PlanningofAviation

FuelConcessions
Presentedby:

CarlosOzores
Principal

AirportsCommercialManagementForum
Miami,FL,June1920,2014

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1

1. AirportFuelingBasics
2. AirportFuelInfrastructure
3. AirportFuelOperatingModels
4. PlanningaFuelConcession

AIRPORTFUELINGBASICS

Inplanninganairportfuelconcession,airportsmust
understandbasicconceptsaboutthejetfuelbusiness
Whatarethecomponentsofthefinal
jetfuelprice?
Whatfactorsdeterminethepriceoffuel
atyourairport?
Howdofuelconcessionfeesaffect
thepriceairlinespay?

AIRPORTFUELINGBASICS

Thefuelpriceitselfrepresentabout93%ofthetotalcost
toairlines
AirlineTotalFuelCostBreakdown
(Estimated)
FuelSupplier
Differential

5% 2%

Covers the costs of

delivery from refinery to
wing/storage, including
the fuel suppliers and
its sub-contractors
margins this is what
is negotiated with the
fuel supplier

FuelCharges
&Levies
Includes charges and
fees levied by the
airport/government
some are outside of an
airlines control, but
some airport imposed
fees could fall under
joint negotiation

93%
AviationFuel
Based on fuel spot price Platts US Gulf
Coast jet fuel for Latin American airports

AIRPORTFUELINGBASICS

Thepriceoffuelthatanairlinepaysatyourairportwill
dependonvariousfactors

FuelSupply
Chain

PRICING
Airlines
Levers

Supplier
Competition

AIRPORTFUELINGBASICS

Thesupplychain i.e.,thecostofgettingfuelfromthe
refinerytotheplane drivescost
Therewillbecountryspecificfactors(e.g.
staffcosts,taxingregime,etc.)thatwill
affectcosts

FuelSupply
Chain

Hardtoaccessairports(e.g.islands)will
havehigherfueltransportationcosts
Therewillbeanumberofotherairport
specificfactorsthatwillaffectthecostof
fuelsupplyfromfuelrefinerytowing,
incl.fuelconcessionfees.

AIRPORTFUELINGBASICS

Intoplanecostsaccountfor~30%oftheoverall
differential costs
IndicativeFreightCosts:
Pipelinecosts:2.4USC/USG
Truckcosts:6USC/USG
Activity

Freightcosts
fromrefinery

~30%

Layingdown
costs

~20%

Airport
storagecosts

~20%

Intoplane
costs

~30%

Source:ICAO

Costsareindicativeastheywillbeairportspecific
EACHairporthasitsownfuelsupplychain

AIRPORTFUELINGBASICS

Fuelpricedifferentialscanvarywidelybetweenairports,
evenamongthoseinasameregion
ExampleofSupplierDifferentials
(EuropeanAirline)
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00

AIRPORTFUELINGBASICS

Marketcompetitiveness i.e.,thenumberofsuppliersat
yourairport alsoaffectspricing

Acompetitivemarkettendsto
reduceprices,improveefficiency
andfosterinnovation

Supplier
Competition

Howcompetitiveamarketiswill
dependonthenumberof
suppliers,thetypesofsuppliers
andthenumberofcustomers

AIRPORTFUELINGBASICS

Supplierdensitydrivesthedifferentialcostsdownwards
UnitedKingdom
Differential(USD)vs.#ofcompetingsuppliers
$0.25
BFS

BRS

$0.20
LPL
$0.15

LTN
EDI

$0.10

MAN

LGW

France

$0.05

Differential(USD)vs.#ofcompetingsuppliers

$0.00
0

7
$0.45

TLS

$0.40
$0.35
$0.30

NCE

$0.25

LYS

$0.20
$0.15

CDG

$0.10

ORY

$0.05
$0.00
0

AIRPORTFUELINGBASICS

Marketcompetitiveness i.e.,thenumberofsuppliersat
yourairport alsoaffectspricing

Airlines
Levers

Howgoodadealanairlinecan
makewillalsodependonhow
attractiveitisasacustomer,
whichwilldependon:
Itsshareofthemarket
Financialstrength
Scheduleconsistency
Growthpotential
Dailydemandprofile

AIRPORTFUELINGBASICS

Anairportsfuelstrategycanhaveconsiderableinfluence
ontwoofthethreedriversofcost
Numberofstoragefacilities

FuelSupply
Chain

Sizeofstoragefacilities
Hydrantsystem
Numberofoperators(depot
andalsointoplane)

Supplier
Competition
Numberoffuelsuppliers

1. AirportFuelingBasics

2. AirportFuelInfrastructure
3. AirportFuelOperatingModels
4. PlanningaFuelConcession

13

AIRPORTFUELINFRASTRUCTURE

Theairportfuelinfrastructurehasthreedistinctparts

Fuel
Supply

Fuel
Storage

FuelDelivery
(IntoPlane)

AIRPORTFUELINFRASTRUCTURE

Airportsneedtoensurethattheirairporthasa
dependableandsufficientfuelsupply
Supplymethods
Pipelinesaresaferandcheaperthan
groundtransport(barge,rail,ortruck)
Pipelinesarehighlyrecommendedfor
largeairportswithsignificantfueluplift

Ensuringadequatesupply
Notaconcernifarefineryorterminal
isneartheairportandfuelcanbe
storedthere
Ifrefinery/terminalisfaraway(lengthy
supplychain),needtoensurethat
thereisfuelstorageatheairport
Ruleofthumbisforairporttohave5
to7daysoffuelonhand

AIRPORT FUEL INFRASTRUCTURE

Airports also need to ensure that they have

sufficient storage on-site
Numberoffacilities
Multiplefacilities(individualoperators)
Consolidatedfacility(singleoperator)

Storagecapacity
Customerbaserequirements

Mainsystemcomponents
Storagetanks
Pumps/filters
Controlsystems
Loading/offloadingpoint(fillstand)

AIRPORTFUELINFRASTRUCTURE

Finally,airportsneedasafeandefficientmethodof
deliveringfuelfromthestoragedepottotheaircraft
Twointoplanemethods
Refueller truck
Hydrantsystem

Benefitsofhydrantsystems
Hydrantcartsmuchcheaper
thanalargerefueller
Safer;refuellers (trucks)canincrease
accidentsandalsoleadtorampcongestion

Whenhydrantsystemsmakesense
Justifiedifpumpingmorethan10million
gallons/month(roughrule)
Onlyrelevantwhenlayingnewapron
(e.g.,terminalexpansion)

1. AirportFuelingBasics
2. AirportFuelInfrastructure

3. AirportFuelOperatingModels
4. PlanningaConcession

18

AIRPORTFUELOPERATINGMODELS

Airportshavethreebasicoptionswhenitcomestojetfuel
supplyandhandling
Fulloutsourcing

Hybrid

Outsourceownership,
managementand
operation

Ownfacility,but
outsourcemanagement
andoperation

Lowerrisk/return
Lowercomplexity

ImpactonAirport

Fullinsourcing
Own,manageand
operatefacility

Higherrisk/return
Greatercomplexity

Airportchoicedependsonappetiteforrisk,costofcapital,and
timeleftinconcession thereisnoonesizefitsallmodel

AIRPORTFUELOPERATINGMODELS

FullOutsourcing
Oilcompanyownedfacilities
Description: Eachoilcompanyowns
andoperatesitsownfacilities
Pros: Highcompetitionamongsuppliers
Cons: Highcost,inefficient;limited
fuelsuppliers;airportlacksinfluence
onoperators
Example: Argentina,Brazil

Oilcompanyjointventure
Description: Oilcompaniesjointlyownasinglefacility(sometimeswithairline
equitypartners)
Pros: Highcompetitionamongsuppliers;costefficient
Cons: Limitedfuelsuppliers;airportlacksinfluenceonoperators
Example: Brazil(e.g.,GRU,GIG);Chile(SCL);Australia(SYD),HongKong(HKG)

AIRPORTFUELOPERATINGMODELS

FullOutsourcing,contd
From1940s1990s,oilcompaniesowned
andoperatedfuelfacilitiesatmost
airportsworldwide
Since1990s,oilcompanieshavebeen
exitingthebusinessofoperating
airportfacilitiesduetolowmargins
(esp.inNorthAmericaandEurope)
Oilcompanieshavealsobeenexiting
theintoplane(ITP)business
Verylaborandcapitalintensive,andlowmargin

Oilcompanyexitfromairportoperationscreatesopportunities
forairportoperatingcompanies.

AIRPORTFUELOPERATINGMODELS

FullOutsourcing,contd
Airlineownedfacilities(fuelconsortium)
Description: Airlinesownfacilityandhirethirdpartytooperate
Pros: Highlycompetitiveandcostefficient;multiplefuelsuppliers
(openaccess)
Cons: Airportgivesupdaytodaycontrol;costtransparencybenefitsairlines
Example: VerycommonatlargeNorthAmericanairports,
(e.g.,LAS,LAX,MIA,ORD,YYZ,YUL,etc.)

Fuelconcessionmodel
Description: Airporttendersconstruction,managementandoperationtoa
thirdparty(ormultiplethirdparties)
Pros: Highlycompetitiveandcostefficient;multiplefuelsuppliers(open
access);airportsetsterms***
Cons: Airportbearsmoreliabilitythanotherfulloutsourcingoptions
Example: Singleoperator/openaccess:BOG,LIM,PTY,UIO.
Singleoperator/singlefuelsupplier:SDQ
*** Efficiency depends on applicable regulations, and airport planning effectiveness and terms of concession

AIRPORTFUELOPERATINGMODELS

Hybrid
Airportownedfacilitiesoperatedbythirdparty
Description: Airportownsfacilities,buthiresa
thirdpartytooperate
Pros: Highlycompetitiveandcostefficient
operation;multiplefuelsuppliers(openaccess);
potentiallylowerconstructioncost(lowerWACC)
Cons: AirportresponsibleforCapEx;increased
liability
Example: SouthAfrica(allmajorairports);London
Stansted;DubaiWorldCentral;Jeddah

AIRPORTFUELOPERATINGMODELS

FullInsourcing
Airportownedandoperatedfacility
Description: Airportownsandoperates
fuelinfrastructure
Pros: Greaterrevenuestoairportoperator;
fullcontroloveroperationandmanagement
Cons: Higheroperatingcostsandcapex,and
greatestrisk/liabilitysinceoutsideairports
corecompetency
Example: Tulsa(TUL),Tucson(TUC),
Phoenix(PHX)used todothis,butstopped

1. AirportFuelingBasics
2. AirportFuelInfrastructure
3. AirportFuelOperatingModels

4. PlanningaFuelConcession

25

PLANNINGAFUELCONCESSION

KeyPlanningQuestions(RepresentativeList)
FuelSupply&FarmOperation
Isthereanexistingmonopolysupplier(oroperator)?
Isitpossibletohavedifferent/multiplesuppliers(oroperators)?

Infrastructure

Issufficientland(forfueldepot)availableonairport?
Howadequateisexistinginfrastructure?
Howlongwillcurrentcapacitylast?
Whatarelongterminfrastructureneeds?

Pricing

Areintoplanepricesfixedbyregulator?
Howcompetitiveareairportfuelcosts?
Whatispotentialfortankering?
Howpricesensitiveisdemand?

PLANNINGAFUELCONCESSION

Step1:Determineyourairportsfuelsupplyneeds
1. Developfuelupliftforecast
Trafficforecast(movements)
Evolutionofaircrafttypemix
Fuelupliftperaircrafttype
Effectofnewgenerationaircraft

2. Determineinfrastructure
requirements
Pipeline
Depot(storagetanks)
Hydrants
Pumps

Goodplanningiscriticaltodefiningtherightconcept,
reducingcosts,andcreatingrevenueopportunities

PLANNINGAFUELCONCESSION

Step2:Evaluateandselectqualifiedfirm(s)
1. Technicalcompetenceandexpertiserequirements
Fuelsupplyisvitaltoyourairport
Fuelhandlingisveryrisky

Onlyfirmsthatmeettechnicalcompetenceandexpertise
requirementsshouldbeconsidered
2. Lowestcostsolution(i.e.,constructionand/oroperation)
Tendermustprovideveryspecificrequirements
anddescribeairportneeds
ClearTechnical,Operational,andSafetystandards

Fuelhandlersshouldbetreatedasacritical,
longtermbusinesspartnerofyourairport!

PLANNINGAFUELCONCESSION

Step3:Generatingrevenuesfromfuelsupply
FuelConcessionFee
Variable
Volume
Sales

Fixed

Otherfeesfromfuelrelated
activities
Intoplaneprovider
(%ofgrossrevenue)

PLANNINGAFUELCONCESSION

Airportsneedtounderstandhowtheirdecisionsaboutfuel
supplywillaffectthecompetitivenessoftheirairport

$7
$6
$5
$4
$3

4.74
4.69
4.59
4.26
4.02
3.97
3.89
3.89
3.88
3.87
3.87
3.85
3.83
3.67
3.62
3.40
3.37
3.22
3.19
3.19
3.16
3.11
3.06
3.04
3.01
3.00
2.93
2.84

$8

6.80

FuelPriceatSelectLatinAmericaandCaribbeanAirports InternationalFlights
(USDperGallon)

$2
$1
GCM
ANU
SJO
MBJ
POS
CLO
MDE
SDQ
STI
BOG
EZE
MGA
CTG
SJU
BSB
SAL
GIG
GRU
MVD
GYE
UIO
SCL
LIM
BGI
CUN
PTY
MIA
GDL
MEX

$0

Note:PricesasofJune13,2014
Source:RDC airportcharges.com

PLANNINGAFUELCONCESSION

andwhatimpactafuelconcessionfeehasonthe
airfaresandairlineoperatingcosts
EffectofFuelConcessionFeeIncrease:
CostperPassenger(USD)
$4

EffectofFuelConcessionFeeIncrease:
AnnualCosttoAirline(USD,000)
$800
$700

$3

$600
$500

$2

$400
$300

$1

$200
$100

$0

$0

$0.01

$0.02

$0.03

737800(3hours)
Note: assumes 85% load factor

$0.04

$0.05

767300(8hours)

$0.01

$0.02

737800(3hours)

$0.03

$0.04

$0.05

767300(8hours)

Note: assumes 85% load factor and three daily flights

Airlinesneedtoassesstheeffectoftheintoplanefeeinthe
contextofitsoverallairportchargesstructure

PLANNINGAFUELCONCESSION

ICAO Guidelines(Doc9562)
RevenuesfromNonAeronautical
Activities:
4.18Aviationfuelandoilconcessions(including
throughputcharges).Allconcessionfees,including
anythroughputcharges,payablebyoilcompaniesor
anyotherentitiesfortherighttosellordistribute
aviationfuelandlubricantsattheairport.[]

CostBasisforFuelConcession:
4.116Thesewouldincludeanymaintenancecosts,administrativeoverheads
andcapitalcostsattributabletopremises,landandequipmentownedbythe
airportandplacedatthedisposalofthefuelconcessionaries(thisincludeany
fuelfarms,pipes,hydrants,pumpingfacilities,etc.)Alsoincludewouldbe
costsoffirefightingandsecurityservicesattributabletothestoringand
tankingoffuel[],aswellascostsattributabletotheusebythe
concessionariesofgroundaccessfacilitiesandservices.

PLANNINGAFUELCONCESSION

FundamentalPlanningGuidelines
FuelSupplyInfrastructure
Keepitsimpletolowercosts

Suppliers(oilcompanies,intoplaneproviders)
Maximizecompetitiontolowercosts

ConcessionAgreement
Minimize/transferriskandliabilitytooperator
Captureasmuchrevenueaspossiblefortheairport
Ensuresimpleadministrationandoversight

Thankyou!

Formoreinformation,pleasecontact:
CarlosOzores
Principal
carlos.ozores@icfi.com
+19178608630