$10 jet-A?: It’s a Possibility, but not in the Near Term

Aviation International News » February 2013
Operators can see wide variations in jet-A prices depending on the geographic region and the amount of competition at the airport.
Operators can see wide variations in jet-A prices depending on the geographic region and the amount of competition at the airport.
February 1, 2013, 4:10 AM

As the cost of jet-A creeps ever upwards, the price last month at several Washington, D.C.-area airport FBOs hovered near $9 per gallon. Signature Flight Support, the lone provider at Reagan National Airport, posted a pump price of $9.18 a gallon, which was still less than the $9.24 per gallon it listed in early March 2011.

Signature v-p of marketing Patrick Sniffen told AIN: “DCA presents extremely unique operating challenges and high costs because of the severe security restrictions placed on business and general aviation operations. We are limited to 48 operations per day–fewer than half of which we receive–and all of them must conform with DASSP regulations. Since 9/11 Signature has operated at DCA at a fiscal loss, but we continue to maintain our dedication to remaining at the airport to serve the needs of our customers.”

Based on data from aviation fuel management system provider and marketplace observer Fuelerlinx, the national average pump price per gallon in the middle of January was approximately $6.18, with the highest regional average in the Southeast at $6.58 per gallon for jet-A and the lowest in the Northwest at $5.80 a gallon. Those numbers clearly show that $9-plus is the outlier on the scale, but with enough locations currently listing prices over the $8 per gallon threshold around the country, it’s reasonable to wonder when the once-unthinkable $10 per gallon plateau might be reached.

“In the petroleum market I never take any long-term view because it’s purely impossible,” said industry consultant Mark Wagner, “but short term, meaning up to six months, I would rate that as a 10-percent chance.” Wagner also noted that jet fuel prices are currently experiencing their annual seasonal increase as heating oil competes for refinery output and terminal space.

While most in the fuel industry shy away from making any prognostications about prices, the short-term outlook is encouraging. A report last month from the U.S. Energy Information Administration predicts that the price of oil will drop slightly over the next two years, leading to an easing of fuel prices. According to the administration’s Short Term Energy Outlook, the Brent crude oil spot price, which averaged $112 a barrel last year, should fall to $105 a barrel this year, and less than $100 per barrel in 2014 as increasing global supply more than offsets higher worldwide consumption.

“In the EIA Short-Term Energy Outlook, we do forecast a jet fuel price that is close to a refinery spot price,” said Tancred Lidderdale, supervisor of the analytical team that produced the report. “Because of projected weakening in the oil market over the next two years, we projected that the refinery jet fuel price would fall from an average $3.10 per gallon to $3.01 per gallon in 2013 and $2.92 per gallon in 2014.” Those predictions, of course, could be skewed easily by geopolitical crisis or natural disasters. As Lidderdale noted, “History has taught us to expect the unexpected.”

Profit Margins

While the cost of crude may be one of the major factors in fuel pricing, it’s by no means the only one, and there is a wide gap between the price the refinery charges per gallon and the price the user pays at the pump. According to the Oil Price Information Service (OPIS), the jet fuel spot price across the U.S. in the middle of January ranged from $3.20 per gallon in New York to $3.06 a gallon in the Gulf Coast.

“The biggest single issue that is driving fuel margin is not so much the cost as the profit threshold that has to be maintained to meet the internal return objectives of the business,” said Steve Dennis, CEO of Aviation Resource Group International. The profit margin per gallon of jet-A for an FBO–after taking all costs, airport fees and taxes into account–ranged from $0.85 to $1.55, according to a survey his company conducted last year. “The prevailing thought at an FBO today is that if you can continue to work on a buck margin, you’re doing pretty well,” Dennis told AIN. “If you can get $0.80 in a highly competitive market, you’re not liking it, but you’re surviving.”

In large metropolitan areas such as Washington, D.C., Dennis noted, FBO operators likely face significant facility costs such as fuel flowage fees and high labor costs, which could easily more than double the spot price of the fuel for the end user. Another factor weighing heavily on the end-user price is the ability of the individual operators to compete in a particular market, with multiple-FBO airports generally showing per-gallon profit margins at the lower end of the range.

Ripple effects from the recent economic downturn also play a role in pricing. “I think a lot of the FBOs have made difficult decisions to reduce overhead costs, and they have done that wisely,” said Steve McCullough, Epic Aviation’s senior vice president for business development and strategy, “but the volume hasn’t recovered.” McCullough noted several factors affecting fuel volumes, including the improved fuel efficiency of newer aircraft, continued headwinds in the charter market and overall reduced flight hours. Reagan National, which previously had one of the nation’s highest volumes of private aviation traffic, saw those totals dwindle amid the strict security regulations imposed after 9/11.

“What remains is a certain fixed cost for all these FBOs; they still have to pay the rent, they still have their power [costs], they still have their salaries that they have to pay, so a big component of retail price or the ultimate price to the end user is made up of the cost recovery for the FBO. If you are spreading it over fewer gallons, the only thing that can really happen so the FBO can stay in business is to raise the price,” McCullough told AIN.

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