Causing a Bottleneck

A more competitive and robust fuel supply chain depends

not only on enough players but also enough infrastructure
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Airline fuel is big business. It represents in the region of 30% of costs for the majority of airlines
and generates somewhere between $16 billion and $48 billion in profits for the oil industry, the
majority of which are upstream of the refinery. Take a major carrier such as Lufthansa. It
contracts more than 540 airports globally using about 150 fuel suppliers. The eight airlines in the
Lufthansa Group consume 10 million tonnes of fuel annually, which is as much fuel per year as
Finland.
Given the scope of aviation, it is surprising that so few companies are involved in fuel supply.
One of the main reasons for this paucity is the limited availability of essential infrastructure.
There are only so many pipelines into airports and even onsite fuel farms do not always provide
open access. In many cases, the jet fuel infrastructure is controlled to an extent that discourage
third party usage. Either the infrastructure owner wont allow their infrastructure to be used or
their pricing is too high.
Any company looking to enter the fuel supply market will do its homework and realize that
infrastructure restrictions are a major problem. That means it will probably stay away until the
issue is resolved. So if there is to be a stronger fuel supply market, infrastructure is a good
starting point.

Controlling the market

Fit for purpose infrastructure would provide not only greater competition in fuel supply but also
a more robust supply chain that is less prone to disruption.
The restrictions on fuel supply infrastructure mainly threaten small to medium-sized airports but
can reach out to hub gateways. Each case also has its own complications, however.
In Brazil, for example, there is only one company involved in jet fuel productionstate oil
company, Petrobras. Although it is mainly a domestic player, Brazil is a big country and so
Petrobras carries plenty of weight. Using its many subsidiaries, the company owns just about
everything to do with fuel supply in Brazil.
To make matters worse, the government subsidizes diesel and gasoline to the tune of some $20
billion per year, making it cheaper than international norms. So suppliers have no incentive to

import diesel and gasoline either and, of course, the necessary investments in infrastructure
cannot be paid by jet fuel imports alone, says Felipe De Oliveira, IATA Assistant Director,
Airport Infrastructure and Fuel.
The Brazilian government has exacerbate the problem with an exorbitant jet fuel pricing policy
based on US Gulf prices. It is estimated that this costs airlines an extra $400 million per year.
Although Petrobras isnt a monopoly by law, IATA is calling for the government to regulate to
create a level playing field and set up genuine competition in the fuel supply market by forcing
pipelines to be common use.

No Eastern promise
Oil companies are also largely in control of the infrastructure in Europe. There isnt a problem at
the vast majority of hubs, which can have up to 10 suppliers competing for airline custom.
Nevertheless, with infrastructure being controlled by a small handful of players, bottlenecks do
occur and a new supplier does need to be on top of its logistical game to compete. Europes
tough environmental standards and relatively small margins also make market entry increasingly
difficult.
Problems tend to get worse the further east you go in Europe. At Warsaw Airport in Poland, for
example, Petrolot, the monopoly supplier until recently, through a parent company and various
subsidiaries, still controls the show. The cost of fuel there is well above the European average.
IATA and the airlines have worked hard to highlight the situation and more open access is on its
way. Already, prices have dropped slightly as two new suppliersalbeit with small volumes
have entered the market but there is still a long way to go and IATA continues to be vigilant.
Meanwhile, in Russia progress has been made thanks to the introduction in 2009 of the antimonopoly Decree No599. This enables non-discriminatory access to jet fuel infrastructure at
Russian airports. As a result, additional fuel farms have been built at 13 airports while four other
independent complexes are to be launched in Pulkovo, Domodedovo, Vnukovo and YouzhnoSakhalinsk airports. Jet fuel prices that were above the average for Europe in 20082009 are now
consistently below that.
India is in a similar situation. Airports such as Mumbai are struggling from lack of access to
infrastructure although IATAs efforts to bring about more effective fuel supply competition has
progressively paid off after the government issued instructions for open access to jet fuel
infrastructure at Kolkata and Chennai airports.

Sydney struggles
Australia also has its problems with Sydney often held up as an example of how it can all go
wrong. The problem with fuel supply and its cost in Australia is the combination of lack of
infrastructure and lack of suppliers, says Warren Bennett, the former Executive Director, Board

of Airline Representatives of Australia. The three suppliers in the marketCaltex, Shell, BP

actually own the infrastructure, that is the pipelines and JUHI infrastructure. Other potential
suppliers are effectively denied access to that infrastructure.
Qantas self-supplies fuel for about 2% of its requirements. Bennett speculates that the principal
reason for that self-supply is that it is cheaper than the general market price. The only other
motivation for it might be some marginal benefits associated with reliability of supply.
The issue can be resolved by getting open access for all parties to the existing jet fuel
infrastructure or, alternatively, building new common-use infrastructure, says Bennett.

Distorted market
Improving jet fuel supply is critical to airline sustainability. Moving toward the system used in
the United States would be a good start. Most of the major US airlines self-supply as the
infrastructure is owned by third parties and not by the oil companies. This makes it possible to
transfer fuel from just about any US refinery to any US airport as long as the airline is willing to
meet the transportation and maintenance costs. In short, it is a competitive, robust market.
Denying the benefits of competition results in market distortions, says Tony Tyler, IATAs
Director General and CEO. That is not good for the airlines and in the long term, not good for
suppliers or local economies that depend on connectivity provided by aviation for growth.
Transparency and competitive markets for the supply of fuel will remain a
key priority for IATA and the airlines.