Aviation May Be Biofuels’ Killer App

The aerospace industry may eventually deliver a huge market

   

Lost amid Japan’s tragic events and continuing unrest in the Middle East was news of a significant breakthrough in aviation technology. As Military & Aerospace Electronics reported, a U.S. Air Force F-22 Raptor aircraft, “powered by a 50/50 fuel blend of conventional petroleum-based JP-8 and biofuel derived from camelina,” broke the sound barrier, achieving a speed of Mach 1.5 and proving the utility of biofuels for military aviation.

The camelina-based fuel came from Sustainable Oils, a private firm. But other organizations, including public or soon-to-be public companies are also involved in the aviation biofuel market, and ongoing experiments are using everything from algae to wood chips as a source of fuel for aircraft – all for good reason.

While the military may see biofuels as a way of guaranteeing supply in times of crises, commercial aviation likely sees them as a way to control costs. As National Defense Business and Technology, noted recently, “Fuel is the aviation industry’s second largest expense, after labor.” With that as an incentive, aviation fuel could become the killer app which helps fledgling biofuel makers achieve the economies of scale they need to reward investors.

Unlike the ethanol industry, which brings a market share that can rely on lobbying state and federal governments for tax incentives and mandates to make the fuel available at filling stations, aviation biofuel makers are able to sell directly to individual customers, be they airlines or aircraft manufacturers. In fact, customers can be intimately involved with creating the product. Qantas, for example, is reportedly in talks with two biofuels suppliers, Solazyme, which recently filed for an IPO and Solena Group. Likewise, Airbus has teamed up with the Romanian firm Tarum to create an aviation biofuels plant in that country, part of the Airbus’s reported plan to establish renewable fuel-making facilities on every continent. Boeing (NYSE:BA), also hopes a biofuels market will emerge by 2015.

The push by these major aircraft manufacturers suggests that in the future they may sell planes packaged with fuel at a guaranteed price. And given the manufacturers’ access to capital and to their aircraft-owning customers, the aviation biofuel space could break out in a few short years.

Where does that leave investors who like the biofuels space? Unfortunately, with fairly slim pickings, at least for now. A few technically public companies are involved with algae production, but these are of the over-the-counter stock variety.

On the other end of the market-cap scale, Honeywell (NYSE:HON) Exxon Mobil (NYSE:XOM) and Archer Daniels Midland (NYSE:ADM) are all involved in growing the industry. Two years ago, Shell (NYSE:RDSA) acquired the aviation biofuel unit of Brazilian biofuel giant Cosan (NYSE:CZZ), while British Petroleum (NYSE:BP) joined Airbus and other companies to complete an 80,000 ton-per-year biofuel plant their by 2013.

As Biofuels Digest noted: “The news reminds us that, while most of the coverage of Brazil has focused on ethanol production and distribution into its well-established, subsidy-free alternative fuels market, there is substantial momentum building up in Brazil on the diesel and jet fuel side.” Indeed, traveling to that nation last week, President Obama touted U.S.-Brazilian cooperation on aviation biofuels.

Bottom line: Keep an eye on this sector, and read the Air Transport Action Group report “Powering the future of flight: The six easy steps to growing a viable aviation biofuels industry.”


Article printed from InvestorPlace Media, http://investorplace.com/2011/03/aviation-may-be-biofuels-killer-app/.

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