US airlines find fuel for less in 2013…but not everywhere

Years of consolidation, capacity cuts, fuel efficient planes and other cost controls helped jet fuel prices glide downward in 2013. But some US markets have still felt turbulence.

US airlines are filling up planes with passengers at a record level. Despite that demand, the US Gulf Coast region, which produces half of the nation’s jet fuel, started 2013 spot trading for typical 25,000-barrel lots at $3/gal and ended July 31 at $2.945/gal, according to Platts data.

The 2013 average of $2.92/gal for that period had a 10% swing up and down but for the most part lacked the volatility of 2012, when it averaged $3.05/gal. New York and Los Angeles saw a same pattern, although about 4-5 cents higher.

Destination hot spots of Hawaii, Miami, Denver, Boston, Chicago and Arkansas haven’t been so lucky for airlines. OK, Arkansas is not a hot spot. But still, local logistics — not national trends — have set the tone for jet fuel.

Hawaii prices shot up 4-6 cents after Tesoro idled one of the two oil refineries on the islands in April. Prices range 6-12 cents higher in Miami and Boston than New York due to any free barge being snapped up by crude traders.

Arkansas and neighboring states fell victim to Enterprise Pipeline reversing its TEPPCO line to carry ethane to the Gulf Coast instead of diesel and jet fuel to the Midwest. “You’re having to truck barrels that used to be pipe fed,” one trader said. Phillips 66 was especially caught in the squeeze at Arkansas sites, sources said.

And then there’s Chicago. Refinery issues, including two big maintenance turnarounds, shot prices 51.50 cents over the US Gulf Coast on June 5, 10 times of the cost of shipping on Explorer Pipeline. Chicago’s outright price was $3.25/gal that day, and it was only slightly lower at $3.18/gal on July 31 despite the refineries restarting.

“Chicago is such a moving target,” a second jet trader said.

He and other sources noted that Morgan Stanley has exited or reduced its presence in the Chicago and Denver markets as United Airlines finished unwinding its supply contract July 1. Other traders have also shied away, leaving Chicago spot trading even thinner than normal.

More than just supply, the deal Morgan Stanley made during United’s bankruptcy in the mid-2000s to handle its jet fuel included tankage at airports and elsewhere and pipeline line space, several sources said. United took those back and spread supply contracts around to many companies.

Contract changes may just be a sign that the airline industry has become healthier, thanks in part to years of mergers such as Delta and Northwest, United and Continental, Southwest and AirTran, and the upcoming merger between US Airways and American Airlines

Delta Air Lines last year exited supply deals as it bought the Trainer, Pennsylvania, refinery in a bold move to control fuel costs, while Air Canada shifted its contract this year from Shell to Valero. The new American, post merger with US Air, will likely consolidate contracts once their merger is approved.

“When all these deals were originally done, they made some sense because of the financial position all these airlines were in,” a jet fuel buyer said. “We were strapped for cash. Buying fuel takes a lot of money. As we look at them now, the need’s not there so let’s unwind these things.”

A second fuel buyer said airlines typically haven’t had the resources this century to deal with sophisticated supply issues.

“The biggest impact that mergers would have is that now all of a sudden the new big companies can self-supply in some places,” he said. “You can justify the volumes.”

That may have smoothed out fuel prices in major markets, but glitches still leave opportunities in other markets.

“They can find jet fuel,” a US supplier said. “What they can’t find is cheap jet fuel.”

Platts