Looking for Options
Up until the late 1970s, fuel storage and distribution at major airports were typically controlled by major oil companies. At major airports like those in San Francisco and Los Angeles, specific companies owned distribution systems that were segmented to supply only specific concourses. These operating structures limited competition and the opportunity for airlines to introduce new supply sources to the airport.
Oil companies passed along their costs for operating fueling facilities to the airlines, which often resulted in escalating fuel costs. With fuel costs constituting a large share — sometimes up to 30% — of airline operating expenses, airlines began actively searching for ways to more effectively manage distribution and begin reversing the cost curve of fuel supplies.
It became apparent that fueling consortia would inject competitive forces into the mix, thus increasing fuel-buying efficiencies and creating cost efficiencies in operating the distribution facilities.
Because airlines have competed intensely for sources of revenue — both passengers and cargo — the concept of collaborating to develop and operate fuel systems for their mutual benefit represented a groundbreaking shift in industry practices. The first airports to establish airline consortia were in Chicago, Honolulu, and Anchorage, Alaska. Later, in the mid-1980s, other airline consortia were formed to manage facilities in Las Vegas, Phoenix, Seattle and Los Angeles.
Coming Together at LAX
The LAXFUEL Corp. consortium at the Los Angeles International Airport (LAX) established a model that represented a significant breakthrough for fueling consortia. It included off-airport storage and access to maritime ports, which enabled airlines to import jet fuel to the West Coast for the first time. It also let airlines take advantage of bonded fuel, which eliminated the import duty on international flights out of LAX. United Airlines led this effort, with significant support from American, Delta, Pan Am, Western, Flying Tigers, KLM, and Lufthansa.
Up until LAXFUEL was formed, Chevron, Shell, Unocal, ARCO, Mobil, and GATX owned and operated several large fuel storage and hydrant systems at LAX, with some larger airlines — American, Pacific Southwest Airlines, and Trans World Airlines — also owning their own fuel storage and/or hydrant systems. Because each oil company pipeline into the airport connected directly to refineries in the area, no common carrier pipelines existed. Not only was this extremely inefficient, it also left airlines at the mercy of the oil companies that served the airport.
In 1985, airlines formed a California mutual benefit corporation, LAXFuel, to purchase the oil company facilities on the airport property, lease the property and rights-of-way from the airport authority, finance the acquisitions and improvements, and manage the fuel infrastructure and operations. LAXFUEL was designed to create an open market, enabling one fuel storage facility on airport property to be shared among all member airlines.
The cooperation of the LAX Airport Authority was essential to facilitate the creation of this integrated fuel storage and distribution system. To this day, LAXFUEL continues to lease additional off-site storage facilities to better position airlines currently operating at LAX to purchase and store fuel near the airport. Each airline purchases its own fuel as needed and uses the common facilities where the fuel is commingled. Accounting of fuel usage and inventory is handled by the fuel system operator.
Drawing on an extensive partnership with LAXFUEL, Burns & McDonnell designed and built the initial 600,000-barrel fuel storage facility that integrated the oil company facilities and new storage capacity with fuel hydrant systems. Consortium members now share the infrastructure, operation and maintenance costs for the facilities, based on each carrier’s consumption as a percentage of total airport volume.
A Spreading Model
Fuel consortia have become a common operational model at major U.S. airports, and now airlines operating at midsize and smaller airports are implementing this same approach to reduce costs in those markets.
Columbus, Boise, and San Antonio are just a few examples of midsized airports now setting up fueling consortia.
Details Matter
Discussions setting parameters for fueling consortia can originate with either airport authorities, or with the airlines that serve them. In either case, it is likely to take an average of 18 months to finalize details of the process.
A major agenda item for these discussions will be negotiating terms of a lease that would be conveyed to a new legal entity that would serve as owner and operator of the fueling facility. An objective assessment of the physical condition of fueling assets is an important element that must be addressed at this stage of the transfer process. This due diligence review — typically performed by a third-party consultant — informs all parties of physical condition of assets as well as the risks and liabilities that could drive future capital improvements.
The consortium is set up to be a legal entity that is jointly owned by the airlines operating at a given airport and governed by a board comprised of representatives of those airlines. One of the first items of business for the consortium is often the process of hiring a third-party operator to run the fueling operation. Major players in the fueling operator sector include Menzies Aviation, Swissport Fueling Services, FSM Group and Allied Aviation Services.
The increasing scale and complexity of fueling infrastructure upgrades required at many airports have made external financing essential to cover rising construction costs.
Evolving Model Continues to Create Benefits
Airlines and airport authorities are now evaluating whether the fueling consortia model can be applied to other facets of airport operations, such as ground support equipment maintenance or aircraft deicing.
Airports have benefited greatly from airlines forming fuel consortia. Working directly with airlines on fuel lease agreements and master planning is a straightforward approach that has paid off in many ways. Airlines not only have a deeper vested interest in the airport’s overall success, but their familiarity with on-site procedures — gained from operating multiple facilities — provides continuity and efficiency. In contrast, large oil companies were typically involved only with the fuel facility itself. Fuel consortia are a model that have enabled airlines to collaborate not only among themselves, but also with airport management. It was a revolutionary idea that continues to pay off for the aviation industry today.
