After narrowly avoiding jet-fuel shortages at several big airports last summer, some U.S. airlines are stepping up investments in fuel storage and pipelines, though executives say the industry is still highly vulnerable to supply disruptions.
Because of regional fuel-distribution bottlenecks, airports in California, Florida, Hawaii, Nevada, Utah and the Washington, D.C. area remain the top trouble spots, according to industry officials, who said carriers routinely fly into these markets with extra gallons onboard or schedule expensive last-minute deliveries by truck.
Nevertheless, airlines appear to be gettting better at coping with the problem, executives said, noting there have been far fewer severe fuel crunches this summer — so far.
"It's either very encouraging or very lucky. I don't know which," said Bob Sturtz, managing director for fuel at UAL Corp.'s United Airlines.
Executives said spending on storage, pipelines and other energy infrastructure has lagged in recent years because airlines have been more focused on limiting losses and staying out of bankruptcy at a time of soaring jet-fuel prices. But now, with a financial recovery underway as passenger traffic and airfares rise — the industry is on pace in July to report its first quarterly profit since 2000 — carriers have more flexibility to address the problem.
At the same time, the upswing in air travel means any supply interruptions that occur this summer are likely to be harder to manage than last year. One complicating factor is that, with more passengers onboard, airlines are unable to ferry as much extra fuel from one city to another as they could a year ago.
‘Fundamental tightness of the market’
"Nothing has changed in terms of the fundamental tightness of the market," said John Heimlich, chief economist at the Air Transport Association, a Washington-based trade group.
Heimlich said a major reason there are fewer flare-ups these days is that carriers have been in better communication with each other and fuel suppliers ever since last summer, when a handful of airports came within days, and at times hours, of running out of fuel.
"We're sort of old pro at dealing with this," he said.
Still, plans are underway to chip away at the underlying problem.
One of the biggest projects on the drawing board is the construction of a 50,000 barrel-a-day pipeline to carry jet fuel from a port in Long Beach, Calif., to the airport in Los Angeles, which consumes some 100,000 barrels a day. The proposed pipeline, which would be paid for by a consortium of more than 50 airlines, could cost as much as $30 million to build.
Hoping for a level of control
What the industry would get in return — a pipeline dedicated to its needs without competition from gasoline or diesel customers — is perhaps far more valuable.
"Can the airlines really afford not to have some level of control over a key resource?" Sturtz asked.
Similarly, a consortium of airlines has worked out a major fuel-storage and delivery project with officials at Washington's Dulles International Airport and the Colonial Pipeline Co., which transports gasoline, heating oil and jet fuel from the Southeast to the Northeast.
The plan is to build a wider pipeline to feed Dulles and add an additional 300,000 barrels of storage at the airport to alleviate a perennial bottleneck. The projects, which will cost a combined $85 million, are expected to be completed by the middle of 2007.
In nearby Baltimore, Southwest Airlines Co. is spending upwards of $30 million to build three storage tanks and a hydrant pumping system along with the construction of a new terminal at the airport. The new tanks will hold a combined 90,000 barrels of jet fuel, tripling the entire airport's existing jet-fuel storage capacity by the end of next year to the equivalent of more than 11 days of demand.
And starting next month, a consortium of airlines operating out of San Francisco's airport will lease 230,000 barrels of nearby storage from Shell Oil Co. at a cost of $4 million a year, effectively doubling the airport's fuel-storage capacity to cover 10 days worth of demand.
Other airports that have increased or are planning to increase their overall jet-fuel storage capacity include: Albuquerque, Milwaukee, Sacramento, San Diego and San Jose, industry officials said.
Investing in infrastructure
Rob Murbin, a vice president of fuel management at Southwest, said his airline and a few others are taking matters into their own hands because "it has just been hard to get oil companies interested in investing in infrastructure."
Indeed, major oil companies have directed the bulk of their resources to exploration and drilling programs because it is the most lucrative end of the business at a time of $75-a-barrel oil. Similarly, oil pipeline operators have been cautious about flooding the market with distribution capacity because they are able to charge more when congestion on their lines is high.
But the distribution of all types of fuel has become so congested in certain markets that companies must weigh the potential for higher profits against the increased risk of unreliable service.
Colonial Pipeline is proposing to build a $1 billion 800,000-barrel-a-day pipeline between Baton Rouge and Atlanta that could significantly improve the fuel-supply situation at Atlanta's Hartsfield airport — one of the nation's busiest — and throughout the region.
Kinder Morgan Energy Partners LP is spending $25 million to boost the capacity of a 550-mile pipeline between Los Angeles and Las Vegas by 16,000 barrels a day by the end of next year. And the company recently completed a $210 million expansion of a pipeline that carries fuel from El Paso, Texas to Tuscon, Ariz., and Phoenix. By replacing 8-inch pipes with 12- and 16-inch pipes, the capacity of the pipeline was increased by 50 percent to almost 150,000 barrels a day, spokesman Larry Pierce said.
Kinder Morgan "has not had a single call this summer from any airline regarding supply issues," Pierce said. "That's obviously good news from compared to how it was last summer."
While adding storage is easier to do in the short term, Jet Fuel Report publisher John Armbrust believes the pipeline projects could ultimately be more significant.
"It matters how quickly you can fill up that storage in the event of an emergency," he said.