Continental Airlines (NYSE: CAL) said Monday it has picked Sapphire Energy as a supplier of algae-based biofuel to power the airline's first bio-fueled test flight scheduled for next month.

The news puts San Diego-based Sapphire in a small club of algae-to-biofuel startups who have landed deals to produce large quantities of fuel. Although there are over 50 algae startups, only a few like Solazyme and Solix have signed contracts and/or filled up more than just a few jugs.

Still, Sapphire – which has raised more than $100 million from investors including Arch Venture Partners, the Wellcome Trust, Venrock and Bill Gates's Cascade Investments (see Bill Gates Digs Algal Oil) – may not brag too loudly about this one because the fuel used in the contract differs substantially from the stuff they hope to produce someday.

The startup seeks to create and grow genetically modified algae that will produce hydrocarbons – crude oils that can be more quickly refined into liquid fuels – for $60 to $80 a barrel once it reaches mass production, Tim Zenk, vice president of corporate affairs, told Greentech Media in October (see Inside Sapphire's Algae-Fuel Plans).

That's different from most other algae-to-biofuel companies, which seek to produce fats from algae and convert them into usable fuels. Sapphire also intends to grow its algae in open ponds, in contrast to companies like Solix Biofuels and GreenFuel Technologies, which intend to grow algae in closed bioreactors (see Solix: Another Me-Too Algae Company Raises $10.5M).

The Continental test, however, won't really serve as a test of Sapphire's technology because Sapphire isn't using its own algae in this contract. It is buying it from a Hawaiian firm called Cyanotech, which specializes in algae food supplements.  Thus, it does not appear that the algae-to-hydrocarbon process – Sapphire's claim to fame – will be used.

Honeywell company UOP (NYSE:HON) has developed the refining technology for the fuel Continental will use for its test flight. UOP spokeswoman Susan Gross said Monday that Sapphire had used algae produced by Cyanotech to produce its share of the fuel needed for the test flight.

Cyanotech proudly boasts on its home page that genetically modified organisms are not used in its products. 

Zenk said Monday that Sapphire was converting Cyanotech's algae to fatty oils for delivery to UOP for refining, a more straightforward process than the proprietary process the company is working to perfect.

"We've been very up-front about this," Zenk said. Sapphire is working towards commercializing its own process at a test facility in Las Cruces, N.M., and hopes to be producing on a commercial scale in the next three years, he said.

Other companies developing algal jet fuels include Solazyme, Inventure Chemical, Aquaflow Bionomic Corp., PetroSun, Chevron and a new Arizona State University spinoff.

In September, South San Francisco-based Solazyme announced its algae-based biofuel had passed tests confirming it could be used as jet fuel. Founded in 2003, Solazyme has developed a process for harvesting oil from algae grown in the dark and fed sugar (see Solazyme Explores Jet-Fuel Market).

Algae-based biofuel isn't as advanced in commercial development as biofuel from other sources. But it's still an area of interest for Continental, Air New Zealand and Virgin Atlantic. Earlier this year, they became among the first aviation-centered companies to join the Algal Biomass Organization, an industry-led nonprofit pushing the commercialization of biofuels made from algae and other aquatic plants (see Algae-Based Biofuel Could Prep for Take Off).

In February, Virgin Atlantic became the first airline to test fly a plane using biofuel. Its Boeing 747-400 flew from London to Amsterdam with one of its four tanks filled with a 20-percent blend of biofuel made of coconut and babbasu oil.

Air New Zealand said in June that it plans to use 10 percent, or one million barrels, of biofuels for its jets by 2013. The airline planned a test flight last week using  biofuel made from jatropha, an inedible weed whose oil-rich seeds are an increasingly popular source of biofuel feedstock. But that flight was put on hold after another, unrelated test flight crashed.

Continental first announced its biofuel plans in March, saying it would partner with Boeing (NYSE: BA) and General Electric's aviation branch (NYSE: GE) on the demonstration.

Continental's Jan. 7, 2009 test flight will be in a two-engine Boeing 737-800 with engines from CFM International, a joint venture between GE and Snecma, an engine company owned by the Safran Group.

One engine will be powered by a fuel that's half traditional jet fuel and half biofuel derived from algae and Jatropha.Sapphire will provide the algae-based biofuel, and Terrasol will provide the jatropha-based biofuel, Continental reported.

Fuel eats up about two-fifths of airlines' expenses, according to the Air Transport Association of America, while the International Governmental Panel on Climate Change puts greenhouse-gas emissions from air travel at between 2 percent and 3 percent of world emissions.