Fuel Farms Control Aviation’s Largest Cost

Effective management and efficient distribution are keys to business model’s success.


Fuel costs represent up to 30 percent of airline operating expenses. That has made effective management and efficient distribution of fuel supplies at large airports an industry priority for decades.

In the late-1970s, airlines at several major airports began looking at a consortium model to lower costs and increase efficiencies.

Up to this time, major oil companies typically controlled fuel storage and distribution at major airports. In many cases, each oil company had its own distribution system to supply specific concourses. The San Francisco and Los Angeles airports, for example, operated in this manner. These structures limited competition and the opportunity for airlines to introduce new supply sources to the airport, and resulted in higher fuel costs for the airlines. The oil companies’ costs associated with these facilities were passed on to the airlines as part of their fuel cost.

Competing airlines came together in a revolutionary response, collectively seeking a free market for fuel pricing and fuel system operations at major airports. The first airports to establish such fuel farms were in Chicago, Honolulu and Anchorage.

By the mid-1980s, many airline consortia were formed to manage facilities in Las Vegas, Phoenix, Seattle and Los Angeles.

The LAXFUEL Corp. fuel operation at the Los Angeles International Airport (LAX), however, represented a major breakthrough because it included off-airport storage and access to ports, which enabled airlines to import jet fuel to the West Coast for the first time. It also let airlines take advantage of bonded fuel, which eliminated the import duty on international flights out of LAX. United Airlines led this effort, with significant support from American, Delta, Pan Am, Western, Flying Tigers, KLM and Lufthansa.

 

COMING TOGETHER

Oil companies, including Chevron, Shell, Unocal, ARCO, Mobil and GATX, owned and operated several large fuel storage and hydrant systems at LAX. Some larger airlines, including American, Pacific Southwest Airlines and Trans World Airlines owned their own fuel storage and/or hydrant systems, but the airlines were still at the mercy of the oil companies serving the airport for two reasons:

Each oil company pipeline into the airport connected directly to local refineries.

No common carrier pipelines existed.

In 1985, airlines formed a California Mutual Benefit Corporation to purchase the oil company facilities on the airport, lease the property and rights-of-way from the airport authority, finance the acquisitions and improvements, and manage the fuel infrastructure and operations. LAXFUEL was designed to create an open market and enable the sharing of one fuel storage facility on airport property for all member airlines’ use.

The cooperation of the LAX Airport Authority was essential to facilitate the creation of this integrated fuel storage and distribution system. LAXFUEL leases additional off-site storage facilities to better position the airlines to purchase and store fuel near the airport. Each airline purchases its own fuel as needed and uses the common facilities. The fuel is commingled and accounting of fuel usage and inventory is handled by the fuel system operator.

Burns & McDonnell worked with LAXFUEL to design and build a 600,000-barrel fuel storage facility that integrates the oil company facilities and new storage capacity with existing fuel hydrant systems. Consortium members share the infrastructure, operation and maintenance costs for the facilities based on each carrier’s consumption as a percentage of total airport volume.

THE MODEL SPREADS

Fuel farms have become a common operational model at major airports in the United States and around the world with airlines operating at midsize to smaller airports adopting the model of shared facilities to reduce costs. Such business models offer an opportunity for airlines to work together with airport management to manage collective activities more efficiently and cost-effectively.

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