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The High Cost of Aviation Fuel

by Jeremy Cox 1. September 2005 00:00
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There is currently no alternative certified fuel available to you at your local FBO or bulk fuel supplier (as far as I know, unless you are planning to add your own cocktail of fuel saving/cutting agents like used cooking oil or have a bio-diesel cracking plant at your hangar) you are pretty much stuck with having to pay whatever price the market establishes as being bearable. In fact there has been talk for years how the fuel choices that are available to you now, may actually be reduced as the refinery companies decide to increase their profits by dropping lower volume products like Avgas 100LL. Eventually we may actually have one type of fuel with a handful of blended choices: i.e. with, or without deicer (either EGME: Ethylene Glycol Monomethyl Ether, or DI-EGME: Diethylene Glycol Monomethyl Ether; see Phillips/Connoco website.) Several German and British companies do currently have some impressive Diesel Engine Conversion Programs under development for light aircraft, while other companies here in the US and in Eastern Europe are working on small Turbine Engine Power-packs as retrofits for current Piston Powerplant Installations.

When pure crude oil is pumped out of the ground, regardless of whether it came out of the North Sea, out of the deserts of Kuwait or Siberia; out of the Gulf of Mexico or the Sea of Japan; the global price for a 42 US Gallon Barrel of crude oil (this is the internationally recognized standard barrel size for crude oil trading) is currently floating around $65.00 USD, which means an un-refined price of approximately $1.55 USD per gallon. However this un-refined price really means nothing to you or I, therefore let's delve further into what the price per gallon breakdown really is, as a delivered product. According to the US Department of Energy, in 2003 the retail price of a gallon of Regular Unleaded Gasoline (MOGAS) was $1.56 and broke down as follows:

Crude Oil = 44% ($0.6864)
Refining Costs and Profits = 15% ($0.234)
Distribution and Marketing Cost = 14% ($0.2184)
Federal and State Taxes = 27% ($0.4212)


The first three costs are mildly variable and can really be considered more of a constant no matter where you are in the world (probably lower in Venezuela and Saudi Arabia when compared to Europe and North America, however they will probably vary no more than say ±$0.50 per USG.) The true variable pricing factor that causes such a major disparage between the global prices that you pay for fuel, nation-by-nation is the amount that is charged as tax. This is illustrated by the total amount of tax levied on a US gallon of AVGAS delivered by fuel truck to a FAR Part 91 (equivalent) owner/operator on the ramp at one of the airports surrounding London in the UK. The tax charged there is approximately $3.80, while the taxes charged on the same specification and measure of AVGAS delivered on the ramp at a rural airport in Kansas is only $0.203. This type of tax disparage is prevalent all-through-out the world. According to the ‘CIA World Statistical Handbook', out of a total of 212 countries in the world, only 98 of them are actually oil producing nations. Interestingly virtually all of the 212 countries elect to charge a fuel use or consumption tax.

According to a recent report published by the French Government titled ‘The oil industry 2004' the report states that the year: 2013 as "…the time of maximum production or ‘Peak Oil'" That would mean that the world's oil consumption would reach its highest point around 97 million barrels per day (mbpd). Certain pundits believe that ‘Peak Oil' will actually occur at the end of this decade (2010), while even others believe that it has already occurred. The Organization of the Petroleum Exporting Countries (OPEC); who account for more than 39% of all crude oil production, and whose member countries hold more than 2/3 of the world's oil reserves, recently reported that they had opened their spigot ‘wide-open' and that global oil extraction currently amounts to 85 Million Barrels of oil per day. It doesn't take much time after thinking about these figures to realize that fuel is not going to drop in price by very much from this point on. So $7.00 per USG Jet A1 delivered into wing at a New York airport, will probably be considered extremely good value in another decade from now. Please believe me when I say that I am not trying to sell you on the actual value that a gallon of aviation fuel currently provides. I am also not figuratively getting up onto an orange box and using this forum to give you all, either an environmental or a geo-political speech on how we Americans have had it too good for too long, when it comes to the price that we ultimately pay for refinery products. Instead I wish to put forward a slightly different point of view regarding this somewhat controversial issue. With this in mind, what is the true impact of the higher than we are used to paying, fuel prices are having on our daily flight operations? To illustrate my alternative response to this question, I need to make three operator ‘direct' comparisons. These are: The FAR part 121 ‘Heavy Iron' Air-Carrier; The Corporate Flight Department and the recreational weekend Private Pilot.

First the FAR part 121 ‘Heavy Iron' Air-Carrier. In this case I will use American Airlines (AMR Corp.) as the example carrier. I wanted to use Southwest Airlines, but they have such a strong and successful ‘forward buy' jet-fuel futures program, that I couldn't really cite them as an example as they will not be breaking the $1.00 per USG threshold until 2008! Back to American; according to the Annual Report filed with the Securities and Exchange Commission, AMR Corporation's annual operating revenue is $18,645,000,000.00 while they currently operate 1,073 aircraft a total of 184,850,000,000 available seat miles per annum. Their operational cost structure means that the cost of the fuel that they burn annually, amounts to 21.1% of their total operating expense, i.e. (3,264,000,000 USG consumed) Total Operating Expense of $18,789,000,000.00 with their total fuel expense equaling $3,969,024,000.00 The average cost per US Gallon of Jet A1 to American Airlines is $1.216.

Now let's look at a Corporate Flight Department that operates three aircraft, i.e. A Falcon 900, a Citation V and a Bell Helicopter. The XYZ Widget Company manufactures electronic components and generates an annual revenue of $863,000,000.00 (not really a specific corporation, just a composite of similar companies, used only as an example in this article.) The Falcon is used to visit clients and suppliers in the United States, Europe and Asia. It flies approximately 500 Hours annually. The Citation and the Bell Helicopter are both used to shuttle operations staff between the various manufacturing and distribution facilities in the Midwest. The Citation flies 700 Hours annually, while the Helicopter flies 300 Hours. Their operational cost structure means that the cost of the fuel that they burn annually, amounts to 23.2% of their total operating expense, i.e. (329,714.3 USG consumed) $4,975,196.00 Total Operating Expense with their total fuel expense equaling $1,154,000.00 The average cost per US Gallon of Jet A1 to The XYZ Widget Company is $3.50.

Last let's look at a typical recreational weekend Private Pilot who is the proud owner of a thirty year old BE55 Baron. The owner is a dentist who decided to take up flying when he and his wife took a vacation in the Cayman Islands six years ago and decided to charter a small aircraft to take them on an island hopping excursion for the day. They were both were so enamored by this experience, they decided that maybe they could have their own aircraft to introduce this same freedom into their lives back at home in St. Louis. Having learn't to fly at the local Beechcraft dealer, our dentist has rapidly moved up from his ab-initio Beech Skipper, thence into a Sundowner until he bought his first aircraft, a P35 Bonanza. He has owned the BE55 for almost two years now and currently flies it 145 Hours annually. His operational cost structure means that the cost of the fuel that he burns annually amounts to 25.9% of his total operating expense, i.e. (3,625 USG consumed) $56,025.00 Total Operating Expense with his total fuel expense equaling $14,500.00 The average cost per US Gallon of Avgas 100LL to our Dentist friend is $4.00.

Now let's take the numbers that we have learn't from the three aircraft operators that are used in this example and analyze the numbers to see what the total financial effect of a 50% per USG increase over what they are currently paying would have upon their overall Operating budget.

American Airlines
Current Annual Operating Expense $18,789,000,000.00
Current Fuel Expense $3,969,024,000.00
($1.216 per USG)
Annual Op. Expense with +50% Fuel Incr. $20,773,512,000.00
($1.824 per USG)
Annual Fuel Expense with +50% Fuel Incr. $5,953,536,000.00
Overall Cost Increase $1,984,512,000.00
Overall Cost Percentage Increase 10.56%
 
XYZ Widget Company
Current Annual Operating Expense $4,975,196.00
Current Fuel Expense $1,154,000.00
($3.50 per USG)
Annual Op. Expense with +50% Fuel Incr. $5,552,196.08
($5.25 per USG)
Annual Fuel Expense with +50% Fuel Incr. $1,731,000.08
Overall Cost Increase $577,000.08
Overall Cost Percentage Increase 11.60%
 
Fred the Dentist
Current Annual Operating Expense $56,025.00
Current Fuel Expense $14,500.00
($4.00 per USG)
Annual Op. Expense with +50% Fuel Incr. $63,275.00
($6.00 per USG)
Annual Fuel Expense with +50% Fuel Incr. $21,750.00
Overall Cost Increase $7,250.00
Overall Cost Percentage Increase 12.94%


Surprisingly the effect of a 50% Fuel Price Increase really does not have the immense impact that we all consciously believe that it does. Remember: If you are currently paying $3.50 for a gallon of Jet A, now, and your price leaps to $5.25, your overall expense will increase by only ± 10% approx. And if you are currently paying $4.00 for a gallon of AVGAS 100LL, now, and your price leaps to $6.00, your overall expense will increase only by ± 11% approx.

Following on from this somewhat surprising viewpoint, what strategies can we still employ as purchasers and consumers of Aviation Fuel?

Well to start with, just like the weather briefing and flight planning process that we all have to undertake prior to making a flight, we should be adding a step to this process by performing a little research with the aid of the Airport Resource Center here at Globalair https://www.globalair.com/airport/ (there are over 2,100 FBOs listed here). Additionally you can use an Airport Facility Directory or similar and then pick up the telephone and call ahead to negotiate the best possible fuel price at your destination. This simple action should result in us being able to have greater control over the price that we pay into-wing on the road, however don't compromise the comfort and convenience of you and your passengers for a mere 25 cent price difference, unless of course you are planning on buying many thousands of gallons. In my opinion, this type of economy just does not make any sense. If you fly a great number of hours each year and operate more than one aircraft, you will achieve the very best fuel cost control by having either your own bulk storage facility, or a bulk storage arrangement with your local FBO (you negotiate a flowage or ‘into-plane' fee that the FBO is comfortable with to adequately compensate them for storing and delivering your fuel to you, and you buy your fuel direct from a bulk fuel supplier.)

Recently I was talking to Tom Prevost, Jr, the Vice President of Aviation for CIGNA Corporation, a Philadelphia based corporate flight department that operates a Falcon 900B and a 900EX. Tom very kindly gave me the following input for this article: "Fuel cost is a huge financial lever in just about any flight department these days since it constitutes a significant percentage of your variable operating costs. I am currently the Chairman of the Board of the non-profit organization called Corporate Aircraft Association and our primary focus is to save our 479 member companies money on their on the road fuel purchases. You can go to our website http://www.corpaa.org/ to learn more about us. Unfortunately membership is restricted to Part 91 operators only, by our bye-laws.

Our company flight department has a multi-pronged approach to fuel savings. First off we have our own fuel farm at our hangar which saves us enough on fuel every year to cover the cost of the hangar. Currently we are saving just over $3.00 a gallon based on the retail fuel price at our airport which is just over $5.00 a gallon. Second we are members of the Corporate Aircraft Association and we try to use as many of their 67 preferred FBO's as possible because they have the absolute lowest prices at each FBO. Third we have assigned a person on our staff to be our fuel manager. He looks through all our top 50 destinations and compares all the available fuel discount programs and selects the program with the best price. We then set the defaults in our flight scheduling software (Professional Flight Management) for that FBO and indicate which fuel program the crew must use. Our scheduling system is updated monthly as the CAA updates pricing and adds new FBO's to the program. Lastly we recently signed up for Universal's new VISA Purchasing Card where we get a rebate based on our total spend. We now use that card for all fuel purchases that do not offer a specific discount for using another card. Fuel costs can be managed but it takes time and effort to find what will work best for your particular situation. If done right there is a lot of money to be saved."

Unfortunately like most people you may not have your own fuel farm and/or you may be based at a ‘city-run' airport where the local city government sets the price that you pay at the fuel truck. So what else can you proactively do? I suggest that you should consider tankering fuel on board your aircraft. What is tankering exactly and how do you decide if tankering is appropriate for specific trips?

You are considered to be tankering fuel when you specifically load more fuel onto your aircraft than what is needed for your next flight. You may choose to do this because of any one of the following reasons: The point at which you are now has the: 1/. Cheapest, 2/. Cleanest or 3/. The Best quality fuel than what is available where you are going. How do you determine if it is cost effective to Tanker fuel or just creating more risk for you and your passengers and causing more wear and tear on your aircraft? Well thanks to David Tuuri, President of ChiefPilot.Com for rustling up a previously published article authored by David Esler, in the March 1991 edition of Aviation International News, we have the following formula that we can use:

MATHEMATICS OF TANKERING
To determine the ‘break-even cost difference' (Cbe), use the formula:

Cbe = ( (RFCh + CmT) / F(1-R) ) x ($/gal)

Where:
R is the percentage of the fuel carried which is consumed due to carrying its own weight. The percentage is expressed as a decimal. Here 10%, that is .1, is assumed.
F is the quantity of tankered fuel in gallons.
Ch is the price per gallon at home base.
Cm is the maintenance cost, including engines, per minute of flight.
T is the additional flight time incurred by the added fuel weight, in minutes.

Assuming 600 gal are tankered, the formula shows that the break-even figure is $0.069/gal. This means that the price of fuel would have to be about 7 cents per gallon more than at home base, just to break even. Obviously, the price difference would have to be much higher than the 7 cents per gallon to make it logical to tanker the 600 gal.

The savings per average trip can be expressed by the following formula: S = F(Cd - RCh - RCd) - CmT. Cd is the cost per gallon difference between home and destination.

Assuming a 600-gal tankering load, at 35 cents difference in price ($.52 at home base and $.87 at destination) and a $2.92/min maintenance cost, the savings comes to $151.96 per trip. The formula: S = 600[$.35 - (.1 x $.52) - (.1 x $.35) - $2.92/min x 2 min] = $151.96 per trip.

If many trips were made to this destination, an operator could reap considerable annual savings in fuel costs.

David also has an extremely neat operating cost evaluator package that he has specifically designed and sells to corporate flight departments. With his program, you can see the overall effect of a specific fuel increase to your bottom line, graphically depicted on an easy to read graph. When you have a moment click over to David's site and check his stuff out: http://www.chiefpilot.com/

So what strategies do you personally employ to ensure that you are getting the best value that you possibly can from the fuel that you buy, either at home or on the road? Any input that you care to make will be of great interest to all of the readers here at Globalair.com. So please don't be bashful and go ahead and write your comments and suggestions here.

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Jeremy Cox | Airports



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