Creating a New Jet Fuel Dynamic John P. Heimlich, VP and Chief Economist Biofuels for Aviation Summit September 1, 2009 Air transport has become an essential economic and social conduit throughout the world. Beyond the benefits of fast and inexpensive transcontinental travel, air transport also has become a vital form of shipping for high-valued items that need to come to market quickly, such as agricultural products subject to spoilage. World Bank Web site
The ATA Energy Council: Composition and Leadership Develops and coordinates policy and industry actions regarding the economics and implementation of fuel purchasing, management and operations; recommends actions affecting fuel consortia and other relevant locations worldwide. ABX Air Air Canada Air Jamaica AirTran Airways Alaska Airlines American Airlines ASTAR Air Cargo Atlas Air Continental Airlines Delta Air Lines Chair: John Rau (AA) Vice-Chair: Rick Pressly (CO) Secretary: John Heimlich (ATA) Alternative Fuels Liaisons DL Bruno Miller FX Joel Murdock US Michael Baer Evergreen Int l FedEx Express Hawaiian Airlines JetBlue Airways Mexicana Midwest Airlines Southwest Airlines United Airlines UPS Airlines US Airways 2 www.airlines.org
Billions In 2008, U.S. Airlines Spent $16B More on Fuel Despite Consuming > 5% Fewer Gallons 60 50 The U.S. airlines have a relatively low proportion of their 2008 fuel needs hedged, because hedging high and volatile fuel prices is expensive and may require posting cash collateral. High Fuel Prices Prompt Review of U.S. Airline Rating Outlooks, Standard & Poor s (March 11, 2008) $57.8 40 $41.9 30 20 Gallons Consumed $22.7 $33.2 $38.8 10 $16.8 $15.0 $12.8 $15.5 0 2000 ($0.82) 2001 ($0.78) 2002 ($0.72) 2003 ($0.85) 2004 ($1.16) 2005 ($1.66) 2006 ($1.97) 2007 ($2.11) 2008 ($3.07) Note: Value in parentheses below year is average price paid per gallon excluding taxes, into-plane fees, pipeline tariffs and hedging costs Sources: ATA, Energy Information Administration, Department of Transportation 3 www.airlines.org
Jan-05 Apr Jul Oct Jan-06 Apr Jul Oct Jan-07 Apr Jul Oct Jan-08 Apr Jul Oct Jan-09 Apr Jul Average Price per Barrel Price Stability Matters Volatility of Jet Fuel Prices Wreaks Havoc on Business Planning $165 $145 $125 $105 $85 $65 $45 Source: Energy Information Administration 4 www.airlines.org
2-Jan-09 16-Jan-09 2-Feb-09 17-Feb-09 3-Mar-09 17-Mar-09 31-Mar-09 15-Apr-09 29-Apr-09 13-May-09 28-May-09 11-Jun-09 25-Jun-09 10-Jul-09 24-Jul-09 7-Aug-09 21-Aug-09 4-Sep-09 21-Sep-09 Cents per Gallon Jet Fuel Price Pushing $2.00, Volatility Persisting in 2009 Volatile Nature of Industry s Largest Cost Wreaks Havoc on Business Planning 210 200 190 180 170 160 150 140 130 120 110 NY Harbor Gulf Coast Los Angeles 5 Sources: Energy Information Administration and ATA www.airlines.org
Jet Fuel Prices in 2009 Exceeding 2001-2008 Average Staffing, Scheduling, Aircraft Purchasing Decision Made in Broader Cycles Average* Jet Fuel Price per Gallon $1.53 $1.56 $0.59 1991-2000 2001-2008 YTD 2009** 6 * Simple average of spot prices in New York Harbor, U.S. Gulf Coast and Los Angeles ** Through August 25 Source: U.S. Energy Information Administration www.airlines.org
Jet Fuel Is a Drop in the Bucket, Subject to the Refinery Economics for All Petroleum Segments (incl. Gasoline) Gallons total 44.7 due to processing gain 3.5 LPGs (Propane/Butane/Propylene/Butylene) Average U.S. Yield From Barrel of Crude Oil in 2008 18.6 Finished Motor Gasoline Light Distillates (49.4%) 4.1 Kerosene and Kerosene-Type Jet Fuel 11.7 Heating Oil and Diesel Fuel Middle Distillates (35.3%) 7 1.1 3.3 2.2 Naphtha* Lubricants, Waxes, Asphalt, Tar & Fuel Oils Petroleum Coke * Feedstock for high-octane gasoline, petrochemicals and solvents Sources: Energy Information Administration and American Petroleum Institute Heavy Distillates & Residuum** (15.3%) ** Includes heavy oils used in industry, marine transportation and electric-power generation www.airlines.org
2-Jan-08 31-Jan-08 29-Feb-08 31-Mar-08 28-Apr-08 27-May-08 24-Jun-08 23-Jul-08 20-Aug-08 18-Sep-08 16-Oct-08 13-Nov-08 12-Dec-08 13-Jan-09 11-Feb-09 12-Mar-09 9-Apr-09 8-May-09 8-Jun-09 7-Jul-09 4-Aug-09 1-Sep-09 30-Sep-09 Crack Spread (10-Day Moving Average) Product Margins Matter $40 $30 Jet Diesel Gas $20 $10 $0 ($10) 8 Source: Energy Information Administration Weekly Petroleum Status Report www.airlines.org
Average Refinery Utilization Rate (%) Refinery Utilization Matters U.S. Refineries Responding to Weak Gasoline Margins, Meaning Less Jet Output 96 94 92 90 88 86 84 82 95 96 97 98 99 00 01 02 03 04 05 06 07 08 YTD 09 Source: Energy Information Administration 9 www.airlines.org
Revenue Ton Miles (RTMs) per Gallon Fuel Efficiency Matters But Efficiency Alone Won t Suffice 5.8 6.0 4.9 3.8 3.0 2.7 1977 1980 1990 2000 2005 2008 * U.S. passenger and cargo airlines operating worldwide passenger and cargo revenue ton miles (RTMs) in all services Source: ATA analysis of DOT Form 41 traffic data (T2-Z240) and gallons (T2-Z921) 10 www.airlines.org
The ATA Alternative Fuels Commitment is Predicated on Performance; We Are Feedstock-Neutral The members of the Air Transport Association of America (ATA) are dedicated to the development and deployment of safe, environmentally friendly, reliable and economically feasible alternatives to conventional petroleum-based jet fuel. We recognize that this effort presents significant technical and financing challenges. Further, we believe that we must proactively evaluate the commercial challenges associated with developing promising technologies that can meet our needs. We commit to work with future suppliers who potentially can integrate alternative fuels into our operations that are consistent with the principles on which we elaborate below. To foster the development and deployment of alternative jet fuels that meet our objectives, ATA is a founding and principal member of the Commercial Aviation Alternative Fuels Initiative (CAAFI), a consortium of government agencies, airlines, manufacturers, airports and current and prospective fuel suppliers that are coordinating work on the research and development of alternative jet fuels, including technical specifications, environmental aspects, production and distribution. Fuel Quality Environmental Benefit Supply Reliability Economic Feasibility Source: http://www.airlines.org/economics/energy/altfuelsprinciples.htm (April 22, 2008) 11 www.airlines.org
QANTAS Southwest Lufthansa All Nippon British Air TAM JAL Alaska Continental Delta SAS Air Jamaica American JetBlue United US Airways Air Canada AirTran Creditworthiness Matters No Passenger Airline in the World Enjoys an A-Minus or Better Rating Amid a financing crisis for the global airline industry, U.S. carriers have fewer options to help them buy new aircraft. I ve been through four airline industry downturns. This one is different, because airlines are coping with falling passenger traffic, and a lack of available credit, not only to buy aircraft but [also] to refinance debt. Thomas Hollahan (Citi), in US Airlines Hardest Hit In Global Financing Crunch, Ann Keeton, DJ Newswires (April 20, 2009) S&P Corporate Credit Ratings U.S. airline Non-U.S. airline BBB- (lowest investment-grade rating) Sources: Standard and Poor s as of June 3, 2009 and http://online.wsj.com/article/bt-co-20090420-711716.html 12 www.airlines.org
Logistics Matter Some sizable airports face shortages and/or logistics constraints that drive up local prices as much as 10-to-30 cents per gallon > U.S. Gulf Coast Boise / Salt Lake City / Denver / Albuquerque Buffalo / Rochester / Toronto Edmonton / Calgary Coastal Southeast: Jacksonville to Wilmington Producers should consider more than feedstock costs when deciding where to locate new facilities 13 www.airlines.org
Distribution Matters Can You Get the Fuel to the Airport? 14 www.airlines.org
Distribution Matters Is Your Facility in Harm s Way? Olympic KM North KM CALNEV Magellan Buckeye KM West KM East Explorer TEPPCO Colonial Plantation 15 www.airlines.org
Fuel Farm Visual Houston Intercontinental (IAH) 16 www.airlines.org
Fuel Farm Visual Indianapolis (IND) 17 www.airlines.org
Airline Wish List Safe and certified Affordable Secure supply No adverse operational impact Environmentally superior Flexible contracts No investment (unless return on risk) Pre-empt adverse regulation 18 www.airlines.org
Why Do Business With Airlines? With proper pricing incentives, carriers can enter into long-term contracts Jointly, we can enhance our creditworthiness Jointly, we can pay premiums for quality with no capital invested to segregate fuels Producers will make more money selling jet fuel We like farmers, universities, and the Air Force 19 www.airlines.org
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