Perverse pricing model means Air NZ has stopped buying biofuel

2026-03-29 - 00:14

Analysis: We’ve talked boats. We’ve talked trucks and trains. Today, let’s talk about the planes. It’s one month ago that Air NZ announced a pre-tax loss of $59 million for the first half of the 2026 financial year. At the time, that seemed terrible. New chief executive Nikhil Ravishankar said he was undertaking a full strategy review, “with the objective of returning the airline to sustained profitability through enhanced operational performance, growth and further cost transformation initiatives”. Sustained profitability? That was the dream. Now, the airline is facing potential pre-tax losses across the current year and next year totalling more than $500m, according to Forsyth Barr analysts. Forsyth Barr’s head of research Andy Bowley and associate analyst Hugh Lockwood say the airline’s fuel bill has “increased materially” over the past three weeks. “The lagged nature of its jet fuel contracts means cash costs have only modestly lifted to date but will likely increase materially into April.” Even the best-case outcome for the 2025/26 financial year is “significantly worse” than the previous fuel cost guidance. The airline is exposed to the so-called crack spread – the difference between the Brent crude oil price and the price of refined jet fuel. As you can see, that’s sent jet fuel prices soaring. What’s curious, in all these discussions, is the work that transport and energy leaders have done on decarbonisation and electrification – and the realisation now, when the rubber meets the road, of how little progress has been made. We reported last year that an Air NZ-Airbus initiative to build a 100-seater hydrogen plane had stalled, and the work with Vermont company Beta Technologies to develop and commercialise a small short-hop all-electric aircraft was “not progressing at the speed it was a few years ago”. Other Air NZ projects to cut emissions have run into turbulence. Even before the oil shock, there were limited supplies of sustainable aviation fuel from companies like Singapore-based Neste, and what little fuel there was sold at a high price. Air NZ had planned to increase its SAF use from 1.7 percent to 3 percent of fuel volumes this year, passing on the increased cost to consumers. So, what is SAF, and is it part of the answer to the oil shock? Sustainable aviation fuel is made from renewable waste and residue raw materials, primarily used cooking oil, animal waste fats (tallow), agricultural residues, forestry waste, and municipal solid waste. Here’s a little story about the life cycle of fuels. There’s a small oil/chemical tanker that I was tracking last week, named Scarlet Ray, that shipped a load of oil or some such from Japan to Fiji, and then the remainder on to Tauranga. It had not long returned to service, after surviving a hit by a Houthi ballistic missile in the Red Sea, near the Saudi port of Yanbu late last year. But the other interesting fact is that after discharging its load in Tauranga, Napier and New Plymouth, it continued on down the country to Timaru – where I’ve discovered it picked up a load of tallow. This unpleasant byproduct of meat production is brown gold to the makers of SAF in Singapore. The world can’t get enough of it. That’s even more the case, now. And perversely, for Air NZ to get low-emissions SAF, it relies first on a dirty diesel tanker chugging across the ocean full to the gunwales of waste from New Zealand’s meatworks. Air NZ was targeting to increase its SAF use to 10 percent of fuel volumes by 2030, just four years away. It had placed some of its hopes, and its capital, in developing the domestic production of SAF – but that seems to be going nowhere fast. And the airline tells me that although it had been buying SAF earlier this financial year, “currently we’re not uplifting any SAF”. Sadly, this is not SAF’s magic moment. As the price of traditional jet fuel has soared over $US$700/tonne this month, SAF has experienced a corresponding increase on world markets including California, where Air NZ fills up. Platts-assessed SAF outright prices in California rose US$1.33 to an all-time high of US$8.85 a gallon this month. By my calculation that’s around $3000 a metric tonne. “The SAF increase is because jet is the most affected product from the closure of the Strait of Hormuz,” an S&P market source said. “SAF is reacting to steep increases in jet prices everywhere.” The latest estimates from the International Air Transport Association show production volumes doubled to 1.3 billion litres last year. Prior to the oil shock, IATA forecast the world would produce 2.4 million tonnes in 2026 – a tiny 0.8 percent of the 300 million tonnes of jet fuel consumed by the world’s airlines and air forces. Matt Connolly is the energy transition sustainability lead for Air NZ. “SAF costs appear to be rising at the moment but we’re working through the dynamics of this to understand what might be being driven by the uncertainty in fuel markets vs other demand factors like mandates,” he says. SAF is most often priced on a ‘jet fuel plus fixed premium’ basis, so any increases in the jet fuel index flow straight through to an increase in the total SAF cost to airlines. “The underlying economics of SAF are driven by the feedstock cost and the cost of production,” Connolly says. “We think the SAF cost of production should remain fairly steady despite the current environment, but inflationary pressures, global market dynamics driven by supply and demand, and feedstock flows could all impact the SAF market price.” So here we are then. Air NZ can’t afford to buy SAF at today’s prices so, if anything, it will be using less of the sustainable fuel than previously. This is a perverse outcome, when market demand should be driving supply. Instead, Air NZ must join the back of the queue to buy jet fuel at overseas airports, or when the New Zealand fuel companies ship it in. And will there be enough jet fuel landed at Marsden Point and piped down the line to Wiri? It’s hard to know. MBIE is scrambling to make sense of the data it’s being sent by fuel companies. On Thursday it issued an urgent advisory correcting its reporting, after Newsroom approached the ministry pointing out its data showed the country was running down its diesel to just 10 days’ supply. But we can tell you that it’s corrected advisory is riddled with even more mistakes and missing oil tankers. We’ve again sought explanations. The Taxpayers’ Union is calling on MBIE leadership to front up and explain “the extraordinary events of the last 24 hours” that saw the fuel supply update corrected three times over the course of the day. “Right now, the supply chain of fuel is the most important economic statistic in the country,” says Taxpayers’ Union spokesperson Tory Relf. “Every business leader and household is relying on up-to-date, accurate information to make informed decisions.” The Newsroom fuel tracker now forecasts diesel supplies will bottom out at 17 days’ worth, this Sunday, but jet fuel is looking a bit better. After briefly dipping to 18 days’ supply this Sunday, supplies will be topped up by the big inbound tanker Front Pollux on Monday. Jet fuel supplies should then hold steady around 22 to 28 days’ supply through April.