Trends in Fuel Management for Simulation of NextGen Operations
Bruno Miller, Ph.D.
January 28th, 2010
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1. Introduction
2. Jet fuel procurement basics
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Main US pipelines and markets
Supply chain and delivery alternatives
3. Alternative fuels
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Types
Factors driving their adoption
4. Implications for NextGen modeling
Fuel a major driver of airline decisions
1. Fuel is currently single major expense for US airlines
2. Small changes in price of fuel can drive substantial cost variations in
an industry with razor-thin profit margins (if any)
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Major airlines consume about 3 – 6 billion gallons per year each
1 penny increase translates into $30 - 60 million additional costs per year
3. Increasing public awareness of environmental matters, in particular
climate change, is putting pressure on the industry to “do
something”
 Fuel is an important factor in many airline decisions of relevance
to the modeling community:
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3.
4.
Fleet
Schedule
Operations
Composition of the fuel
Jet fuel procurement process
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Getting fuel to the aircraft occurs in two major steps:
1. Supply negotiation and contracting
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Set-up purchase agreements with fuel suppliers (major oil companies, FBOs, etc)
Can also buy on the spot
2. Into-plane services
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In the US, a third-party vendor typically manages the loading of fuel into the airplanes
What about hedging?
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Hedging typically resides within finance
The fuel group procures the fuel, finance hedges the risk
Major US fuel pipelines and markets
New York
Harbor
(NYH)
Los Angeles
(LA)
HNL
Singapore
(SIN)
Gulf Coast
(USGC)
Observations regarding US markets
• US Gulf Coast (USGC)
• Single largest market of jet fuel in the US
• Pipelines allow access along East coast, into the Midwest
• Area prone to disruptions during hurricane season (July – November)
• New York Harbor (NYH)
• Feeds NYC, New England
• Los Angeles (LA)
• Primarily West coast but can reach the Mountain region (e.g., PHX, SLC)
• Some interactions between markets
• NYC can be served locally or through pipeline from Gulf Coast. NYH more
expensive in winter, cheaper in summer (hurricane season in the Gulf)
• Fuel can be brought by vessel from Singapore to supply the US West coast
• Hawaii can be supplied with LA or Singapore
Jet fuel supply delivery alternatives
Production
Bulk transport
Bulk storage
Airport distribution Destination
Pipeline
Refinery
Tanker truck
Airport
fuel farm
Value
chain
Airplane
Fuel truck
Vessel
Delivery
process
Hydrant
truck
Into-storage
Self-supply/ into-pipe
Refinery
FOB price
Transport/tariffs/
fees
Storage fees
Plus, insurance, cost of capital, and other costs
Into-plane fees
Into-wing
A note on airport fuel storage
• The large majority of airports in the US have shared jet fuel storage
and distribution systems
• All jet fuel is comingled
• Airlines/oil companies/third parties put their own fuel in the system but do not
necessarily get the same molecules on their aircraft
• If required, a paper-trail can be established to keep track of the
molecules
• Free-trade zone (FTZ) fuel uses this
Alternative fuels
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Airlines looking at alternative fuels for several reasons:
1. Decrease price exposure to crude-oil markets
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Alternative fuels may (or may not) be cheaper than conventional fuels
Alternative fuels would at least be less correlated to crude than conventional fuels
2. Reliability of supply, especially through US-domestic alternatives
3. Environmental benefits
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Increased public awareness regarding climate change forcing airlines to act
Governments around the world are starting to take action, e.g., the EU Emissions
Trading Scheme (EU ETS)
Alternative fuels can also have a beneficial impact on local air quality
Airline requirements for use of alternative fuels:
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Certified and compatible with existing infrastructure (i.e., ‘drop-in’)
Environmentally beneficial over conventional fuels
Reliability of supply
Economic feasibility
Source: ATA
Types of alternative fuels
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Two major types of alternative fuels being considered for aviation:
1. Fischer-Tropsch (FT) fuels
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Uses well-established technology to produce kerosene out of different fossil/organic
fuels:
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Advantages
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Coal: coal-to-liquid (CTL)
Natural gas: gas-to-liquid (GTL)
Biomass: biomass-to-liquid (BTL)
Abundance of relatively cheap, domestically available feedstock, especially coal and natural gas
Mature technology (developed in the 1930s, SASOL in South Africa producing CTL since the 1980s)
Use of CTL-derived jet fuel has been approved for aircraft
Disadvantages
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Capital intensive production plants
Carbon footprint on a life-cycle basis higher than conventional fuel (can reduce it with carbon capture and
sequestration (CCS) technology)
Types of alternative fuels (cont’d)
2. Bio-derived fuels
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First generation of bio-fuels based on edible crops (e.g., corn, soy)
Second generation uses crops or organic matter that does not compete with food
production (e.g., camelina, jatropha, algae)
Different technologies under consideration, in particular hydro-treating
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Advantages
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Potential for much lower carbon footprints and better local air quality impact profile compared to conventional
fuels
Expected to gain certification by 2011 or 2012
Can be produced in the US
Disadvantages
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Hydrotreated Renewable Jet (HRJ) can be produced, in theory, from any vegetable fat or oil: corn, soy,
canola, camelina, jatropha
Technology still developing
Costs not yet well understood
Back to the land:
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~80% of cost of bio-fuels is the feedstock
 cost-effective production of bio-jet has everything to do with understanding how crops are grown
Factors driving adoption of alt fuels
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The adoption of alternative fuels driven by:
1. Geography:
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Distance to market and access to pipelines key to secure demand and reduce cost
US wheat production (camelina can be
grown in rotation with wheat)
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Schematic of principal pipelines in the US
Other geographical areas, in particular South America, SE Asia, and Africa may be
better suited for the production of bio-fuels
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The adoption of alternative fuels driven by:
2. Availability:
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No significant production currently exist in the US
Earliest possible expected in late 2012
3. Cost:
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Best estimates indicate alternative fuels may not be cheaper than conventional fuels,
at least initially
Airlines willing to support alternative fuels but no appetite for large premiums over
conventional jet fuel
Factors driving adoption of alt fuels (cont’d)
4. Certification:
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Fuel must be certified before it gets to a commercial aircraft
Certification expected in 2011 or 2012
5. Legislation:
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Regulation (e.g., EU ETS) incentivizing airlines to take action
Alternative fuels may benefit from tax credits extended to other bio-fuels (biodiesel)
6. Carbon markets:
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The development of carbon exchanges would provide a tangible financial advantage
to alternative fuels
7. Emissions profile:
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Wide range of lifecycle CO2 footprints depending on feedstock, process, etc
Implications for modeling
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Cost of jet fuel:
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Major determinant of airline direct operating cost (DOC)
Market price of fuel as reported publicly (e.g., US Gulf Coast, NY Harbor) only
one of many components of total cost of jet fuel for the airlines
Some of the other costs can be obtained from public/private sources:
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Pipeline tariffs
Transport costs
Storage
Insurance
Into-plane (maybe)
Some costs are proprietary to the airline, in particular, cost of capital
Seasonality may have an impact on price and availability of fuel
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Hurricanes may impact supplies/distribution in the Gulf Coast
Price of crude oil products increase in the Winter in the Northeast
Implications for modeling (cont’d)
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Alternative fuels and NextGen:
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Alternative fuels are coming and will play a key role in NextGen to reduce the
environmental impact of aviation
– Alternative fuels provide mechanism to reduce lifecycle carbon emissions reductions
while allowing aviation to grow
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Expectations are high but so are uncertainties:
– Availability still at least two years away and still unknown when significant volumes
will arrive
– Adoption rate will depend on several, uncertain factors: cost, certification, legislation,
carbon markets, emissions profile
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Need to develop capabilities to estimate the impact of alternative fuels:
– Carbon/emissions profile dependent on feedstock/process
– Effect on local air quality dependent on where they are burned
– Asymmetries of alternative fuels loading will require revision of fuel composition
assumptions as they become airport/region specific
– Comingled fuel distribution systems create challenges:
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Unable to track use of alternative fuels molecules by flight,
However, paper trail could help keep track of alternative fuels use
Questions?
Bruno Miller, Ph.D.
bruno.miller@metronaviation.com
617 291 6352