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Business

Southwest and British Airways deals send Velocys shares surging

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Shares of London-listed fuels technology firm Velocys rose by more than 40% on Wednesday after it announced two deals related to the supply of aviation fuel.

In a statement, the company said its subsidiary, Velocys Renewables, had entered into an agreement with Southwest Airlines.

The deal relates to a planned biorefinery in Mississippi, with Southwest set to buy an expected 219 million gallons of sustainable aviation fuel at a fixed price across a period of 15 years.

“After blending, this will enable approximately 575 million gallons of net zero SAF,” Velocys said. The Bayou Fuels biorefinery is slated to start commercial delivery of fuel “as early as 2026.”

In addition to the deal with Southwest, Velocys Renewables signed a memorandum of understanding with the International Consolidated Airlines Group. Again, the deal is connected to the Bayou Fuels project.

According to Velocys, it “covers the purchase by IAG’s constituent airlines, which includes British Airways, Aer Lingus and Iberia amongst others, of an expected 73 million gallons of SAF, in aggregate, at a fixed price.”

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The purchase contract is due to last for 10 years from 2026. Post blending, the equivalent of 192 million gallons of net zero SAF will be generated.

In a statement issued alongside Velocys’ announcement, IAG’s CEO, Luis Gallego, described the agreement as “another important step towards achieving our goal of 10 per cent sustainable aviation fuel use by 2030.”

Although the European Union Aviation Safety Agency says there’s “not a single internationally agreed definition” of sustainable aviation fuel, the overarching idea is that it can be used to reduce an aircraft’s emissions.

According to Velocys, Bayou Fuels will focus on processing waste from the lumber and paper industries, which it describes as “woody biomass forest residue that would otherwise rot on the forest floor or contribute to forest fires.”

Carbon capture and storage technology will be used at the project to allow for what Velocys calls “the commercial-scale production of SAF with an extremely negative carbon intensity.”

Aviation’s challenge

As concerns about sustainability and the environment mount — the World Wildlife Fund describes air travel as “the most carbon intensive activity an individual can make” — discussions around aviation are increasingly focused on how innovations and ideas could cut its environmental footprint.

In a recent interview with CNBC’s Steve Sedgwick, Ryanair CEO Michael O’Leary was cautious when it came to the outlook for new and emerging technologies in the sector.

“I think … we should be honest again,” he said. “Certainly, for the next decade … I don’t think you’re going to see any — there’s no technology out there that’s going to replace … carbon, jet aviation.”

“I don’t see the arrival of … hydrogen fuels, I don’t see the arrival of sustainable fuels, I don’t see the arrival of electric propulsion systems, certainly not before 2030,” he went on to say.

“So it will certainly be after my career in the airline industry is finished … but I hope it will get here before the end of our mortal lives.”

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Business

Europe’s low-cost airlines could have the edge in a post-Covid world

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Ryanair and EasyJet airplanes.

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LONDON — European low-cost airlines have clear advantages over larger flag carriers in a post-pandemic world, analysts have told CNBC, despite the massive support packages deployed from governments around the world.

It’s been a bruising time for airlines as the coronavirus pandemic brought travel to a halt. But now, low-cost carriers seem to be showing signs of recovery compared with national carriers, which can often be subsidized or given preferential treatment.

“You are seeing legacy carriers unable to move so quickly compared with the lost-cost carriers out of the pandemic,” Paul Charles, chief executive officer of the luxury travel consultancy firm The PC Agency, told CNBC’s “Squawk Box Europe” Monday.

The International Air Transport Association said earlier this month that both international and domestic flights surged in July compared to June, but demand was still “far below pre-pandemic levels.” In Europe alone, passenger traffic was still down 56.5% from July 2019.

However, easyJet, a British low-cost carrier, said it expects to fly up to 60% of its 2019 levels in the three months between July and September. In comparison, IAG — the owner of British Airways said it only expects to fly around 45% of its 2019 capacity over the same period.

Lufthansa, another flag carrier, predicts it will fly around 40% of its 2019 levels in the whole of 2021. Budget airline Ryanair, meanwhile, said its fiscal full-year traffic to March could reach between 90 and 100 million passengers — which would represent between 60% and 67% of the 148.6 million passengers it flew in the full year to March 2020.

Laura Hoy, equity analyst at Hargreaves Lansdown, said that low-cost airlines benefit from being focused on short-haul flights. These are proving to be more attractive to consumers given ongoing travel restrictions and uncertainty over the pandemic. 

In addition, Hoy added that amid economic uncertainty and potential for further disruption going forward, consumers are not keen to spend much on flights, which also benefits the business model of low-cost airlines.

Ryanair shares are up 1.8% year-to-date. Wizz Air shares, another low-cost firm, are up by 7.5% over the same period, while easyJet’s are down 9%. Wizz Air had approached easyJet over a potential merger, but the latter declined the offer last week.

On the other hand, IAG is down 2.6% year-to-date and Lufthansa shares are also lower by 19.7% over that period.

The outlook

“You are going to see the likes of easyJet able to take up more opportunities. That means potentially getting more slots, but also moving their fleet around more quickly in order to take advantage of where demand is,” Charles from The PC Agency also said.

This is despite the massive injections of cash that different governments made in the wake of the pandemic to flag carriers, namely the 9 billion euros ($10.6 billion) that the German government gave to Lufthansa. British Airways also received a £2 billion loan from the U.K. government in December.

“The aid got them through a bad time,” Hoy said, but it didn’t support their growth. The financial help came with a lot of conditions attached, including restrictions to dividend payouts, she added.

In addition, there are question marks about how far governments will be willing to go to keep their flag carriers afloat. They have supported the sector, but some are facing legal action over it and they are, in general, strapped for cash after the efforts to contain the economic shock from the virus.

“There is going to be a change of tune,” Charles said, as “governments are looking to offload where they can, they can’t afford to keep some of these stakes, they would rather cash them in and see private sector buyers inject more innovation into the sector.”

“I think you will see some loosening over time, especially in Europe, of some of these restrictions on who can own carriers, so now is the time that actually you will see more private equity starting to emerge into the sector. And this is on the back, of course, of many short-haul carriers able to take their market share from those legacy carriers,” he added.

 

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