TECH TALK
Will the Crash in the Price of Oil Affect the Move to Alternative Fuels in Aviation?
By John Pawlicki
and eff ect might impact the move to alternative aviation fu- els if prices persist at a low point for a long period of time.
T
A QUICK HISTORICAL PERSPECTIVE While we all rejoice at paying 30 to 50 percent less at the pump as compared to a year ago, we know that this will not last. (Fill ’er up while you can at these reduced prices.) The root cause of this rapid price drop is a large increase of drilling in the United States and Canada — this has tipped the oil market into having too much supply for not enough demand. While demand is continually increasing due to global population growth, the combination of economic slowdowns in many countries with increased fuel effi ciencies in many vehicles, maritime vessels, power- generating plants (and not to mention more energy-effi cient buildings and electronics that aff ect natural gas usage, and heating oil in parts of the world) have lessened the demand for oil and gas. At times, the capitalistic markets work the way they should, causing prices to collapse when you have too much of a good thing (as shown in Figure 1).
he price of oil has fallen dramatically since the summer of 2014, with a slight recovery in early 2015. While the latest price drop is nothing out of the ordinary from a historical perspective, the cause
not all oil is used in fuel production due to other uses). Globally, the aviation industry consumes 85 to 95 billion gallons of fuel each year (Y2010 data), including nearly 14+ billion gallons for U.S. civil aviation, so the industry should be performing long-term planning in regards to its second- largest expense (after labor). Aviation accounts for 15 percent or less of the global oil market customer base. With the drop in price from ~$115/barrel in June 2014
to roughly $48 in late February 2015 (at the time this article was written), aviation is certainly enjoying the unexpected gift from the oil gods. Most of the aviation industry is experiencing booming profi t margins due to the recent market consolidations (and shedding of costs). Airlines are increasing their ancillary fees (baggage, IFE, food/drinks and perhaps trying to fi nd ways to charge us to use bathrooms if Ryanair ever gets its way), squeezing in additional seats into aircraft, etc., and now, the icing on the cake, the reduction fuel, their second-largest expense. This is truly a great time to be an executive at an airline or an investor in this market. (How often do you hear such a statement?) It is a great time to invest in the future while everyone is fl ush with profi ts. The question is, does the industry have the fortitude to do so?
In the past, the aviation industry in general has been
As of early 2015, the International Energy Agency (IEA) Oil Market Report forecast average demand for the year of more than 93 million barrels of oil and liquid fuels per day worldwide, which comes to more than 34 billion barrels per year (roughly translating to 1.428 trillion gallons, although
notorious for poor business planning, by over-ordering aircraft into the future, and either cancelling orders later, or taking aircraft which were not needed. Many operators did not hedge fuel costs when prices were climbing, and then hedged too much when prices were starting to fall. This not only depressed the bottom lines of these businesses, but the entire industry suff ered accordingly, from aftermarket service providers to OEMs. This can also be said for the airlines and operators that are resisting the move to FAA’s NextGen and its dependence upon updated avionics and new procedures, since it has been claimed that the business case for many operators is not positive to support these pricey avionic upgrades. Part of this is posturing to have the government subsidize equipment upgrades but part of it is short-sightedness.
This argument also boils over to the recent advances in alternative or biofuels use in aircraft.
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