With the price of crude oil in retreat and autogas falling below $2 a gallon in many parts of the U.S. for the first time in years, motorists have been cheering at the gasoline pump for the past several weeks. The retail price of jet-A has come down too, but perhaps not as quickly as end users would wish. “Consumers like it, especially at the gas pump with the car,” said one industry executive, “but it’s difficult for wholesalers and retailers trying to keep their costs in check while still having to market the product in this environment; prices differ widely, determined by when they bought their inventory.”
Since last summer, the price of crude oil has dropped by approximately 55 percent. Looking at “normal” years (as opposed to 2009, when global economic collapse appeared to be a real possibility and a barrel of crude oil fell to the high-$30s), “We haven’t seen these prices since 2005,” noted Thomas Kloza, global head of energy analysis for the Oil Price Information Service (OPIS). As the cost of crude oil has tumbled, so too has the price for some users of jet fuel. According to OPIS data, the spot market price for jet-A this month averaged less than $1.60 a gallon, slightly more than half the cost a year ago, a development that has been greeted warmly by most in the aviation industry. “Without question, airlines are the biggest beneficiaries of this dramatic price crash,” Kloza told AIN.
General aviation operators have seen some relief as well, but not on the grand scale the airlines are enjoying. Industry fuel price tracker Fuelerlinx calculated the overall average posted price for a gallon of jet-A at FBOs in the U.S. at $5.53 a gallon last month, with a high of $5.81 in the southeast and a low of $5.35 in the south central states. That represents a drop of about 50 cents from the January 2014 average of $6.06 a gallon and an 89-cent decline from the average in mid-January 2013. Both numbers appear pale in the context of the bonanza the airlines are reaping. The price plunge is more apparent for business aircraft operators who have directly negotiated FBO jet fuel pricing, with Fuelerlinx citing a national average of $3.93 a gallon last month, down $1.17 from January a year ago, and down $1.35 from January 2013.
Jet-A Prices Slow To Come Down
So why has the average posted price of jet-A at FBOs fallen by only 10 percent (approximately) if the price of crude oil has plunged by 55 percent?
The aviation fuel suppliers offer several reasons, the most important being volume. Given the much higher level of production, demand and competition for gasoline, the local gas station will turn over its supply of gas more quickly than most FBOs and therefore has more flexibility to keep its prices in line with falling costs.
“The retail price of jet fuel will lag what we see in the wholesale market,” said Steve McCullough, senior vice president for business development and strategy with Oregon-based fuel reseller Epic Aviation. “It takes some time for that less expensive crude to get processed and delivered to the street as a refined product.” During that processing and delivery time, oil prices have been moving ever lower, making it difficult for retailers to keep pace. As the price of crude has plummeted, fuel suppliers have found themselves saddled with high-priced inventory in their tanks that they have to sell before they can buy a new load of fuel for less and reduce the posted price, industry veteran John Enticknap, founding principal of FBO industry consultant Aviation Business Strategies Group, told AIN. “With the rapidly falling fuel prices, inventory management on their cost has been a real struggle.”
“The price came down so hard so fast that I think many folks who were sitting on inventory–retailers, resellers–took losses,” said McCullough. He believes that the market has gained some measure of relative stability over the last several weeks.
The price an FBO pays for a gallon of jet fuel makes up 40 to 60 percent of the final price it charges, and the formulas each company uses to determine its posted price remain closely guarded. However, all face a similar reality: their fixed costs, such as lease/rent, labor, fuel truck operations, insurance premiums, pumping and flowage fees, remain constant no matter the current price of crude oil. FBOs are like any other business in that they aim to make a profit, Enticknap pointed out, and the recent situation allowed some to make up some lost ground. “FBOs have been under quite a bit of margin pressure because of contract fuel issues. Selling at the posted price is a myth; it’s always discounted, and the contract fuel suppliers have pressed that a lot harder,” he told AIN, adding that the lower prices have allowed operators to stretch their margins.
However low the prices sink, consumers shouldn’t grow too fond of them. Most analysts expect the price of crude to rebound to $70 to $90 a barrel by the middle to end of this year.