Amid concerning developments regarding climate change, biofuel specialist Gevo (NASDAQ:GEVO) provided a glimmer of hope. Earlier today, the company announced a sustainable fuel sales agreement with American Airlines (NASDAQ:AAL). The terms stipulate that Gevo will provide 100 million gallons of sustainable aviation fuel, or SAF, per year for five years. Expectations call for deliveries to begin in 2026. Despite the positive implications, GEVO stock is down about 9% during the afternoon session.
For Gevo, the deal with American Airlines represents the single largest fuel sales agreement ever entered with a customer. Further, the biofuel maker estimates that that contract should generate approximately $2.75 billion of revenue over the life of the deal, inclusive of the value of environmental benefits. Naturally, this financial benefit has huge implications for GEVO stock, which currently commands a market capitalization of $502 million.
Notably, American Airlines is a member of the Oneworld global alliance. Earlier this year, Gevo and Oneworld members signed a memoranda of understanding which laid the groundwork for the airliner network “to purchase 200 million gallons of SAF per year, from Gevo’s future commercial operations.”
Further, this “SAF purchase agreement expands the list of committed airline partners and supports Gevo’s pursuit of its stated goal of producing and commercializing a billion gallons of SAF by 2030.”
Why Is GEVO Stock in the Red?
Again, despite the myriad positive implications of the SAF agreement — with a top airliner no less — GEVO stock is down 9% in the afternoon hours. Naturally, investors want to know why this may be the case.
A component of the volatility has nothing to do with GEVO stock itself. On Friday, the major indices got off to a rocky start, with the S&P 500 down 1.4% in the afternoon session. At the same time, the Nasdaq index is down more than 2%. Further, AAL — the other partner in the SAF agreement — is around 3% below parity.
Another factor to consider is that while SAF is a promising endeavor, it must still overcome significant challenges. On the positive front, the International Air Transport Association, or IATA, noted that over 370,000 flights have taken to the skies using SAF since 2016. Further, more than 45 airliners now have experience with SAF.
Most importantly, SAF is a drop-in solution, meaning that current aircraft can use a 50/50 blend of SAF and traditional jet fuel with no modifications. However, economic concerns always weigh heavily in any innovation.
According to a report from Aviation Today, “SAF currently costs four times as much as conventional jet fuel and it makes up less than one percent of fuel available in the market.”
All in This Together
Given the obstacles facing SAF, it’s then not the biggest surprise why GEVO stock isn’t jumping into positive territory. In 2019, global fuel consumption by commercial airliners reached an all-time high of 95 billion gallons. Therefore, the 100 million gallons that Gevo will provide only represents about a tenth of a percent of global consumption — a drop in the bucket.
Further, the Environmental Protection Agency notes that the transportation sector as a whole emits 27% of greenhouse gas emissions. Therefore, it’s not just airplanes that will need to be sustainable for the planet to be greener. All together this presents yet another daunting challenge for Gevo and other biofuel specialists.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
