis of AEA,

European full service airlines operate in a highly competitive market with low profit

Rivalry is high. Low cost carriers have entered relative recently and operate


compared to the full service carriers. Boeing and Airbus are the dominating aircraft

manufacturers. Airlines can be grouped as ‘Boeing-addicts’ or ‘Airbus addicts’.


Fuel costs are highly influencing operating margin. Biofuels are a


biofuels market, if vertical upward integration steps can be taken.

0

5

10

15

20

25

40% -20% 0% 20% 40% 60% 80%

dominated airlines Share of Airbus planes in Airbus-dominated

50%

BrusselsAirlines

Flybe

SverigeFlyg

Aegean Airlines

Easyjet

OlympicAir

TurkishAirlines

Finnair

TAP Portugal

SwissAirlines

Lufthansa

AirFranceVirgin Atlantic

AlitaliaCzechAirlines

AustrianAirlines

MontenegroAirlines

BritishAirways

Average fleet age (years)

Full service carrier

Low cost carrier

Airline active in biofuels

TAROM Airlines

. Strategic Group Analysis of AEA and ELFAA members (own analysis on basis of AEA,

with low profit

Rivalry is high. Low cost carriers have entered relative recently and operate


ng aircraft

addicts’ or ‘Airbus addicts’.


Fuel costs are highly influencing operating margin. Biofuels are an option


80% 100%

dominated airlines

100%

WizzAir

Airlines

Easyjet

AirMalta

OlympicAir

Vuelling

Finnair

BMI

TAP Portugal

SwissAirlines

abcd

a= Adriab= Iberiac= CroatiaAirlinesd=CyprysAirways

biofuels activities

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 Ai

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

for tackling issues via a non

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

also enables using existing fuelling infrastructure at airport, avoiding additional

investments. Currently, only two biofuel production processes

by the US standardisation organisation ASTM for producing bio

2011). The so-called 2nd

commercially the least demonstrated and in an early innovation stage. Large

production, therefore, has not yet started.

4 Fischer-Tropsch (FT) based Biomass to Liquid biofuel and Hydrogenated Vegetable Oil (HVO) based biofuel.

What are the options and issues for




ated to biofuels and which activities airlines undertake to bring those

Options and issues


when talking about biofuel: they should be (British Airways, 2011; Lufthansa,

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,

ilable at competitive prices.



mover advantage, and at the same time, on pre-competitive level seek collaboration

for tackling issues via a non-market strategy.


(ExxonMobil, 2005). For that reason airlines request fuel producers to develop so

in’ fuels, that are inter-exchangeable with the fossil jet fuels. Drop


investments. Currently, only two biofuel production processes4 have been approved

the US standardisation organisation ASTM for producing bio-based jet fuel (ASTM, nd and 3rd generation biofuels (see Chapter

commercially the least demonstrated and in an early innovation stage. Large

production, therefore, has not yet started.

Tropsch (FT) based Biomass to Liquid biofuel and Hydrogenated Vegetable Oil (HVO) based biofuel.

What are the options and issues for




ated to biofuels and which activities airlines undertake to bring those


rways, 2011; Lufthansa,

in” fuels (i.e. fully up to specification of standard jet fuel and can use



level seek collaboration


(ExxonMobil, 2005). For that reason airlines request fuel producers to develop so-

exchangeable with the fossil jet fuels. Drop-in


have been approved

based jet fuel (ASTM,

generation biofuels (see Chapter 6) are

commercially the least demonstrated and in an early innovation stage. Large-scale

Tropsch (FT) based Biomass to Liquid biofuel and Hydrogenated Vegetable Oil (HVO) based biofuel.

28

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.

Table 5. Biofuel initiatives of various airlines (own analysis).

Airline Description of activities

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.

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 2

established a sustainability advisory board.

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 FTcould not deliver. Now Neste Oil will

provide the recent ASTM approved HVO

fuel.

TAROM Romanian

Airlines4

Airbus and Tarom Romanian

up a consortium to explore the biofuels value chain in Romania, using non

edible oil from the Camelina crop. Project is in start-

feasibility studies and sustainability

analyses

Air France5 Plans to explore opportunities for FT

biofuel production

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

Airport.

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

The studied airlines are member of one or more strategic alliances through which

collaborative actions are taken.

existing alliances and includes the major issues. Purpose of these alliances is to

Biofuel initiatives of various airlines (own analysis).

Description of activities Partners Market Strategy

Joint investment in FT biojetfuel

production facility located east of London, using 500 ktonne municipal

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

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

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.

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

for supplying FT-biofuels, but could not deliver. Now Neste Oil will

provide the recent ASTM approved HVO

Airbus Neste Oil German Aerospace Center

(DLR)

Purchasing of the fuels from fuel provider

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. up stage and exploring

feasibility studies and sustainability

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

Plans to explore opportunities for FT

biofuel production

CEA (FR) No detailed information

provided

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.

Boeing (USA)

V-Australia (AUS)

Virgin America (USA)

No detailed information

found

(BBC, 2010; British Airways, 2010; British Airways, 2011)

(KLM, 2009; Reuters, 2010; KLM, 2011, SkyNRG, 2011)

(BBC News, 2008; Flightglobal, 2011)

Strategic alliances for dealing with non-market issues


collaborative actions are taken. Table 6 (next page) provides an overview of current


Market Strategy

Joint venture for biofuel

production

Joint venture for biofuel sourcing.

Purchasing of the fuels from fuel provider

Not clear yet. Still in

feasibility stage


provided


market issues


provides an overview of current


30

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.

Alliance Description of activities

SAFN

Sustainable Aviation Fuels NorthWest5

Publication of June

‘Powering the next generation of flight” on opportunities for aviation biofuel

production in Northwest region of USA

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

ABRABA

Brazilian Alliance for Aviation Biofuels7

“ABRABA, will act as a

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.

Australian consortium8

Development of a roadmap for Australian and New Zealand aviation

industry. June 2011

‘Flightpath to Sustainable aviation’ predicts that “over the next 20 years a

new, sustainable Australiaaviation fuels industry could cut

greenhouse gas emissions by 17%, generate more than 12,000 jobs and

reduce Australia’s re

fuel imports by $2 billion per annum”.

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

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

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

initiatives however, the partnerships are business oriented and collaboration

between competitors is avoided.

Description of activities Description of members Major issues tackled

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

perspectives for biofuel production

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

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, 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.

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 sustaienvironmental, technical

and economic

challenges. Providing information for

awareness building. Preparing for innovation

and regulation support

(Sustainable Aviation, 2011; Go Green, 2011)

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 environment (Sako, 2010).

Alliances focusing on the pre-competitive, non-market issues vary in their


strongly operate from the sustainability issues perspective.

The alliances are characterized by a wide variety of involved stakeholders, which

non-market strategy (Sako, 2010). In the actual market


between competitors is avoided.

Major issues tackled

Providing economic

perspectives for biofuel production

Setting innovation

agenda. Preparing for

regulatory frameworks.

Requesting for R&D budgets

Support established of

legal framework. Provide information to stakeholders. Develop

financing mechanisms.

Technological evaluation.

Framing the sustainable, environmental, technical

and economic

challenges. Providing information for

awareness building. Preparing for innovation

and regulation support

in’ fuels complying to sustainability criteria make

Conform globalisation theory, airlines align both market strategies and non-


es vary in their


The alliances are characterized by a wide variety of involved stakeholders, which

market strategy (Sako, 2010). In the actual market


32

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.

6 Current market and technology

developments in the biofuels arena

6.1 Introduction

What will airlines encounter when they step into the biofuels sector

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 in

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 p

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 re

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 susta

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 resu

growing global operating market for biofuels, with world

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 convers

The current biofuels for road transport are largely still based on so

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,

Current market and technology


What will airlines encounter when they step into the biofuels sector? At first



Secondly, the aviation sector focuses on ‘drop in’ fuels, therefore the innovation


framework). A following section discusses the current battle among major oil


ated that airlines entering this market are late entrants and might experience

challenges in building vertical integration positions.

Brief policy history


the USA biofuel policies emerged from the early 1990’s, mostly



expensive oil imports. In these three regions the climate related issues were



(EC, 2003). Partly due to the pressure on sustainability issues the commission



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


litres) in 2009 (Lamers et al., 2011).

Innovation in the biofuel conversion routes

The current biofuels for road transport are largely still based on so-called 1



rmance to boost greenhouse gas emission reduction and maximise yield to limit



ontinuously improving. The TMO framework proves a valuable tool to analyse



At first, for



novation


framework). A following section discusses the current battle among major oil


ated that airlines entering this market are late entrants and might experience


the USA biofuel policies emerged from the early 1990’s, mostly



gions the climate related issues were



inability issues the commission



lted in a stark

wide production growing


called 1st



rmance to boost greenhouse gas emission reduction and maximise yield to limit



ontinuously improving. The TMO framework proves a valuable tool to analyse


34

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.

Figure 5. the technology S-curve of three generations of biofuel conversion rotues (own

analysis).

time

Yield

(dry

matter/ha,

not linear presented)

1st generation biofuels:

•Corn based ethanol•Sugar cane based ethanol•Vegetable oil based biodiesel

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

In the last five to six years the attention for algae based fuels (3

increased enormously as can be concluded from an analysis of founding and exit

dates of the companies that have

trend line (see Figure 6) is very similar to that of other industries (natural ice

making, car industry) with long l

growth of the number of entrants, followed by consolidation and high exit numbers

(Ventresca, 2010).

Figure 6. entry and exit in the algae

Figure 6 shows that following an initial request to start investigating algae

biofuels, a long period of non

started investigating algae as fuel for long

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 numb

the major players receive strong financial support in various IPO’s

5 Own analysis using various company websites, other sources: Biomass Organisation, 2011; European Algae Biomass Association, 2011; AlgaeBiotech, 2011; BioProdukte

Steinberg, 2011; Solarix, 2011.

In the last five to six years the attention for algae based fuels (3rd generation) has


dates of the companies that have been active in the US and Europe. The discovered

) is very similar to that of other industries (natural ice

making, car industry) with long lead time after initial technology invention, a rapid


. entry and exit in the algae-based fuel market5

shows that following an initial request to start investigating algae

biofuels, a long period of non-activity occurred. As early as 1985, US-based Marte

started investigating algae as fuel for long-term space flight, as requested by



ts increased sharply, following the stronger policy incentives for



well, with as result that the number of total players is now slightly decreasing, while


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

generation) has


been active in the US and Europe. The discovered

) is very similar to that of other industries (natural ice

ead time after initial technology invention, a rapid


shows that following an initial request to start investigating algae-based

based Martek

term space flight, as requested by



ts increased sharply, following the stronger policy incentives for



er of total players is now slightly decreasing, while


Algae University, 2011; Algal Biomass Organisation, 2011; European Algae Biomass Association, 2011; AlgaeBiotech, 2011; BioProdukte

36

(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.

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 surr

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

resource production and thus securing the availability and sustainability of their

future fuel supply.

overnments have not yet adopted their policies to biofuels for aviation.


biofuel production technologies, still surrounded with high market risks.


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


overnments have not yet adopted their policies to biofuels for aviation.


ounded with high market risks. Fuel


The only option in the biofuel value chain to improve the power balance

utmost upstream position: in


38

7 Conclusions and recommendations for

the European airlines

7.1 Conclusions

The European airlines sector is characterised by hi

supplier power is high. Aircraft manufacturers Boeing and Airbus form a duopoly,

therefore the best strategy for airlines is to align with them.

put increasing pressure on revenues and profit.

additional costs and more pressure on profit.

than low costs carriers as they have older (les fuel efficient) fleets.

Biofuels are the most important option to sustain growth in aviation

carbon constraints for coming decades.

opportunity to by-pass traditional fuel suppliers and to opt for vertically backward

(upstream) integration. Biofuels may provide ‘premium

operation, which is less possible for low cost carriers.

Several full service airlines

(investments in joint ventures

chain wide alliances for influence on pre

regulations force airlines to focus on

curve analysis of three generations of biofuel conversion technology

clear that ‘drop-in’ biofuels are not yet commercially available

Government regulation on biofuels

biofuels production technology. Market entry and exit analysis of newest algae

fuels technology illustrates th

stage.

However, airlines are late entrants in the biofuel domain.

traditional fuel suppliers to airlines) have

for early market dominance in the new generation biofuels market.

has shown that airlines are

barriers for entry. Also, resource providers

often absent these network alliances.

the resource production to secure supply and secure sustainability of the resources.

To sum up, this research

balance for European airlines. Biofuels are key to improve the carbon performance of

airlines. The best opportunities for airlines are

value chain for biojetfuels. This implies taking position in the production of

sustainable resources. In this way security of supply is organised. Furthermore, this

Conclusions and recommendations for

the European airlines

The European airlines sector is characterised by high rivalry and competition

Aircraft manufacturers Boeing and Airbus form a duopoly,

best strategy for airlines is to align with them. Fuel costs are rising

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

pass traditional fuel suppliers and to opt for vertically backward

Biofuels may provide ‘premium’ for green/sustainable

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

s for influence on pre-competitive issues). Safety and fuel quality

airlines to focus on ‘drop-in’ fuels. The TMO-Framework

curve analysis of three generations of biofuel conversion technology help to make

els are not yet commercially available.

on biofuels has ignited innovation towards newer generation

biofuels production technology. Market entry and exit analysis of newest algae

fuels technology illustrates that the technology currently is in an ‘era of ferment’

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

irlines are in most cases not member of such alliances. This

esource providers (except for algae-based companies) are

these network alliances. Airline have an opportunity to build position in

to secure supply and secure sustainability of the resources.

research has shown that biofuels can improve the market powe

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

for biojetfuels. This implies taking position in the production of

In this way security of supply is organised. Furthermore, this

Conclusions and recommendations for

gh rivalry and competition and

Aircraft manufacturers Boeing and Airbus form a duopoly,

rising and

ng carbon regulation brings

Full service airlines feel this stronger

sector under

Focus on biofuels provide airlines an

pass traditional fuel suppliers and to opt for vertically backward

for green/sustainable

, applying market

market strategies (forming aviation value

Safety and fuel quality

Framework and S-

help to make

has ignited innovation towards newer generation

biofuels production technology. Market entry and exit analysis of newest algae-to-

‘era of ferment’

Major oil companies (the

They aim

This research

. This causing

based companies) are

opportunity to build position in

to secure supply and secure sustainability of the resources.

improve the market power

European airlines. Biofuels are key to improve the carbon performance of

end of the

for biojetfuels. This implies taking position in the production of

In this way security of supply is organised. Furthermore, this

40

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.

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, website

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, website

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Policies and collaborative partnership for

, report prepared with support of Booz and Company,

ECOFYS Netherlands B.V.

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3526 KL Utrecht

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