The aviation industry is a central component of the global economy; however, it is enormously intensive in its demand for petroleum derived fuel, amounting in the U.K. to almost one quarter of the total fuel used nationally to run all forms of transport. It is an odd contradiction too, that while the recent Energy Review ("U.K. Energy Review Published") calls for energy efficiency (i.e. use less fuel) as a central part of its strategy, to secure supply and to cut CO2 emissions, plans remain afoot to build a fifth runway at Heathrow Airport. It all seems like a bizarre tug-of-war contest in which the rope of current activities moves very little, however hard either side pulls. However, not only is the aviation industry set to expand, but it must do so against the backdrop of fuel becoming more scarce and accordingly more expensive. If whole-scale coal liquefaction will be required to meet the world's current demands, on an undreamt of scale perhaps beyond what is possible in reality, how can we make a sales pitch for increased demand in any form including for aviation?
However it is provided, from oil-wells or coal (see for example, "Gasoline from Coal"), the cost of liquid combustible fuel will almost certainly escalate during the post-"Peak Oil" period. There will be an unprecedented demand for all kinds of fuel, including synthetic (made from coal or gas) and biofuels (biodiesel and bioethanol) - really whatever can be brought to hand; and it must follow an upward market curve of cost. Aircraft turbines are in fact very flexible in terms of the kind of fuel they can burn. It seems likely that short-haul and commuter "shuttle" air services will benefit most from alternative aviation fuels, as most of them operate only over stretches of 500 miles or less. Short-haul flights can be made using turbo-prop or turbo-fan engines that run on naphtha (an air-equivalent of diesel for road transport), which is much cheaper than high-octane "jet" fuel. Such aircraft also have enough fuel-tank capacity to carry even lower-energy fuels such an ethanol, which packs only around 60% of the "punch" of hydrocarbon fuel. I remain lacking in my optimism that the equivalent of 12 million tonnes (oil equivalent) of alternative fuel (that's just for the U.K.!) could be provided by alternatives, however.
In my alternative "localised living" scenario, I envisage that some "essential" aviation will continue, possibly fuelled by alternative fuels; however, we will mostly be living in communities "pods" of limited population, connected by electrically powered tram systems. That would eliminate 90% of our current requirement for liquid petroleum fuel, and a substantial fraction of what is finally left over from that subtraction might be provided using coal/gas derived fuel and biofuels. Electricity might be provided on a "county" scale (a British "county" being far smaller than a U.S. "state") from regional sea, hydro, wind and nuclear installations, with micro-generation providing much of the rest.
What "Peak oil" means is the end of luxury. We will no longer be able to squander energy, and that includes transportation fuel, as we do now. If we need to cut back dramatically on road transport - as indeed we do, in relatively short order - we can hardly maintain let alone expand the aircraft industry. It is a nonsense to suggest otherwise.