Jet Fuel Information

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Guest
Q&A on the the Fuel-Related Challenges Facing U.S. Airlines

ATA chief economist discusses the airline industry’s energy situation

Updated Jan. 3 – Vice President and Chief Economist John Heimlich provides some perspective on jet fuel and its implications for industry operations and financial performance.

Related Links -- Presentation to the Institute of Economic Affairs' Future of Air Transport Conference (London, U.K.)

How much jet fuel do U.S. airlines consume annually?

In total, U.S. passenger and cargo airlines are projected to consume 19.5 billion gallons of jet fuel in worldwide operations in 2005. Thanks to improved fuel efficiency, that figure remains below the 2000 peak of 20.3 billion gallons. And keep in mind, airlines need little incentive to improve jet fuel efficiency, because unlike other modes of transport they have no alternative source of energy.

So how do fuel price increases translate to higher airline operating expenses?

At a consumption rate of 19.5 billion gallons per year, every penny increase in the price of a gallon of jet fuel drives an additional $195 million in annual fuel costs for U.S. airlines. So if the price were a dollar higher over the course of a year, we're talking about a $19.5 billion increase in expenses. That's just staggering, and virtually impossible to pass through in an environment of limited price power for air transportation services.

Consider how higher fuel prices affect an individual flight. As cited in a September 12 Bear Stearns research report, "It costs an airline over $12,000 in fuel alone to fly a [Boeing] 757 from L.A. to New York, which means that flying coast-to-coast is over $4,000 more expensive per trip today than it was in 2004." Just two days later, the Washington Post quoted Independence Air's Jeff Pollack as follows: "Flying to L.A. burns a lot of fuel, and we're not seeing average fares that cover that. We burn about 3,500 gallons on a trip to the West Coast, and since fuel is up by a dollar in recent months, that's another $3,500 per trip we need to recoup. The current fares people are willing to pay to the West Coast just aren't able to cover the expense of flying there."

What's happening with oil prices?

On August 30, according to the U.S. Energy Information Administration (EIA), the price of West Texas Intermediate (WTI) crude oil reached an all-time (nominal) high of $69.91 per barrel, setting us on course to average nearly $60 in 2005. (Note: In 2001, the price of crude oil averaged just under $20 a barrel and had risen above $41 in 2004.). That's a huge, structural jump in a short period of time.

It is essential to recognize that for airlines, trends in crude oil prices give you only part of the picture because jet fuel prices have been rising disproportionately.

Okay, well how much have jet fuel prices risen and what does that mean for airlines?

Simply put, today's jet fuel prices are crushing, and could prove to be a knock-out blow for some. Thanks to the high price of crude as well as a range of issues with refining capacity, product distribution, and market speculation, jet fuel prices have soared. And keep in mind -- unlike other modes of transport, airlines have no alternative to jet fuel. Even before Hurricane Rita landed, we saw two additional bankruptcy filings, not to mention significant reductions in domestic air service. Others may be on the horizon.

On August 17, with Hurricane Katrina approaching the Gulf Coast, the price of jet fuel stood at $1.87 per gallon. At 42 gallons per barrel, that per-gallon price translated to $78.69 per barrel--$15.40 higher than the price of crude oil.

Date Average Price ($ per Barrel)

WTI Crude Oil Crack Spread* Jet Fuel*
5-Jan-04 33.71 8.42 42.13
3-Jan-05 42.16 6.66 48.82
1-Aug-05 61.51 12.74 74.25
17-Aug-05 63.29 15.40 78.69
29-Aug-05 67.41 19.10 86.51
30-Aug-05 69.91 25.22 95.13
31-Aug-05 68.63 27.41 96.04
1-Sep-05 69.50 29.63 99.13
7-Sep-05 64.38 23.13 87.51
15-Sep-05 64.64 18.52 83.16
29-Sep-05 66.83 42.23 109.06
4-Oct-05 63.74 43.48 107.22
15-Oct-05 64.26 30.94 95.20
31-Oct-05 59.80 20.19 79.99
15-Nov-05 57.05 12.70 69.75
30-Nov-05 57.33 10.30 67.63
15-Dec-05 60.01 14.75 74.76
30-Dec-05 61.06 14.23 75.29


*Average of New York Harbor, U.S. Gulf Coast, and Los Angeles jet fuel spot prices

Source: U.S. Energy Information Administration (EIA)

Katrina landed ashore on August 29. By September 1, jet fuel prices* had risen 49 cents per gallon to $2.36, or $99.13 per barrel – a whopping $29.63 above the price of crude oil. That product-to-crude gap is known as the "crack spread," essentially the refining profit margin. As of September 7, thanks to recovery efforts and some quick action by various federal agencies, the price of jet fuel had fallen to $2.08 per gallon or $87.51 per barrel. The crack spread had narrowed to a still-high $23.13 per barrel.

Post-Hurricane Rita, however, fuel prices surged again. As of September 29, a barrel of jet fuel cost $109.06, versus $66.83 for crude oil—up 123 percent and 59 percent, respectively, from the beginning of the year. As of October 15, a barrel of jet cost an average of $95.20, with prices in the Gulf Coast as high as $107.86. Jet fuel finished 2005 at $75.29 on December 30, including $61.06 for crude oil and a $14.23 crack spread, with momemtum carrying into the begining of 2006.

What has the crack spread looked like in the past few years?

After falling from 2000 to 2001, then again in 2002, the crack spread for jet fuel has increased four fold from 2002 to 2005:

2000 -- $7.49
2001 -- $5.56
2002 -- $3.63
2003 -- $5.90
2004 -- $9.28
2005 -- $15.84

How has the crack spread varied historically?

You can see for yourself by clicking HERE to view our new table, which depicts crude oil and jet fuel prices back to 1977. We also compute the jet fuel crack spread for each year. The long-term average is in the neighborhood of $5 per barrel.

What was Katrina’s impact on U.S. jet fuel supplies?

U.S. refineries produce 1.55 million barrels of jet fuel on a daily basis. Katrina eliminated about 13 percent—nearly 200,000 barrels—of daily production. [Note: In 2004, the United States imported 127,000 barrels per day and exported 40,000 barrels per day, about half of which went to Canada via pipeline or barge.]

And Rita made it worse, right?

You bet. As of September 30, according to the Department of Energy, there were four refineries still shut down in the New Orleans area, seven shut down in the Port Arthur and Lake Charles areas, and one shut down or attempting to restart in the Houston/Texas City/Galveston refining area, amounting to a total of over 3.0 million barrels per day of refining capacity that is currently offline. So combined, post-Katrina and post-Rita, nearly 400,000 barrels per day of jet fuel are not being produced, representing roughly 25 percent of normal US jet fuel production.

What is driving high fuel prices?

Fuel prices are influenced by a myriad of global and local factors, but are heavily correlated with the price of crude oil, which is being driven principally by a robust global economy, increasing supply tightness, geopolitical insecurity, and unique production and demand factors, and, most recently, Hurricanes Katrina and Rita, among other causes.

The technical specifications for jet fuel make it more complex to refine. U.S. buyers have also been somewhat disadvantaged in recent years vs. their foreign counterparts, due to a relatively weak dollar. Beyond the price of crude oil, the price of jet fuel has risen sharply with overburdened refineries, competition with other products in multi-product pipelines and refinery outages.

Why don’t airlines pass on the cost of higher fuel to passengers?

Within the airline industry, everyone knows competition is intense. But we also compete with other modes of transport and with various forms of technology, or with customers not traveling at all. That makes demand for air transport highly price-sensitive, or "elastic." People may be willing to travel by air these days, but it's at a far lower price than once paid. This is playing out in particular on shorter-haul routes, where the airport experience has become more uncertain and substitutes such as bus, car or train abound. Although airlines have recently passed through a few price increases, they pale in comparison to the magnitude of the sustained rise in jet fuel prices.

Don’t airlines use special purchasing practices, such as hedging, to mitigate the impact of high fuel costs?

Traditionally, airlines have “hedged†a portion of their fuel requirements by locking in future purchases at a set price. However, hedging is a gamble, rather than an arbitrage opportunity, and it requires a relatively healthy financial condition (i.e., investment-grade credit), a willing counter-party, and often a hefty up-front transaction cost. In a period with abysmal credit ratings, it's near impossible to secure a good deal for many carriers. Some carriers had to liquidate hedges either in the course of filing for bankruptcy protection or to free up cash to meet immediate financial obligations. No airline out there is 100 percent hedged and no industry in America foresaw oil prices in excess of $50 per barrel at this point, let alone $70.

U.S. airlines pay fuel taxes, too, right?

Yes, at the federal level, airlines pay 4.4 cents for every gallon consumed on a domestic flight. Of that amount, 4.3 cents goes to the Airport and Airway Trust Fund while 0.1 cents supports the Leaking Underground Storage Tank Fund. The industry has asked Congress for a 12-month moratorium on the former.

In addition, in most states airlines pay a flat rate per gallon or an ad valorem sales tax on the purchase of fuel. In California, for example, airlines pay a fuel tax in excess of 8.0 percent of the price of jet fuel. So if the price of jet fuel purchased in California doubles, our tax doubles as well, generating substantial revenue for the state's treasury.

How are airlines changing their operations to improve fuel efficiency?

Airlines have developed many different operational and planning techniques aimed at saving fuel and optimizing fuel purchases.

On the operational front, airlines are:

Employing single-engine taxi during normal operations and selective engine shutdown during ground delays;
reducing and measuring more accurately onboard weight and redistributing belly cargo; tankering extra fuel on certain flights to avoid refueling at more expensive locations, and cruising at higher altitudes and employing shorter, steeper approaches.

In terms of planning for fuel usage, airlines are: optimizing flight planning for minimum fuel-burn routes and altitudes; working with FAA to change en-route fuel reserve requirements to reflect state-of-the-art navigation, communication, surveillance and wind forecast systems; employing ATC and airline ground-delay programs to reduce airborne holding; modernizing their fleets with more fuel-efficient airplanes; investing in winglets to reduce aircraft drag and thereby increase fuel conservation; redesigning hubs and schedules to alleviate congestion; advocating expanded and improved airfield capacity – runways, taxiways, etc.; using airport power rather than onboard auxiliary power units (APUs) when at the gates; changing paint schemes to minimize heat absorption (which requires additional cooling); altering the location in which fuel is purchased (i.e., to avoid higher-priced west coast), and pooling resources to purchase fuel in bulk through alliances with other carriers.

Does ATA do anything to help airlines optimize fuel consumption?

ATA provides assistance to member airlines via the FAA Command Center, working collaboratively with member airlines and FAA to optimize routes and provide subject matter expertise. Specifically, they: work with FAA to decrease reroute mileage;
increase ATC/airline coordination during severe weather;
analyze the jet stream and make recommendations for routing transcontinental flights;
inform FAA of single flight route issues and reduce mileage for flights unable to accept airborne reroutes;
provide advance notice to airlines of future reroutes or “playbook†routes to prevent over-fueling, and
alert FAA to opportunities for avoiding fuel waste during costly departure delays and airborne holding.

So what's been the result of these conservation efforts?
Since 2000, airline fuel efficiency has risen an impressive 18.1 percent, on average, from 38.2 revenue passenger-miles (RPMs) per gallon to 45.1. Of course, part of that gain is driven by higher passenger load factors. If we look strictly at capacity per gallon, we find a 12.1 percent increase over that same period, from 52.8 to 59.0 available seat-miles (ASMs) per gallon. Viewed over a longer time span, it is worth noting that U.S. airlines have tripled passenger-miles flown per gallon since our first data point in 1971. ASMs per gallon doubled over that period.

Why are some airlines having problems with their supply of fuel?

This issue is really more airport-specific than airline-specific, but supply tightness has become a growing commercial challenge and frustration at a number of airports, quite obviously exacerbated by Hurricanes Katrina and Rita, which collectively wiped out 25 percent of our daily jet fuel production through damage to Gulf Coast refineries and pipelines. That doesn't mean airlines have been forced to cancel flights, but the logistics required to maintain adequate jet fuel supplies nationwide are unprecedented. Also, this comes at a time when demand for automobile/truck gasoline and diesel are high. And the hurricanes and other weather affecting refineries have worsened an already difficult situation.

Will this affect flights?

Thanks to the extraordinary efforts and of and cooperation among airlines, ground service providers, and fuel suppliers in managing the supply tightness, flights continue to take off as scheduled. By securing off-site storage, tankering fuel, or supplementing pipeline-transported supplies with shipments by land or sea, they've managed to keep passengers and shippers from experiencing palpable disruption. This industry is quite familiar with working fuel-supply issues simultaneously, and that experience is clearly paying off.
 
The alternative is to raise the price of the passenger ticket. But I guess its easier to rape your employees, file for bankruptcy and go out of business
:down: :down: :down:
 
Yes, because if raising price (and getting passsengers to pay) were actually that easy, then its completely clear why executives would take the tougher road of fixing salaries. Please note extreme sarcasm.
 
The alternative is to raise the price of the passenger ticket. But I guess its easier to rape your employees, file for bankruptcy and go out of business
:down: :down: :down:
Buried in this statement is the accusation that executives aren't doing everything they can to maximize revenue and rather focusing their efforts on a more difficult task of reducing labor costs.

Do you really believe that they actively take in less revenue than they feel they could realize?
 
Buried in this statement is the accusation that executives aren't doing everything they can to maximize revenue and rather focusing their efforts on a more difficult task of reducing labor costs.

Do you really believe that they actively take in less revenue than they feel they could realize?

The airlines have been actively destroying airlines workers since 9-11. They used the economic impact of the attacks to break unions and force concessions which set us back 40 years. If all airlines added fuel surcharges everytime the price of fuel spikes, losses would be stemmed and profits realized. The CEO's tell you they can't raise airfares because they will lose customers.

What BULL%#$*!!!!!!!!!

They put most of the blame of their woes on employee costs and benefits and pensions! They blame these items more than fuel.

So what do these greedy CEO's do?

They threaten the workforce with bankruptcy and, as we all know, some of them have filed for bankruptcy, or they ask a bankruptcy judge to do it!

That's not enough for these greedy bastards! They then ask the same bankruptcy judges to increase their own pay and compensation in order to keep the "talented" execuutives!

TALENTED???????????????????????????????
Maybe dc3fanatic totally agrees with the raping of the airline worker so that the airline executives can get their deserved bonuses!
 
The alternative is to raise the price of the passenger ticket. But I guess its easier to rape your employees, file for bankruptcy and go out of business
:down: :down: :down:
An interesting tidbit about fuel surcharges, in last months(I think, could be Nov) ATW magazine, there was a column about how the European carriers fuel surcharges of up to 100 euro per flight have not hurt business at all. You can add to that the fuel surcharges of Fed-Ex or UPS of at least $5 a package,this can be confirmed by going to their sites, and we still had the biggest online Christmas, sorry Holiday Season :p ever with the packages being delieved. Knowing this, you really have to question the logic of not charging the right price for the fuel by the airlines. European airlines, as well as Fed-ex and UPS are enjoying profits. They haven't gutted employees salaries, and Europe has some of the most cut-throat low cost carriers around. Lastly, many of them have made quite the business doing maintenance for others so they can't use the don't do maintenance excuse.
 
Maybe dc3fanatic totally agrees with the raping of the airline worker so that the airline executives can get their deserved bonuses!
No, but I don't think you fully undestand the market forces of supply and demand for pricing tickets.

Again, are you saying that the airlines execs are purposely trying to realize less revenue than they could?

Do you think that if they could push a few buttons on their computers and increase revenue, they would? Or are they purposely holding revenue down for the sake of screwing with front line wages?
 
No, but I don't think you fully undestand the market forces of supply and demand for pricing tickets.

Again, are you saying that the airlines execs are purposely trying to realize less revenue than they could?

Do you think that if they could push a few buttons on their computers and increase revenue, they would? Or are they purposely holding revenue down for the sake of screwing with front line wages?

What I am saying is that the airlines are finishing off the airline worker in terms of pay and beneifts!
They never shared in the sacrifice that the rest of us did. Mechanics, took a 17.5% paycut. one week vacation loss, 5 sick days a year with the first two of every occurence at half pay, loss of 5 holidays and those 5 holidays at 1 1/2. No more double time!

Airline execs like to toss around the term "market rate." for themselves. But who do you think determines market rates for CEO's and executives? THE BOARD OF DEIRECTORS WHICH IS MADE UP OF OTHER COMPANIES'CEOS AND TOP EXECUTIVES!

Since 9/11 these greedy bastards saw an opportunity to screw labor and, by GOD, what a superb job they have done!
 
Buried in this statement is the accusation that executives aren't doing everything they can to maximize revenue and rather focusing their efforts on a more difficult task of reducing labor costs.

Do you really believe that they actively take in less revenue than they feel they could realize?
Does that mean your answer is YES?
 
In total, U.S. passenger and cargo airlines are projected to consume 19.5 billion gallons of jet fuel in worldwide operations in 2005.

From the useless trivia dept


If two giant rectangular tanks were overlayed over runways 17R and 17C at DFW (the two main runways just east of the terminals), the volume of 19.5 billion gallons of Jet-A would fill them to a height of about 555' high, or roughly 1.5 football fields.

If the total area of the airport was a reservoir, it would be 3.14' deep.

Now I'm off to get a life :p
 
An interesting tidbit about fuel surcharges, in last months(I think, could be Nov) ATW magazine, there was a column about how the European carriers fuel surcharges of up to 100 euro per flight have not hurt business at all. You can add to that the fuel surcharges of Fed-Ex or UPS of at least $5 a package,this can be confirmed by going to their sites, and we still had the biggest online Christmas, sorry Holiday Season :p ever with the packages being delieved. Knowing this, you really have to question the logic of not charging the right price for the fuel by the airlines. European airlines, as well as Fed-ex and UPS are enjoying profits. They haven't gutted employees salaries, and Europe has some of the most cut-throat low cost carriers around. Lastly, many of them have made quite the business doing maintenance for others so they can't use the don't do maintenance excuse.

In the past five years two European air carriers have gone out of business, Sabena and Swissair. Alitalia and Olympic are on life support. So not all is well over there in Europe either. And yes they may have some LCC's over there as well they are not as prolific as here in the states. In addition a lot of the business European carriers have is overseas flights where they don't have to compete with the LCC's.

One could also use airlines like Qantas and Emirates as an example. However they have certain advantages US carriers can only dream of. Qantas main competitor, Ansett, went out of business years ago. A start up LCC, Impulse, was eventually bought by Qantas. Can you imagine when Jet Blue first started if say DAL or AA had bought them out? There's Jetstar but guess what, Qantas owns them as well. The only real competition they have domestically is Virgin Blue. Which really is not that big of a deal since Qantas only has to compete with them on less than half their domestic routes. I wonder what AA's finacials would look like if their only real compeitior flew on less than half the routes they do.

As for Fed Ex and UPS who are their competitors? Each other and DHL. Even though they fly aircraft like the airlines they are ina different business so it's not a very good comparison.
 
An interesting tidbit about fuel surcharges, in last months(I think, could be Nov) ATW magazine, there was a column about how the European carriers fuel surcharges of up to 100 euro per flight have not hurt business at all.


This only works if everyone plays the by the same rules. As I seem to recall an airline is always trying to raise fars, surcharges ... etc but if the other carriers do not follow suit, they drop it as well.
 
This only works if everyone plays the by the same rules. As I seem to recall an airline is always trying to raise fars, surcharges ... etc but if the other carriers do not follow suit, they drop it as well.


The guilty party in that deal is; Northwest!