Trends in Fuel Management for Simulation of NextGen Operations Bruno Miller, Ph.D.

1. Trends in Fuel Management for Simulation of NextGen Operations Bruno Miller, Ph.D. January 28th, 2010

2. Introduction • Jet fuel procurement basics • Main US pipelines and markets • Supply chain and delivery alternatives • Alternative fuels • Types • Factors driving their adoption • Implications for NextGen modeling

3. Fuel a major driver of airline decisions Fuel is currently single major expense for US airlines Small changes in price of fuel can drive substantial cost variations in an industry with razor-thin profit margins (if any) Major airlines consume about 3 – 6 billion gallons per year each 1 penny increase translates into $30 - 60 million additional costs per year Increasing public awareness of environmental matters, in particular climate change, is putting pressure on the industry to “do something”  Fuel is an important factor in many airline decisions of relevance to the modeling community: Fleet Schedule Operations Composition of the fuel

4. Jet fuel procurement process Getting fuel to the aircraft occurs in two major steps: Supply negotiation and contracting Set-up purchase agreements with fuel suppliers (major oil companies, FBOs, etc) Can also buy on the spot Into-plane services In the US, a third-party vendor typically manages the loading of fuel into the airplanes What about hedging? Hedging typically resides within finance The fuel group procures the fuel, finance hedges the risk

5. Major US fuel pipelines and markets New York Harbor (NYH) Los Angeles (LA) HNL Singapore (SIN) Gulf Coast (USGC)

6. Observations regarding US markets US Gulf Coast (USGC) Single largest market of jet fuel in the US Pipelines allow access along East coast, into the Midwest Area prone to disruptions during hurricane season (July – November) New York Harbor (NYH) Feeds NYC, New England Los Angeles (LA) Primarily West coast but can reach the Mountain region (e.g., PHX, SLC) Some interactions between markets NYC can be served locally or through pipeline from Gulf Coast. NYH more expensive in winter, cheaper in summer (hurricane season in the Gulf) Fuel can be brought by vessel from Singapore to supply the US West coast Hawaii can be supplied with LA or Singapore

7. Jet fuel supply delivery alternatives Hydrant truck Airport fuel farm Airplane Refinery Fuel truck Production Airport distribution Destination Bulk transport Bulk storage Pipeline Tanker truck Vessel Into-wing Delivery process Into-storage Self-supply/ into-pipe Storage fees Into-plane fees Refinery FOB price Transport/tariffs/fees Value chain Plus, insurance, cost of capital, and other costs

8. A note on airport fuel storage The large majority of airports in the US have shared jet fuel storage and distribution systems All jet fuel is comingled Airlines/oil companies/third parties put their own fuel in the system but do not necessarily get the same molecules on their aircraft If required, a paper-trail can be established to keep track of the molecules Free-trade zone (FTZ) fuel uses this

9. Alternative fuels Airlines looking at alternative fuels for several reasons: Decrease price exposure to crude-oil markets Alternative fuels may (or may not) be cheaper than conventional fuels Alternative fuels would at least be less correlated to crude than conventional fuels Reliability of supply, especially through US-domestic alternatives Environmental benefits Increased public awareness regarding climate change forcing airlines to act Governments around the world are starting to take action, e.g., the EU Emissions Trading Scheme (EU ETS) Alternative fuels can also have a beneficial impact on local air quality Airline requirements for use of alternative fuels: Certified and compatible with existing infrastructure (i.e., ‘drop-in’) Environmentally beneficial over conventional fuels Reliability of supply Economic feasibility Source: ATA

10. Types of alternative fuels Two major types of alternative fuels being considered for aviation: Fischer-Tropsch (FT) fuels Uses well-established technology to produce kerosene out of different fossil/organic fuels: Coal: coal-to-liquid (CTL) Natural gas: gas-to-liquid (GTL) Biomass: biomass-to-liquid (BTL) Advantages Abundance of relatively cheap, domestically available feedstock, especially coal and natural gas Mature technology (developed in the 1930s, SASOL in South Africa producing CTL since the 1980s) Use of CTL-derived jet fuel has been approved for aircraft Disadvantages Capital intensive production plants Carbon footprint on a life-cycle basis higher than conventional fuel (can reduce it with carbon capture and sequestration (CCS) technology)

11. Types of alternative fuels (cont’d) Bio-derived fuels First generation of bio-fuels based on edible crops (e.g., corn, soy) Second generation uses crops or organic matter that does not compete with food production (e.g., camelina, jatropha, algae) Different technologies under consideration, in particular hydro-treating Hydrotreated Renewable Jet (HRJ) can be produced, in theory, from any vegetable fat or oil: corn, soy, canola, camelina, jatropha Advantages Potential for much lower carbon footprints and better local air quality impact profile compared to conventional fuels Expected to gain certification by 2011 or 2012 Can be produced in the US Disadvantages Technology still developing Costs not yet well understood Back to the land: ~80% of cost of bio-fuels is the feedstock cost-effective production of bio-jet has everything to do with understanding how crops are grown

12. The adoption of alternative fuels driven by: Geography: Distance to market and access to pipelines key to secure demand and reduce cost Factors driving adoption of alt fuels Schematic of principal pipelines in the US US wheat production (camelina can be grown in rotation with wheat) • Other geographical areas, in particular South America, SE Asia, and Africa may be better suited for the production of bio-fuels

13. Factors driving adoption of alt fuels (cont’d) The adoption of alternative fuels driven by: Availability: No significant production currently exist in the US Earliest possible expected in late 2012 Cost: Best estimates indicate alternative fuels may not be cheaper than conventional fuels, at least initially Airlines willing to support alternative fuels but no appetite for large premiums over conventional jet fuel Certification: Fuel must be certified before it gets to a commercial aircraft Certification expected in 2011 or 2012 Legislation: Regulation (e.g., EU ETS) incentivizing airlines to take action Alternative fuels may benefit from tax credits extended to other bio-fuels (biodiesel) Carbon markets: The development of carbon exchanges would provide a tangible financial advantage to alternative fuels Emissions profile: Wide range of lifecycle CO2 footprints depending on feedstock, process, etc

14. Implications for modeling Cost of jet fuel: Major determinant of airline direct operating cost (DOC) Market price of fuel as reported publicly (e.g., US Gulf Coast, NY Harbor) only one of many components of total cost of jet fuel for the airlines Some of the other costs can be obtained from public/private sources: Pipeline tariffs Transport costs Storage Insurance Into-plane (maybe) Some costs are proprietary to the airline, in particular, cost of capital Seasonality may have an impact on price and availability of fuel Hurricanes may impact supplies/distribution in the Gulf Coast Price of crude oil products increase in the Winter in the Northeast

15. Implications for modeling (cont’d) Alternative fuels and NextGen: Alternative fuels are coming and will play a key role in NextGen to reduce the environmental impact of aviation Alternative fuels provide mechanism to reduce lifecycle carbon emissions reductions while allowing aviation to grow Expectations are high but so are uncertainties: Availability still at least two years away and still unknown when significant volumes will arrive Adoption rate will depend on several, uncertain factors: cost, certification, legislation, carbon markets, emissions profile Need to develop capabilities to estimate the impact of alternative fuels: Carbon/emissions profile dependent on feedstock/process Effect on local air quality dependent on where they are burned Asymmetries of alternative fuels loading will require revision of fuel composition assumptions as they become airport/region specific Comingled fuel distribution systems create challenges: Unable to track use of alternative fuels molecules by flight, However, paper trail could help keep track of alternative fuels use

16. Questions?Bruno Miller, Ph.D.bruno.miller@metronaviation.com617 291 6352