Renewed Focus on the Ramp: U.S. airports selling fuel? Perhaps; but ramp safety, security concerns are reality

CONFERENCE REPORT Renewed Focus On The Ramp By John F. Infanger, Editorial Director U.S. airports selling fuel? Perhaps; but ramp safety, security concerns are reality MIAMI — Jet Fuel Conference host John Armbrust asks, Wasn’t...

Robert Sturtz of United Airlines says the carrier has historically maintained a “self-supply strategy.” But it also resells some one billion gallons of fuel each year and maintains more than 150 million gallons of inventory. Now it’s relying on Morgan Stanley to deliver the product.

Its 150 million gallons of working inventory is stored in systems at most major U.S. airports, and it uses eight common carrier pipelines to get it there. Through a subsidiary — UAFC — it resells some one billion gallons.

In an attempt to guarantee competitive prices, reduce supply-related working capital, and to maintain an exit strategy, United is contracting with Morgan Stanley, which is now in fuel distribution and management, according to Sturtz. Morgan Stanley was one of 12 firms invited to respond to a request for proposals from United, he says.

The supply agreement has been executed, according to Sturtz, bankruptcy court approval received, and deliveries began January 1, 2004. All bulk supplies from the U.S. Gulf to O’Hare, Dulles, Denver, and New York airports are supplied by Morgan Stanley. All associated fuel supply, pipeline, and terminal agreements have been transferred to Morgan Stanley, he explains. Over time, Morgan Stanley will supply up to 75 United locations.

Among the other benefits to United, according to Sturtz:

• a reduction in working capital tied up in pre-payments, inventories, receivables;
• maintaining U.S. Gulf-related pricing without the staffing, overhead, administrative costs, and trading risks;
• $30 million a year reduction in interest expense on capital employed;
• obtaining a partner with investment-grade credit to finance and grow fuel supply activities.

The deal, says Sturtz, is only beginning to evolve. Shell and World Fuel Services recently signed on with United for distribution and marketing services, showing the potential for more partnering, he says. Through February, United had freed up some $180 million in working capital, says Sturtz.

Michael Boyd, an airline industry analyst with The Boyd Group/ASRC based in Denver, is uncharacteristically optimistic about the fate of the legacy air carriers. The system as a whole, however, continues to face challenges, he says Boyd forecasts airline growth of 2.5 to 2.7 percent through 2007/08 and says, “The news is good; we see positive things.

“We don’t see any more bankruptcies out there,” he says. He thinks management at US Airways will get it through its current challenges and sees the other major carriers working through their current economic hardships. While cautiously optimistic about the success of Song, Delta’s new low-cost wing, he sees Ted as a “dagger aimed at the financial heart” of United, although he expects the carrier to survive. He says that American, Continental, and Northwest in particular are doing well today. Among low-cost carriers, he is very optimistic about the prospects for AirTran.

Boyd says that, for the most part, regional airlines no longer exist and are now “small jet providers” to the majors. Airlines within airlines are on the way out, he says, as are independent commuter carriers and “anything with a propeller.”

Boyd expresses concern that the nation still lacks a clear-cut national aviation policy and that FAA and TSA continue to change the rules. Regarding the nation’s focus on aviation security, he says, “We’re building a chain link fence to stop a flood.”

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