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Singapore's sustainable aviation goals will not weigh SIA down: OCBC Investment Research

Jovi Ho
Jovi Ho • 4 min read
Singapore's sustainable aviation goals will not weigh SIA down: OCBC Investment Research
This is the second of three stories revealing the analyst’s stock picks. Photo: Bloomberg
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Deputy Prime Minister and Finance Minister Lawrence Wong emphasised in his Budget 2024 speech that Singapore will “make no apology for pursuing growth”. 

While Wong acknowledged that embracing sustainability may entail additional costs for businesses, going green can also be a competitive advantage, and it is important that local companies are “sustainability-ready”, says OCBC Investment Research analyst Ada Lim. 

“While Singapore’s approach to environmental sustainability may not be the most perfect nor the most ambitious, we think there is merit in highlighting the various ways in which the Singapore government is striking a balance with, partnering and galvanising the private sector to decarbonise, without compromising on economic growth,” adds Lim.

In a March 11 note, Lim names eight Singapore stocks across industrials and financials that are contributing to Singapore’s transition to a low-carbon economy. This is the second of three stories revealing the analyst’s stock picks. 

Sustainable aviation 

Singapore’s transport minister announced at an industry summit on the eve of the Singapore Airshow that all flights departing from Singapore will have to use 1% sustainable aviation fuel (SAF) from 2026. 

See also: Budget 2024 schemes will aid these energy, industrial stocks: OCBC Investment Research

This proportion could potentially increase to 3%-5% by 2030. 

Costs will be borne directly by travellers, and this has been estimated to be between $3 and $16, depending on the destination. 

“Given that this is not a significant jump from current flight ticket prices, we do not expect the green fuel levy to have much of a dampening effect on travel demand,” writes Lim. 

See also: Paying $16 more for a flight ticket 'not exorbitant'; experts praise Singapore's push for sustainable aviation fuel

Thus, Lim does not foresee a significant impact on national carrier Singapore Airlines C6L -

, “unless the mandated proportion (and corresponding levy) rises by a larger magnitude in the medium term”. Lim’s fair value for Singapore Airlines is $8.

The aviation industry is one of the most difficult to decarbonise, says Lim. 

Globally, SAF use needs to rise to 65% by 2050 in order for the aviation industry to achieve net zero emissions. However, SAF currently accounts for only 0.2% of the jet fuel market despite its benefits. 

As a nascent technology, SAF costs three to five times more than conventional jet fuel due to capacity and feedstock constraints, notes Lim. 

“Fuel expense is one of the most significant operating costs for airlines, and the transition to more expensive SAF will certainly weigh on margins. With airlines just starting to turn the corner post-pandemic, carriers may not be willing to bear the high costs of SAF.”

According to Lim, Singapore’s proposed levy is seen as “mild” and “lags global targets”. In Europe, for example, airlines are obliged to use a minimum 2% SAF by 2025, 6% by 2030 and 70% by 2050. “However, Singapore’s approach to decarbonising the domestic aviation industry is sensible, in our view.”

See also: Can sustainable aviation fuel take flight before the net-zero runway ends?

Stimulating demand

That said, the Civil Aviation Authority of Singapore (CAAS) is looking to stimulate demand for SAF, adds Lim. 

Unlike in Europe, where airlines pay for blended fuel and decide what proportion of costs will be passed on to passengers through ticket prices, CAAS will centrally procure SAF to achieve better prices through demand aggregation and economies of scale. 

Airlines do not have to bear the costs, says Lim, and those that wish to go beyond the 1% may also ride on the central procurement mechanism to purchase additional SAF.

Finnish energy company Neste expanded the capacity of its Tuas South Refinery in Singapore in mid-2023. The expanded refinery allows it to produce up to 1 million tonnes of SAF each year, 10 times its previous capacity. 

Neste also acquired a minority stake in Changi Airport Fuel Hydrant Installation to establish an integrated SAF supply chain to Changi Airport. 

Singapore’s Sustainable Air Hub Blueprint, which details the SAF levy and other green initiatives at the Changi and Seletar airports, alleviates the burden of cost for airlines, says Lim. 

“[It] strikes a balance between maintaining Singapore’s status as a global aviation hub and signalling the city state’s commitment to reduce domestic aviation emissions,” she adds.

Shares in Singapore Airlines closed at $6.36 on March 12. 

Infographic: OCBC Investment Research

Read OCBC’s full list of eight stock picks that could benefit from Budget 2024 schemes here:

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