Airlines face risk of fuel shortages

Brad Foss

Thursday, Aug. 11, 2005 | 11:15 a.m.

WASHINGTON -- Lost luggage, bad weather and now ... no fuel?

While fliers haven't yet had to add that problem to the list of headaches associated with air travel, it may not be far away. Airports in Arizona, California, Florida and Nevada recently came within a few days -- and at times within hours -- of running out of jet fuel.

Because of supply bottlenecks, airlines were forced to fly in extra fuel from other markets and scramble for deliveries by truck. But these are expensive, short-term fixes that do not address what airline executives consider to be the underlying problem: with passenger traffic rising above pre-9/11 levels, the nation's aviation business is slowly outgrowing the infrastructure that fuels it.

What started as routine supply tightness in these markets quickly snowballed following disruptive events that included a hurricane, a canceled fuel shipment and, ironically, the airlines' own efforts to prevent shortages, according to several airline executives.

Late July and early August were "unprecedented for Southwest for the number of cities where we've had to manage supply problems," said Glenn Hipp, director of fuel purchasing and inventory management at Dallas-based Southwest Airlines Co.

AMR Corp.'s American Airlines, UAL Corp.'s United Airlines and America West Holdings Corp. also said there has been recent supply trouble.

These airlines have not canceled flights or made extra stops to tank up, nor have planes flown with less than the minimum fuel required by the Federal Aviation Administration, executives said.

But the near shortages underscore the added strain on refineries, pipelines and the airlines' own fuel procurement efforts as the industry recovers from its worst-ever downturn -- June passenger traffic was up 4 percent from 2001 levels, according to industry data -- and energy demand rises throughout the economy.

"It's really starting to surface as an issue," said James Holland, vice president of logistics at Kinder Morgan Energy Partners L.P., a Houston-based pipeline operator.

Part of the problem is that refining and pipeline capacity in some regions of the United States have grown slower than demand, meaning companies must run their equipment harder to satisfy growing fuel needs. This raises the chances of operational snags and leaves less of a cushion when something does go wrong. Recent refinery outages have helped push oil prices to record heights near $64 a barrel.

Also, the petroleum industry has reduced its fuel inventories in recent decades, redirecting funds once spent on storage to more lucrative oil drilling. Thus, some of the burden of storing surplus fuel has shifted to the airlines.

But the industry's financial woes have hindered its ability, or willingness, to increase spending on storage, according to John Armbrust, publisher of Jet Fuel Report, an industry newsletter.

"If more effort isn't put into resolving some of these issues, it could have serious impact on the operational integrity of the whole aviation system," warned Bob Sturtz, general manager of fuel at Elk Grove Village, Ill.-based United Airlines.

While progress is being made, airline and energy executives predicted that the problem could get worse before it gets better.

Just outside Washington, officials at Dulles International Airport are working with airlines as well as the Colonial Pipeline Co. -- which transports gasoline, heating oil and jet fuel from the Southeast to the Northeast -- to alleviate a regional bottleneck.

The goal is to build a wider pipeline to feed Dulles and an additional 300,000 barrels of storage at the airport, according to Chris Browne, the airport manager at Dulles. The project is still in the design phase. For now, airlines are coping by having additional jet fuel brought in by truck, Browne said.

The fuel supply woes are dogging an industry already losing billions of dollars a year in large part because of soaring fuel costs. The price of jet fuel averages $1.91 per gallon in Los Angeles, up 46 percent from a year ago, according to government data.

Airlines have used all sorts of strategies to improve their fuel efficiency, from flying at slower speeds to taxiing on one engine. These efforts have worked, but they have also been offset by their maneuvering around supply bottlenecks.

America West's assistant treasurer Timothy Walker said the industry deserves credit for its ability to manage these problems without affecting service. But he conceded that making up for low supplies with truck and airplane deliveries is not a long-term strategy.

"The lack of fuel could slow growth in certain markets," Walker said. He cited Phoenix and Las Vegas as two America West markets likely to face fuel-supply challenges if traffic continues to grow.

Indeed, one of the latest supply snags to catch the industry's attention began around July 20 in Phoenix. While accounts of what happened vary slightly, it is agreed the trouble began after Kinder Morgan did not make a scheduled delivery of jet fuel, at which point carriers began "ferrying" extra fuel to Phoenix from California and Nevada.

At first, it seemed a crisis was averted. Then it cascaded.

The near-shortage in Phoenix gradually spread to airports in Reno, Nev., San Diego and Ontario, Calif. Jet fuel had to be trucked in just to keep the ferrying program to Phoenix alive, executives said.

Delivering jet fuel by truck is like "putting a handful of sand on a beach," Hipp said. "It doesn't really keep up with demand."

San Diego and Ontario came so close to drawing down their fuel inventories, Sturtz said, that airlines were a few hours away from scheduling additional layovers so planes could refuel.

The crisis was resolved gradually as pipeline deliveries returned to normal and airlines focused on using as little fuel as necessary.

Kinder Morgan blamed its canceled fuel shipment on an unnamed refiner that couldn't keep up with higher-than-anticipated demand. Nevertheless, it announced plans to spend $130 million to replace a 140-mile pipeline with a larger one to move more fuel to Arizona from Texas and New Mexico refineries.

Airports across the Southwest weren't the only ones struggling with fuel supplies last month.

A handful of airports in Florida, most notably Orlando and Tampa, saw their regular shipments cut off as a result of refinery and shipping snags caused by hurricanes and tropical storms moving through the Gulf of Mexico. Again, the airlines began bringing in fuel by plane.

"We've been ferrying to Orlando for two weeks," Sturtz said. "It just goes on and on."