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Would A Fuel-BUYING Cartel Make Sense?  
User currently offlineEA CO AS From United States of America, joined Nov 2001, 13608 posts, RR: 61
Posted (6 years 8 months 5 days 1 hour ago) and read 2520 times:
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We all know various airlines - particularly in the U.S. - use collars, swaps, etc to hedge the price of fuel.

But they all do so individually.

Is fuel hedging an area where groups of carriers - perhaps all U.S. carriers, for example - could form their own fuel-purchasing entity that each contributes a set percentage (based on each carrier's projected ASMs for the year) of their total projected fuel budget toward a mega-fund for hedging and lowering their costs?

Would it make a difference in the long run?

Just a random thought...I'd love to hear the input of the resident economists here.


"In this present crisis, government is not the solution to our problem - government IS the problem." - Ronald Reagan
17 replies: All unread, jump to last
 
User currently offlineTdscanuck From Canada, joined Jan 2006, 12709 posts, RR: 79
Reply 1, posted (6 years 8 months 5 days ago) and read 2464 times:



Quoting EA CO AS (Thread starter):
Is fuel hedging an area where groups of carriers - perhaps all U.S. carriers, for example - could form their own fuel-purchasing entity that each contributes a set percentage (based on each carrier's projected ASMs for the year) of their total projected fuel budget toward a mega-fund for hedging and lowering their costs?

Bulk purchase is a little different than fuel hedging.

Fuel hedging takes cash now...that's why Southwest could do it so heavily while most of the legacies were cash-poor and in the midst of bankrupcy. So pooling together would only be advantageous for those carriers that couldn't do it on their own...not sure why those carriers that have the cash would want to do that.

Bulk purchasing, as far as I know, could be done. However, since jet fuel is a commodity in high demand I'm not sure they'd be able to get any discount. As a fuel seller, why would you offer a discount when you know full well that you'll be able to sell all of your production at full price anyway? If the US goes into a recession that might not be the case but, at least today, I suspect the fuel vendors are happy to keep charging full price.

Tom.


User currently offlineLAXintl From United States of America, joined May 2000, 25414 posts, RR: 49
Reply 2, posted (6 years 8 months 5 days ago) and read 2457 times:

Such bulk purchases do happen. For instance airlines in several cities run fuel consortium's. However at the end of the day this is more done for handling reasons then financial reasons as its somewhat difficult to gain much of a discount (if any) for such a commodity that as Tdscanuck states will be purchased one way or the other by airlines. Really no incentive for seller to offer any special rates.


From the desert to the sea, to all of Southern California
User currently offlineN1120A From United States of America, joined Dec 2003, 26499 posts, RR: 75
Reply 3, posted (6 years 8 months 5 days ago) and read 2450 times:



Quoting EA CO AS (Thread starter):

Is fuel hedging an area where groups of carriers

Remember that hedging is not the same as buying fuel. Southwest pays the same pump price as everyone else. Their hedging activities are merely commodities market investments that make them some money on the side that can be set against higher costs in other areas.

Quoting Tdscanuck (Reply 1):

Bulk purchasing, as far as I know, could be done.

The issue here is that airlines buy so much fuel on their own at this point that there really isn't much to be saved by doing bulk purchasing. I can only see this being effective at an outstation that is served by a small, as opposed to national, FBO.



Mangeons les French fries, mais surtout pratiquons avec fierte le French kiss
User currently offlineRwessel From United States of America, joined Jan 2007, 2353 posts, RR: 2
Reply 4, posted (6 years 8 months 4 days 19 hours ago) and read 2341 times:
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Not particularly. Not very much jet fuel is actually refined (as a percentage of petroleum distillates), and the amount is fairly easy to vary, within some limits. The simpler refineries, which can process only light crude, are not so easy to vary (since they do little more than distill the crude into the various components already there), but the ones that process the heavy gunk so common these days are pretty flexible. It's hard to specify an exact figure, but probably about half the current jet fuel production could be converted to lighter product in a matter of two or three months, if the refiners were so motivated.

A buyer's cartel, or some other monopsony, demanding much lower prices, would pretty much be ignored by the refiners, who would just convert a big chunk of production to more profitable products - like gasoline or diesel, resulting in a huge shortage of jet fuel.


User currently offlineN1120A From United States of America, joined Dec 2003, 26499 posts, RR: 75
Reply 5, posted (6 years 8 months 4 days 17 hours ago) and read 2294 times:



Quoting Rwessel (Reply 4):
like gasoline or diesel, resulting in a huge shortage of jet fuel.

Two flaws there. One, jet fuel is a huge part of the market for oil and the idea of a massive jet fuel monopsony wouldn't be so simply dismissed. Second, jet fuel and diesel are near identical distillates, which means gasoline would really be the only other place to go with it.



Mangeons les French fries, mais surtout pratiquons avec fierte le French kiss
User currently offlineRwessel From United States of America, joined Jan 2007, 2353 posts, RR: 2
Reply 6, posted (6 years 8 months 4 days 16 hours ago) and read 2282 times:
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Quoting N1120A (Reply 5):
One, jet fuel is a huge part of the market for oil

It's about 7.5% globally, about 9% of U.S. refining.

Quoting N1120A (Reply 5):
Second, jet fuel and diesel are near identical distillates, which means gasoline would really be the only other place to go with it.

There's actually a pretty good undersupply of diesel in the U.S. at the moment. Not to mention gasoline. In both cases at least part of the current supply issue is a shortage of refining capacity.

In any event, a significant portion of the Jet-A refining capacity can simply be turned off. Remember that the refinery still has to buy crude, and the only thing the jet fuel cartel can actually hope to squeeze out the refiner is the refinery's profit, and one that's gone, so is a large fraction of the worlds Jet-A.


User currently offlineVgnAtl747 From United States of America, joined Apr 2001, 1514 posts, RR: 2
Reply 7, posted (6 years 8 months 4 days 11 hours ago) and read 2202 times:

The other option would be for alliances to bulk buy, could be another perk of membership into an alliance such as Sky Team. Bulk buying at an international level as with a global alliance would create some more price competition.


Work Hard. Fly Right. Continental Airlines
User currently offlineRampart From United States of America, joined Aug 2005, 3139 posts, RR: 6
Reply 8, posted (6 years 8 months 4 days 11 hours ago) and read 2189 times:



Quoting Rwessel (Reply 6):
It's about 7.5% globally, about 9% of U.S. refining.

Interesting. Can you give us a perspective on that? What % goes to gasoline for automobiles, or to heating oil, or to petrochemicals? Is aviation fuel a proportionally large percentage of anything not destined to automobiles?

-Rampart


User currently offlineN1120A From United States of America, joined Dec 2003, 26499 posts, RR: 75
Reply 9, posted (6 years 8 months 4 days 5 hours ago) and read 2096 times:



Quoting Rwessel (Reply 6):

It's about 7.5% globally, about 9% of U.S. refining.

That is a pretty fair chunk

Quoting Rwessel (Reply 6):
In both cases at least part of the current supply issue is a shortage of refining capacity.

I don't believe that for a second. Refinery utilization is at its lowest rate in more than 15 years.

http://www.theoildrum.com/files/SmokeyFigure4.png



Mangeons les French fries, mais surtout pratiquons avec fierte le French kiss
User currently offlineTdscanuck From Canada, joined Jan 2006, 12709 posts, RR: 79
Reply 10, posted (6 years 8 months 4 days 5 hours ago) and read 2076 times:



Quoting N1120A (Reply 9):
Quoting Rwessel (Reply 6):
In both cases at least part of the current supply issue is a shortage of refining capacity.

I don't believe that for a second. Refinery utilization is at its lowest rate in more than 15 years.

Those aren't mutually exclusive statements. There hasn't been a new large refinery built in the US for ages...older refineries need more maintenance and downtime. "On the book" capacity and actual running refineries may not be the same.

Tom.


User currently offlineN1120A From United States of America, joined Dec 2003, 26499 posts, RR: 75
Reply 11, posted (6 years 8 months 4 days 5 hours ago) and read 2050 times:



Quoting Tdscanuck (Reply 10):
There hasn't been a new large refinery built in the US for ages...older refineries need more maintenance and downtime.

If age was such an issue, then capacity wouldn't have been as high as it was 8 years ago, seeing that those refineries were considered "old" then.



Mangeons les French fries, mais surtout pratiquons avec fierte le French kiss
User currently offlineRwessel From United States of America, joined Jan 2007, 2353 posts, RR: 2
Reply 12, posted (6 years 8 months 4 days 1 hour ago) and read 1985 times:
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Quoting Rampart (Reply 8):
Interesting. Can you give us a perspective on that? What % goes to gasoline for automobiles, or to heating oil, or to petrochemicals? Is aviation fuel a proportionally large percentage of anything not destined to automobiles?

From: http://www.eia.doe.gov/emeu/aer/txt/ptb0511.html

(U.S.) Petroleum Products Supplied by Type 2006, (thousand barrels per day equivalent)

Asphalt and Road Oil: 506
Aviation Gasoline: 18
Distillate Fuel Oil: 4,172
Jet Fuel: 1,624
Kerosene: 54
Liquefied Petroleum Gases: 2,044 (1,203 propane)
Lubricants: 115
Motor Gasoline: 9,233
Petroleum Coke: 518
Residual Fuel Oil: 681
Other: 1,623

Total: 20,588

Some jet fuel is classed under "Other", so the real number is a bit higher than that, but gasoline is the big one, and the heavier fuels (diesel is under distillate fuel oil, BTW), makes up another big chunk. Petrochemical usage is all under "other".


User currently offlineAvek00 From United States of America, joined Oct 2004, 4387 posts, RR: 19
Reply 13, posted (6 years 8 months 3 days 23 hours ago) and read 1949 times:

What would be the benefit from the standpoint of an airline manager? I want my competitors to pay as much as possible for their jet fuel, and the best way to deal with the cost of jet fuel is to hedge, converting a variable cost into a fixed one that I can plan around.


Live life to the fullest.
User currently offlineN1120A From United States of America, joined Dec 2003, 26499 posts, RR: 75
Reply 14, posted (6 years 8 months 3 days 23 hours ago) and read 1949 times:



Quoting Avek00 (Reply 13):
and the best way to deal with the cost of jet fuel is to hedge, converting a variable cost into a fixed one that I can plan around.

That simply isn't the case. The cost remains variable and the airlines pay the same price for fuel. The only difference is that they make money on the commodities markets.



Mangeons les French fries, mais surtout pratiquons avec fierte le French kiss
User currently offlineTAN FLYR From United States of America, joined Aug 2000, 1909 posts, RR: 0
Reply 15, posted (6 years 8 months 3 days 23 hours ago) and read 1937 times:



Quoting Rwessel (Reply 4):
Not particularly. Not very much jet fuel is actually refined (as a percentage of petroleum distillates), and the amount is fairly easy to vary, within some limits. The simpler refineries, which can process only light crude, are not so easy to vary (since they do little more than distill the crude into the various components already there), but the ones that process the heavy gunk so common these days are pretty flexible. It's hard to specify an exact figure, but probably about half the current jet fuel production could be converted to lighter product in a matter of two or three months, if the refiners were so motivated.

A buyer's cartel, or some other monopsony, demanding much lower prices, would pretty much be ignored by the refiners, who would just convert a big chunk of production to more profitable products - like gasoline or diesel, resulting in a huge shortage of jet fuel.

Most refineries are now more than just distiileries of crude oil, most have some catalytic and hydro cracking, reformulators, etc. The governments demand for cleaner fuels has pushed this. However, there are quite a few that can only process "Sweet" or "intermediate" crudes as opposed to the heavy or "sour" crudes. For those of you in the midwest there are several joint ventures with Canadian crude (syncrude blend from Alberta) with a number of refineries to be converted to run slates of this crude once new connecting pipelines are in place. Some of those include refineries in Lima, Ohio, Wood River, Il, Borger, TX and I believe one of the refineries near Minneapolis. From articles in the WSJ consumers will be tapping into more of that as soon as 2009.

But just in the mental exercise department, lets look at an airport like ORD. One would assume that they have the ability to have delivered to the ORD tank farm Jet-A from one (or all) of the three immediate Chicago area refineries or the Marathon Refinery in downstate, IL. Since it appears to me (assumptions!!) that UA or AA or whomever pulls fuel from the underground system, I would guess that the airlines pay a daily average of cost of fuel each day in the tanks.

So, any ORD A.netters on here that know how that works, I'd be interested, as I think others.

Thanks


User currently offlineFlighty From United States of America, joined Apr 2007, 8544 posts, RR: 2
Reply 16, posted (6 years 8 months 3 days 23 hours ago) and read 1895 times:

I don't think it would work. Trying to picture them bargaining with say DFW to get cheaper fuel margins. That's one thing, the fuel service sector. It might be possible to cartel those guys, or bring in a new competitor.

As for buying oil direct from oil companies, or oil producing countries, the going rate is $100 per barrel plus refining costs. There ain't a single reason oil companies would accept less than that. Airlines can't credibly say they are going to shut down if they don't get their way. So they have no power to threaten oil companies. Nor should they. That price is fair and square. Those with oil in the ground get to demand their price.


User currently offlineBA From United States of America, joined May 2000, 11153 posts, RR: 58
Reply 17, posted (6 years 8 months 3 days 22 hours ago) and read 1890 times:

This practice is already done. The one example I can think of is the Joint Fuel Purchasing Program of the 24-member Arab Air Carriers Organization (AACO).

Joint Fuel Purchasing Program
The AACO Joint Fuel Purchasing program successfully provides better economic environment, and contractual advantages to the Arab airlines. The project aims at reducing the cost of purchasing fuel through joint bidding and joint negotiations with fuel suppliers in order to consummate sizeable savings. The group also purchases fuel by direct negotiations in stations where the market is monopolistic and where we try to get higher discount.

In 2006, AACO members managed to save about US$ 9 millions in fuel services fees due to the joint fuel purchasing approach covering the requirements of 17 Arab airlines in 450 airports worldwide.


http://www.aaco.org/about_joint_projects.asp#subtitle6

The Arab Air Carriers Organization (AACO) is a trade organization of Arab airlines.

There are at least 5 other airline trade organizations that I know of, the US-based Air Transport Association (ATA), the African Airlines Association (AFRAA), the Association of European Airlines (AEA), the Association of Asia Pacific Airlines (AAPA), and the Asociacion Latinoamericana de Transporte Aereo (ALTA).



"Generosity is giving more than you can, and pride is taking less than you need." - Khalil Gibran
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