Speaker 1: Hi, Mark, Hey Dina. So today on the podcast we
Speaker 1: interview our colleague David Doherty, who is a oil demand
Speaker 1: analyst here at b NF, and we are talking about
Speaker 1: a note he wrote called jet fuel Turbulence Ahead for
Speaker 1: Demand Growth. And I can't help but fixate on the
Speaker 1: word turbulence. Mark, have you ever been in bad turbulence
Speaker 1: in a nerve plane before? Sure? But just once? Really
Speaker 1: may be nervous. I was coming in from Guatemala into
Speaker 1: Newark in New Jersey, and it was in a rainstorm,
Speaker 1: lightning storm, and it was just bouncing all around, and
Speaker 1: I broke into a cold sweat. Just once, just once? Really? Yeah,
Speaker 1: how about you? Well, apparently once is all it takes.
Speaker 1: So I had some really bad turbulence once, which was
Speaker 1: one of those where the flight attendants took their seats
Speaker 1: and people's bums were coming out of their seats and
Speaker 1: everybody was sitting there praying. The woman next to me
Speaker 1: kept tears in her eyes, asking to see her children again,
Speaker 1: and um. It ended up causing some pretty serious flight
Speaker 1: anxiety for me, and I ended up going to a class.
Speaker 1: I tried to book a hypnotherapist, but unfortunately I was
Speaker 1: unable to get in with the hypnotherapist. Because I was
Speaker 1: flying so often for work, I was unable to get
Speaker 1: our to get our schedules to match up, which actually
Speaker 1: I think it speaks a lot of volume over the
Speaker 1: demand growth. Here we're still flying despite all this, still flying,
Speaker 1: so I was miserable on every flight, but I refused,
Speaker 1: deep down my stubbornness over road the level of anxiety
Speaker 1: I had about flying because I refused to let it
Speaker 1: limit my life. It's pretty common for people not to
Speaker 1: like flying in turbulence, but we do it anyway. And
Speaker 1: so when we say turbulence ahead for demand growth, it's
Speaker 1: actually the demand part of you and me and everybody
Speaker 1: we know wanting to fly. That's not the main issue.
Speaker 1: It's all the other stuff that goes into ramping up
Speaker 1: this industry. So let's jump in today with David Doherty
Speaker 1: and hear what he has to say about airline demand
Speaker 1: going in the future. As a reminder, Bienny Have does
Speaker 1: not provide investment or strategy advice, and you can hear
Speaker 1: the fulldest claimer at the end of the show. Hi David,
Speaker 1: thanks for joining us today. Thanks for having me. You
Speaker 1: might have noticed in the news that there have been
Speaker 1: a recent increase in what's being termed as flight shaming,
Speaker 1: where people are making other people feel guilty for taking
Speaker 1: flights because of their carbon footprint. And that might lead
Speaker 1: you to believe that maybe the overall amount of flight
Speaker 1: that's happening on commercial aircraft is decreasing. But David, you're
Speaker 1: an oil analyst here at be Enough and you have
Speaker 1: a view that's a little bit contrary to that. So
Speaker 1: let us know what you think is actually going to
Speaker 1: be happening with airline demand going forward. Yeah, I mean,
Speaker 1: just by looking at the data, it tells a totally
Speaker 1: opposite story of that. And the interesting part is it's
Speaker 1: a great story for us if we're looking at something
Speaker 1: from our London office or in Europe. But for a
Speaker 1: lot of people flights new they want to go on holiday,
Speaker 1: and are we going to deny them that? We expect
Speaker 1: them most of this also expect that man for flying
Speaker 1: is going to continue to grow. Where's this demand coming from?
Speaker 1: Mostly China and Asia Pacific, and that's from a small base,
Speaker 1: but that was pretty much where the growth is coming from.
Speaker 1: What's interesting has developed Europe also growing. As we changed
Speaker 1: the way Europe is structured, we expanded the EU ten
Speaker 1: years ago, right, So you can now travel to other
Speaker 1: parts of Europe without visas or easier access. And the
Speaker 1: low cost carrier came around and they fly a lot
Speaker 1: and they're super cheap, and that opens up to a
Speaker 1: whole new market people who couldn't afford to fly before
Speaker 1: they can fly net What time horizon are we talking about?
Speaker 1: Choose housands onwards you see a spike up. The only
Speaker 1: place in the world really where you're kind of seeing
Speaker 1: flat demand or steady ish demand is the US, and
Speaker 1: you don't really have the low cost carrier there. You do,
Speaker 1: and you kind of do, but you don't have your
Speaker 1: I mean I moved here, what's six seven years ago,
Speaker 1: and I didn't. We didn't have Ryanair or easy Jet
Speaker 1: or anything like that in the US when I was there. Oh,
Speaker 1: I think we do on the west coast Southwest? Okay, Yeah,
Speaker 1: the biggest domestic airline I guess is that Southwest. Yeah,
Speaker 1: there's a few. It's a different, got a long time,
Speaker 1: it's different. So the European stories a lot of connecting
Speaker 1: the new East to what was western Europe. Right, So
Speaker 1: you've got this expanded wealth in Europe which didn't exist before.
Speaker 1: The US hasn't expanded its wealth to the same extent
Speaker 1: because you don't have brand new markets coming into one
Speaker 1: large market, right, So you're kind of moving the goalpost
Speaker 1: a little bit. In terms of fuel consumption as well,
Speaker 1: the system in the US gets quite efficient, so you've
Speaker 1: got fairly flat oil consumption jet oil consumption, whereas in
Speaker 1: Europe Jeffield demand is growing and growing. It's slowing down now,
Speaker 1: but it's still growing a pack. It's going through the roof.
Speaker 1: You've got lots of new low cost carriers coming in.
Speaker 1: Traditional carriers traveling longer distances. You know, you can connect
Speaker 1: now in China if you're going to Singapore or to Australia.
Speaker 1: Previously that would never happen. So yeah, the whole system
Speaker 1: is changing and the demand profile as a result is changing.
Speaker 1: So flight schaming, whether or not exists, might not actually
Speaker 1: be decreasing demand as much as we might think. It's
Speaker 1: a bit like when I want to eat some candy
Speaker 1: and I don't want my kids to see I'm going
Speaker 1: to go around the corner. Are kind of stand in
Speaker 1: the closet so they don't see me getting the candy.
Speaker 1: But the reality is everybody wants it. You're saying, this
Speaker 1: is growing in Asia. Is there not a lot of
Speaker 1: infrastructure that needs to be added in order to make
Speaker 1: that take place? And what does that look like for
Speaker 1: that market? I mean in terms of fuel supply or
Speaker 1: airports or anything else that you might need and have
Speaker 1: a massively growing industry. Yeah, there's a lot of pipes
Speaker 1: that need to be put together for this to work. Essentially,
Speaker 1: So the biggest growth centers in terms of countries that
Speaker 1: are expected to sort of lead the market in the
Speaker 1: future of China, the US, interesting, it and India. Now,
Speaker 1: India and China are really interesting when you think about it,
Speaker 1: um they're underserved massively. So in the UK and the
Speaker 1: US we travel on average about two times per year
Speaker 1: each right. In Germany, which has a really good rail network,
Speaker 1: it's about once per year. But if you look at
Speaker 1: India and China, you're looking at zero point to zero
Speaker 1: point four trips per year per person, right, So it's
Speaker 1: tiny and it's massively undersaturated. What they don't have is
Speaker 1: the network we have in Europe and in the US
Speaker 1: of airports and connection points and ways to get off
Speaker 1: the ground. Right, you need that runway. So for example,
Speaker 1: in India, it's got a ton of runways that are
Speaker 1: just laying idle. So the government of they have a
Speaker 1: regional connectivity scheme in order to get people flying in
Speaker 1: mobile so they're bringing back runways that were previously essentially derelict.
Speaker 1: Right They're also trying to build new runways, so the
Speaker 1: capacity they have at some of their biggest airports is expanding,
Speaker 1: and they're building new airports. So they want to double
Speaker 1: the amount of airports in India. It's pretty ambitious. India
Speaker 1: hasn't got a great record of building these massive projects
Speaker 1: out on time. But nonetheless, even if that's five ten
Speaker 1: years delayed, doubling the airport numbers is pretty chunky. And
Speaker 1: right now it's somewhere around one. I think it's like
Speaker 1: in and around one in India, yeah, and in and
Speaker 1: around two hundred in China, and they want to increase
Speaker 1: there's to four five. So again doubling over fifteen year
Speaker 1: time period. It now in China, say they want to
Speaker 1: do it, they do it. So it's a slightly different
Speaker 1: way they're gonna they're gonna build out that capacity. And
Speaker 1: actually in China already we're seeing brand new, big, mega
Speaker 1: runways and big mega airports being built, so we're building
Speaker 1: out all these airports. Talked to us about airplanes. Once
Speaker 1: you build all the airports, you actually need airplanes to
Speaker 1: fill them, So who's winning there. Yeah, it's an interesting
Speaker 1: time for the airline sector. What we're seeing is a
Speaker 1: shift in the business model of airplane manufacturers. So we
Speaker 1: used to have really big airplanes and you put everybody
Speaker 1: on it, like the A three a D from Airbus
Speaker 1: right for big engines, a lot of people, which is
Speaker 1: actually quite efficient on a pair passenger mile basis, but
Speaker 1: expensive and it's hard to fill them. The key for
Speaker 1: the airline industry is getting as many people into every
Speaker 1: aircraft so as possible, and the range is pretty chunky, right,
Speaker 1: So on average about two of all seats globally are filled,
Speaker 1: but that varies. So you've got some traditional airlines like
Speaker 1: Air China or BA or American airlines who are in
Speaker 1: and around two. Others on the low end, like Emirates
Speaker 1: are in around seventy seven seventy eight percent, and then
Speaker 1: you've got like Europeans Rhiner, so they're really filling these
Speaker 1: and essentially what you're doing is meeting that demand with
Speaker 1: the same airplane. So it's much much more efficient. And
Speaker 1: airplanes are much more efficient than they were twenty years ago,
Speaker 1: but they have about a twenty five year lifespan. But
Speaker 1: every new generation airplane is about more efficient in the
Speaker 1: previous right, So if we're building this out and you're
Speaker 1: filling them up, you can meet a lot of this
Speaker 1: new demand. And airplanes are happy, you know, airlines are happy.
Speaker 1: The environment's a little bit happier. I guess we're all
Speaker 1: still traveling. But with that is more demand for oil. Right,
Speaker 1: So despite a more efficient airplane, I saw you put
Speaker 1: in forecasting in the note that forecasted roughly between forty
Speaker 1: increase in oil demand for aviation fuels at right. Yeah,
Speaker 1: that's correct. Yeah, it's a hard, hard industry to decarbonize.
Speaker 1: You know, shipping is hard to de carbonized. Trucks are
Speaker 1: hard to dec urbanized. But this is next level. Not
Speaker 1: only is it hard to you know, switch to a
Speaker 1: bio fuel, but the aviation industry is incredibly safety conscious.
Speaker 1: But it's difficult to get a different grade fuel into
Speaker 1: the airplane and ensure that it's safe to take off.
Speaker 1: So we are seeing some small things like biojet, which
Speaker 1: at the moment is very expensive and technologies from the
Speaker 1: likes of Airbus where they want to hybridize existing jet
Speaker 1: jet engines and essentially maybe run auxiliary power off an
Speaker 1: electric motor or aid the systems in some way with
Speaker 1: electric motors or batteries, so that makes it more efficient,
Speaker 1: but ultimately it's a long way away. So we're looking
Speaker 1: at forty Airbus have targeted their hybrid planes to take off,
Speaker 1: so batteries, pure, pure batteries are you know, even further
Speaker 1: away than that. So yeah, it does mean that there's
Speaker 1: more oil in the world because there is no alternative,
Speaker 1: and oil and gas companies are responded by investing right.
Speaker 1: They want to produce petrochemicals and jet fuel. They are
Speaker 1: the two things that are pretty safe to grow over
Speaker 1: the next twenty years, and it saves them from worrying
Speaker 1: about a stranded acid. If you want to produce a
Speaker 1: bunch of gasoline, now you've got to worry if evs
Speaker 1: are going to take your market away. You're less worried
Speaker 1: if there's going to be an airplane and the sky
Speaker 1: with a battery. Slightly different angle, but tell me a
Speaker 1: little bit more about the bio fuels part, because you
Speaker 1: can have some mix in there, and it is it
Speaker 1: is efficient, What are the economics of it? It's um,
Speaker 1: it's expensive, is the answer. And biofuels are not one thing.
Speaker 1: You've got totally different types of biofuels and different generations,
Speaker 1: and they are now being sort of painned as the
Speaker 1: answer to everything. It's hard to do carbonized trucks and ships,
Speaker 1: like I said, but bio fuels are earmarked for that.
Speaker 1: They're also earmarked for fift of fuels that are on
Speaker 1: the roads in the US right that competes to There's
Speaker 1: only so much you can really generate. If you have
Speaker 1: like a natural source to make bio fuels, like say Brazil,
Speaker 1: it makes sense absolutely to turn that into of your
Speaker 1: road fuel. Otherwise you're competing with every but use for
Speaker 1: all of this new biofuel which we've yet which you know,
Speaker 1: we haven't seen, and that's why the prices are high.
Speaker 1: The supply is not there, and it's also not it's
Speaker 1: not as well proven, I guess as jet jet fuel um,
Speaker 1: and there's less of it available, but airlines are turning
Speaker 1: to it. It's almost a I don't want to say
Speaker 1: a marketing campaign in certain ways, but it definitely does
Speaker 1: well for green credentials of airlines if they're running off
Speaker 1: of biojet. So we saw it, for instance at Davos,
Speaker 1: or we've seen some of the corporate flights being fueled
Speaker 1: by biojet. That's great, but they've all flown in on
Speaker 1: private jets. Right, it's not quite the solution that you're
Speaker 1: kind of thinking. So we've all been at the airport
Speaker 1: or maybe an advance gotten the email saying that our
Speaker 1: flight has been canceled, and in some circumstances that flight
Speaker 1: gets canceled because the flight isn't full. One would then
Speaker 1: assume that, at least to some degree, that airlines and
Speaker 1: CEO two emissions might be in some way a line
Speaker 1: because they want to be as efficient as possible because
Speaker 1: that's where their margins come from. And this is a
Speaker 1: pretty petitive space to make money. And is it not
Speaker 1: or is it a robust space? Margins are thin. We
Speaker 1: see airlines go bus quite regularly. I mean we're in Europe.
Speaker 1: There's five six examples in the last decade decade and
Speaker 1: a half, right, So yeah, absolutely, it's in the interest
Speaker 1: of the airline not to have big exposure to oil
Speaker 1: prices essentially, and somewhere between of their margin is down
Speaker 1: to the oil price or the jet fuel price in
Speaker 1: the case of airlines, right, so they want to shift
Speaker 1: away from that. The answer so far has been more
Speaker 1: efficient airplanes or lighter airplanes, or ones that can operate
Speaker 1: in a much more efficient way. So not flying through
Speaker 1: two other cities or through one other city instead flying directly.
Speaker 1: You use less fuel because you've only got to take
Speaker 1: off ones and you've only got a land once, and
Speaker 1: it's much more efficient. A jet is much more efficient
Speaker 1: and cruising altitude then when it's coming down and circling
Speaker 1: an airport waiting for a landing spot, or when it's
Speaker 1: delayed um and trying to get off the ground right
Speaker 1: taking off with all that fuel on board. So yeah,
Speaker 1: there's a lot of ways they could save fuel, operate
Speaker 1: efficiently and have the most efficient engine and fill the
Speaker 1: airplane the highest load factor is the best way to
Speaker 1: do it. Does this have a net benefit for CEO
Speaker 1: two emissions? And then what's the flip side of that?
Speaker 1: If yeah, I mean if you look at the distance
Speaker 1: versus fuel efficiency profile of some flights, it's horrendous. So
Speaker 1: if you fly Washington, d C. To New York, roughly
Speaker 1: ten of the fuel is burned before you even take
Speaker 1: off the ground. So just moving around the A C
Speaker 1: on your you know, getting your safety briefing, the lights
Speaker 1: have to run off of something. You're in a queue,
Speaker 1: your six in line to take off. That's crazy. And
Speaker 1: between that taking off and the landing fuel profile, a
Speaker 1: flight that short can have of its fuel just from
Speaker 1: coming down, not the cruising part of the flight. So
Speaker 1: when you make these things much more efficient, particularly things
Speaker 1: like airplane operations at an airport, you can you can
Speaker 1: cut that number down pretty quickly, and things like digital sensors,
Speaker 1: digitalization can really help this. So we've seen a few
Speaker 1: early indicators that there's low hanging fruit to be had. Right,
Speaker 1: you can you can really make the whole system much
Speaker 1: more efficient and save cash. Right, you're saving cash, you're
Speaker 1: also saving CEO two emissions. It seems that all roads
Speaker 1: lead to the airlines themselves in terms of the attention
Speaker 1: that maybe you know we're talking about now and the
Speaker 1: end consumer. But really the innovation has got to be
Speaker 1: somewhere else, Right, they don't manufacture the airplanes, and they
Speaker 1: don't make the fuels. Where is most of the innovation
Speaker 1: coming from? Aside from the biofuels and electric planes that
Speaker 1: you've already addressed. Where is the other innovation. Yeah, it
Speaker 1: can come from all different angles. Air traffic controllers, for example,
Speaker 1: they can do a much better job if you delay
Speaker 1: a flight and tell them in advance. They can be
Speaker 1: delayed and fly slower at a height when it's much
Speaker 1: more efficient instead of circling around Heathrow Airport. We've all
Speaker 1: been there. You can also have airports that know better
Speaker 1: how to direct their traffic. So we saw study in
Speaker 1: China say, if you can use AI to hit your
Speaker 1: talk because you take off time, so when you hit
Speaker 1: back from the airport and go towards the runway, you
Speaker 1: can save on your fuel bill. I mean fuel bill
Speaker 1: translates into fuel consumption translates into carbon. The airline's happy,
Speaker 1: carbon emissions are happy. The person is not delayed, right,
Speaker 1: you're not sitting on that airplane again. So there's a
Speaker 1: lot of things. It's going to come from all different angles,
Speaker 1: and policy has to play a role. It's a little
Speaker 1: bit more dull, but they're trying to do what the
Speaker 1: shipping industry has done in terms of the I m O.
Speaker 1: It's just not quite having the same execution I guess
Speaker 1: is a fair way to say it without being too critical.
Speaker 1: It's a really weak policy we're seeing in course you're
Speaker 1: coming out who governs it, and it's the United Nations
Speaker 1: essentially the I c A. Oh, it's a it's a
Speaker 1: body of the U n Can you explain what Coursia
Speaker 1: is to us? Yeah, So essentially, the goal of course
Speaker 1: here is that by growth and emissions to will be
Speaker 1: net zero pretty much. And to do that there's a
Speaker 1: few different mechanisms. So you can either offset your carbon emission.
Speaker 1: If you offset your carbon emission, you got to buy
Speaker 1: a credit. Essentially they haven't yet defined what that credit is.
Speaker 1: You can use a Corsio eligible fuel, which is like
Speaker 1: a biofuel or and this is the big or a
Speaker 1: jet fuel at his temper sound cleaner than a benchmark
Speaker 1: jet fuel that they've currently recommended. So if you're a
Speaker 1: clean oil refinery and you get your oil in a
Speaker 1: less carbon intensive way, let's say Saudi Arabian oil which
Speaker 1: is not super carbon intensive, that can be registered as
Speaker 1: of course the eligible fuel and you can use it.
Speaker 1: So there's a lot of potential there for oil jet
Speaker 1: fuel to be used, and some biofuels and then this
Speaker 1: sort of carbon officer that we don't know the price
Speaker 1: of yet, so there's a lot of moving parts. It's
Speaker 1: really limited though, because it's only international flights. It's optional
Speaker 1: pretty much before the end of this decade, and some
Speaker 1: countries have just said no, we're not taking part, crucially India,
Speaker 1: which again third biggest market in terms of growth that's expected.
Speaker 1: Russia have said no, Philippines have said no. You're getting
Speaker 1: quickly into pretty chunky terms. Less than half of all
Speaker 1: the fuel consumed today would be covered under CORSEA. Is
Speaker 1: this something where countries will provide the stick to you know,
Speaker 1: to this to this market, or is something where companies
Speaker 1: will pick up the slack and decide to take this
Speaker 1: on themselves. I know we've heard of Jet Blue having
Speaker 1: a goal for net zero. By it's both sides, I think,
Speaker 1: right for airlines they don't want to pay the bill
Speaker 1: um for countries they have to be seen to moving
Speaker 1: towards this Paris agreement. So we've seen UM Europe for example,
Speaker 1: float the idea of including the airline industry in the
Speaker 1: EU E t S system, so that would be quite
Speaker 1: interesting to see how it works. But also watching that
Speaker 1: or the Chinese, so they have earmarked aviation to fall
Speaker 1: under the emissions trading scheme out there as well. So
Speaker 1: these will essentially have a much bigger impact on the
Speaker 1: emissions profile, particularly EU E t S because they say
Speaker 1: you need to lower emissions, not net zero and keep
Speaker 1: a flat you need to every year lower it. And
Speaker 1: then in the U S they're looking at applying levies
Speaker 1: or equivalent programs. It's sort of TBD to regulate it there. Now,
Speaker 1: if China, Europe and the U S acted even on
Speaker 1: their own, to estic flights, you're talking much much bigger
Speaker 1: numbers and it becomes a thing as opposed to international
Speaker 1: flights if you want to take part in our scheme.
Speaker 1: So what do you see is the one thing having
Speaker 1: the biggest impact in the next decade. There's a few
Speaker 1: secret weapons out there that could really take away from
Speaker 1: jet field demand or travel demand in the next ten years.
Speaker 1: High speed rail, I think is the big one. So
Speaker 1: China built out this gigantic project infrastructure project over the
Speaker 1: last ten years and they're continuing to do so um
Speaker 1: and that could have a big impact, particularly on domestic flights,
Speaker 1: because you can you can change the taxes and that
Speaker 1: you can encourage people to travel there, and we've seen
Speaker 1: that to a certain extent just recently in Germany. But
Speaker 1: we saw a study from the I a while ago
Speaker 1: saying that between nine and two thousand the Eurostar took
Speaker 1: about fifty of the passengermand out of that flight path.
Speaker 1: So if that happens, you're talking about real numbers. But TBD,
Speaker 1: if that actually makes an impact, I think it will.
Speaker 1: I think that's the most important thing in the short term.
Speaker 1: That plus policy, because technology is just a little bit
Speaker 1: too far away right now. It's too bad. I'm just
Speaker 1: looking forward to the hyperloop and the suborbital rockets text
Speaker 1: elon right. Cool. So this was the first in a
Speaker 1: series right on aviation from benf what's next in this
Speaker 1: line of research? Yeah, it is the first in a
Speaker 1: series for us, and it's an exciting new new area
Speaker 1: for us to research. The next few things that we're
Speaker 1: going to take a look at our biojet fuel specifically
Speaker 1: because it's kind of the solution for everything at the moment.
Speaker 1: We want to question is it actually the solution and
Speaker 1: what cost is It's just you know, what kind of solution,
Speaker 1: what cost? And then we're going to look at the
Speaker 1: EU e t S scheme for aviation, what does it mean?
Speaker 1: And then that lets us see is that mechanism one
Speaker 1: that might work elsewhere? And that would be quite interesting,
Speaker 1: I think, because again we're seeing the Chinese looking at
Speaker 1: including aviation and their carbon market and if they do that,
Speaker 1: you're talking big numbers. Again. China can do things overnight
Speaker 1: that we can't quite do in Europe the same speed. David,
Speaker 1: thank you for joining us. Yeah, thanks for having me. Guys.
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