If you are wondering what our future holds with an economy subjected to political gridlock, an overview of an emerging industry called aviation biofuels could offer some interesting insights.
Airlines today operate on razor thin profit margins with an industry average of less than one half of one percent, largely due to soaring fuel prices that gobble up about 30% of ticket revenues. Many factors are to blame and ultimately the traveling consumer is unwilling or unable to pay the higher ticket prices airlines need to offset their mounting losses. Merger mania among top airlines has played itself out leaving fewer options on the table. Aside from shaving off more capacity than they have already, airlines are looking elsewhere to stay in business. One area that remains unexplored is the diversification from a one fuel source model to multiple fuel sources, which would include biofuels.
At a recent Aviation Biofuels Development Conference in Washington DC organized by FC Business Intelligence based out of London, thought-leaders, investors, government officials, and private sector industry leaders spent two days evaluating the growing prospects of aviation biofuels. So nascent is this industry that not even the US Government had a handle on its realistic potential and implications. However much they differed in their respective opinions, conference participants did agree on the pressing need to stabilized jet fuel prices through the production of alternative jet fuels. Their target production for 2015 was 600 million gallons per year, which amounts to a mere fraction of the 36 billion gallons per year mandated by Congress for ground transportation fuel blending. What impressed me most between the many animated discussions was the underlying dynamics among so many capable players that for whatever their reasons had been thrust together into the uncharted territory of aviation biofuels.
By the second day, the conference reminded me of the knocking sounds of an engine running with the wrong type of fuel. Was it the engine design or the fuel mismatch that was at fault? …and then it occurred to me. It was neither. The aviation business model, which in my example would represent the engine, was being forced to change its fuel sourcing strategy from a single fuel pathway (from ground to gas pump) to multiple fuel pathways. Both the engine in my example and the fuel type were up for a complete redesign and eventual realignment, hence the ‘knocking’ sounds.
To appreciate the tectonic impact from a transition to multiple fuel pathways, imagine for a moment what life would be like if every home in the US had its own oil well and processing plant in its ‘backyard’ that could easily produce optimal grade fuel at a price well below today’s market price. “That scenario is absolutely ridiculous!”, you might say under your breath. …and yet, the emerging aviation biofuels industry speaks directly to this end.
Instead of purchasing fuel from traditional fuel brokers, airports are planning to produce their own fuel at a lower and more stable price using feedstocks and a processing facility located adjacent to the airport’s existing storage tanks. Under this arrangement, airlines would no longer be subjected to volatile energy prices caused, for example, by a political event in the Middle East. Also, by positioning biofuels production facilities in their ‘backyard’, airports can eliminate shipping and port handling costs. Once more, if airports succeed in producing their own fuel source, what would prevent industrial parks around the world to do the same?
The resounding significance from producing fuel at the point of consumption will give both companies as well as groups of companies a far greater and sustainable edge over their competitors. Just how an energy-decentralized economy will play out in the end will be anyone’s guess. One thing is for sure. The base of wealth and power both politically and economically will shift significantly.
Considering this new perspective, one can better understand the industry’s current frustrations. On the one hand the US Government is hesitating with its renewable energy strategies not knowing if an untested policy might eliminate entire industries (i.e. fuel transportation), reduce existing business tax revenue streams, and increase unemployment. In the meantime, the DOE (Department of Energy) continues to invest in biofuels R&D and to develop incentives for private investors willing to scale biofuel productions.
The progress in the aviation biofuels industry can be measured by the rapidly growing number of fuel-production pathways. In fact there may be too many pathways and efforts are underway to standardize a comprehensive evaluation process. Also in play are efforts to improve efficiencies within each pathway such as increasing the energy yield per acre of feedstock. But despite all of these efforts, the price of biofuels per gallon remains well above that of most conventional fuels.
With Republicans unwilling to pay more for energy than the lowest cost fuels available, the future of biofuels remains potentially entangled in a political gridlock. However, as the real threat to the airline industry continues to grow, aviation biofuels may force opposing members of Congress to reconsider their positions. If and when they do, the production of aviation biofuels may unintentionally trigger the decoupling of crude oil prices globally. When that day arrives, businesses will learn to compete not only on price, but also on their respective ready access to ‘backyard’ biofuels energy.