• DATVF.ATLPHL
    1.743
    -0.027
    -1.5%
  • DATVF.CHIATL
    1.978
    -0.165
    -7.7%
  • DATVF.DALLAX
    0.916
    -0.086
    -8.6%
  • DATVF.LAXDAL
    1.446
    -0.049
    -3.3%
  • DATVF.SEALAX
    1.006
    0.021
    2.1%
  • DATVF.PHLCHI
    1.069
    0.000
    0%
  • DATVF.LAXSEA
    2.100
    0.056
    2.7%
  • DATVF.VEU
    1.597
    -0.064
    -3.9%
  • DATVF.VNU
    1.444
    -0.031
    -2.1%
  • DATVF.VSU
    1.181
    -0.068
    -5.4%
  • DATVF.VWU
    1.553
    0.038
    2.5%
  • ITVI.USA
    9,385.190
    -18.330
    -0.2%
  • OTRI.USA
    6.800
    -0.320
    -4.5%
  • OTVI.USA
    9,385.780
    -15.500
    -0.2%
  • TLT.USA
    2.740
    0.000
    0%
  • WAIT.USA
    156.000
    -2.000
    -1.3%
  • DATVF.ATLPHL
    1.743
    -0.027
    -1.5%
  • DATVF.CHIATL
    1.978
    -0.165
    -7.7%
  • DATVF.DALLAX
    0.916
    -0.086
    -8.6%
  • DATVF.LAXDAL
    1.446
    -0.049
    -3.3%
  • DATVF.SEALAX
    1.006
    0.021
    2.1%
  • DATVF.PHLCHI
    1.069
    0.000
    0%
  • DATVF.LAXSEA
    2.100
    0.056
    2.7%
  • DATVF.VEU
    1.597
    -0.064
    -3.9%
  • DATVF.VNU
    1.444
    -0.031
    -2.1%
  • DATVF.VSU
    1.181
    -0.068
    -5.4%
  • DATVF.VWU
    1.553
    0.038
    2.5%
  • ITVI.USA
    9,385.190
    -18.330
    -0.2%
  • OTRI.USA
    6.800
    -0.320
    -4.5%
  • OTVI.USA
    9,385.780
    -15.500
    -0.2%
  • TLT.USA
    2.740
    0.000
    0%
  • WAIT.USA
    156.000
    -2.000
    -1.3%
American Shipper

Fuel wars

Delta and other airlines consider ways to better manage energy for jets.

By Jon Ross

   In 2012, Delta Air Lines made a bold move to tamp down its jet-fuel costs.
  
Tired of paying a premium for fuel and seeing prices yo-yo in the market, carrier officials decided to get into the refinery business and purchased Trainer, an idle facility in Philadelphia.
  
Though it only benefits Delta, the purchase has become a significant the factor in the jet fuel market today. Something that, in the end, benefits carriers throughout North America was started by a major competitor in the industry.
  
Delta is still growing into its role as refiner. The airline hopes to increase its daily fuel output from 30,000 barrels to 40,000 barrels by early next year at the facility. The refinery is capable of producing 185,000 barrels a day. Even with the relatively small amount of its total output capabilities in play, 40,000 daily barrels equates to 25 percent of Delta’s domestic fuel use, according to the company.
  
In the long term, industry analysts believe the refinery will suit Delta well, but getting it up and running has not been without some growing pains. According to the energy analysis firm Platts, the refinery wrote down a $22 million loss in the first quarter after seeing a $63 million loss in the fourth quarter of last year.
  
“The big question is, has the Delta refinery brought down the price of jet fuel?” an analyst asked. “There’s some evidence, and some traders would say yes it did, at least in the beginning.”
  
Delta is taking credit for a drop in jet fuel prices earlier this year, but industry watchers point out that could have come from other factors, including the impact of renewable identification number credits necessary for production of most fuels, except jet fuel. These credits require refineries to blend a certain amount of renewable fuel into their gasoline. Instead of pursuing this, some refineries have increased their production of jet fuel, driving down its cost.
  
“Because it’s getting more expensive to refine gasoline and diesel and heating oil with these new blending requirements, it’s making them want to make more jet (fuel),” according to Paul Whitty, Air Canada’s director of fuel purchasing and supply. “It’s really been advantageous to us consumers because we’ve seen a higher production rate for jet, particularly in the states.”
  
Still, by adding 30,000 barrels a day into the U.S. East Coast refining network, Delta has boosted jet fuel production by only a small amount. “In terms of total product, it’s not a big number,” the industry analyst said.
  
Nevertheless, the Delta story is having an impact. “I’ve had other airlines tell me that it’s a win-win for them. If it works for Delta, they all get lower prices, and if it doesn’t, then your competition gets hurt,” he said.
  
At Air Canada, Whitty has seen a great benefit from Delta’s move. He added that every carrier sourcing fuel in the Northeast market has seen pricing drop due to the new refinery output.
  
“Had Delta not (purchased the refinery), there certainly would have been less jet available in that marketplace, and prices definitely would have been driven up as a result,” Whitty said. “Because of Delta’s acquisition there — they’re even making more jet than that refinery ever made — all it’s done is it’s provided more jet for the entire airline community.”
  
The face of jet fuel pricing changed forever in 2008. That year, according to the firm IHS, barrels of jet fuel averaged $124.49 — and topped out much higher than that — after spending 2007 lingering at $89.50 per barrel. Per-gallon prices shot up from around $2.13 to nearly $3 per gallon. In 2009 and 2010, barrel prices fell steeply, averaging $68.89 and $90.16, respectively, but after another meteoric rise in 2011, jet fuel has stayed in the range of $125-$135 per barrel.
  
Ultimately, that’s a good thing. Fuel pricing is no longer volatile, according to Chuck Clowdis, managing director of transportation advisory and consulting services for IHS. He predicted that moving forward barrel prices will likely hover around $135 for the rest of the year, declining slowly in the next few years. In 2017, average per-barrel costs will be $127.43, coming out to a per-gallon price of $3.03.
  
As of May 31, the average jet fuel price for this year stood at $125.50 per barrel, according to data that the International Air Transport Association (IATA) sourced from Platts. The price for overall jet fuel stood at $2.72 during the last week of May, down nearly 1 percent from the previous week, but up 1.5 percent from the end of April. On May 31, 2012, jet fuel came in 2.9 percent lower.
  
Pricing ended up highest in Latin America, which represents 4 percent of the global market for aviation fuel. A gallon of jet fuel cost $2.81 in the region, whereas in North America, which accounts for 39 percent of the world’s jet fuel, pricing stood at $2.69.
  
There could be more good news ahead for air cargo shippers with carriers using fuel sourced from the United States. While shippers will see an increase in fuel costs in their transportation bills during the summer and a slowdown in the fall, which is a typical, seasonal cycle, the volatility in the market is mostly gone.
  
Before the recession, the industry analyst, who did not have permission from his firm to speak on the record, explained on background to American Shipper that the United States was a net import market which took in a lot of jet fuel from Asia. In 2008, the needle started shifting toward net exports, and for a few months in 2009, the United States was sending out more fuel then it was taking in.
  
“Really since 2010, you’ve gotten into a net export market. Right now it runs about 100,000 barrels a day, or more, that we send out,” the analyst said. ”A large part of that is Canada, but you’re seeing it everywhere — not Asia; we still import from Asia to the West Coast.”
  
A trend in how carriers buy jet fuel has also led to a shift in pricing. Earlier in the last decade, volatility in pricing burned a few airlines which had been hedging their fuel costs, trying to lock in an acceptable rate for fuel and hoping the market didn’t bottom out underneath them.
  
“Any carrier has tried hedging, and with hedging you try to outwit the market,” Clowdis said. “In 2008, in June, when crude went to $147 a barrel, it taught a lot of people a lesson.”
  
Clowdis doesn’t see a lot of hedging in the market now.
  
“If hedging had worked, would they have stopped? No,” he said. “They weren’t getting an advantage out of it any more.”
  
Air Canada’s Whitty more or less sees the jet fuel market moving forward as it has been trending in the last few months with no major surprises for the rest of the year. He noted fuel prices have gone up, but they are staying within a specific price range and are not all over the place. Supply and demand are currently working in the carrier’s favor, and that low cost is being passed on to shippers in the form of lower fuel surcharges, he said.
  
In his job watching over fuel for the airline, Whitty rarely plays in the spot market, choosing instead to enter contracts with suppliers. Pricing for this is based on a previous week’s average cost published by Platts, and the two parties come to an agreement on the overall cost of the supply. He said this method is common for nearly every global airline. Nobody plays the spot, but to safeguard Air Canada from price exposure for services purchased in advance, Whitty uses some hedging.
  
“That’s one way for us to help mitigate that price exposure when people buy for future flights, hedge on a portion of future requirements,” he said. “The other means by which we help mitigate that pricing risk is by fuel surcharges. We try to the best of our ability to manage those fuel surcharges as the market is moving upward or downward.”
  
Pricing still may seem a bit high when it appears new fuel sources are popping up everywhere. Truckers are now experimenting with liquefied natural gas, and oil companies are finding new ways to get gas out of the ground. Clowdis said there’s probably more oil in the world that people know about than ever before. This oil boom should translate to lower pricing, but there simply aren’t enough refineries for increased jet fuel production.
  
His advice to shippers is to be practical about fuel prices. All this new technology that is helping get more fuel out of the ground won’t shift the market for jet fuel down necessarily. That means the onus is on the shipper to negotiate surcharges and keep an eye on fuel costs.
  
“A carrier comes in and says, ‘Fuel is up; I need a 12 percent surcharge.’ You can’t just fold on that first negotiating pass,” Clowdis said.
  
“If I’m a shipper,” he continued, “I’d negotiate hard.”
  
What will certainly have a big effect on fuel costs eventually is the newfound efficiency seen in plane production. Each new fleet promises a bit more fuel efficiency — something in the area of a 15- to 20-percent gain over older models, so even though there are improvements, the movement toward better fuel usage is a slow climb.
  
Shippers aren’t likely to see a massive reduction in fuel costs due to these new planes simply because of the nature of the industry. New aircraft require a large financial commitment and take a great deal of time to deliver to carriers and get integrated into their fleets. Even though airlines are committed to replacing older planes, the savings for shippers will be found down the road.
  
An IATA spokesman called the introduction of these new planes a “constant incremental improvement” for fuel efficiency, but noted there “aren’t any major game-changers appearing soon.”
  
Fuel pricing, he maintained, is an illusive but major part of the aviation puzzle.
  
“It’s a high cost that we look to get around through investment in new technology,” he said. IATA itself has a global fuel efficiency target of 1.5 percent a year.
  
Where technology moves along slowly, something to speed up the process would be air traffic management, such as the NextGen program in the United States and the Single European Sky initiative in Europe. The lack of progress on the European front has frustrated IATA, the spokesman said, but there is hope that might turn around soon.
  
In a speech supporting the European Commission’s recent decision to jumpstart its program by amending some regulations and rules, transport commissioner Siim Kallas said flights are forecast to increase 50 percent in the next decade or two. Without a managed solution to airspace in Europe and the United States, the possibility remains that in-demand jet fuel will be wasted by inefficiency.
  
“If we leave things as they are, we will be confronted with heavy congestion and chaos in our airspace,” he said in the speech. “On the ground, airports will be so crowded that there will be 2 million flights unable to take off or land.”
  
The final technological piece that could affect jet fuel prices is the steady movement toward biofuels, which seems to be rapidly gaining new converts. Carriers and manufacturers have completed test runs powered by jet-fuel/biomass mixes, and industry-wide, most shareholders recognize biofuel as a suitable alternative.
  
Last month, United Airlines signed an agreement with a Los Angeles-area refinery to buy renewable jet fuel that will be converted by AltAir Fuels into 30 million gallons of advanced biofuel each year. The Seattle-based company will then supply 5 million gallons of biofuel to United annually over a three-year period. The carrier will use the fuel to power flights from its Los Angeles hub, buying it back from AltAir at a competitive price to traditional fuel. According to Platts, spot jet fuel was trading at $2.73 per gallon when the announcement was made.

Sources: IHS.

  
The airlines’ pledged commitment to alternative fuels will not speed up the slow trend toward renewable fuels. Those in the industry say shippers shouldn’t be holding their breath for lower jet fuel prices anytime soon, and while biofuels may eventually become a strong contributor, that reality is far off in the future.
  
“I don’t really see it picking up until 2020,” the industry analyst said. “The most optimistic estimates are 5 percent at that time.”
  
At Air Canada, Whitty and his team have looked into biofuels and been part of the testing, but he can’t see biofuels becoming a factor anytime soon.
  
“Air Canada is very involved in terms of looking for alternative fuels, biofuels; at the end of the day, though, those alternative fuels or biofuel alternatives to conventional jet fuel need to be commercially viable,” Whitty said.
  
“It’s all about the cost,” he continued. “Today, bio jet fuel is still significantly much more expensive than conventional jet.” This is due to a lack of production, he said.
  
Until production of biofuel increases and a significant infrastructure for getting that fuel to airlines is put in place, costs for alternative fuels will remain prohibitive. And though industry organizations have touted the safety of biofuel blends, some officials may still have their doubts.
  
“It’s one thing to have ethanol in your gas tank when you’re driving 30 miles an hour down the road. It’s another thing to have some unknown quantity of biojet in your airplane when you’re flying 30,000 feet in the air,” the industry analyst quipped.
  
What might be a little closer to reality or future fuels is the U.S. Federal Aviation Administration’s quest to use unleaded jet fuel in the aviation market. The development, which would replace the low-leaded fuel currently used, is still in the proposal stage, and manufacturers won’t even begin the initial testing phases until late 2014. While it’s not biofuel and analysts haven’t weighed the benefits of such a move, unleaded gas could open up some new doors to carriers.
  
For now, jet fuel in its current state is here to stay, and shippers shouldn’t put too much stock into alternative fuels to significantly lower these costs soon.
  
“Technology-wise,” Clowdis said, “we’re going to have to do some pretty creative things to replace Jet A, simply because of the nature of the beast.”

Show More
Close