Last week, Alaska Air (NYSE:ALK) entered into a strategic alliance agreement with Gevo (NASDAQ:GEVO), a chemical company, to purchase its renewable jet fuel and fly the first-ever commercial flight on its alcohol-to-jet fuel (ATJ). Gevo’s patented ATJ is a clean burning, homegrown, drop-in jet fuel, which has the potential to deliver aviation biofuel at scale and at competitive costs. Alaska Air, which has set a target to use sustainable aviation biofuel at one or more of its airports by 2020, plans to fly a demonstration flight to test Gevo’s renewable jet fuel, once the company receives certification from the standards group – ASTM (American Society for Testing and Materials) International – which is expected to come in the second half of the year. Soon after the public announcement of this alliance, the airline’s stock soared by 3.3% while Gevo’s stock more than doubled within a single trading day. Our current price estimate for Alaska Air stands at $69 per share, 4% ahead of its current market price.
Gevo is a renewable chemical and biofuel company focused on the development and commercialization of alternatives to petroleum-based products using renewable feedstock. The company converts corn and plant waste into isobutanol, which is then processed into jet fuel, which can be used as a drop-in substitute for petroleum-based fuel. It has been working through the ASTM process for over six years to ensure that the fuel can be integrated into its existing distribution infrastructure and onto commercial aircraft soon after the certification is received.
The deal comes at a time when jet fuel costs for airlines have been declining due to plummeting global crude oil prices over the last nine months. While the airlines have been flourishing due to this decline, they remain vulnerable to any volatility in crude oil prices. The development of a domestic, competitively priced biofuel, with sustainable supply, will protect the airlines against any fluctuations in crude oil prices and, hence, will be critical for the US aviation industry in the long term. It will also enable them to offer economical air fares while remaining profitable, help them meet their environmental goals, and stimulate economic growth in the country.
Alaska Air, being the first US airline to have flown multiple commercial passenger flights using biofuel from used cooking oil, has been proactively working towards using alternative fuels for its operations. It has been a partner in a strategic initiative called Sustainable Aviation Fuels Northwest (SAFN), which is an effort to explore the feasibility, challenges, and opportunities for creating an aviation biofuel industry in the US. Thus, Alaska Air’s decision to invest in Gevo’s ATJ will help in strengthening its cost advantage over its competitors. Further, this will reduce the airline’s exposure to crude oil prices, minimize its carbon footprint, and help to demonstrate the growing demand for fuel alternatives.
View Interactive Institutional Research (Powered by Trefis):