Introducing the A4A Energy Council to ACI-NA Keeping Jet Fuel Affordable, Reliable & Safe Michael Baer Chairman, A4A Energy Council John Heimlich A4A Vice President & Chief Economist April 7, 2014
Overview Importance of fuel to the airline industry Introduction to the Airlines for America (A4A) Energy Council Why airports should understand how the Federal Energy Regulatory Commission (FERC) works Airport choices on fueling infrastructure 2
Jet Fuel is of Great Importance to the Airline Industry s Bottom Line Airline revenues remain sensitive to events out of their control Fuel price volatility is, by far, the biggest risk (Glenn Engel, Bank of America Merrill Lynch, Industry Overview, Jan. 10, 2014) = $180 million in annual fuel expense Jet fuel costs U.S. airlines more than $50 billion annually 2005 $33.2 2010 $39.3 2011 2012 2013 $51.0 $53.5 $53.9 3
Jet Fuel is of Great Importance to the Airline Industry s Bottom Line (Cont d) Jet fuel typically accounts for one-third of airline operating costs Other Aircraft Fuel 34% Airports Maintenance Labor 24% We can t control volatility, but airports and airlines can cooperate to lower the bill. 4
Who and What is the A4A Energy Council? Consists of heads of fuel management (supply and operations) from A4A member airlines: Alaska, American, Atlas, Delta, Hawaiian, FedEx, JetBlue, Southwest, United, UPS and Air Canada Works to reduce fuel and fuel-handling costs, minimize financial, operational and environmental risks, and maintain and improve fuel quality; develops industry standards and coordinates policy regarding the economics of fuel management and operations at locations worldwide Meets semiannually (typically in April and October) and provides industry oversight o Fuel Technical Committee o Consortia services (e.g., accounting/budgeting, audits, insurance, standards [ATA 103/123/124]) o Alternative fuels commercialization and deployment o Regulatory input (e.g., futures trading, taxation, trade, environmental compliance, pipeline tariffs) o Crisis management (e.g., fuel quality issues, supply disruptions) FAME (BOS), fires (BOS/MIA), MSEP (BWI/DSM/FLL/GEG/MDW/MSY/PHL/ROC/SLC), storms (EWR/JFK/LGA), thermal stability (LAS/PHX/RNO), various (Chicago, Florida, San Diego) We can improve and meet objectives, both on and off the airport, through cooperation 5
Off-Airport Cooperation The Federal Energy Regulatory Commission (FERC) Just and Reasonable??? FERC is an independent government agency with the mission to to protect the public and energy customers, ensuring that regulated energy companies are acting within the law Composed of five presidentially-appointed commissioners (Acting Chairman Cheryl LaFleur, Philip Moeller, John Norris, Tony Clark, vacant) serving five-year terms and having equal votes Dedicates the majority of its resources to electricity and natural gas Almost as an after thought, FERC regulates interstate and U.S. international transportation of petroleum by common carrier pipelines and ensures that oil pipeline carriers file tariffs, which contain the rates, charges, and rules for transporting the oil by pipeline (18 CFR 341) Hepburn Act of 1906 amended the Interstate Commerce Act (ICA), classifying interstate oil pipelines as common carriers and commencing the regulation of interstate oil pipelines Energy Policy Act of 1992 subsequently mandated FERC to provide a simplified and generally applicable ratemaking methodology for oil pipelines, authorized FERC to streamline oil pipeline proceedings and deemed oil pipeline s existing rates just and reasonable as of date of enactment Rates are now established via: indexing, cost-of-service, settlement rate or market-based rates 6
FERC: Why It Matters to Airlines and Airports Although the fuel to many airports is delivered by truck, nearly all U.S. jet fuel molecules have traveled through pipelines, which are mostly monopolies, at an estimated cost of $500 million/year In 1992 Congress took action to minimize the pipelines regulatory burden: o Created a regime to enable automatic annual index-rate increases (i.e., 21.4% since 2011) o Allowed market-based rates, if pipelines could show that it does not have significant market power in the applicable market i.e., that economically viable alternatives exist Tariffs mostly left alone if they remain just and reasonable examined only if a shipper complains Pipelines have been allowed to carve out essential assets (from FERC oversight) and charge fees that are not even reported; notable examples include infrastructure that supplies DCA and LAS Shippers have rarely complained, ones that do, frequently reach settlements that don t benefit all o Conflicts of interest (e.g., ownership of energy assets, ability to pass costs on to end-users) o Although consumers pay the costs, they lack status (i.e., legal standing) with FERC o Lack of scale, information, knowledge or human/financial resources to launch a complaint Pipeline annual reports (aka Form 6 ) are inconsistent and lack transparency (e.g., p. 700) 7
FERC: Why It Matters to Airlines and Airports (Cont d) Regulatory environment actually discourages new investment (or upgrade of existing pipes) o Unrealistically high expectations with respect to financial return o Projects executed only upon signing of throughput-and-deficiency agreements (ship or pay) with customers (e.g., airlines) o Pipelines know that eventually their over-recovery could be challenged, so why would they invest in expansion/upgrade unless returns are guaranteed? A4A Energy Council is looking for partners to increase awareness and pressure FERC and Congress to rectify these economic and consumer harms, which, among other consequences, increase the cost of serving an airport and the cost of providing air transportation o Increase transparency of pipeline submissions o Increase oversight of pipeline over-recoveries and excessive returns Require pipelines to show cause as to why their rates are not unjust and unreasonable Require pipelines to file annual paper work prior to rate increases Regularly monitor pipelines that have been granted market-based rate authority Grab a white paper and let us know how we can combine resources to achieve common goals 8
On-Airport Cooperation Choices on Fuel-Related Infrastructure Variety of options for infrastructure related to fueling o Smaller airports: FBO o Larger airports: airport owns/operates; airport owns, airline operates; airline owns/operates o Committees, Corporations, and Limited Liability Companies Optimal structure allows airlines to do as much as possible and utilize airport financing as needed Consult with the A4A Energy Council to help you address your fueling concerns o Develop new resources to be more responsive to airport needs o Reduce dependency on paid consultants o Obtain unbiased and expert advice 9
On-Airport Cooperation Choices on Fuel-Related Infrastructure (Cont d) Narrowing in on the ideal: Airline consortia are proven most effective when structured as LLCs o One entity with which to execute lease o Clear financial accountability and operational oversight o Efficient alternative financing when necessary o Experience developing fuel infrastructure o Environmental responsibility o Transparent management through annual meetings and open access to records o Inventory management (net/gross accounting, days of supply on hand, capacity) o Protects airports from the changing composition of airlines and their representatives 10
On-Airport Cooperation Choices on Fuel-Related Infrastructure (Cont d) Cooperation vs. Competition: Consortia are run to maximize industry benefits o Open enrollment or joining fees consistent with value creation lower barriers to entry o Cost sharing based on usage and membership o Level balance of power with suppliers, operators, infrastructure providers and engineers Enhancing import facilities feeding LAX Opening up PHL to additional suppliers Resolving supply constraints at IAD Although small airports may not have the critical mass to attract consortia management, consulting with us as partners can create value for the airport (e.g., BGR) and the airlines that serve it Keeping fuel infrastructure fees and costs down is good for the environment a win-win Standardization leads to synergy, benchmarking and best practices for everyone As we develop new resources, we are seeking feedback from folks like you Thank you! 11
QUESTIONS? fuel@