|EPIC took over Air BP’s North American general aviation assets in 2012 and supplies fuel services to four Canadian FBOs, including the Million Air franchises in Toronto and Vancouver. Photo: Dassault EPIC
“A number of factors drive price fluctuations, including geo-political strife, oil supply disruptions, seasonal demand and acts of God such as weather emergencies,” says Joel Hirst, vice-president of sales for Ann Arbor, Mich.-based Avfuel Corporation, which supplies fuel and related services to more than 600 fixed-base operators (FBOs) in Canada and the United States, and close to 3,000 worldwide. To illustrate his point, Hirst notes political instability in Egypt and the possible closing of the Suez Canal, impacting three million barrels a day, and greater transparency in Iran, as factors that could influence the price of oil either up or down.
But while the business of moving and refining oil is global, pumping the stuff into airplanes remains local and there are plenty of domestic factors that will reshape the Canadian aviation fuel sector over the next five years.
“I see FBOs and oil refineries severing their relationships over the next five years,” says Tyler Hunt, aviation sales manager for Apron Fuel Services, a Montreal-based fuel reseller with operations at airports across Canada. “Oil companies want to make fuel. They are no longer interested in going far downstream from their refineries. That would be a win at both ends. The refinery sources to a reseller. They still get their margin for the fuel without the investment in trucks and tanks. The reseller uses infrastructure not controlled by the refinery and can source from multiple locations, thereby driving down cost.”
The pullout is already underway. Both Shell and Esso, the dominant players in the Canadian aviation market, have recently closed refineries in Montreal and Dartmouth, Nova Scotia where Jet A was made and distributed throughout Quebec and the Atlantic provinces. The window on cooperation agreements between the two industry giants, where each company draws jet fuel from the other’s tank at specific airports is reportedly closing.
It is not just a Canadian trend, notes Steve McCullough, senior vice-president, business development and strategy for EPIC, an Oregon-based fuel supplier to FBOs across Canada and the U.S. “You look at Chevron, Exxon and Mobil. All the majors have been stepping away from downstream branded assets over the last three years,” McCullough says. EPIC ended a branding agreement with Air BP covering Canada and the U.S. in 2012. Locations were branded as part of the EPIC or UVair FBO network. Epic supplies fuel services to four Canadian FBOs including the Million Air franchises in Toronto and Vancouver.
McCullough maintains the transition away from the majors has been good for the industry. “The distributors that remain in the fuel supply business today understand both the needs of the FBOs and flight operations. They have the experience inside of the industry and can meet their needs more effectively.”
Certainly it means greater opportunities for independents, perhaps a rethink by operators of how they purchase fuel and FBOs or how they provide services and a fatter fuel revenue stream for smaller airports.
|AvFuel supplies fuel and related services to more than 600 fixed-base operators (FBOs) in Canada and the U.S. Photos: Avfuel
customer business model. Now, the refineries are closing, Esso and Shell are exiting the market and you are putting a lot more pressure on the bulk agent. We evaluate changes from a refinery perspective, a supply perspective and provide an answer for the aviation fuel demand that is still there.”
PetroValue has expanded into all major Canadian airports and is now looking at other airport pursuits where supply challenges exist.
Hunt points out that distributors have greater flexibility to move product than oil refineries that are cuffed to their own supply chain. “I can buy from one refinery or another, I can bring it in from out of the country, I can use trucking companies that oil refineries don’t, use tanks that oil refineries can’t, and I can assemble multiple different approaches at an airport to optimize my supply chain, which an oil refinery can’t do. That affects price and secures supply.”
For some independents, securing a supply within infrastructure-challenged Canada will continue to be a challenge on its own. Hirst points out, for example, that Canada is already experiencing shortages in aviation fuel in certain regions due to the fact that there is only one aviation fuel refinery in the country.
“Canada really is a logistics play, as we don’t have a refinery, pipeline and terminal network like you find in the U.S.,” says Coleman. “So as a consumer, it is imperative that you are working with a supplier that possesses a comprehensive understanding of supply, logistics, safety programs, quality assurance and can get you that supply on a guaranteed and uninterrupted basis.”
Both Shell’s closed refinery in Montreal and the Esso refinery in Dartmouth (the last of Nova Scotia’s three oil refineries) are being converted into terminals, but Coleman is concerned that is not sufficient to satisfy aviation’s thirst.
“We believe Avgas being stored at the Shell terminal in Montreal is not a long-term strategy,” he says. “In fact, we may see certain major oil companies exit the aviation fuels sector in certain parts of eastern Canada as these closed refineries, including Esso Dartmouth, are certainly not ideal import terminals.”
According to Hunt, what is being produced is just as concerning. A process known as hydrocracking is enabling refineries to shift their product mix almost at the “flip of a switch” potentially squeezing out less profitable formulas such as jet fuel. “Jet fuel competes with other fuel types to utilize infrastructure,” Hunt says. “Refineries want to better allocate their barrel of fuel to what is making money at the end of the refining process. In the past few years, we have seen diesel prices going through the roof. Jet fuel being the less profitable product coming out of the refinery means it is going to take up less and less space with pipelines, railways and tanks in comparison with diesel and gasoline, which is going to impact supply and price.”
It all adds up to operators, especially large airlines, becoming more creative in securing their fuel supply. In 2002, Air Canada began to build its own global supply chain to import jet fuel from refineries in South America, the Middle East and Asia to Toronto, the airline’s busiest hub.
Fuel is shipped by ocean-going freighter to a terminal in Quebec City where it is moved to a 17-tank fuel farm at Toronto’s Pearson International Airport either by railcar or along the St. Lawrence Seaway to Hamilton. “The investments that Paul Whitty (Air Canada’s director of fuel purchasing and supply) has made over the years have been absolutely brilliant,” Coleman says. “He understood years ago that he was not able to secure adequate domestic supply to satisfy the Air Canada demand.” A more controversial jet fuel terminal on the end of the salmon-rich Fraser River is being proposed to ensure a steady supply of fuel to Vancouver International Airport, Canada’s second busiest. The $93-million storage facility would be owned and operated by the Vancouver Airport Fuel Facilities Corporation, a consortium of airlines that includes Air Canada. Fuel would be pumped into the airport by pipeline.
“Air Canada understands that the most logical model to handle the demand and growth at YVR is establishing a bulk strategy facility where you can import product then pipe to the airport,” Coleman says. He predicts that Air Canada will ultimately duplicate the Toronto rail-loading model to move product from B.C. into landlocked Alberta. “There is definite length in Alberta currently and we do see significant diesel length going forward,” Coleman adds. “However, the supply and economics reality with aviation fuels can change quickly and I do think they will want to have that import alternative available to them.”
And perhaps iron out pricing volatility, something many airlines also do through mechanisms such as hedging, a tool that is not available to private operators who the National Business Aviation Association estimates already pay almost 50 per cent more to fill a tank than the airlines. Even without hedging, Hunt says business operators are not without options.
“This is not your corner gas station,” Hunt say. “Jet fuel is jet fuel, it doesn’t differ from Shell to Esso. Business operators have to move away from sourcing directly from the older refinery companies and have mutually owned storage facilities. By pulling product out of a communal storage they are reducing infrastructure costs and driving down price.”
|In 2002, Air Canada began to build its own global supply chain to import jet fuel from refineries in South America, the Middle East and Asia to Toronto, the airline’s busiest hub. Photo: Air Canada
Avfuel’s Hirst agrees. “Flight departments have become much more sophisticated when it comes to strategically locating the best-price fuel and services. They’re using two or three contract fuel programs that cover the majority of their desired locations, and tankering where they can get the best price. In general, they are doing the research to ensure that they aren’t paying more for fuel than they need to.”
Tankering, known as the old-fashioned “splash and dash,” should continue to be a concern for Canadian FBOs and fuel suppliers where taxes also contribute to the higher cost of a fillup compared with the U.S. But Hirst explains that tankering is a growing trend throughout North America. “What we are seeing with operators flying into Canada – flying anywhere, really – is that the more diligent departments are tankering fuel where they can get their best costs, or taking minimal amounts of fuel is just enough to reach the destination where they will get their best price.”
As Canada’s aviation fuel sector becomes more transparent and flight departments base more decisions on price, operators may even see changes to the FBO business model, especially at smaller facilities that do not have multiple profitability streams such as maintenance and hangaring.
“I think FBOs have made some very difficult decisions over the past five years and they have trimmed their overhead costs,” Hirst says. “But an FBO’s fuel margins are designed to cover fixed costs such as staff and the services to draw in customers. There is only so much they can reduce.”
Which might lead to some FBOs imitating the low-cost airline business model and charging for some of the non-fuel-related amenities that were once part of the overall package. The industry is already seeing signs of that trend, according to PetroValue’s Coleman. “We are seeing a de-bundling of some services. Previously, a fuel purchase entitled you to free amenities such as use of the pilot lounge and access to courtesy cars,” he says. “That is no longer happening at some FBOs, which proves to me that fuel margins are not enough to sustain the business. It will be very important to develop these ancillary revenue streams.”
One of the winners in the transition away from the traditional refinery supply model could be smaller airports such as Prince George, which has recently installed its own fuel farm. It is a solid strategy, says Coleman. “At many airports, fuel sales are the number 1 revenue generator. Instead of having a branded program at the airport where they receive a small concession fee off the volume, why not take over their fuel program and maximize the profit of that stream?”