ENROUTE
an editorial opinion

Aviation fuel price volatility, pricing and stock market performance—their effect on corporate and GA flight operations activity

Rising operating costs lead to growing uncertainties for FBO businesses.

By Gene Condreras
Pres, Panorama Flight Service


Citation Excel is refueled at Panorama Flight Service at HPN (White Plains NY).

It was suggested to me recently that, although aviation fuel prices have risen of late, they seem to remain fairly stable overall.

Since the word "stable" is normally defined as meaning fixed and steadfast, as opposed to changing or fluctuating, I asked myself how in the world, if pricing has been rising steadily over the past few months, can anyone consider it to be stable?

Fuel pricing seems to me to be anything but stable, so I got to thinking about what makes the price of crude (and subsequently refined) fuel so volatile, and what effect this volatility may have on corporate and overall GA operations.

Given that I am an FBO owner and the aforementioned activity generates the income that I use to pay my bills, it seemed like a good idea to conduct some research and see if any useful information could be gleaned in the process.

Initial assumptions

My initial thoughts focused on the idea that the price of fuel is driven primarily by the price of crude and that the price of crude is driven chiefly by supply and demand, rising when demand is high and dropping when it is low.

This seems obvious. I further theorized that oil-producing nations dictate the overall available supply and commodities traders (speculators) base pricing on the amount of supply that they anticipate will be available and subsequently used.

In addition, I have always felt that oil-producing nations, speculators and oil companies also use any excuse they can to drive the price up to increase profits—for example, any type of uncertainty anywhere that crude is produced or refined, etc.

So my initial thoughts focused around the idea that the true key to where crude product is priced is utilization and consumption of that product. Hence, just like most FBO owners whom I speak with on a regular basis, I theorized that the price of aviation fuel must have a direct impact on the overall flight activities of the corporate/GA industry.

I further surmised that the Dow Jones Industrial Average (DJIA) would also have a direct impact on overall flight activity for these segments of the aviation industry.

Fuel price volatility

It wasn't long before I found out that there are a number of issues and factors to consider in regard to aviation fuel price volatility and what effect they may have on corporate and private aviation operations in terms of overall volume.

I ran my previously mentioned theories by someone who has a plethora of experience working as an aviation fuel supplier executive, and solicited his opinion.

It seemed that my prior synopsis—that fuel oil commodity traders base pricing on the amount of supply they estimate will be available for subsequent use—was an oversimplified explanation of a very complex process and did not paint a true picture of a number of factors that need to be considered.

Supply and demand are a small piece of the equation but not the determining factor. My colleague, who chooses to remain anonymous, provided me with the following perspective to consider.

As he noted, "Unfortunately, markets that are made up of buyers and sellers are scientific only in the context of psychological or human science. No one knows where the rest of the year will end up, but the trend is up until it changes direction. Right now, volatility is driving the market and speculators are behind such movements with futures contracts."

When volatility is injected in any market by news-driven events (real or fabricated), big money is made and speculators are the gamblers—they make big money but also lose big when the trend changes. The key is in following the trend. Remember, says my colleague,

"When someone is making money, it's because someone else is losing money. When big money is not made or lost, [volatility declines and] the speculators retreat to find other markets where they can make their mark. It may be an oversimplification, but it defines volatility in markets that are driven by capital."

He further explains that the Internet stocks of the late 1990s and the real estate market of the 2000s go hand in hand. "When money was no longer to be made in Internet stocks, the speculators went to the markets of real estate and loan underwriting to make the money.

(Of course, the government, lenders and buyers also had more to do with it.) Before Internet stocks, it was biotech stocks and companies. Since real estate busted, it has been oil and commodities such as silver, gold, coffee and wheat."

The Energy Information Administration (EIA) is an excellent source for information and forecasts. In late Dec 2010 my colleague sent EIA's Short Term Energy Outlook for 2011 to one of his customers, as they were trying to do their budget to forecast 2011 jet fuel expense.

To address jet fuel and projected inflations, he sent them a table highlighting estimated pricing for jet fuel and other products for 2011. The projected prices for 2011 led my colleague to advise his customer that he could estimate an average increase of 10% year-over-year for jet fuel from 2010 to 2011.

In fact, he was completely wrong, because the "experts" were wrong—at least so far in the short term. So how does this apply to fuel price volatility and the statement that, although fuel prices have risen recently, they seem to remain fairly stable overall?
First, the underlying wholesale prices are anything but stable.

When looking at the EIA forecast data for jet fuel for 1Q2011, you find the price point to be 241 or $2.41 for the Platts Index. As of mid-Mar 2011, the Platts Index for the Gulf Coast is approximately $3.10. This is a big miss and constitutes volatility with a difference of almost 70¢ or 29%.

1


1 | 2| next