INSIGHT: US airline fuel costs, regulations to impact industry in 2013

07 December 2012 16:09  [Source: ICIS news]

By Anna Matherne

A Delta Airlines jetHOUSTON (ICIS)--Regulatory activity and changes in the production of jet fuel will have the biggest impacts on the US airline industry in 2013.

Decisions on key airline industry regulatory issues following the re-election of President Obama could help to improve the US economy, according to industry group Airlines for America (A4A).  

“Like other industries, we expect to see considerable regulatory activity on many fronts in 2013,” said A4A’s managing director of communications Victoria Day. “The US airline industry is a major contributor to our economy and enables us to compete globally.”

“Excessive taxes and burdensome regulations prevent US airlines from doing more to grow the economy and produce high-paying American jobs,” said Day. “The growing regulatory burden on the US airline industry is one reason why we are calling for a national airline policy.” 

One issue that should have some resolution in 2013 is the US stance on the EU Emissions Trading System (ETS).

The ETS works on a cap and trade system, which means there is a limit on the amount of greenhouse gases that can be emitted from EU and non-EU airlines flying into EU countries.

The policy was not well received by many countries, including the US.

In November, the European Commission proposed to defer application of the scheme to allow more time for a global agreement to be reached.

While organisations, such as the A4A, are optimistic about the EU decision to suspend ETS enforcement, it does not remove the threat that it could be implemented at a later date.

Furthermore, the US House of Representatives approved the Senate-passed bill, S. 1956, which is a measure that allows the transportation secretary to direct US airlines not to participate in the ETS.

“The US has sent an unequivocal signal to the EU and the world that while the illegal and unilaterally-imposed EU ETS is the wrong way to proceed, there is a steadfast commitment to the right way – a global sectoral approach at the international level,” said A4A President and CEO Nicholas E. Calio. 

Another factor that could change the US airline industry is the production of jet fuel and its impact on fuel costs.            

In early 2012, Delta Air Lines bought the idled 185,000 bbl/day Trainer refinery in Pennsylvania from Phillips 66 through its subsidiary Monroe Energy.

The refinery should reduce jet fuel costs, an airline’s biggest expense, by more than $300m/year once at full capacity. The Trainer refinery should provide Delta with 172,000 bbl/day of its 210,000 bbl/day in domestic jet-fuel needs, the company said.

When first announced, many predicted this acquisition would result in massive losses for the airline; however, Delta said it expects the refinery to break even or contribute to profits in the fourth quarter of 2012, when the refinery should be fully operational.

“Production levels at Trainer are continuing to ramp up, and we are pleased with the initial results we’re receiving from the facility,” said Delta CEO Paul Jacobson during the company’s third quarter results conference call.

However, higher-than-expected fuel costs in the third quarter, and potentially higher fourth quarter costs could limit the airlines profits.

Delta said that Hurricane Sandy, which hit the east coast in early November, negatively impacted the company’s refinery start up, slowing production and efficiency levels at the plant.  

As a result of lower refinery contribution, the company expects its fourth quarter fuel price to be $3.20-$3.25/gal.

“The jury is still out with respect to how that opportunity will ultimately impact Delta profitability and the competitive advantage that Delta will realise relative to other airlines as a result,” said Lesa S Adair, CEO of consulting firm Muse, Stancil & Co. 

According to Adair, other airlines may follow Delta’s lead and acquire idled refineries to minimise costs, but outside factors may make the opportunity less attractive.

“As with any complex transaction, the devil will be in the details and the ultimate impact will hinge on the economics of exchanging other refinery products for jet fuel and basis risk as jet fuel is exchanged from location to location,” said Adair.

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By: Anna Matherne

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