Features Operations
Fuel: The Burning Issue

Aviation fuel prices have peaked and are on a downward slope. For now.
The price of West Texas Intermediate Crude (a global benchmark) has
tumbled from a 12-month high of US$36 a barrel in February, to the
US$26 million mark in early May. A stronger Canadian dollar is proving
to be an added bonus.

Any relief is welcome to carriers who have watched already tight
margins squeezed even tighter each time a nozzle is hooked up to the
wing. In most cases, fuel is the second-largest operating expense for
carriers, running between approximately 15% to 35% depending on size.
One operator with a fleet of 30 aircraft estimates that a 10% hike in
fuel prices amounts to an additional $800,000 in costs.Major players
such as Air Canada and WestJet have offset rising prices by
implementing temporary fuel charges. Options for owner/operators have
not been so clear cut. Smaller companies likely have little pricing
power left having already inched charges upward to compensate for
increased insurance premiums and escalating third party user fees.

Even with falling prices, 2002/03 has been a cruel year for crude.
Political instability in Venezuela (a major oil producer), tensions in
the Middle East and the fact that the global oil industry keeps less
inventory than was the case 10 years ago, each conspired to put upward
pressure on the price of oil. Add to the price of crude the cost of
refining, storage, distribution and marketing, and you soon arrive at
the 85¢ a litre that operators without some forward planning have been
forced to pay.

“The price of aviation fuel is driven by
similar factors that effect the pricing of filling up your car,” says
Peter Gallen, president of Air BP Canada, a subsidiary of UK-based Air
BP, one of the world’s largest suppliers of aviation fuel and
lubricants. With perhaps one irritating exception: federal and
provincial excise taxes. According to the Air Transport Association of
Canada (ATAC), Ottawa’s aviation fuel excise tax snatches an additional
$70 to $90 million from Canada’s struggling aviation industry. ATAC
argues that the tax is regressive because it hurts the smaller operator
more.