Are airports the key to greater competition in fuel supply?

When John Pitts, Managing Director at aviation fuel consultancy eJet International, was instrumental in implementing the first open access fuel supply model at Hong Kong International Airport in 1998, the idea was to promote healthy competition among suppliers. This could drive prices down, maximise fuel uplift at the airport and encourage new routes and footfall. Now, after more than 20 years since its implementation, he asks whether airports are doing enough to promote competition in fuel supply.

Open access was a fresh idea in 1998, but is increasingly the business model of choice for new airports when they look at their fuel supply operations. Its principles ensure the ‘operator’ of the facility (or any other part on the airport) is unable to restrict or prevent airlines from selecting their fuel suppliers or into-plane agents, and an airline can even be a qualified fuel supplier to itself (or its alliance partners).

This enables virtually any fuel supplier with an airline contract to supply an open access airport, and introduces choice. Basic economics of supply and demand should therefore deliver lower prices to the airlines looking to uplift there.

However, despite the competitive pressure on airports, there seems to be little desire for them to consider fuel as a revenue stream in the way they embrace car parking and retail in the terminal building. Which leaves the question, why?

It’s an airport’s time to profit from jet fuel

The business opportunity for parking, shopping, car rental, advertising and so on is a highly visible one for an airport. A survey by ACI in 2015 showed that an airport’s non-aeronautical income was 27% for retail concessions, 20% for car parking, and fuel and oil amounted to a meagre 1%. But what is the true potential for the airport from jet fuel?

There are several levels of revenue generation that the airport could consider. Let’s look at the fuel uplift itself. In the traditional model the airport would receive a modest concession fee from a single fuel supplier or a joint venture for occupation of the plot on which the fuel farm sits, and no other revenue from the fuel. But the airport could be maximising fuel sales itself. Jet fuel makes up 30 to 40 % of an airline’s total costs and that’s a substantial spend, and even a small slice of a big cake could be very profitable.

The ability to make fuel more competitive at the airport is the key to becoming the uplift location of choice for airlines. Let’s consider the knock-on effect. It means securing new routes, which in turn will increase passenger footfall and hence on-airport spend – as well as selling even more jet fuel.

So why aren’t airports doing more to open up competition for fuel supply? Open access sounds like a simple concept, and can work well at most large airports – new or existing – when we have assessed the feasibility, construction and contractual elements that make it workable. And while we’ve worked with high-profile airports such as Dublin, Luxembourg, Delhi and Bangalore in making open access work, the majority of large airports remain encumbered with a closed model in which new entrants are not encouraged and generally prevented. This must be a t legacy of the past.

If you rent out parking or shop concessions, the process is simple to understand and manage for an airport. But there’s no ‘one size fits all’ for airports when it comes to fuel supply. However even within smaller airports it is possible to introduce some level of competition between fuel suppliers that could change its fortunes.

Changing dynamics and external influence

IATA has been campaigning against monopolistic or restricted choice for airlines regarding providers of fuel and restricted access to fuel infrastructure. The fear is an increasing cost burden on the industry from a lack of open access to fuel supply and the continued imposition of various taxes on jet fuel for international operations.

Toying with tax on aviation fuel by states has been seen by some as a cynical attempt to generate revenue at the expense of the airport, airlines and passengers. Clearly the airport has no control of this. In recent years we have seen the Thai government increasing tax on jet fuel on domestic routes, although in India short-haul routes have seen tax cuts in an attempt to reduce costs to passengers and encourage usage of smaller airports.

IATA is also concerned that changes in the jet fuel supply chain is leading to more challenges in the reliability of supply. We can see that oil companies that have traditionally been incumbent at airports are choosing to move out of having a direct airport presence. Some airports are being left to operate their own facilities without the relevant expertise, or hire in independent operators who take the risk and make the profit.

We’ve been advocates of Sustainable Aviation Fuel (SAF) for some time. Airlines such as Cathay Pacific, which is home-based at Hong Kong International Airport, is one of the partners involved in the fuel operations franchise at the airport alongside a number of oil companies.

It, like other airlines, is investing in the creation of biofuels – in this case from municipal solid waste. Once these new supply chains are able to converge upstream of the airport they will be able to compete with traditional jet fuel and offer real opportunity for the airports (as well as airlines) to influence the fuel mix and hence price.

This signals an opportunity to look ahead and make a change. If airports understand that competition is good, so long as it is healthy, then we will all benefit.

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