Southwest, IAG agree to buy sustainable aviation fuel made from wood waste

Southwest Airlines (LUV.N) and British Airways-owner IAG (ICAG.L) agreed to purchase nearly 300 million gallons of sustainable aviation fuel created from woody biomass at a Mississippi biorefinery, the companies said on Wednesday.

The aviation industry has thrown its weight behind SAF as a way to make flying more environmentally friendly before less carbon-intensive hybrid, electric or hydrogen airplane options become available from the late 2030s.

Velocys’ Bayou Fuels facility is expected to produce fuel that is considered carbon negative, due to its use of biogenetic feedstock, renewable power and carbon capture technology offsetting the emissions from burning the fuel.

The fuels made at the Bayou Fuels facility will be blended with petroleum-based jet fuel to generate more than 750 gallons of negative carbon sustainable aviation fuel that Bayou says will be commercially available as early as 2026.

Velocys (VLSV.L) said projected revenues could total $3 billion over the course of the offtake agreements.

IAG agreed to purchase 220,000 tonnes of sustainable aviation fuel (SAF) over 10 years beginning in 2026, as part of its goal of using 10% SAF by 2030. Southwest’s purchase of 220 million gallons of SAF will span 15 years.

The SAF will generate tradable credits under California’s Low Carbon Fuel Standard and the federal renewable fuel standard. Southwest and IAG will buy at a fixed price that includes projected cost of the credits.

SAF generally produces up to 70% less carbon than fossil fuels but is more costly to produce without tax credits, particularly as production volumes are currently very low at less than 1% of total jet fuel demand.

The United States is setting a goal of achieving net-zero greenhouse gas emissions from the U.S. aviation sector by 2050, Transportation Secretary Pete Buttigieg said on Tuesday.

The White House said in September it was targeting 20% lower aviation emissions by 2030.