Energy and Environmental Matters
From Fossil to Fuel
Petroleum, or crude oil, is a hydrocarbon (a chemical compound containing hydrogen and carbon) that can be distilled into gasoline, kerosene, oils and waxes. Hydrocarbons are formed from large deposits of decomposed plant and animal matter. The best environments for the production of petroleum are restricted basins of water, such as oceans or lake bottoms, where there is little or no water circulation. Petroleum, which is squeezed out of decomposing micro-organisms as sediment, becomes increasingly compacted over time. This process takes billions of years and occurs in large quantities in certain regions of the world.
Once extracted from the ground, oil is transported to refineries in the United States via pipeline, oceangoing tanker or barge. The United States buys oil from a globally diverse group of suppliers, including private domestic producers from Alaska to Louisiana, as well as a mix of private and state-owned suppliers in nations such as Kuwait, Mexico, Russia, Canada and Venezuela. With increasing demand throughout the economy and limited access to domestic supplies, U.S. consumers must rely on foreign suppliers to make up the difference.
After it is refined, jet fuel travels by pipeline to storage sites, airports or fuel terminals where it is distributed by truck, barge or pipeline. Once it reaches the airport, fuel is distributed in a variety of ways. Some airports have internal hydrant systems that carry fuel from a storage site at or near the airport, then under ground to the terminal gates, where hoses span the final distance to the wing of the airplane. At airports without such systems, refueling trucks are used to move fuel from the storage site to the aircraft.
Accommodating Demand
Producers sell oil through a variety of arrangements, including private bilateral contracts and market contracts that are priced through a commodity exchange. Air carriers buy fuel from multiple suppliers and at differing rates. Not every supplier operates at every airport that a carrier may serve, so multiple arrangements are necessary. Since airline schedules make fuel demand generally predictable, carriers can purchase fuel months or years in advance in order to receive a discounted rate from the supplier.
Locking in the prevailing price for future deliveries of a commodity like jet fuel is called a hedge. Hedging allows airlines to limit the uncertainty over future costs by mitigating volatility and improving financial planning. However, hedging requires a relatively healthy financial condition, a willing counter-party and often a sizable upfront transaction cost. Hedging also can be financially risky, because an airline could find itself locked into paying more for fuel if the market price drops below what it has agreed to pay in the hedge contract.
The Cost of Doing Business
Fuel and labor are the two largest operating expenses for all U.S. airlines, with fuel constituting 20 percent to 30 percent of the industry's operating costs. Several factors contribute to the price of jet fuel, which historically has tracked closely with movements in the price of crude oil. Those factors include: interrupted refinery operations; environmental regulations; surges in regional demand; seasonal swings in demand; supply disruptions caused by natural disasters, military conflict or geopolitical events; and market speculation.
The difference between crude oil and jet fuel prices, commonly known as the "crack spread," historically averaged about $5 per barrel. In the weeks following hurricanes Katrina and Rita in 2005, however, the crack spread widened dramatically when major oil supply disruptions prompted refiners to focus their operations on producing gasoline. As a result, airline demand for fuel far exceeded the available supply, causing the spot price of jet fuel to surge to more than double the spot price of oil. At its peak, the crack spread added the equivalent of $60 per barrel to the final cost of jet fuel, which reached $131.47 in the Gulf Coast on Oct. 5, 2005.
Just as motorists pay different prices for gasoline in different parts of the country, airlines pay different prices regionally for jet fuel. West Coast prices traditionally run higher, because of limited refining capacity as well as inferior storage, logistics and distribution capabilities. In addition to the mountainous terrain, which limits trucking capability, the West Coast lacks the more robust pipeline network of the East, although the latter is becoming increasingly strained by today’s demand and competing product needs (i.e., gasoline vs. diesel vs. jet). Much of the product on the West Coast is imported, often from countries with even higher prices.
Airlines constantly strive to improve jet fuel efficiency, because unlike other modes of transport, airlines have no alternative source of energy. Airlines conserve fuel in many different ways, including reducing and more accurately measuring onboard weight; cruising longer at higher altitudes; employing greater use of flight-management systems; and conducting more in-depth analyses of weather conditions. In addition, airlines modernize their fleets with more fuel-efficient airplanes; invest in winglets to reduce aircraft drag and thereby reduce fuel consumption; redesign hubs and schedules to alleviate congestion; and pool resources to purchase fuel in bulk through alliances with other carriers.
Airlines also are monitoring the potential to utilize synthetic jet fuel currently employed in some parts of the world. While there are many questions that need to be addressed about the widespread use of synthetic fuels to propel commercial aircraft in the United States, ATA is encouraged by efforts by the Department of Defense, NASA, the Federal Aviation Administration, airframe and engine manufacturers, and academic institutions to bring coal-to-liquids (CTL) technology to the marketplace. Any incremental fuel supply, especially if both environmentally friendly and economically viable, is worth pursuing.
Did You Know?
- Determining how much fuel is needed for a particular flight involves a variety of factors such as aircraft type, passenger load, cargo, weather conditions and route length. Every aircraft is required to carry, at minimum, enough fuel to reach its destination, or reach a pre-determined alternate airport and still be able to fly for an additional 45 minutes.
- There are limits both for how much an aircraft can weigh to take off and land. Fuel burn is most efficient at higher altitudes; every aircraft type burns fuel at a different rate. Occasionally, an aircraft will carry more fuel than is needed for a particular flight either because fuel is more expensive at an intermediate stop, or because “ballast” is required to provide correct weight and balance.
- Winglets, those vertical fins at the ends of the wings, make airplane wings more aerodynamic, cut fuel consumption between 3 and 5 percent, saving more than 100,000 gallons of fuel per aircraft per year while reducing noise and emissions.
- Jet fuel is linked to the commodities markets principally through home heating oil, a refined product similar in consistency. Because home heating oil is traded on public exchanges, it is often used as a reference to price jet fuel – when the price of heating oil rises, so does the price of jet fuel. The inverse is also true, in that jet fuel prices often move heating oil prices.
- Jet A and Jet A-1 are kerosene grades of fuel for aircraft powered by turbine engines. Jet A is the most commonly used fuel for commercial airplanes and has a maximum freezing point of -40°F; Jet A-1 has a maximum freezing point of -53°F to meet the low-temperature requirements of long, high-altitude flights. Jet A and Jet A-1 have a high flash point (100° F), making them relatively stable fuel types.
- About 50 percent of our petroleum imports are from countries in the Western Hemisphere, with 19 percent from the Persian Gulf, 18 percent from Africa and 13 percent from other regions.
- The United States consumes more than 20 million barrels (840 million gallons) of petroleum products each day, almost half in the form of gasoline used in more than 200 million motor vehicles with combined travel of more than seven billion miles per day.
- Approximately 145 refineries in the United States produce 1.55 million barrels of jet fuel per day.
Supply tightness has become a growing commercial challenge and frustration at many airports. By securing off-site storage, tankering fuel or supplementing pipeline-transported supplies with shipments by land or sea, however, airlines have managed to keep passengers and shippers from experiencing palpable disruption.
Fuel Prices
Fuel prices are influenced by a myriad of global and local factors, but are closely linked to 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.
The technical specifications for jet fuel make it more complex to refine. U.S. buyers have also been somewhat disadvantaged in recent years when compared to 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.
Existence of the futures market and other derivative instruments allows any participant to “lock in” the prevailing price for future deliveries, such as home heating-oil prices for the winter season. Such a strategy, called a “hedge,” involves a series of transactions, offsetting profits or losses on a futures transaction against losses or profits on the physical purchase or sale of oil. By limiting the uncertainty over future costs, the hedge allows companies to mitigate volatility and thereby improve financial planning. A hedge instrument may or may not accompany the actual (physical) delivery. In most cases it does not. An airline could hedge volume at a fixed price, but most frequently hedges occur in paper markets or on an exchange, typically settled on a monthly or quarterly basis between the airline and an oil company or bank.
The primary means by which airlines purchase jet fuel is through “term contracts” based upon a projected volume for a given period. For example, ABC Airlines might agree with supplier X to supply its requirements in Chicago for a one-year term from Feb. 1, 2010, through Jan. 31, 2011, estimated at five million gallons per year on a Platts Gulf Coast index (based on the week prior to delivery) plus or minus a fixed differential (usually stated in cents per gallon). After term contracts and hedging, spot-market purchases constitute a minute portion of the industry’s jet fuel consumption. These purchases tend to be limited to larger, more sophisticated airlines that have become integrated into the supply chain for reasons of price or supply surety. And even those airlines only tap the spot market for well under 10 percent of annual purchases.
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. 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 were to double, the airlines’ fuel-tax burden would double as well.
Fuel Efficiency
Beyond the numerous, diverse, successful measures that U.S. airlines have taken and continue to explore to conserve fuel, the single biggest advance in fuel conservation will come from reform of the U.S. air traffic control (ATC) system, which continues to rely on 1950s technology and procedures. Efficiency gains could reduce unnecessary fuel consumption by as much as 400,000 barrels a day by 2030, according to Securing America’s Future Energy (SAFE), a nonpartisan organization working to reduce America’s dependence on oil. And every drop of fuel saved results in emissions reductions.
Airlines have developed many different operational and planning techniques aimed at conserving fuel, reducing emissions and optimizing fuel purchases. On the operational front, airlines are:
- employing single-engine taxi procedures during normal operations and selective engine shutdown during ground delays
- reducing and measuring more accurately onboard weight while redistributing belly cargo
- tankering extra fuel on certain flights to avoid refueling at more expensive locations
- cruising longer at higher altitudes and employing more efficient approach procedures
- employing self-imposed ground delays to reduce airborne holding
- using airport power rather than onboard auxiliary power units (APUs) when at the gates
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
- 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
- changing paint schemes to minimize heat absorption (which requires additional cooling)
- altering the location in which fuel is purchased
- pooling resources to purchase fuel in bulk through alliances with other carriers
ATA provides assistance to member airlines via the FAA Command Center in Herndon, Virginia, 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
- alert FAA to opportunities for avoiding fuel waste during departure delays and airborne holding
Environment
Soaring fuel prices have continually intensified the airline industry’s efforts to increase fuel efficiency – the most effective means of reducing emissions. By employing more fuel-efficient aircraft and operational procedures, reducing aircraft weight, cutting marginal routes and matching capacity more closely with demand, U.S. airlines continue to carry more passengers and cargo with substantially fewer gallons of fuel. These voluntary measures have resulted in significant reductions of greenhouse gases and more localized ozone-forming pollutants. As the industry continues to replace older aircraft with quieter and cleaner jets, per-operation noise and air quality impacts will continue to diminish.
ATA members also continue to support noise abatement measures consistent with the safe and efficient operation of aircraft. Improvements in navigation technology facilitate compliance with noise reduction measures and help diminish noise impacts on communities. Area Navigation (RNAV) and Required Navigation Performance (RNP) procedures and improvements in positional accuracy from Automatic Dependent Surveillance – Broadcast (ADS-B) permit aircraft to operate more closely at optimal altitudes and follow more precise flight tracks, thereby enabling even better noise management. However, some noise abatement procedures require longer flight paths, which increase the amount of fuel-related emissions, and such conflicting goals must be considered in each situation. Many new operational procedures, such as the Continuous Descent Approach (CDA), also offer the potential for significant reductions in both noise and emissions.
While future advances in air traffic management promise to further reduce noise and emissions, it is important to remember that the converse is also true. In the absence of critical investment in our air traffic control (ATC) system, worsening congestion threatens to overtake hard-earned gains in fuel efficiency and environmental compatibility. Rapidly advancing ATC reform is critically important to mitigating aviation environmental impacts.
Through collaboration with industry, agency and intergovernmental partners, ATA is engaged in many approaches to address environmental issues. ATA experts play key roles in the International Civil Aviation Organization (ICAO) Committee on Aviation Environmental Protection (CAEP). CAEP is responsible for environmental measures affecting international aviation, including noise and emissions standards for aircraft engines and measures to address greenhouse gas emissions. In addition, ATA serves on the Advisory Board for the Partnership for Air Transportation Noise and Emissions Reduction (PARTNER), a research center sponsored by the Federal Aviation Administration (FAA), NASA and Transport Canada. Moreover, ATA represents its members on the Joint Planning and Development Office (JPDO) Environmental Working Group (EWG), which works to ensure that environmental concerns will not constrain the planned expansion and modernization of the U.S. ATC system. At the same time, in coordination with industry and government partners, ATA is playing an active role in efforts to develop and deploy commercially viable, environmentally friendly alternative fuels.
ATA and its members are working hard to identify measures that will continue to lessen the environmental impacts of aviation and better manage environmental constraints on aviation growth.
Chapter 9