Posts Tagged ‘Jet Fuel’

United Airlines increased the second bag fees to $50 citing high cost of fuel. The fees will start for tickets bough beginning Tuesday September 16th 2008 for travel beginning November 10th 2008 in US or to/from Canada, Puerto Rico and US Virgin Islands.

The fees will not apply to –
1. First/Business Class
2. Premier frequent fliers
3. Active duty military personnel

Funny but hasn’t the crude oil being going down on downward trend from a high of $147 a barrel to almost $96 a barrel? Do we assume that United Airlines has hedged itself at a higher oil price?


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Lufthansa, Europe’s second largest airline. has announced plans to mix biofuels with conventional jet kerosene as part of their environmental strategy.

Main points from their announcement –

  • Lufthansa intends to use as much as 10% biofuel (made from non-food sources, not algae) by 2020.
  • They also aim to cut carbon dioxide emissions per km flown by 25% by 2020

With the current market, by 2020 with a possible $1000+ per gallon, I am not sure if any commercial airline will survive. How about a nuclear power as currently used in space flights?

Current Initiatives on Alternative Fuels

  • Virgin Atlantic successfully flew a Boeing 747-400 (without passengers) from London to Amsterdam with 1 of the 4 fuel tanks filled with biofuel made of babassu pil and coconut oil. The test was done in partnership with – Boeing, General Electric and Imperium Renewables. (more read here)
  • Airbus with Rolls-Royce staged a joint test on Feb 1st 2008 of a gas-to-liquid fuel on a Airbus A380.

Seems like a Boeing-GE (US) vs Airbus-Rolls Royce (EU) race with the whole world to benefit :).

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(I know this is not the way to fuel an airplane 🙂 )

Rising cost of jet fuel is causing airlines all over the world to increase airfare. Australian airlines Virgin Blue and Qantas are looking into increase fuel surcharges. Starting next month (May 2008), Virgin Blue is going to increase fuel surcharges by up to $12 (Australian $) and Qantas is considering a similar move.

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Why are airlines have such a low margin?
There is only one answer – Increasing cost of Jet Fuel (which follows the graph for crude oil)

Jet fuel – “Jet fuel is a mixture of a large number of different hydrocarbons,
possibly as many as a thousand or more. The range of their sizes
(molecular weights or carbon numbers) is restricted by the requirements
for the product, for example, freezing point or smoke point.
Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon
number distribution between about 8 and 16 carbon numbers; wide-cut or
naphtha-type jet fuel (including Jet B), between about 5 and 15 carbon
(from here)

(cost of a barrel, not adjusted to Inflation)

From 2003 to 2008, crude oil has gone from $30 to $111, an increase of 270%.

Big Days –

  • August 11th 2005 – $60 per barrel
  • Summer 2006 – $75 per barrel
  • Early 2007 – $50-$60 per barrel
  • October 2007 – $92 per barrel
  • Feb 29th 2008 – $103 per barrel
  • April 9th 2008 – $112 per barrel

For American Airlines, largest airline in US, the fuel bill last year was $6.67 billion (Revenue – $ 23 bil – google finance). This year it is supposed to be even higher!!!

Then there is the exception of Southwest Airlines. Why do they pay so low for fuel?
Answer –
Fuel hedging (the practice of making advance purchases of fuel at a fixed price for future delivery to protect against the shock of anticipated rises in price – definition from here)

Because they hedged fuel very early and according to their 2006 Annual report from here
Southwest paid low prices for fuel thanks to the benefit of fuel hedges:

  • 2004 – 82.8 cents/gallon
  • 2005 – 103.3 cents/gallon
  • 2006 – 153.0 cents/gallon

Southwest’s fuel hedge for
forward years (“approximate” per barrel basis, as of mid-January): 2007
is 95% hedged at $50/barrel; 2008 is 65% hedged at $49/barrel; 2009 is
over 50% hedged at $51/barrel; 2010 is over 25% hedged at $63/barrel;
2011 is over 15% hedged at $64/barrel; 2012 is 15% hedged at $63/barrel.

Currently, all airlines hedge fuel, but Southwest is well ahead in the game!

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