Fuel suppliers coping with low demand as prices flatten
In the 12 months since the last NBAA convention, most indicators show that business aviation flight hours dropped as aircraft operators and flight departments were squeezed between a shaky economy and unstable fuel prices. Those two factors resulted in reduced demand for jet fuel.
In the months before 2008’s show, as the price of jet-A spiked to more than $8 per gallon in some locations, fuel costs were a factor in the decline in usage, and this was felt by the major fuel providers. “Certainly the peak prices in the middle part of last year, principally the third quarter, started to lead the demand erosion and it just progressed into more of an economic challenge,” said Steve McCullough, vice president of sales and marketing at Air BP Aviation (Booth No. 268). “Demand is definitely off. Our numbers showed [a decline] somewhere in the 27- to 28-percent range across all products.”
While end users felt the pain at the pump, the wild price fluctuations also presented problems to the fuel suppliers. “Over the past year we’ve seen an unprecedented rise and fall in energy prices,” Avfuel president and CEO Craig Sincock told NBAA Convention News. “We’ve seen also the emergence of greater volatility in pricing daily, weekly and monthly rather than what has been seen historically. If you are used to crude oil at $50 a barrel, it is quite different than when it was $150 a barrel last year.” (Avfuel is exhibiting at Booth No. 2100.)
According to Sincock, fluctuations of five dollars per barrel in a week became common and caused difficulties for suppliers because it cost more to hold the inventory. “What we saw last year was just deterioration in values of the inventory that you might purchase or you might hold as a fuel supplier. If you sold 100,000 gallons a year or a million gallons a year to an FBO, it owed you three times what it normally owed you because the price per gallon was higher and the inventory you are shipping around in pipelines and so on. It all cost more. Then there was the fantastic devaluation and the price just came tumbling down.”
The fuel price volatility was evidenced by the highs and lows seen over the span of just a few months, as the price of crude fell dramatically from a high in the $140 per barrel range last year down to the low- to mid-$30s early this year. But as the year progressed, that volatility subsided. “Prices this year have been a little bit more stable; they’ve been lower but the economy is still struggling,” noted Air BP’s McCullough. Over the past few months, as fuel prices seemed to hover in the $70- to $80-per-barrel price range, statistics from industry analyst ARG/US show business aircraft operations slowly rising through August until they met the August 2008 level, which at the time was in the midst of a decline. According to Avfuel’s Sincock, that translates into a decline of only around 20 percent. “We’re encouraged by the fact that 80 percent of the business is still happening and we kind of feel that we are at the bottom of the trough right now, depending on whether the economy has another major setback.”
Cost Is Key
Chevron uses its own corporate flight department as a kind of business barometer and it has noticed a decline in flight hours as employees have made more use of teleconferencing for domestic meetings. The company expects to see an uptick in aircraft usage. “I think as companies and people get more confident you’ll see people moving back to charter, fractional use and so forth,” said Keith Sawyer, Chevron Global’s general manager of general aviation. “We’re fortunate in our general aviation business to have customers who are in all of the segments: fractional, charter or corporate flight department.”
The message from FBOs indicates that pricing is key among customer concerns, but there are still other means to attract business, according to McCullough of Air BP. “We are looking at ways to provide FBOs with tools to compete on things other than price, to try to help them either bring business to their ramp or reduce their operating costs or provide them with certain types of training that will allow them to differentiate themselves so that we can allow them to stand out.” Such techniques include the use of proprietary credit cards with lower processing fees, offering customer service training programs for FBO employees, and sharing their marketing expertise with the FBOs to develop new business-generating strategies.
Another trend is the growing use of contract fuel. “At many corporations the flight department was somewhat isolated, and now the entire company is looking for any savings it can find,” said Avfuel’s Sincock. “We expect that the flight departments, owner/operators and others will be much more careful about purchasing fuel, how and where they do that in the future.”
While the price of fuel has not reached the lofty heights of last year, how long the current calm will remain in the market is uncertain, according to industry members. “It’s a hard thing to pin down,” said McCullough. “I believe that some of the speculation in the market that drove crude prices and ultimately jet fuel prices last year is not there now as much as it was last year, so that will naturally lead to a bit more stability. I think all we can hope for is a bit of a stable time to allow the industry to catch its breath.”