Decarbonizing aviation: Executing on net-zero goals

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Though the aviation industry has committed to achieving net-zero flying by 2050,1 its path to reaching that goal is complex.2Decarbonizing the aviation sector: Making net zero aviation possible,” McKinsey July 15, 2022; Future Air Mobility, “Critical insights on the path to a net-zero aviation sector,” McKinsey, October 14, 2021. The industry has aligned on most of the important actions needed to decarbonize—namely, fleet renewal, disruptive propulsion technologies, operational efficiency, sustainable aviation fuel (SAF) usage, and carbon offsetting.3 From 2005 to 2019, the aviation industry improved fuel efficiency by approximately 39 percent,4Fuel efficiency: Why airlines need to switch to more ambitious measures,” blog entry by Axel Esqué, Guenter Fuchs, and Robin Riedel, McKinsey, March 1, 2022. but absolute growth of emissions is larger than efficiency gains by far. Going forward, achieving decarbonization in a cost-effective way requires transparency and adaptability across a wide range of carbon mitigation measures as well as a clear focus on short-term versus long-term initiatives.

Many companies across the aviation value chain have set goals to be completed over the long term, but there are actions they can take today to move closer to accomplishing these objectives. To get started, companies should understand which actions to prioritize for the greatest impact and for a cost-optimal path to net-zero emissions.

The current state of aviation decarbonization

Prepandemic CO2 emissions from aviation contributed to roughly 2.5 percent of global total emissions,5Fuel efficiency: Why airlines need to switch to more ambitious measures,” blog entry by Axel Esqué, Guenter Fuchs, and Robin Riedel, McKinsey, March 1, 2022. but the global-warming potential could be significantly greater (see sidebar “Aviation and non-CO2 emissions”). The sector is hard to abate because of unique requirements, including weight and size constraints, long innovation cycles, prioritization of safe operations, and because key technologies, such as SAFs, are relatively costly and have not been adopted at scale.6Decarbonizing the aviation sector: Making net zero aviation possible,” McKinsey July 15, 2022.

Many stakeholders in the aviation value chain have committed to various sustainability goals, including emission-reduction targets,7 SAF targets,8 targets that include compensation,9 and membership in coalitions.10 In addition to the defined paths to reduce emissions that are in line with the Paris Agreement, the Science Based Targets initiative (SBTi) has emerged as one of the leading standards (see sidebar “The Science Based Targets initiative”).

As of April 2023, 25 airlines—mostly based in the Americas and Europe—have committed to setting or have set science-based targets. According to McKinsey analysis, this group represents more than 30 percent of global passenger traffic. On the OEM side, aerospace and defense companies, representing about 20 percent of the global value pool, have also committed to goals aligned with SBTi (Exhibit 1).

The number of airlines and aerospace and defense companies committed to Science Based Targets initiative–aligned climate goals is growing.

While the ambitions are clear, actors in the aviation sector are highly dependent on each other to achieve their decarbonization commitments. For example, more than 95 percent of aircraft OEMs’ emissions come from their Scope 3 Category 11 downstream emissions,11, 12A dual approach to decarbonization in aerospace,” blog post by McKinsey, July 18, 2022. which is mostly airlines’ fuel burn. This interdependency has strengthened the industry’s unified ambition to decarbonize, but it also highlights the role that actors such as commercial aviation lessors, OEMs, and suppliers need to play to support airlines and offer solutions.

Factors affecting decarbonization

Options for airlines to abate CO2 emissions differ based on existing fleet efficiency, the network of the airline, and the baseline decarbonization efforts already implemented by the airline.

From a technology perspective, the development to scale new SAF pathways with improved emission-reduction potential, such as advanced biofuels or power to liquid (PtL) fuels, is uncertain.13Clean skies for tomorrow: Delivering on the global power-to-liquid ambition,” McKinsey, August 25, 2022. Biobased pathways face challenges in feedstock availability and collection to be immediately scalable, and PtL requires significant access to large amounts of renewable electricity. Other uncertainties remain about the progress in other technologies fields, such as new propulsion technology or advanced analytics for flight planning.

From a regulatory perspective, aviation players will need to adapt to the ever-changing implementation of regional incentives and penalties. For example, Europe’s reaction to the Inflation Reduction Act could change SAF-related decarbonization costs for European airlines.

Other industries such as marine and road transport, which are sourcing from the same sustainable fuel feedstock, also influence the aviation sector. This competition affects the balance of SAF supply and demand and therefore its market price, especially as the regulatory schemes and customer willingness to pay evolve.

Many decarbonization efforts also require investments with longer lead times that are not in line with traditional airline yearly business planning cycles and, as such, require a different view on economic and environmental returns. Although many airlines have shown strong financial results in 2022, outlooks are uncertain as the industry returns to pre-COVID-19 capacity levels, which drives traditional airlines to limit riskier investments despite their potential payoff beyond five-year financial plans.

These external factors have contributed to the struggle of companies across the aviation ecosystem to deploy multiple decarbonization efforts in the most cost-effective way, while managing uncertainties in parallel.

Introducing the marginal abatement cost curve

As the timeline to hit near-term emission targets shortens, aviation sector players are increasingly searching for ways to achieve these goals—and do so quickly to compensate for the long lead times of many initiatives. For example, solidifying sufficient access to affordable SAF can take several years, and renewing fleet quickly depends on OEMs’ or lessors’ ability to deliver or provide new aircraft.

As a first step, airlines can evaluate carbon abatement costs and impact potential by developing their own marginal abatement cost curve (MACC).14A revolutionary tool for cutting emissions, ten years on,” blog entry by McKinsey, April 21, 2017. This assessment helps companies compare and sequence different decarbonization measures while also allowing for adjustments and updates. It also helps companies determine the best and most cost-effective decarbonization solutions for the industry (see sidebar “Reading a marginal abatement cost curve”).

Categories within a typical MACC for airlines

Exhibit 2 illustrates a typical MACC for an airline. Actions are classified by three categories: operational measures (including air traffic management), fleet renewal, and SAF.

Airlines’ marginal abatement cost curves typically include actions in three areas.

Operational measures. Operational and efficiency measures often come at negative or low costs (due to associated fuel savings) but are limited in their impact.

Airlines can relatively easily enforce initiatives within their own control, such as introducing pilot incentive programs to fly and taxi more fuel efficiently or imposing stricter operational weight limits to reduce fuel needs. Bolder moves could affect customer experiences, such as reducing ultra-long-haul flights, removing some catering on short-haul flights, or densifying cabins to include more seats.

Other efficiency efforts are dependent on collaboration among several stakeholders, especially to optimize air space usage. For example, the Single European Sky program15 aims to modernize air traffic control infrastructure to reduce up to 10 percent of emissions,16 and a similar program called NextGen17 is underway in the United States. However, an airline’s actual carbon emission savings depend on its exposure to the affected airspace, and emission reductions could be significantly lower than 10 percent.

Fleet renewal. Accelerated fleet rollover can come at negative marginal abatement cost, particularly when including the impact of regulatory action, such as future SAF mandates and kerosene taxes. Depending on the state of an airline’s fleet, the evolutionary rollover to already available aircraft types represents a decarbonization potential of up to 15 to 20 percent.18Fuel efficiency: Why airlines need to switch to more ambitious measures,” blog entry by Axel Esqué, Guenter Fuchs, and Robin Riedel, McKinsey, March 1, 2022. It is expected that next-generation aircraft, such as the Airbus A320neo or the Boeing 777-X family, will replace a significant share of current-generation aircraft in the next ten years (Exhibit 3).

Next-generation aircraft are expected to replace a significant share of current-generation aircraft in the next ten years.

In the long term, both OEMs and airlines could benefit from transitioning to more fuel-efficient aircraft and could adjust their prices to reflect greater fuel efficiency.

SAF. SAF is by far the most impactful initiative, but financial effects vary due to mandates, subsidies, sourcing approaches, voluntary commitments, and customers’ willingness to pay. Minimum sustainable fuel–blending mandates have been introduced in some geographies, and several airlines have committed to SAF volumes of 10 to 30 percent of total jet fuel used by 2030, totaling about 5 percent of expected aviation fuel demand in 2030.19

Notably, many airlines have expressed concerns around the cost, production, and timing of new SAF technologies and raised questions regarding where responsibility for spearheading and paying for these efforts lies.20, 21 Producers will need to scale different SAF-production technologies beyond those currently used because today’s feedstocks, such as waste oils, are limited in availability. These new technologies, which are often still in developmental phases, and the costs of crucial input parameters, such as renewable electricity and green hydrogen, will affect costs to produce SAF.

Challenges influencing an MACC

Ever-changing regulations affect all solutions. It is important to recognize the full impact of regulations, such as SAF mandates and carbon taxes. Because an MACC displays only the marginal cost to the airline, a government-mandated increase in SAF at European airports, for example, will show an abatement impact in the curve but limited additional marginal costs to the airline. Still, it should be recognized that mandated SAF quotas could affect airlines’ competitiveness compared to carriers operating through hubs outside of the mandate’s geography. Carbon taxes such as the EU Emissions Trading System have an amplifying effect on the identified actions: as taxes increase, it becomes more costly to operate in a traditional way and emission-reduction strategies become less costly.

Quantifying levers is not easy. One challenge in developing an MACC lies in quantifying both the impact and estimating the associated cost of initiatives. MACCs are also not static; they look different every year. While the potential mitigation options for the aviation sector are relatively well known, the abatement opportunity and effective costs to airlines are typically not well quantified and are largely affected by many uncertainties in the market.

Customer willingness to pay is growing. Cargo, corporate, and leisure customers have signaled or have the propensity to pay for decarbonization measures. A 2023 McKinsey survey22Opportunities for industry leaders as new travelers take to the skies,” McKinsey, April 5, 2022. indicated that 85 percent of travelers globally said they were willing to pay 2 percent or more for carbon-neutral flight tickets, which is a significant increase compared to previous years: in 2019 and 2021, a McKinsey survey showed consumers’ willingness to pay more for carbon-neutral flight tickets was 46 and 39 percent, respectively. But consumers’ actual behavior may differ. Another survey indicated that only 14 percent of travelers actually pay more for sustainable options when they travel.23Accelerating the transition to net-zero travel: Strategies for action, a joint report from McKinsey and Skift, September 2022. Not only are consumer decisions subject to economic factors, but there is also a scarcity of sustainable booking options and unclear sustainability-related information. As such, raising ticket prices to factor in sustainable options could reduce demand or lead consumers to shift to other connections. Still, leading carriers could limit losing customers by creating transparency, debundling products, and driving personalized, sustainable offerings based on clear segmentation.

In addition to considering CO2 abatement and the cost of certain actions, airlines can include additional sources and criteria in their decision making. For example, taking weight-reducing measures in the cabin to reduce CO2 could have ramifications for an airline’s competitiveness and its customers’ experience.

Potential paths for OEMs in aviation decarbonization

MACCs will take different shapes for different stakeholders, and most initiatives will require actors to work together. Aviation OEM MACCs will likely predominantly focus on Scope 3 Category 11 emissions (use of sold products). OEMs are also dependent on airlines taking measures to improve operational efficiency to fulfil their own downstream decarbonization potential. As such, OEMs can work with airlines to aggregate demand for SAF, for instance, to reduce fuel burn in the short term.

More revolutionary technologies, such as hydrogen and electric propulsion, will likely be limited to short-haul or few-passenger use cases until 2035, and the path to scaling these technologies remains uncertain.

Considerations for implementation

A dynamic and flexible approach to decarbonization allows stakeholders to consider changes in the market and draw implications from external ambiguity. Once companies have established targets and determined their priorities, they can take steps to make these goals more accessible. They can first recognize inherent uncertainties with regulatory landscapes, customer behavior, technology development, SAF availability and prices, and emissions. Then they can create scenarios and identify no-regret moves in the next one to three years.

To ensure rigorous implementation across the different departments—which is especially relevant for weight-saving measures, in which many operational departments play a role—airlines can benefit from a central governance structure to track and trace progress and steer where needed. Leading airlines integrate this as much as possible into their regular business planning cycles.

Some themes, however, may require a temporary thematic governance structure. One example is the optimization of SAF procurement, managing short-term and long-term offtake agreements, and long-term coinvestments. Another one is taking equity stakes to invest in advanced air mobility start-ups that will help them accomplish mid-term and long-term goals.

Aviation companies that integrate decarbonization efforts into their standing business planning cycles can de-risk their sustainable transition and achieve optimized decarbonization costs. While decarbonizing the aviation industry is one of the largest challenges the industry has ever faced, the significant lead times of some investments heighten the urgency for companies across the aviation value chain to act quickly to position themselves better in the future. Airlines that embrace radical transparency on their decarbonization options and investigate partnerships with other aviation value-chain actors can determine the future of green aviation.

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