A new report from the International Air Transport Association, or IATA, predicts Europe's major carriers are on track to suffer $1.1 billion in net losses this year thanks to rising fuel costs.
That's the bad news. The good? A volatile oil market is forcing airlines to search for alternatives, and that means biofuels -- though in limited use today -- could become mainstream within a few years. No company stands to benefit more from this shift than Solazyme (Nasdaq: SZYM ) .
Although there's plenty of technical expertise that goes into what Solayzme does, the simple explanation is that it specializes in turning microalgae into oil. And it can do so faster than alternatives and without the need for direct sunlight to act as a catalyzing agent.
Efficiency is what makes Solazyme's process disruptive, and could lead to a long-term solution for rising aircraft fuel costs. United Continental (NYSE: UAL ) tested a Solazyme blend last November during what the company called an "Eco-Skies" flight between Houston and Chicago.
A lot of big names with deep pockets have an interest in seeing Solazyme succeed. Honeywell (NYSE: HON ) is a refining partner. Venture capital firm Harris & Harris was an early investor. Bunge (NYSE: BG ) and Dow Chemical (NYSE: DOW ) are joint development partners.
But if Europe is any indicator, demand from the major domestic and international air carriers will drive gains in the years ahead.
Just consider the numbers. IATA's loss estimates are pegged to oil staying at around $110 a barrel. Right now, with oil topping out at about $84 a barrel, that number looks conservative. Trouble is, IATA research shows that fuel still accounts for 33% of annual airline operating expenses, up from just 13%-14% a decade ago.
Something has to change. Either oil prices have to fall dramatically for the long term -- unlikely, in my view -- or carriers have to become more aggressive about developing alternatives. I'm betting on the latter in my CAPS portfolio, where you can see that I've picked Solazyme to outperform. I still like that call.
Searching for black gold
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