[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]






    COMMERCIAL JET FUEL SUPPLY: IMPACT AND COST ON THE UNITED STATES 
                            AIRLINE INDUSTRY

=======================================================================

                                (109-45)

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                                AVIATION

                                 OF THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 15, 2006

                               __________

                       Printed for the use of the
             Committee on Transportation and Infrastructure








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             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                      DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-    JAMES L. OBERSTAR, Minnesota
Chair                                NICK J. RAHALL, II, West Virginia
SHERWOOD L. BOEHLERT, New York       PETER A. DeFAZIO, Oregon
HOWARD COBLE, North Carolina         JERRY F. COSTELLO, Illinois
JOHN J. DUNCAN, Jr., Tennessee       ELEANOR HOLMES NORTON, District of 
WAYNE T. GILCHREST, Maryland         Columbia
JOHN L. MICA, Florida                JERROLD NADLER, New York
PETER HOEKSTRA, Michigan             CORRINE BROWN, Florida
VERNON J. EHLERS, Michigan           BOB FILNER, California
SPENCER BACHUS, Alabama              EDDIE BERNICE JOHNSON, Texas
STEVEN C. LaTOURETTE, Ohio           GENE TAYLOR, Mississippi
SUE W. KELLY, New York               JUANITA MILLENDER-McDONALD, 
RICHARD H. BAKER, Louisiana          California
ROBERT W. NEY, Ohio                  ELIJAH E. CUMMINGS, Maryland
FRANK A. LoBIONDO, New Jersey        EARL BLUMENAUER, Oregon
JERRY MORAN, Kansas                  ELLEN O. TAUSCHER, California
GARY G. MILLER, California           BILL PASCRELL, Jr., New Jersey
ROBIN HAYES, North Carolina          LEONARD L. BOSWELL, Iowa
ROB SIMMONS, Connecticut             TIM HOLDEN, Pennsylvania
HENRY E. BROWN, Jr., South Carolina  BRIAN BAIRD, Washington
TIMOTHY V. JOHNSON, Illinois         SHELLEY BERKLEY, Nevada
TODD RUSSELL PLATTS, Pennsylvania    JIM MATHESON, Utah
SAM GRAVES, Missouri                 MICHAEL M. HONDA, California
MARK R. KENNEDY, Minnesota           RICK LARSEN, Washington
BILL SHUSTER, Pennsylvania           MICHAEL E. CAPUANO, Massachusetts
JOHN BOOZMAN, Arkansas               ANTHONY D. WEINER, New York
JIM GERLACH, Pennsylvania            JULIA CARSON, Indiana
MARIO DIAZ-BALART, Florida           TIMOTHY H. BISHOP, New York
JON C. PORTER, Nevada                MICHAEL H. MICHAUD, Maine
TOM OSBORNE, Nebraska                LINCOLN DAVIS, Tennessee
KENNY MARCHANT, Texas                BEN CHANDLER, Kentucky
MICHAEL E. SODREL, Indiana           BRIAN HIGGINS, New York
CHARLES W. DENT, Pennsylvania        RUSS CARNAHAN, Missouri
TED POE, Texas                       ALLYSON Y. SCHWARTZ, Pennsylvania
DAVID G. REICHERT, Washington        JOHN T. SALAZAR, Colorado
CONNIE MACK, Florida                 JOHN BARROW, Georgia
JOHN R. `RANDY' KUHL, Jr., New York
LUIS G. FORTUNO, Puerto Rico
LYNN A. WESTMORELAND, Georgia
CHARLES W. BOUSTANY, Jr., Louisiana
JEAN SCHMIDT, Ohio

                                  (ii)


























                        SUBCOMMITTEE ON AVIATION

                    JOHN L. MICA, Florida, Chairman

THOMAS E. PETRI, Wisconsin           JERRY F. COSTELLO, Illinois
HOWARD COBLE, North Carolina         LEONARD L. BOSWELL, Iowa
JOHN J. DUNCAN, Jr., Tennessee       PETER A. DeFAZIO, Oregon
VERNON J. EHLERS, Michigan           ELEANOR HOLMES NORTON, District of 
SPENCER BACHUS, Alabama              Columbia
SUE W. KELLY, New York               CORRINE BROWN, Florida
RICHARD H. BAKER, Louisiana          EDDIE BERNICE JOHNSON, Texas
ROBERT W. NEY, Ohio                  JUANITA MILLENDER-McDONALD, 
FRANK A. LoBIONDO, New Jersey        California
JERRY MORAN, Kansas                  ELLEN O. TAUSCHER, California
ROBIN HAYES, North Carolina          BILL PASCRELL, JR., New Jersey
HENRY E. BROWN, Jr., South Carolina  TIM HOLDEN, Pennsylvania
TIMOTHY V. JOHNSON, Illinois         SHELLEY BERKLEY, Nevada
SAM GRAVES, Missouri                 JIM MATHESON, Utah
MARK R. KENNEDY, Minnesota           MICHAEL M. HONDA, California
JOHN BOOZMAN, Arkansas               RICK LARSEN, Washington
JIM GERLACH, Pennsylvania            MICHAEL E. CAPUANO, Massachusetts
MARIO DIAZ-BALART, Florida           ANTHONY D. WEINER, New York
JON C. PORTER, Nevada                BEN CHANDLER, Kentucky
KENNY MARCHANT, Texas                RUSS CARNAHAN, Missouri
CHARLES W. DENT, Pennsylvania        JOHN T. SALAZAR, Colorado
TED POE, Texas                       NICK J. RAHALL II, West Virginia
JOHN R. `RANDY' KUHL, Jr., New       BOB FILNER, California
York, Vice-Chair                     JAMES L. OBERSTAR, Minnesota
LYNN A. WESTMORELAND, Georgia          (Ex Officio)
DON YOUNG, Alaska
  (Ex Officio)

                                 (iii)





























                                CONTENTS

                               TESTIMONY

                                                                   Page
 Cirillo, Michael A., Vice President, Systems Operations 
  Services, Air Traffic Organization, Federal Aviation 
  Administration.................................................     6
 Felmy, John, Chief Economist, American Petroleum Institute......    17
 Hawk, Jeffrey, Director, Certification, Environment and 
  Government Relations, the Boeing Company.......................    17
 Heimlich, John P., Vice Pewsident and Chief Economist, Air 
  Transport Association of America, Inc..........................    17
 Shages, John D., Deputy Assistant Secretary, Office of Petroleum 
  Reserves, U.S. Department of Energy............................     6

          PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Boswell, Hon. Leonard, of Iowa...................................    35
Carnahan, Hon. Russ, of Missouri.................................    37
Costello, Hon. Jerry F., of Illinois.............................    52
Johnson, Hon. Eddie Bernice, of Texas............................   102
Oberstar, Hon. James L., of Minnesota............................   106
Pascrell, Hon. Bill, Jr., of New Jersey..........................   109

               PREPARED STATEMENTS SUBMITTED BY WITNESSES

 Cirillo, Michael A..............................................    38
 Felmy, John.....................................................    55
 Hawk, Jeffrey...................................................    73
 Heimlich, John P................................................    87
 Shages, John D..................................................   113

                       SUBMISSION FOR THE RECORD

 Cirillo, Michael A., Vice President, Systems Operations 
  Services, Air Traffic Organization, Federal Aviation 
  Administration, responses to questions from Rep. Costello......    47

















 
   COMMERCIAL JET FUEL SUPPLY: IMPACT AND COST ON THE UNITED STATES 
                            AIRLINE INDUSTRY

                              ----------                              


                      Wednesday, February 15, 2006

        House of Representatives, Committee on 
            Transportation and Infrastructure, Subcommittee 
            on Aviation, Washington, D.C.
    The committee met, pursuant to call, at 10:00 a.m. in room 
2167, Rayburn House Office Building, Hon. John Mica [chairman 
of the committee] presiding.
    Mr. Mica. Good morning. I would like to call this hearing 
of the House Aviation Subcommittee to order.
    The topic of today's hearing is Commercial Jet Fuel Supply: 
The Impact and Cost on the U.S. Airline Industry. I would like 
to welcome our participants and members. What we are going to 
do as far as proceeding is start with opening statements. Then 
we have two panels of witnesses, and we will recognize them.
    With that, I will start with my opening statement and then 
yield to other members.
    One of the principal reasons why the United States airline 
industry lost an estimated $10 billion last year is due to the 
supply and cost of commercial jet fuel, which is the subject of 
our hearing today. America's commercial aviation industry was 
nearly brought to its knees last year when Hurricanes Katrina 
and Rita crippled our Gulf Coast refineries and two major 
pipelines. The resulting supply disruption propelled commercial 
jet fuel prices to a record high of $3.13 per gallon.
    In January 2005, the average market price of a gallon of 
commercial jet fuel by contrast was $1.33. To put this into 
perspective, every penny in increase in the price of a gallon 
of jet fuel results in an additional $195 million in annual 
fuel costs for the United States airline industry. Airlines 
cannot be profitable when the average price of jet fuel exceeds 
$70 per barrel or about $1.67 per gallon.
    The average price for commercial jet fuel was about $72 per 
barrel, or $1.81 per gallon last month. The price of commercial 
jet fuel has more than doubled over the past five years.
    In order for the U.S. airline industry to reverse its 
recent string of multi-billion annual losses, several critical 
challenges relating to jet fuel must be addressed by Government 
and industry initiatives. First, I think we need some mechanism 
for stabilization of jet fuel prices. Secondly, expansion of 
our domestic refining capacity is also a challenge that we 
face. Third, improvements to the Nation's oil and refined 
product distribution network need attention. And finally, 
further gains in commercial aircraft fuel efficiency can also 
be an important element.
    There are many reasons why the cost of jet fuel remains at 
record highs. It is more expensive and less profitable for a 
limited number of U.S. refiners to produce jet fuel. Another 
factor is the high cost of crude oil from which jet fuel is 
refined. Although the oil costs remain high for many reasons, 
most industry analysts cite limited U.S. refining capacity, 
increased demand around the world, including India and China, 
and also geopolitical events which affect price and supply.
    Jet fuel supply problems were compounded last fall by 
Hurricanes Katrina and Rita, which eliminated about 25 percent 
of the domestic jet fuel production capacity. The jet fuel 
supply problem following the hurricanes prompted some oil and 
aviation industry analysts to propose the creation of a jet 
fuel reserve, similar to the existing Strategic Petroleum 
Reserve.
    With the damaging impact of soaring oil prices and in light 
of jet fuel supply crises following the hurricanes, I believe 
we should seriously consider establishing some type of jet fuel 
reserve. I understand many European countries have taken 
similar measures to ensure an adequate supply of fuel.
    Although most of the U.S. jet fuel supply is refined in the 
United States, 60 percent of our oil, of course, comes from 
overseas and is imported, oil prices will no doubt increase 
further if Iran, the world's fourth largest exporter of oil, 
follows through on its recent threat to stop exporting oil to 
the United States due to diplomatic and other concerns relating 
to Iran's nuclear weapons program. A major terrorist attack in 
the Middle East would also have a really bad effect on our oil 
supply and could result in even higher jet fuel costs for the 
airline industry.
    I am also concerned that the U.S. jet fuel supply is being 
further constrained by the export of U.S.-produced jet fuel 
abroad, where jet fuel is even more profitable today. At least 
one U.S. producer has taken voluntary steps to restrict exports 
that other producers have not taken similar steps to limit.
    Regrettably, regulators in Washington are also contributing 
to higher jet fuel prices and supply problems. The Department 
of Energy recently warned that the distribution of jet fuel and 
other refined petroleum products may be impeded later this year 
due to the phase-in of more emissions friendly ultra-low sulfur 
diesel fuel, which has been mandated by EPA. Suppliers and 
refiners will have to take special measures to prevent 
contamination of ultra-low sulfur diesel during the petroleum 
refining process, as well as the storage and transport of jet 
fuel and other refined products. The added cost of these 
measures most likely will be passed on to the airlines in the 
form of even higher jet fuel market prices later this year.
    Another regulatory threat to jet fuel price stability in 
2006 is the proposed increase in the standard, the Federal 
Energy Regulatory Commission tariff rate that owners and 
operators of oil and refined products pipelines can charge 
their customers. Virtually every drop of commercial jet fuel 
passes through the Nation's vast network of pipelines. 
Ironically, I understand that the stronger pipeline security 
mandates from the Department of Transportation is one of the 
main reasons why the major pipeline association is seeking a 
higher than usual tariff rate this year.
    Although the result of these new regulatory burdens could 
be just a penny or two increase in the cost of jet fuel, as I 
mentioned previously, this is a very significant added cost to 
the airlines, given that, as I said before, every one cent 
increase in the price of jet fuel adds $195 million to their 
operating costs. If jet fuel prices had remained at 2004 levels 
last year, the U.S. airline industry would have recorded a 
profit instead of an estimated $10 billion loss. The airline 
industry could make a strong recovery if somehow jet fuel costs 
stabilized in the $60 per barrel range.
    One creative way the airline industry has coped with the 
rising jet fuel costs is through the practice of hedging, in 
which airlines lock in a fixed price or maximum cap for fuel in 
the future by buying a contract at a specified price. Due to 
the hedges made when jet fuel prices were low, Southwest 
Airlines and Alaska Airlines are currently paying or have been 
currently paying between 40 and 48 percent less for a 
significant portion of their current fuel needs.
    Unfortunately, legacy carriers have not had the cash or 
creditworthiness to pay for fuel hedge contracts. With oil 
prices so high for so long, fuel hedges will almost run out, be 
non-existent by 2010. By this time, the core business of the 
airlines industry will be the one way ticket to sustain 
profitability.
    Although there is little that the Federal Government can do 
in the short term to lower oil prices or jet fuel prices, 
industry and Government can work in tandem on several fronts. 
First, to stabilize the jet fuel supply by possibly 
establishing some sort of jet fuel reserve. Secondly, by 
lowering regulatory barriers that impede the Nation's oil and 
refined product distribution network. Third, by increased 
domestic refining capacity or some incentives or assistance in 
that regard. And fourth, by reducing demand and taking steps to 
further improve commercial aircraft fuel efficiency.
    I have also directed our Subcommittee staff to begin 
looking into the various factors behind the soaring costs and 
some of the sort of jacked up costs after the recent natural 
disasters we have seen, take a very serious look at what has 
taken place and is there price gouging or what is going on.
    The U.S. airlines have improved fuel efficiency by 18 
percent over the last five years by changing operating 
procedures and utilizing technology to make their aircraft more 
fuel efficient. In addition, the use of composites and other 
advanced aircraft manufacturing technologies will make future 
commercial jet liners more fuel efficient. We will hear a 
little bit more about what is being developed by one of our 
witnesses, Mr. Hawk, from Boeing.
    The Subcommittee, through its oversight responsibilities, 
can also help airlines further improve fuel efficiency by 
ensuring that certain air traffic control modernization 
programs remain on track and on budget to move forward. We will 
also hear from FAA's air traffic organization to discuss some 
of those programs in detail.
    Finally, I just want to mention for the record, I am 
concerned about reports that the operator of London Heathrow 
Airport, BAA, is engaged in a fuel rationing scheme that 
discriminates against U.S. airlines. The fuel rationing system 
was established after a fire and explosion damaged the 
airport's major fuel depot in December. We will also hear from 
some folks from the Air Transport Association who will testify 
on our second panel and give us an update on this situation.
    I am pleased to recognize at this time the Ranking Member, 
Mr. Costello.
    Mr. Costello. Mr. Chairman, thank you, and I thank you for 
calling the hearing today. The last time this Subcommittee held 
a hearing on jet fuel was in October of 2000, after crude oil 
had climbed to a 10 year historic high of almost $38 a barrel. 
At that hearing, the former Chairman of this Subcommittee, Mr. 
Duncan, said rising fuel costs had created havoc in all of the 
transportation sectors and threatened to derail global economic 
growth.
    To put today's hearing in perspective, the average price 
for a barrel of crude oil in 2005 was $56 a barrel and $72 a 
barrel for jet fuel. To further put it in perspective, every 
penny, as you noted, in the increase in price in a gallon of 
jet fuel results in an additional $195 million in annual fuel 
costs for the U.S. airline industry.
    Although average air fares are still low, and lower than in 
2000, it has been reported that rising fuel costs have led U.S. 
airlines to raise fares 12 times in 2005 and once so far in 
2006. In total, the industry has lost $44 billion since the 
beginning of 2001. Roughly a quarter of the U.S. aviation 
capacity is in chapter 11.
    Consequently, airlines have made efforts to drive down 
their operating costs, particularly labor costs. In total, U.S. 
passenger carriers cut labor costs by almost $3 billion between 
2000 and 2005. During that period, 140,000 airline workers have 
lost their jobs, thousands have accepted pay cuts and benefit 
cuts, and still thousands more have lost their pensions or have 
significantly seen their pensions reduced.
    However, the labor cuts have been more than offset by the 
rising fuel costs. In total, U.S. passenger carrier fuel costs 
have increased by more than $11 billion between 2000 and 2005. 
Fuel unit costs have risen despite the fact that airlines are 
operating more efficiently through fleet changes, weight 
reductions and operational changes. U.S. passenger and cargo 
airlines are projected to consume 19.5 billion gallons of jet 
fuel in 2005, 800 million gallons less than the peak experience 
in the year 2000. Unfortunately, the airline industry analysts 
predict that jet fuel will likely remain at $70 a barrel in 
2006.
    Mr. Chairman, as you noted, during Hurricanes Katrina and 
Rita, U.S. production of commercial jet fuel dropped by almost 
25 percent. The U.S. relied heavily on foreign imports, which 
more than doubled during that period, including some imports 
from European emergency stocks. Some have suggested that in 
addition to the Strategic Petroleum Reserve, which contains 
crude oil, the U.S. should form a strategic reserve comprised 
of refined petroleum products like jet fuel. I am interested in 
hearing from our witnesses today about their thoughts 
concerning that issue as well as other ideas that they may 
have.
    Our greatest hope for addressing high fuel prices may lie 
in technological advancements, both in the air traffic 
infrastructure and in aircraft itself. The bottom line is that 
there is a very clear connection between infrastructure, 
airline profitability and the ultimate issue of American jobs. 
This Subcommittee must ensure that adequate resources are 
dedicated to modernizing the national air space system.
    Airlines must continue to invest in equipment upgrades and 
new aircraft that will enable them to take full advantage of 
Government infrastructure and investments. Regarding new 
aircraft, I am pleased that we have a witness here from the 
Boeing Company today to testify about advances in aircraft 
manufacturing, including the use of lighter composite plastic 
air frames, improved aerodynamics and innovations in engine 
design.
    Mr. Chairman, that summarizes my statement, and I will put 
my entire statement in the record. I look forward to hearing 
from our witnesses today.
    Mr. Mica. I thank the Ranking Member. We will include his 
entire statement in the record.
    Mr. LoBiondo.
    Mr. LoBiondo. Thank you, Mr. Chairman. I appreciate your 
holding this hearing.
    I understand the difficulties that the aviation industry is 
having in dealing with the high prices of jet fuel. I think one 
of the best ways that the Government can be helpful is by 
increasing the fuel efficiencies through the modernization of 
our air traffic control system.
    As you, Mr. Chairman, know, and have highlighted on many 
occasions, we are managing air traffic with technology and 
procedures developed in the 1970's that were not intended nor 
are suited to the traffic demands of today. As a result, there 
is an enormous amount of fuel that is wasted: thousands, 
possibly tens of thousands of gallons from sitting in line to 
takeoff or circling, to wait to land or some other problem with 
traffic or weather.
    Efforts by the FAA to implement new air traffic control 
technology and procedures are woefully behind schedule. In 
order to keep our aviation system efficient and safe, I think 
we need to find ways to step up the pressure, pressure and/or 
investment in traffic flow management technologies in the next 
generation of air traffic systems. Once again, Mr. Chairman, I 
thank you very much for holding this hearing and your interest 
in this particular topic.
    Mr. Mica. Thank you.
    Mr. DeFazio.
    Mr. DeFazio. Thank you, Mr. Chairman. Thanks for this 
timely hearing.
    When I look at the numbers here, it causes tremendous 
concern. With United Airlines' emergence from bankruptcy, I saw 
a number of assumptions they made. Their assumption regarding 
the future price of fuel for the airline to succeed is far less 
than what is projected in our memos and by many industry 
experts. So that raises a concern about how long they are going 
to stay out of bankruptcy and the viability of that airline. 
There are many other airlines that are jeopardized in a similar 
way by the high price of fuel.
    Unlike the crisis, or so-called crisis, we saw after 
Katrina, odd that on the West Coast they jacked up prices 
almost as much as the East Coast, even though we are in a 
different supply area, but anyway, so-called refinery capacity 
or whatever, there is sufficient refinery capacity for aviation 
fuel. The problem is, the industry diverts from that production 
to gasoline production when they are extorting consumers with 
artificially high prices and making bigger profits on that 
side.
    I think Government oversight and action in this area is 
necessary, both for consumers of gasoline for their automobiles 
and to protect the crucial aviation sector. Exxon-Mobil made 
$100 million a day last year. That means airlines, some of our 
airlines are losing $1 million a day, and Mobil is making 100 
times that in profits, in one day. It is not from free market 
exercise here.
    And then we should be looking at other innovative ideas. 
Maybe since the Republicans want to move more tax cuts and they 
want to talk about energy efficiency, maybe we should provide 
some incentives to airlines to upgrade or make their fleets 
more efficient with U.S. manufactured aircraft, providing jobs 
here and also providing some help in that area. Many of them 
need to upgrade their fleets anyway, but can't afford to do it 
because of the pressures of fuel prices and other things.
    So I think there are some very interesting and perhaps some 
innovative and different ways to look at this, the petroleum 
reserve, which my colleague from Illinois mentioned, to offset 
when the oil industry diverts over to gasoline, perhaps a 
gasoline reserve too, to help drive down their extortion of 
profits in that area and remove the incentive for them to 
divert production from jet fuel and be able to jack up the 
price on both sides.
    So I am hopeful that we will hear some very plain talk from 
folks today and some interesting new ideas and perhaps the idea 
that the so-called free market is not working in this area. 
Thank you, Mr. Chairman.
    Mr. Mica. Thank you, Mr. DeFazio.
    Are there additional opening statements? Mr. Brown?
    Mr. Brown. No, thank you, Mr. Chairman.
    Mr. Mica. Mr. Kuhl?
    Mr. Kuhl. Nothing, thank you, Mr. Chairman.
    Mr. Mica. All right. No additional opening statements.
    Then we will proceed with our first panel, and our first 
panel consists of Mr. John D. Shages, Deputy Assistant 
Secretary of the Office of Petroleum Reserves in the Department 
of Energy. The second witness is Mr. Michael A. Cirillo. He is 
Vice President of Systems Operation Services, the Air Traffic 
Organization under FAA. I would like to welcome both of you. If 
you have lengthy material or information, background you would 
like to be made part of the record, we would welcome that and 
also summarizing any of your statements.
    I will first call on Mr. Shages with the Department of 
Energy. Welcome and you are recognized, sir.

TESTIMONY OF JOHN D. SHAGES, DEPUTY ASSISTANT SECRETARY, OFFICE 
  OF PETROLEUM RESERVES, UNITED STATES DEPARTMENT OF ENERGY; 
    MICHAEL A. CIRILLO, VICE PRESIDENT, SYSTEMS OPERATIONS 
     SERVICES, AIR TRAFFIC ORGANIZATION, FEDERAL AVIATION 
                         ADMINISTRATION

    Mr. Shages. Thank you very much, Mr. Chairman. I have 
submitted my statement for the record.
    Mr. Mica. Without objection, the entire statement will be 
made part of the record. Please proceed.
    Mr. Shages. Thank you very much.
    I am honored to be here today to talk about jet fuel and 
the U.S. Strategic Petroleum Reserve. The Strategic Petroleum 
Reserve is a very large and robust crude oil stockpile, located 
at four sites along the Gulf of Mexico and Louisiana and Texas. 
It is the most efficient stockpiling system in the world.
    We currently have 685 million barrels of oil in storage. We 
can draw it down at a rate of 4.4 million barrels per day. The 
Reserve is authorized by the Energy Policy and Conservation Act 
to protect us against petroleum supply interruptions and in 
their event, to offset their impacts on the United States. The 
Reserve has been used under presidential authority to respond 
to severe energy supply interruptions only twice. The first 
time was in 1991 in conjunction with Operation Desert Storm; 
the second time in September 2005 in response to the damage 
caused by Hurricane Katrina.
    The sale last September immediately followed loans to 
refiners made under authority of the Secretary of Energy who 
would otherwise have stopped refining for lack of feedstock. 
Between the loans and sales, we made almost 21 million barrels 
of oil available. In addition to the Strategic Petroleum 
Reserve, the United States is a charter member of the 
International Energy Agency. It is our policy that we will 
coordinate with the other member countries of the IEA during a 
supply emergency.
    In the case of the 2005 hurricanes, that coordination was 
critically important. While the United States offered 30 
million barrels of oil for sale, the other member countries 
made available 33 million barrels of crude oil and products. A 
large portion of that was refined products.
    The release of those products allowed U.S. imports, 
including jet fuel, to surge during September, October and 
November. As a result, fears of shortages were quickly 
dispelled and prices began to retreat. The United States has a 
strong infrastructure of producing, refining, transporting and 
selling petroleum. While the hurricanes of 2005 dealt that 
infrastructure a devastating blow, systems recovered amazingly 
quickly. Thankfully, the Strategic Petroleum Reserve and our 
partners in the International Energy Agency backstopped the 
private sector, as designed, at the heart of the devastation.
    Since then, we and industry have been cataloging ways to 
improve infrastructure and respond to future disruptions. It is 
our duty to protect the United States, its people and its 
businesses from disruptions of supply. We have done it in the 
past and we believe we are well equipped to do it in the 
future.
    Mr. Chairman, that ends my opening statement.
    Mr. Mica. Thank you. We will now hear from Michael Cirillo, 
Vice President of Systems Operations Services under FAA. We 
will save questions until we have heard from both of you.
    Mr. Cirillo. Good morning, Chairman Mica, Congressman 
Costello and members of the Subcommittee. I would please like 
to ask that my written statement be entered into the record.
    Mr. Mica. Without objection, the entire statement will be 
made part of the record. Please proceed.
    Mr. Cirillo. Thank you. I am here today representing the 
Department of Transportation, the Federal Aviation 
Administration and the Air Traffic Organization on the topic of 
fuel consumption in the commercial jet fuel market, and its 
impact on the U.S. aviation industry. This is an extremely 
important issue to us all.
    We know that fuel costs have increased dramatically and we 
feel the impact, as do our customers. Through daily 
collaboration with them, we are providing services that 
maximize the most efficient routing from point A to point B.
    The good news is that we have developed new technologies 
and procedures, many already in place, which help our customers 
reduce fuel consumption. I would like to tell you a little bit 
about them today. Some of these programs have been in place for 
a while, programs like TMA and URET. The FAA's traffic flow 
management program provides about $340 million in benefits to 
our customers every year, while the user request evaluation 
tool, or URET, saved airlines approximately 25 million miles 
and $175 million in fiscal year 2005.
    Last year we made significant progress when we doubled the 
number of usable altitudes in the high altitude air space with 
domestic reduced vertical separation minima, or DRVSM. The 
procedure essentially allows more planes to fly fuel-efficient 
routes over the United States.
    All the estimates were that DRVSM would save airlines 
approximately $5.3 billion through 2016. That estimate now 
appears to be conservative in light of the dramatic increase in 
fuel prices in the last year.
    In 2005, our new oceanic air traffic control system, ATOP, 
became operational. This system uses state of the art 
technology to reduce the separation minima from 100 to as few 
as 30 miles. This allows more airplanes to fly fuel efficient 
routes over the oceans.
    Another new initiative, Area Navigation, or ARNAV, uses 
more precise routes for takeoffs and landings, reducing the 
amount of fuel burned and the time between takeoffs and 
landings, with no impact on safety. Delta Airlines expects that 
ARNAV procedures at Atlanta will save them $30 million. 
Projections for savings from ARNAV procedures at Dallas-Fort 
Worth are approximately $10 million a year.
    Another tool, Required Navigation Performance, or RNP, 
promises to add to capacity and save fuel. This is because RNP 
uses onboard technology that allows pilots to fly more direct 
routes. RNP provides both lateral and vertical guidance and 
impacts all aspects of the flight, departure, enroute, arrival 
and approach. This not only will allow for more efficient air 
space management, but will also provide significant savings in 
fuel.
    Last year, we partnered with Alaska Airlines to implement 
new RNP approach procedures at Palm Springs International 
Airport. Under the conventional procedures in use today at Palm 
Springs, planes cannot land unless the ceiling and visibility 
are at least 2,300 feet and 3 miles. With these new RNP 
procedures, airlines can land in all sorts of weather, with a 
ceiling and visibility as low as 734 feet and 1 mile. In the 
first 11 months of 2005, this allowed Alaska Airlines to 
complete 27 flights that would otherwise have been diverted to 
an airport 70 miles away.
    RNP approaches also reduce the distance an aircraft has to 
fly by as much as 30 miles. This translates into fuel savings 
for our customers.
    Finally, we continue to work with our customers on our 
Nation's air space design. The Florida Air Space Optimization 
Project is a result of collaboration between the airline 
industry and FAA to redesign the air space in Florida to 
improve air traffic efficiency by reducing the complexity of 
the air space. The benefits include shorter distances on routes 
into south Florida airports and reduced departure delays from 
Boston, New York and Washington, D.C. to Florida destinations. 
The projected cost savings as a result of the Florida Air Space 
Optimization is $18.2 million a year.
    In summary, the FAA and its Air Traffic Organization are 
working hard to help our customers save fuel. We will continue 
to work collaboratively with industry, academia and the 
Congress to ensure our future technologies meet the needs of 
our air space system. We take this commitment seriously, as we 
continuously strive to provide the safest, most efficient, 
national air space system possible.
    Mr. Chairman, this concludes my testimony. I would be happy 
to answer any questions you may have.
    Mr. Mica. I thank both of our witnesses.
    We will jump right into questions. I have a few. Mr. 
Shages, during the hurricane, I quoted, we eliminated about 25 
percent of our daily production of jet fuel. Subsequent to the 
hurricane, we saw a situation where we could have literally run 
out of jet fuel.
    Can you lay down the pros and cons, or give us any of your 
thoughts, about establishing some type of jet fuel strategic 
reserve? Right now, you are not having specifically any jet 
fuel as a component in your reserve, is that correct?
    Mr. Shages. That is absolutely correct. The Strategic 
Petroleum Reserve has 685 million barrels of crude oil. A 
separate but related program is the Northeast Home Heating Oil 
Reserve, we have a very small reserve of 2 million barrels of 
heating oil. But those are the only two components of the 
Nation's Strategic stockpiles.
    The choice to make the reserve almost solely crude oil goes 
all the way back to 1976, after the original enactment of the 
Energy Policy and Conservation Act. The Act had required 
regional refined product reserves, but gave planners the option 
of substituting crude oil and centralizing storage of that 
crude oil, if it was justified for economic purposes, or cross-
purposes. In addition, if we had a high level of certainty that 
the centralized storage could actually satisfy the needs in the 
regions.
    So the original SPR plan submitted to the Congress did 
actually substitute crude oil and centrally stored facilities 
for all the requirements for all products in our regional 
reserves. We continue that way to this day. It is still 
primarily driven by cost.
    Mr. Mica. What about, again, setting aside a specific 
reserve for jet fuel?
    Mr. Shages. We could do that. We have the authority to do 
it. If we were to build facilities for jet fuel----
    Mr. Mica. Would you need legislative authority, or do you 
have existing authority, do you feel, to set that up?
    Mr. Shages. The authority that we have in the Energy Policy 
and Conservation Act authorizes a reserve of up to a billion 
barrels. The definitions allow us to store any petroleum 
product, refined or crude oil.
    Mr. Mica. So you think you have that authority?
    Mr. Shages. We have that authority.
    Mr. Mica. One of the problems I heard was the shelf life of 
jet fuel is only about a year. Would it be necessary to sort of 
have that a rotating or revolving supply?
    Mr. Shages. That would be absolutely the case. You would 
have to rotate it on a regular basis. Depending on how you 
stored it, that would determine the frequency of the rotation.
    Mr. Mica. I am also told that in Europe, they require, I 
guess, the airlines to maintain a reserve a little bit 
different. I am not sure how all of them do it, but I 
understand some of them have reserves. Are you familiar with 
that?
    Mr. Shages. I am not intimately familiar. I do in general 
know that each of the member countries has a separate system, 
and each country differs a little bit from the others. Mostly, 
it is a regulatory system where the companies, whether they are 
the oil companies or the individual airlines are forced to keep 
excess inventories at their expense.
    Mr. Mica. We have nothing of that?
    Mr. Shages. We have nothing like that or any regulatory----
    Mr. Mica. Also we have the difficulty with so many of them 
in financial trouble, they can't even hedge, let alone keep a 
supply on hand.
    Well, again, we are trying to find some way to stabilize 
the supply. Refining capacity is another issue. Is there 
anything else we can do? Do either of you gentlemen want to 
speak to refining capacity, which again is somewhat limited? We 
import all that fuel, as I said, the crude oil. Most of it is 
refined, aviation fuel, in the United States, and then much of 
it is exported. Is that the case? And do you have any 
recommendations on refining capacity?
    Mr. Shages. Well, of course, we would like to see there be 
more refining capacity in the United States. There have been 
announcements of expansions in refining capacity. Currently we 
are at about 17.1 million barrels a day of capacity. By the 
year 2010 we expect that to be up almost 2 million barrels a 
day. So that is a significant growth in the actual capacity.
    There will also be improvements in capacity, so that you 
can generate more high quality fuels from low quality crude 
oil. It is a very robust industry. And we do, there is no 
question, we do import products and we also export some small 
amounts. But we don't see that there is a crisis in refining. 
It would be a good thing to have more refineries.
    Mr. Mica. Well, finally, one of the things I heard that we 
have a problem with is that much of this refined product is in 
fact shipped overseas, or a significant amount. And there 
aren't any, there aren't controls on what is exported in in an 
emergency situation. Some of what is done now is sort of 
voluntary. The rest finds its highest price on the world 
market. Is that correct?
    Mr. Shages. Yes, that is essentially correct. The United 
States actually benefits from imports. If we are talking about 
jet fuel, we are importing about 150,000 barrels of day of jet 
fuel and exporting about 50,000 barrels of jet fuel. So on 
average, we regularly benefit. In general, it is that way with 
other products.
    But at any given point in time, the flow could be in either 
direction. Frankly, it is critically important that there not 
be any controls on that, because take the situation with 
Hurricane Katrina. Without imports, the entire East Coast of 
the United States would have been critically short of products. 
Those products came from Europe, for the most part. That 
wouldn't have been possible unless the Europeans would have 
released their strategic reserves.
    So it is very important that we not stop our exports for 
fear of stopping the imports from those people that we 
otherwise export to.
    Mr. Mica. I appreciate your viewpoint. Let me defer now to 
the Ranking Member, Mr. Costello.
    Mr. Costello. Mr. Chairman, I do have some questions, but I 
would ask at this time that we recognize Mr. DeFazio.
    Mr. Mica. OK, Mr. DeFazio.
    Mr. DeFazio. Thank you, Mr. Chairman. And thanks to my 
friend, the Ranking Member. I have a very important meeting 
later in my office and I am going to have to go. Not that this 
is not important.
    But I have a concern which has been brought up by another 
industry. I am not sure whether Mr. Shages can really address 
it. And this is a concern of truckers as we move toward the 
introduction of the ultra-low sulfur diesel and because of the 
multiple uses of our pipelines. They are saying because of the 
standards that are going to be imposed that there will be huge 
penalties for just minuscule amounts of sulfur contamination, 
which will be likely in some portion of the fuel when you are 
moving different fuels through the same line. You send through 
fuel that doesn't require the ultra-low sulfur diesel and then 
you send another slug of fuel behind it and there is no real 
way to prevent an interim amount of fuel that is mixed. The 
question is OK, what are you going to do with all that, how is 
this all going to work?
    And the airlines are going to potentially, it seems to me, 
have problems in the same area. I am seeing yet another excuse 
for the industry to jack up prices, saying, oh, my God, it is 
that new Federal regulation on ultra-low sulfur diesel in the 
pipelines.
    Can you address what actions, are you aware of any actions 
that have been taken by the Administration either to look at 
some sort of regulatory relief for the minuscule amounts of 
contamination that might be in some of this interim fuel or 
other things that would assure us that the pipelines are going 
to continue to be used effectively during this transition?
    Mr. Shages. I have some knowledge of the issue. I can't 
speak authoritatively for the Administration, and I don't know 
of any regulatory relief that might be had. I do know that you 
do move, especially through the Colonial and Plantation 
pipelines, you move all sorts of products, some of them very 
high sulfur, and obviously with the ultra-low sulfur, you need 
to not only leach out sulfur from the pipeline from other 
products that would cause you to go above spec.
    My understanding is that the refiners understand that 
problem and that they are refining to a standard that will 
allow for the pickup of some sulfur. I believe the standard is 
less than 15 parts sulfur per million. They are actually 
planning on shipping ultra-low sulfur diesel that is down in 
the range of 8 parts, because they use----
    Mr. DeFazio. But what I am saying about the trucking 
industry is they don't think that all the capacity is going to 
be there to move to that ultra low, so that it can pick up the 
contamination, and they think it is going to be an excuse for a 
jack-up in diesel prices in trucks. Have you heard any inklings 
of that?
    Mr. Shages. No, I haven't actually heard that or been told 
that.
    Mr. DeFazio. OK. So do you think the way they are going to 
compensate, then, is to do this ultra-clean refining and then 
pick up some contamination along the way and still be below the 
standard?
    Mr. Shages. Well, it is not regulated. I think that is a 
possible solution. I think there may be other things that may 
have to happen. There may have to be longer runs of any 
specific product. Of course, the reason this all happens is 
because things are batched. And you may have to have longer 
runs of any given fuel to minimize the amount of contamination.
    Mr. DeFazio. If there is adequate storage for that fuel at 
the other end. Some of it is because of just in time problems 
and not being adequate storage, which is why the dispatch in 
smaller slugs, right?
    Mr. Shages. That is right. So I have, I am not an expert on 
that subject. I brought a few experts on other matters, but I 
don't have anybody here that can actually address that problem 
per se.
    Mr. DeFazio. OK. I appreciate that. I knew it wasn't your 
particular area of expertise.
    Just one quick question on the storage issue. You would 
need an appropriation, I assume, to construct----
    Mr. Shages. If we were going to deviate from our current 
configuration, we don't have any facilities that could store 
any kind of refined product. So we would need a separate 
appropriation to either build or lease those facilities.
    Mr. DeFazio. OK. Do you think it might be a possibility?
    Mr. Shages. The budget that we have just sent to Congress, 
we do not ask for any appropriation.
    Mr. DeFazio. No, but I am not saying, I am saying is there 
leasable capacity out there potentially?
    Mr. Shages. Well, it depends on what we are talking about. 
Actually, I would say right at the moment, there is probably 
not enough. If you are thinking in terms of a very large 
reserve, since inventories have been building for the better 
part of a year, if we actually went out and tried to store some 
large volume in existing facilities the way we do with the 
Northeast Home Heating Oil Reserve, we would end up driving up 
prices dramatically, because we would suck up virtually all of 
the available tankage. And it being a free market, the price of 
storage would go up dramatically.
    We can see that now, just to give you an indication, we 
have been storing heating oil, 2 million barrels in commercial 
facilities, in the Northeast for the last five years. We are 
paying about $2.50 per barrel per year to store that in 
commercial facilities.
    If we were to go out for a contract today, the price would 
be more in the range of $4 per barrel, simply because the 
inventories are so much higher today than they were five years 
ago when we created it. And so if we can, we are so big, that 
whenever we do something like this, we can drive prices around, 
not just for parts, but for the actual storage facilities. So 
we have to be a bit careful.
    Mr. DeFazio. OK, thank you. Thank you, Mr. Chairman.
    Mr. Mica. Thank you. Mr. Duncan?
    Mr. Duncan. Thank you, Mr. Chairman, and thank you for 
calling this hearing on this very important topic.
    I want to first, I want to commend the FAA and Mr. Cirillo 
for the innovations and the progress they have made on air 
traffic management, because I think that has helped this 
situation quite a bit. I want to commend Boeing and others in 
the aviation industry for making their planes so much more fuel 
efficient than they were 30 or 40 years ago. That has helped 
quite a bit.
    As Mr. Heimlich from the ATA, a later witness will testify, 
or at least it is in his testimony, that each one penny 
increase in jet fuel costs the aviation industry $195 million, 
and I have heard similar figures like that from the ATA for 
several years, so this is a very serious problem. Oil has gone 
down a little bit over the last few days. I think it is under 
$60 a barrel now, and that is hopeful.
    But we also have some of these experts saying that it could 
go way up from here. Some even predicting as high as $100 a 
barrel, and I don't believe that is going to happen. I 
certainly hope it doesn't. But this is something that we all 
need to talk about and work on as much as possible and see if 
there are other steps that can be taken.
    I think part, a big part of the problem is the fact that 
you have some of these groups around the Country, they don't 
want any natural resource production in this Country. They 
don't want you to cut any trees, they don't want you to produce 
any natural gas, they don't want you to dig for any coal, and 
they especially don't want you to drill for any oil.
    I have noticed that most of the people in those groups come 
from very wealthy or very upper income families. But who that 
hurts the most, when they stop all natural resource production, 
it hurts the poor and the lower income working people, because 
it drives up prices and destroys jobs. I think the key to this 
whole thing is, Mr. Felmy from the American Petroleum 
Institute, in his testimony later, he says we can no longer 
afford to place off-limits vast areas of the Eastern Gulf of 
Mexico or off the Atlantic and Pacific Coast, and offshore 
Alaska. Similarly, we cannot afford to deny American consumers 
the benefits that will come from opening the Arctic National 
Wildlife Refuge and from improving and expecting approval 
processes for developing the substantial resources on Federal 
multi-use lands in the West.
    Whenever you talk about doing any natural resource 
production, people, somebody on the other side will always say, 
well, you know, there is just not enough there. But if we just 
increased our production just a little bit, I am convinced that 
some of these foreign energy producers would get so concerned 
or so worried that they would start coming down on their 
prices, or at least hold them down.
    And then in my home of Knoxville, we have just been 
through, as many cities around this Country have been through, 
the unfortunate experience with Independence Air, who had such 
a big presence in Knoxville. They based all their projections, 
as I understand, on $35 a barrel oil. So even though they had 
more start-up capital than any new airline, I think, in the 
history of the Country, they couldn't make it.
    So I think that is just, at least some slight increase in 
our natural resource production in this Country, domestically, 
is probably the key to either bring down prices or at least 
hopefully holding them stable. Because that is going to be the 
biggest challenge or the biggest problem, biggest concern that 
I see that airlines could have. A strong aviation industry is 
important even to people who don't fly, because it is the key 
to our whole economy, not only for the movement of people, but 
for the movement of goods and services.
    Let me just ask one question, and maybe you don't know 
this, but I will ask Secretary Shages. We always hear, too, 
about alternative fuels or alternative sources. Are there any 
alternative fuels that you know of in the near future, other 
products that we could put into jet fuel that will hopefully 
bring the price down? Is anything like that realistic in the 
next five or ten years, or do you know anything about that?
    Mr. Shages. I know a bit about it, in the Energy Policy 
Act. My office was given responsibilities for strategic fuels. 
We are looking at those things. The time frame that you talk 
about, five years, there is virtually nothing. There are 
hundreds and millions of dollars being poured into alternative 
fuels. But the R&D timelines and the development timelines are 
vast.
    Mr. Duncan. Right.
    Mr. Shages. We have one of the largest untapped resources 
in the world out in the Rocky Mountain area, it is oil shale. 
We have as much oil in oil shale as Saudi Arabia has oil. And 
we have never produced any on a fully commercial basis. There 
was production, heavily subsidized production, back in the 
1970's. Now there is no production.
    However, companies are pouring hundreds of millions of 
dollars into doing research. But they have to go through all 
the steps: they have to do the research, pilot level programs, 
commercial demonstrations and we are talking an industry that 
might have 2 million barrels of production, but 20 years from 
now, not 5 to 10 years. It is very similar to the Canadian tar 
sands that are very, very successful now. But that was because 
they started in the 1970's and didn't give up on it.
    Mr. Duncan. Actually, that is what I assumed you would say, 
that we are still pretty far off. I hope that we can make 
progress in that direction.
    But then the other key thing is, you can't go as long as we 
have in this Country without opening up any new refineries, at 
a time that demand has increased greatly, not only in this 
Country but all over the world. That is something else that is 
going to have to be done if we are not going to just drive 
prices out the window.
    We have, air traffic, air passenger traffic has been 
greatly increasing. We just saw a report yesterday about the 
Washington airports having a record 45 million passengers. 
There is a lot of hopeful signs out there if we don't blow the 
whole thing up once again with some huge increases in the price 
of oil. I certainly hope that we don't do that.
    Mr. Chairman, thank you very much.
    Mr. Mica. I thank the gentleman. Mr. Boswell.
    Mr. Boswell. Thank you, Mr. Chairman. I think pretty much 
what I was going to say has been said. I would like to just 
submit a statement for the record.
    But I really appreciate the dilemma for our airline 
industry on fuel. I am one of the several general aviation 
pilots around here, and that has certainly hit my pocketbook, 
to keep trying to fly even though I am buying navgas versus jet 
fuel. But I am a big supporter, as you all probably know, of 
the airline industry, and I want to see it succeed. We are 
intrigued with this idea of jet fuel reserve, patterned after 
the Strategic Petroleum Reserve.
    Having said that, I would just like to, Mr. Chairman, if I 
could, I think it is germane to this discussion, but Mr. Duncan 
and others have made some very good remarks, as well as 
yourself and others. We have a fuel crisis in this Country. And 
we are in bondage to OPEC, we all know that. I would submit to 
you, and I would hope we would have some hearings, discussions, 
whatever, that we have developed some alternatives: ethanol, 
biodiesel and so on. There is no reason that science will let 
us get into jet fuel as well, from our own natural resources, 
that are biodegradable. This is important.
    I don't think that the alternative is any threat to 
petroleum whatsoever. They just can't produce that much. With 
the increase in China and India, usage, and so on, we are going 
to still be importing. If we use all the alternatives we can 
use and all the oil we can use, we are going to still be 
importing. And what we can do for our own economy, it seems 
like our time has come. The tests are done. We know the 
alternatives work. We are done. We have run them in commercial 
vehicles, we have run them, in the State of Iowa, we have run 
alternatives in State automobiles for several years. I was in 
on it. I know a lot about it.
    There is just no threat. I know the petroleum industry has 
a lot of clout, a lot of lobby clout here. I think it is time 
to move on beyond that. The biggest problem we have in 
alternatives, Mr. Chairman, is transportation. We have the 
transportation, it is buried in the ground, the pipelines. I 
don't know why, Mr. Shages, you couldn't be part of maybe, if I 
can persuade you to start talking about this, first, it is not 
a threat. We have the transportation. The oil industry that 
owns the pipelines could take a piece of the pie to transport. 
And we could have biodiesels and ethanols and whatever else we 
wanted to produce all over the Country. It would help.
    Still, we are going to import. I fully believe that, and I 
think you do, too. So I just, Mr. Chairman, would lay that out 
there, that we need to get into that discussion very badly. I 
thank you for your time.
    Mr. Mica. I thank the gentleman.
    Are there other members with questions? Mr. Costello.
    Mr. Costello. Mr. Chairman, thank you.
    Mr. Shages, let me ask you to clarify a point. The Chairman 
asked you a question about the European Union. I took it that 
your answer was that from a regulatory standpoint, that the 
reserves are the responsibility of the airlines and each 
airline has a different procedure.
    It is my understanding that there is a regulation that 
actually puts the responsibility on the oil companies as 
opposed to the airlines. Can you clarify that point for me?
    Mr. Shages. Yes, I believe that the vast majority of it is 
on the oil companies. It may also be on the airlines. I don't 
know that for a fact. I do know that most of what I hear about 
it is on the oil companies.
    Mr. Costello. Well, I would further ask what your opinion 
is as to implementing that type of a policy in the United 
States. The Chairman made the point that many of the U.S. 
airlines are, as I mentioned, a third of our capacity is in 
bankruptcy right now, chapter 11. So they may not be able to 
afford to take the risk. But certainly the oil companies can, 
as Mr. DeFazio mentioned, they are making huge profits, record 
profits. What would be wrong with having a regulation that 
places the responsibility on the oil companies to in fact have 
a strategic product reserve for jet fuel?
    Mr. Shages. Well, I think it is philosophical. When the 
Strategic Petroleum Reserve was created and it was authorized, 
there were originally choices. You had a Federal reserve and 
you also had a possibility of regulating and causing industry 
to store oil. The original plan said we are going to do it all 
federally owned and absorb all the costs and the taxpayers will 
pick up all the costs and reap whatever benefits there are, if 
there are benefits, to owning it. That was chosen, a plan was 
put together for that, sent to the Congress, Congress agreed.
    Then later, in the year 2000, the authority to actually 
have industry do this was deleted from the line in the Energy 
Act of 2000. So it is a philosophical matter who picks up the 
cost and who reaps the benefits.
    I don't think, I can't speak for the Administration from my 
position on making a change in that philosophy. It is just a 
philosophy, it has been there for a long time, which I think 
has actually worked well. Despite having been branded with the 
idea that we buy high and sell low, of course, the average 
costs to do all that we have bought to put into the reserve is 
about $27. It is clearly worth a lot more than that now if we 
were to sell it. The taxpayer would profit.
    If you regulate it and you make a company hold it when it's 
actually sold, if the price is high the company will profit. It 
is a philosophical question.
    Mr. Costello. It is indeed, and I know you can't speak for 
this Administration and this policy has been in place for a 
number of years through not only this Administration but 
previous Administrations. But can you offer your opinion? Do 
you think, speaking for yourself, would this be a good thing?
    Mr. Shages. Speaking for myself, I like the situation as it 
is. I tend to think that the benefits of reserves are general, 
broad-brush, they are not specific to individuals or companies. 
It is appropriate for the taxpayer to pay for it and for the 
taxpayer to reap the benefits when the oil is sold.
    Mr. Costello. Final question for you is, we talked about, I 
think Congressman Duncan talked about alternative fuels. We 
have talked about strategic product reserves. We have talked 
about, in my opening statement, technological advances and 
improving the ATC system. Is there any one single thing that 
you think should be at the top of the list?
    Mr. Shages. I am sorry, I don't think of any one thing that 
just jumps out to me. If you like, I can respond later to the 
record.
    Mr. Costello. Mr. Chairman, thank you.
    Mr. Mica. Thank you.
    Well, we may have some additional questions that we will 
submit, if there are no other questions for the panel at this 
time. What I will do is excuse you and thank you again for your 
participation today.
    Let me introduce our second panel of witnesses and have the 
staff go ahead and put their name cards out. We have Mr. John 
Heimlich, Vice President and Chief Economist of the Air 
Transport Association of America. Mr. John Felmy, who is the 
Chief Economist and Director of the Statistics Department of 
the American Petroleum Institute. And Mr. Jeffrey Hawk, who is 
the Director of Government Certification and Environment with 
the Boeing Company.
    I would like to welcome the witnesses on our second panel 
and as I mentioned to our first witnesses, if you have lengthy 
statements or documents you would like to have made part of the 
record, or referred to in the record, just request that through 
the Chair. Lengthy statements will be made part of the official 
record.
    So let me introduce and welcome for his testimony John 
Heimlich, Vice President of Air Transport Association of 
America. Welcome, and you are recognized.

    TESTIMONY OF JOHN P. HEIMLICH, VICE PRESIDENT AND CHIEF 
  ECONOMIST, AIR TRANSPORT ASSOCIATION OF AMERICA, INC.; JOHN 
 FELMY, CHIEF ECONOMIST, AMERICAN PETROLEUM INSTITUTE; JEFFREY 
   HAWK, DIRECTOR, CERTIFICATION, ENVIRONMENT AND GOVERNMENT 
                 RELATIONS, THE BOEING COMPANY

    Mr. Heimlich. Thank you, Mr. Chairman, and good morning. I 
appreciate the opportunity to address the issue of jet fuel 
supply and its impact on commercial aviation. ATA's members 
have a vested interest in ensuring access to an affordable, 
reliable supply of jet fuel.
    Today I will describe the effect of rising jet fuel prices, 
provide examples of unprecedented measures U.S. airlines have 
taken to reduce fuel costs and explain how modernization of our 
Nation's air traffic control system can help all system users 
minimize fuel consumption.
    From 1991 through 1999, jet fuel prices averaged 56 cents 
per gallon, and never exceeded 65 cents. The significance is 
not only the reasonable average price, but also its stability. 
It is against that backdrop that operational decisions and 
investments were made. Airline financial planners did 
anticipate higher fuel prices, but nowhere to the extent and 
duration they witnessed over the last few years. For most 
carriers, fuel has now tied or overtaken labor as their largest 
expense.
    Between 2003 and 2005, the average market price of jet fuel 
soared from 88 cents to $1.72 per gallon. In the period during 
and after Hurricanes Katrina and Rita, prices in the Gulf Coast 
spiked to $3.13. The outlook for 2006 is no better, with 
experts projecting an average in excess of $1.80.
    This forecast is especially critical at this time because 
airlines are increasingly exposed to fluctuating market prices 
as their fuel hedge positions deteriorate. This includes 
leading low cost carriers, all of whom likely would have lost 
money in 2004 and 2005, had it not been for their hedges. On 
the other hand, at 2003 fuel prices, nearly every U.S. carrier 
would have recorded meaningful profits.
    At today's consumption rate, every penny increase in the 
price of a gallon of jet fuel does drive an additional $195 
million in annual industry operating expenses. In fact, from 
2000 to 2005, the industry's fuel tab doubled from $16.4 
billion to an estimated $33 billion, even though it consumed 
less, thanks to increased fuel efficiency.
    That is just staggering. Like any other tax, fee or cost 
increase, it is virtually impossible to pass through to the 
consumer in this environment of limited pricing power.
    Our airlines have an enormous built-in financial incentive 
to reduce consumption. Indeed, the industry's track record 
shows just that. Fuel efficiency has risen an impressive 18 
percent since 2000, and tripled since 1971. Airlines have left 
no stone unturned in identifying ways to conserve fuel, through 
improved aerodynamics, weight reduction and operational 
procedures. The use of winglets, which cut fuel consumption 3 
to 5 percent, the removal of ovens or entire galleys to reduce 
aircraft weight, and procedures like continuous descent 
approaches are just a few examples.
    Jet fuel is similar in composition to diesel fuel and home 
heating oil and consumers of those other products compete with 
airlines and other jet fuel users for that portion of refinery 
output. Also, because the price of jet fuel is principally 
determined by the underlying price of crude oil, any efforts to 
conserve energy across the broader economy ultimately provide 
some relief to the aviation community. We strongly encourage 
other industries to take similar actions.
    In short, airlines have not been able to cut costs or raise 
fares fast enough to keep up with skyrocketing fuel costs. 
While we recognize that the U.S. Government can do relatively 
little in the short term to reduce jet fuel prices, it should 
first do no harm. I refer you to recent fuel tax changes and a 
pipeline rate case before the Federal Energy Regulatory 
Commission detailed in my written comments submitted to the 
record.
    Finally, I want to end by emphasizing how air traffic 
control modernization could mitigate fuel expenses. The 
existing ATC system has generally served our Nation well. 
However, it was not designed with fuel conservation in mind. 
Nor was it built to accommodate the anticipated growth in 
volume and complexity. A modernized system, utilizing available 
technologies and recently developed procedures, could save 
hundreds of millions of gallons per year.
    In addition to reducing costs to operators, fuel savings 
achieved through ATC improvements produce significant 
environmental benefits. For every gallon of fuel not burned, 
related emissions are not released into the atmosphere.
    In conclusion, no other industry is more conscious of 
energy consumption than the airlines. In the best of times, 
conservation and efficiency are a way of life. In the worst of 
times, they are a matter of survival. We are proud of our fuel 
efficiency gains over the past 30 years, and we intend to 
continue.
    With the pending aviation reauthorizations, Congress has an 
opportunity and an obligation to leverage advancements in 
technology and bring about long-needed changes in our national 
airspace system. This must be a cooperative effort among all 
participants in our Nation's aviation system. We look forward 
to working together to save fuel, save time and save jobs. 
Thank you.
    Mr. Mica. Thank you, and we will withhold questions until 
we have heard from all the panelists. Mr. John Felmy, with the 
American Petroleum Institute, you are recognized next.
    Mr. Felmy. Thank you, Mr. Chairman.
    I am John Felmy, Chief Economist of the American Petroleum 
Institute, the national trade association of the U.S. oil and 
natural gas industry, representing all sectors of the industry 
including companies that make, transport and market jet fuel. 
We very much appreciate this opportunity to discuss commercial 
jet fuel supply and its impact on the airline industry.
    Our companies are making the maximum effort to meet the 
demand of airlines for jet fuel. However, to better meet the 
long term fuel needs of U.S. consumers and businesses, changes 
are needed in our energy policy. We need to increase oil and 
natural gas supply, reduce demand and expand and diversify our 
energy infrastructure.
    Let me summarize our current situation. For the week ended 
February 3rd, national inventories of kerosene jet fuel were 
43.5 million barrels. This level is 2 percent above last year's 
level and 6 percent above the average for 2001 to 2005 levels 
for the week. Production of kerosene jet fuel so far in 2006 
has been about equal to the average of the years 2001 to 2005.
    Last year, even with the major disruption to refineries 
caused by Hurricanes Katrina and Rita, jet fuel production 
nearly matched 2004's four year high. These results are 
consistent with the very high level of refinery utilization 
with which the industry has been operating. Over the past year, 
the Nation's refineries have operated at more than 90 percent 
of capacity for nearly two-thirds of the time and above 85 
percent for nearly 95 percent of the time.
    While the refinery system is running all out to produce jet 
fuel and other oil products to meet consumers' fuel needs, 
there is a limit to how hard refineries can run. The operations 
of a refinery is subject to decisions by each refinery manager, 
and most importantly, involve decisions on operations that are 
dominated by health and safety concerns. The U.S. oil and 
natural gas industry will not compromise the health and safety 
of its workers or surrounding communities for any reason.
    The United States uses about 1.6 million barrels per day of 
jet fuel. Of this amount, about 1.5 million barrels a day are 
produced domestically and about 148,000 are imported. A small 
amount, 52,000 barrels a day, are exported, 77 percent to 
Canada and United Kingdom, primarily as fuel for international 
flights. Jet fuel usage peaked in 2000 and then after September 
2001, declined sharply with a complete shutdown of air travel 
for a period and a sharp decline in travel with operations 
resumed. It has remained at about 1.6 million barrels a day 
since 2002.
    Prices of jet fuel have generally followed the price of 
crude oil. Since 2000, the correlation between spot jet fuel 
prices and spot crude oil prices has been about .98, indicating 
a strong relationship between the cost of crude oil to produce 
jet fuel and the price of jet fuel. This relationship varies at 
times due to the relative supply and demand conditions in the 
jet fuel market, and is particularly affected by major supply 
disruptions, such as we experienced after the hurricanes in 
2005.
    We recognize how the price of jet fuel has been a serious 
problem for airlines. For example, about 20 billion gallons of 
jet fuel are used each year, so this has meant that for every 
penny increase in the cost of jet fuel, it means over a $200 
million increase in the cost of jet fuel annually.
    We believe that positive changes in U.S. energy policy can 
help alleviate this burden on the airline industry and better 
meet the energy needs of American consumers and the U.S. 
economy as a whole. API is prepared to work with the Congress 
and the Administration to bring these changes about.
    Thank you, Mr. Chairman. I am prepared to answer any 
questions you might have.
    Mr. Mica. Thank you, and we will hear from our last witness 
on this panel, Mr. Jeffrey Hawk, with the Boeing Company. 
Welcome, sir, and you are recognized.
    Mr. Hawk. Good morning, Mr. Chairman and members of the 
Committee.
    On behalf of the Boeing Company and in my capacity as 
Director of Certification, Environment and Government Relations 
on the 787 program, I thank you for the opportunity to address 
the Aviation Subcommittee. I have submitted written testimony 
for inclusion in the record.
    Mr. Mica. Without objection, the entire statement will be 
made part of the record. Please proceed.
    Mr. Hawk. I would like to briefly summarize that material.
    The prepared testimony addresses the demand side of fuel 
consumption. Three areas are covered: the newest Boeing 
airplane, the 787 Dreamliner; secondly, the incorporation of 
continuous improvements in our existing product lines; and 
lastly, our request for Congressional support for the necessary 
improvements in our air traffic control system to enable 
aircraft to move more efficiently in the world's air space, 
thereby saving fuel and time.
    The Boeing Company is committed to continuous improvements 
in the fuel efficiencies of our airplanes. Sine the dawn of jet 
travel, there has been a reduction of more than 60 percent in 
fuel consumption compared to the 707 era aircraft. Our latest 
program, the 787 Dreamliner, is a revolutionary step forward in 
this pursuit. One of the significant features of the 787 is the 
use of carbon fiber composites for the primary structure. This 
material saves weight, thereby saving fuel.
    A new airplane program allows us to use new engines from GE 
and Rolls Royce, new aircraft systems, the latest aerodynamic 
techniques to reduce drag and lightweight composites to produce 
a revolutionary new airplane that burns 20 percent less fuel 
and 20 percent less CO2 than the aircraft it replaces. The 20 
percent fuel savings results in a 10 percent reduction in 
airline operating costs, much needed for their financial 
recovery.
    A fleet of Boeing 787s would save over 3 billion gallons of 
aviation fuel in 20 years. The 787 is the right airplane at the 
right time. The airline response has been exceptional, with 379 
announced orders to date. Our existing products have 
incorporated many changes to ensure fuel efficiency. New and 
derivative engines, more efficient aircraft systems and 
aerodynamic systems, such as winglets and swept wingtips, are 
examples.
    Our newly announced 747-8 family of aircraft will be using 
the same very fuel efficient 787 engines to produce the next 
member of the durable 747 family of aircraft. Our airplanes 
today are equipped with modern navigational equipment. We need 
an air traffic control system that is compatible with this 
capability. Boeing is doing its part to improve fuel 
efficiency. We ask Congress and the Aviation Subcommittee to do 
the same by sponsoring and supporting necessary legislation to 
create the next generation air traffic controlled system.
    The ability of aircraft to fly directly to their 
destination, unimpeded by ATC, will save time and precious fuel 
resources. The future air traffic control system needs to match 
the improvements the industry is making in our airplanes.
    In conclusion, the Boeing Company is pleased to present 
this testimony before your Committee. Our performance and 
demonstrated commitment to improvements in fuel consumption 
will continue.
    Mr. Chairman, thank you for the opportunity to address you 
and the Committee on this subject of our Nation's fuel supply.
    Mr. Mica. Thank you, and now we will get into some 
questions. Mr. Heimlich, what about requiring some sort of jet 
fuel reserve? There are several ways that this can be done. I 
guess in Europe they require the airlines, some of the folks on 
the panel have talked about the oil companies, petroleum 
companies, being saddled with the responsibility, maybe the 
Government. Any ideas?
    Mr. Heimlich. Yes, I think it is an idea worth exploring. 
This is a classic case where the devil is in the details. Would 
the reserves be held in geographically diverse areas? What 
would the fill rate of the reserve be? Would it be filled at 
opportune times, considering market prices, so it would not 
aggravate the price in the marketplace?
    As far as the European situation, I do believe they 
obligate the oil marketers, rather than the airlines, to hold 
the stocks. And there you get into, as Mr. Shages said, a 
control issue. Would the Government have the leeway to release 
the products at will, or as we saw in the hurricanes, when the 
IEA stock release occurred, they allowed, they freed the 
marketers from their obligations and hoped that high prices in 
the U.S. would bring product to the United States, and that in 
case did happen. So I think the punch line is, it is worth 
evaluating further. We don't have definitive position.
    Mr. Mica. And right now we have, Mr. Felmy, what, about a 
one month's supply, did you say, of jet fuel?
    Mr. Felmy. In terms of the inventory level, we have around 
40, at least according to my data, about 43 million barrels in 
inventory. With a consumption of 1.6 million barrels a day that 
puts it roughly at about a one month inventory, just from 
inventories. But remember, please remember that most of the 
supply comes contemporaneously from the refinery operations. So 
it is a little misleading to use those calculations.
    Mr. Mica. What is your viewpoint on having, actually, Mr. 
Heimlich corrected what I think I was saying, that the burden 
would fall on the airlines in Europe. It is actually on the 
petroleum companies. What do you think about that?
    Mr. Felmy. Well, again, as Mr. Heimlich has pointed out, it 
is clearly a devil in the details issue. Philosophically, I 
believe we have adequate inventories. We faced a once in a 
century impact from Hurricanes Katrina and Rita, and we did 
have a challenge in terms of meeting supplies.
    But it was also the case that we had a huge surge in 
imports, as was mentioned earlier, by a doubling of them. We 
also saw a dramatic drop in exports, which are small to begin 
with. And that was because the pricing was such that the spot 
prices in September, October and November for jet fuel were 
higher in the United States in the three major harbors than 
they were in Singapore or Rotterdam.
    So I think we have a functioning system. I think the other 
issues that have to be addressed in terms of mandating higher 
minimum inventories than we have right now are one of cost and 
where is the product going to come from. We are already running 
the refineries at very high levels of utilization. There isn't 
a lot of excess capacity worldwide. So you have the potential 
of trying to mandate higher inventories, of potentially driving 
up costs.
    Mr. Mica. Mr. Heimlich, what percentage now is fuel of the 
cost, of your cost for commercial passenger service?
    Mr. Heimlich. I think it has exceeded 20 percent for most 
of the carriers. The historical range was probably 10 to 15, 
now we are talking in the 20 percent range, maybe 25.
    Mr. Mica. Again, I think others have testified, I think my 
testimony also indicated that it is really sort of the 
backbreaker, right now of the industry, the fuel costs. I guess 
that is a correct assumption. You have tackled some of the 
labor issues mainly by going into bankruptcy, those costs. And 
you have cut back.
    Most of the legacy carriers are now some version of a 
discount carrier. Fuel seems to be the nut that you have to 
crack as far as staying on top of prices. I think we had 
information that last year you raised your fares about 10 
times, something like that, 10 or 12 times and maybe once 
already this year. What is the problem with keeping up with 
those costs and passing them on to the consumer?
    Mr. Heimlich. Well, we keep trying, and fortunately, we 
have seen some modest progress in the last few months in the 
willingness of the customer to pay. High fuel prices have 
interestingly forced some capacity reduction on the part of the 
carriers, supporting a little better pricing environment. The 
difficulty is in, I had mentioned that our fuel prices doubled 
over the last couple of years from $16 billion to $33 billion. 
It is difficult to pass through $17 billion in fare increases 
over a two year period.
    So it is really the magnitude of the increase, can it all 
be passed through fares. We are making some modest progress, 
but of course, if we could pass all our costs through, we would 
never lose money. So it is a continual battle.
    Mr. Mica. I have a question relating to, I don't know if 
anybody can answer it, maybe we will go back to you. The 
Europeans are now considering some sort of a fuel tax because 
of jet fuel or airplane fuel pollution effects on the 
environment. Are you following that at all, Mr. Heimlich?
    Mr. Heimlich. Yes. We have some folks who are very engaged 
in international environmental matters and we do not support 
that tax. As I said, we have a tremendous built-in incentive, 
being price, to be as conservation oriented as possible. I 
think the best thing for us would be to hope that other 
industries can follow our lead in that regard.
    Mr. Mica. Finally, Mr. Hawk, you have increased the fuel 
efficiency of some of your aircraft. Maybe you could give us 
some idea where your latest models stand. Of course, one of the 
things that I think anyone in the market for acquiring 
commercial aircraft would look at is your fuel efficiency. How 
do you stand in competing in the international market maybe 
with your latest product?
    Mr. Hawk. We have seen a trend since 1990 of the average 
size of jet transports getting smaller. Part of the reason for 
that is the demand for airlines to move point to point, from 
city of origin to final destination without making an 
intermediate stop, the classic hub and spoke environment.
    We were developing technology in the late 1990's originally 
aimed at increased speed. That is where the origin of more 
extensive use of composite materials was envisioned, and also 
new engines. That was known as the sonic cruiser program.
    Because of the exogenous shocks of 9/11 and the significant 
increase in cost of aviation fuel, and the request of the 
airlines, we migrated that efficiency originally aimed at 
speed, about a 20 percent increase in speed, to be specifically 
targeted at fuel efficiency, essentially traded at 20 percent 
increase in speed for 20 percent reduction in fuel consumption. 
That is brought about by using new engines that are more 
efficient, a higher bypass engines, operates by passing more of 
the air around the outside of the engine. That is good for fuel 
efficiency.
    Lightweight materials, as cited previously, were the 
composites. The latest in aerodynamics to reduce the drag of 
the airplane and lightweight, efficient systems that again, in 
interaction and integration with the engines, to not exact hot, 
high pressure bleed air from the engines. The classic airplane 
systems that had previously been powered by that bleed air on 
the 787 will be powered electrically. The integration of all 
four of those are what achieved the 20 percent reduction in 
fuel consumption, compared to, say, today's 767 aircraft.
    Mr. Mica. OK, thank you.
    What we will do is, I will yield now to Mr. Larsen. I may 
get back with a couple of questions.
    Mr. Larsen. Thank you, Mr. Chairman.
    Mr. Heimlich, you didn't mention in your oral testimony the 
issue of hedging. It is in your written testimony. I won't ask 
you to define for us, I think we have a good idea what it is 
about. But what is interesting about the hedging policies are 
the various airlines, because they are all over the map. There 
is no consistent policy. We talked about a lot of solutions, a 
lot of ideas.
    One idea we haven't explored is what the airlines do 
themselves and sometimes do to themselves by having a good 
hedging policy or a terrible hedging policy. Can you explain to 
us exactly what kinds of choices airlines go through to decide 
on their hedging policy?
    Mr. Heimlich. Absolutely. Let's start off by remembering 
that hedging is a gamble. And you win some, you lose some. In 
the past, there have been some charter airlines or smaller 
airlines that have hedged themselves into bankruptcy by locking 
in at prices that were too high. I think few would have 
foreseen the very high prices we see today.
    Having said that, the individual airlines look at hedging 
as one, a matter of financial planning to limit volatility, so 
they know exactly what they are going to pay, even if sometimes 
they bet wrong, they bet too high. And some of them look at it 
as a luxury, if they have the cash wherewithal to do it. Today 
if you go in the market and you do find a willing counter 
party, you are not going to get someone to give you the $26 a 
barrel price----
    Mr. Larsen. Not any more.
    Mr. Heimlich.--that Southwest had a couple of years ago. 
And even their positions are eroding. I think the other thing 
to recognize is, there were carriers like United that had hedge 
positions and were forced to rescind those contracts as part of 
bankruptcy. Delta had, in early 2004, had to liquidate its 
hedge positions to free up cash for immediate obligation.
    So basically, the airlines and their treasury groups have, 
they look at their cash capability, what the market will offer, 
a projection of what the energy prices will be, and then see if 
there is a counter party willing to do it. You are absolutely 
right, that some look at those more as strategic financial 
planning rather than bets. But in the end, it does come back to 
a gamble for them.
    Mr. Larsen. In testimony, you mentioned fuel prices varying 
in different parts of the Country. Can you explain why?
    Mr. Heimlich. Yes. We do pay very different prices in 
different regions of the Country, as we do throughout the 
world, as Mr. Felmy also mentioned, Singapore and some other 
areas. It has a lot to do with the quality of the physical 
infrastructure, the pipeline network, trucking capability 
across mountains, the percent that comes in from overseas. So 
those things tend to make the West Coast higher with a limited 
trucking and refining capability, compared to the East where 
you have three or so major pipelines, you can move things by 
far in a probably more competitive area.
    So we do, because of that reason, some economic tankering, 
where sometimes even if there is not a hurricane, we might 
ferry fuel, let's say, from Baltimore-Washington International 
to the West Coast on a transcontinental flight if the price is 
sufficiently cheaper.
    Mr. Larsen. So for the same reasons that Whatcomb County in 
my district, home of two refineries, has the highest price at 
the pump of any county in the State of Washington, the same 
principle applies to jet fuel? It doesn't matter where the 
source is, it is how it gets there, the different ways you can 
get oil to the pump?
    Mr. Heimlich. That is absolutely correct. Supply and demand 
at the local level and the transport costs associated with 
getting it there are critical to the ultimate price to the 
consumer.
    Mr. Larsen. Mr. Felmy, I have a question here about where 
the major refinery questions are located. That is more of a set 
of questions. I will just jump through it. Of the five 
refineries in Northern California, on the West Coast, four of 
them are in my district. The fifth one is U.S. Oil and just 
serves the two bases in Puget Sound.
    So we have these refineries, four refineries in the 
district. In your testimony you mentioned that refineries 
overall have operated at more than 90 percent capacity for 
nearly two-thirds of the time, and 85 percent for nearly 90 
percent of the time. My question to you is, what stops them 
from operating at, say, 95 percent two-thirds of the time and 
95 percent 90 percent of the time? What stops them from getting 
closer to 100 percent more of the time?
    Mr. Heimlich. Several things. The statistics you have, of 
course, are affected by the hurricanes. So in terms of some of 
those impacts, that is clear as was mentioned earlier, 25 
percent of the refining capacity was affected by the 
hurricanes. Secondly, we regularly have maintenance that has to 
be done. Also significant upgrades in terms of producing new 
fuels. You can't run the refineries at the same time that 
you're adding pieces of equipment and so on and so forth.
    That refinery utilization is very high, as compared to 
other industries, which is more in the 80 percent area. But the 
key thing that dominates why you don't run them harder than we 
are is health and safety concerns. You have to do required 
maintenance, and on a twice a year basis, you typically have to 
go through a turnaround or maintenance schedule, just to be 
able to make sure these high temperature, high pressure 
facilities are operating safely.
    Mr. Larsen. OK. I will have further questions on a second 
round, but if I could, for Mr. Hawk, welcome to Washington, 
D.C. and I hope you get to fly home tomorrow, if not sooner. 
Can you talk about the migration of composite technology to the 
747-8 program, and from 787 to other, you talked about the 
engines, but can you talk about the composite technology?
    Mr. Hawk. We have actually seen an interesting growth of 
the use of composites throughout the jet aviation program. The 
first generation of aircraft back in the late 1950's, early 
1960's, used about 1 percent of the air frame in various forms 
of composites. Aircraft of the 1980's used about 3 percent, 777 
from 10 years ago used about 11 percent of the air frame weight 
in composite materials.
    The 787 makes a more fundamental step forward, where about 
half of the structural rate is the carbon fiber composite 
material. We see this as an appropriate emerging trend. We 
think new aircraft will continue that same technology. The 747-
8 is a derivative of the current 747 family, so there will not 
be a significant change in the percentage of composite use, 
other than its current application and flaps and spoilers and 
areas like that on the air frame.
    But we expect new aircraft from virtually all manufacturers 
to make much more extensive use of this lightweight, low 
corrosion, low key characteristic, very durable material.
    Mr. Mica. I thank the gentleman.
    Mr. Moran?
    Mr. Moran. Mr. Chairman, thank you very much.
    You indicated in your testimony that 25 percent of the 
refining capacity was affected by the hurricanes of the Gulf 
Coast. Has that capacity now been fully restored, and has the 
price consequence of that lack of refining capacity for that 
period of time been taken into account? Are prices now no 
longer affected by the hurricanes of the Gulf Coast?
    Mr. Felmy. First, we have still some lingering damage from 
refineries. There are a couple that are still offline. We are 
going through some level of restarts, so that there still is 
some lingering damage.
    In terms of the price impacts across the fuels, what we saw 
after the hurricanes, even with the capacity offline, we saw 
prices spike up, markets function, huge surges in imports, and 
demand was affected. So you have seen prices come down 
dramatically where jet fuel is now, well, in New York Harbor, I 
guess it is around $1.79 a gallon from the previous highs that 
you were experiencing back in the post-hurricane impact.
    So there still are some lingering impacts in terms of 
supply, but fortunately, we had imports which have come in to 
help fill the gaps that have been there.
    Mr. Moran. Is jet fuel refined at specific refineries or is 
it refined at a broad array of refineries? If you are a 
refinery, do you specialize in jet fuel?
    Mr. Felmy. It is refined in many refineries. Virtually all 
refineries have, I guess, the capability to be able, but it 
depends on whether or not you take the cut that goes out of jet 
fuel from either the middle distillate pool. So some don't 
produce any jet fuel. But most do, which is an interesting 
point, because one of the unfortunate rumors that was floating 
around after Katrina was that the one refinery, one of the 
refineries that was severely impacted was the sold provider of 
jet fuel in the Country. And that was simply wrong.
    Mr. Moran. The complaint in Kansas is often diesel fuel, 
Mr. Felmy, that the price consequence of Katrina and supply and 
demand has been reduced for gasoline consumption and the 
automobile, you are telling me somewhat, or jet fuel. But the 
one that seems to linger the highest, particularly in my 
agriculture communities, is the continued concern that diesel 
fuel has not responded subsequent to Katrina.
    Mr. Felmy. Well, it has responded some. It has come down 
from somewhere, I forget exactly what the peak was, but it is 
now around $2.58 nationwide, something like that. Diesel fuel 
market has been fundamentally different from gasoline, as you 
note. It is because one, you have had much stronger demand for 
diesel, where you saw, for example, diesel demand in 2005 was 
up 2.1 percent, whereas motor gasoline was only up .4 percent.
    But a lot more importantly in the case of diesel fuel, we 
did not see the surge in diesel imports that you saw in the 
case of gasoline. Gasoline imports surged to almost 1.5 million 
barrels a day from an average of 1, whereas diesel was up a 
little but not that. At the same time, you had post-hurricanes, 
you had right the timing for harvest demand and also a lot of 
construction demand for rebuilding and so on. So fundamentally 
two different markets.
    Mr. Moran. Why the difference in imports between jet fuel 
and diesel?
    Mr. Felmy. As near as I can figure out, it is because 
Europe continues to, I guess you would say, diesel-fy its motor 
fleet where consumers there are buying a much larger share of 
diesel engines than motor gasoline. So you have gasoline, they 
have gasoline to export, but not as much diesel.
    Mr. Moran. One of the things that I guess I should know 
before I came to Congress, and having been her a while now is 
that there is a set of principles, of laws, of supply and 
demand, and perhaps what we need to often remember is that we 
can't overcome those laws of supply and demand. They exist, as 
much as Congress would like to change the consequences. Have 
you seen any policy steps that the Federal Government has taken 
that fundamentally would affect supply and demand, the supply 
of jet fuel, demand for jet fuel, or just energy in general? 
Are we doing anything right or wrong?
    Mr. Felmy. Well, I think the Energy Policy Act of last 
year, signed on August 8th, was a first step. It had provisions 
in there for conservation, renewables, it had quite a bit of 
provisions for coal, for nuclear power, electric transmission 
and some natural gas distribution lines. It had very little for 
oil and gas, however. So what remains to be done is still 
policies that can help us open up and explore for more oil and 
gas in this Country. You can also improve conservation and 
energy efficiency to help that, and improve the infrastructure.
    So we still need more policies in that area to help 
American consumers.
    Mr. Moran. Thank you, sir. Thank you, Mr. Chairman.
    Mr. Mica. Thank you. Mr. Pascrell?
    Mr. Pascrell. Thank you, Mr. Chairman.
    Mr. Felmy, the largest ten refiners of oil operating in the 
United States have control over 78 percent of the domestic 
refining capacity. The oil industry has indicated that jet fuel 
supply will be limited indefinitely because of difficulties 
getting permits to expand or build domestic refineries, adding 
to a pre-existing shortage of refineries due to the under-
investment in the 1990's.
    The crack spread, as it is called, for jet fuel hit an all 
time high of $42.23 in late September of 2005. It remains at 
$11.88. The historical average has been $5. According to the 
Congressional Research Service, in 2004, the largest net income 
increases were in the independent refining and marketing 
segments, which rose a whopping 190 percent. The simultaneous 
occurrence of these circumstances could be interpreted in many 
ways, including the appearance of collusion or price gouging on 
jet fuel.
    Aside from the given fact of high crude oil prices for all 
sectors of the petroleum industry, how do you explain this? How 
do you explain this?
    Mr. Felmy. Markets at work, sir.
    Mr. Pascrell. What did you say?
    Mr. Felmy. Markets at work.
    Mr. Pascrell. Markets at work?
    Mr. Felmy. That's correct.
    Mr. Pascrell. Would you explain that? What do you mean by 
that?
    Mr. Felmy. What we had was fundamentally tight markets. As 
indicated earlier, you had a huge shift to the supply chain and 
in order to be able to allocate scarce supplies, you have price 
movements, which do that in a market economy. In terms of the 
concentration that you mentioned, yes, our industries are in 
that range. But that puts them along with many other consumer 
industries in terms of the concentration ratios that serve 
consumers. You have to be large and have scale to be able to 
cost effectively serve consumers.
    In terms of adjustments, as I said, you have seen increases 
in imports as a result of those price signals. You have had 
some alleviation of demand and you have seen a decline in 
prices as a result. But it is fundamentally markets at work, 
moving prices around.
    Mr. Pascrell. Markets at work I find to be a fascinating 
term. It was the same term used by the Enron folks in 2000 and 
2001 out in California, the markets are at work. The industry 
is moving forward. And you can wonder, I guess you don't, I 
think you understand why there is question about all of these 
things coming together at the same time. Circumstances are 
unusual. And I am not so sure it is the markets at work. I 
believe in the free market. I believe in an open market. I 
believe in competitive systems.
    But at the same time, I think the very parts of the market 
at work bring about just the opposite situation, markets 
controlled. I am not so sure these outlandish increases, I 
mean, 190 percent is just unbelievable. How do you explain that 
in terms of market operations or market activity?
    Mr. Felmy. It is fundamentally a function of the price 
determination of the buyers and sellers who are in the product 
markets. Comparing 190 percent is a misleading number, because 
you have to look at what the returns to the refinery industry 
were for a very long time.
    Mr. Pascrell. Well, tell us about them.
    Mr. Felmy. They were very low, very low returns for much of 
the 1990's. Going back 20 years, we have had low rates of 
return. You had an improvement in that sector over the past 
couple of years, but you still don't have a great rate of 
return in terms of some of the refiners, if you look at their 
margins. And if you look at the overall industry, our profit 
rate, our earnings rate, is only about 8, 8 and a half cents on 
the dollar.
    That is less than many other industries. It is slightly 
above the national average for all industries. But it is well 
below other markets, other industries, such as pharmaceuticals, 
banks, computer companies, software, and so on.
    Mr. Pascrell. What is the influence, specific influence of 
demand on those prices?
    Mr. Felmy. Demand is a very powerful influence. We saw that 
specifically in the gasoline market and as was mentioned 
earlier, the difference with the diesel market. Gasoline demand 
was down post-hurricanes, and that combined with an increase in 
imports, restoration of production, you saw prices come down 
dramatically. In the case of diesel, demand continued high 
because of the harvest and because of construction demand and 
continuing economic growth. Demand is very, very important to 
markets.
    Mr. Pascrell. Can I ask one elemental question, Mr. 
Chairman? I am interested in the subject of demand. The 
argument is that the increase in demand keeps the price 
elevated. I would conclude from that, then, the problem being 
that if you had an increase in, if you lowered the price, there 
would be an increase in demand. Correct?
    Mr. Felmy. That is correct, sir. An economist can believe 
nothing else.
    Mr. Pascrell. Oh, really? You know what I think? I think, 
Mr. Chairman, and I apologize for being late, I had three 
hearings at the same time. I think, Mr. Chairman, when one 
looks at the machinations of the market, in a so-called free 
market, when one looks at the machinations of this market 
economy, there are a lot of questions. The consumer is a victim 
most of the time. We are all victims. You are a victim 
yourself. We are all victims.
    But I don't think it is the economists that you claim are 
not so sure about what brings rise to the prices. Demand is one 
part of it, no question about it. But there are many other 
factors that are involved. What you consider to be below 
average earnings in the 1990's, you could take a look at that 
also. We don't have the time here today.
    But these numbers are not acceptable. The numbers I 
presented to you are legitimate numbers. I didn't make them up. 
You understand that, correct?
    Mr. Felmy. Yes.
    Mr. Pascrell. Thank you.
    Mr. Mica. I thank the gentleman.
    Are there other questions from any of our members? Mr. 
Larsen, I will let you go again.
    Mr. Larsen. Mr. Hawk, in your testimony you talk about, in 
your oral testimony you touched on improvements to the air 
traffic control system. Your written testimony goes into a 
little more detail. Can you tell us why Required Navigation 
Performance, tailored arrivals and trajectory based operations 
would help the efficiency of the system? Then could you tell us 
if those things were in place, what our current ATC system 
would have to do to accommodate that?
    Mr. Hawk. The capability of modern aircraft allows much 
greater navigation precision than what we saw in place 20 plus 
years ago. So an aircraft can be properly positioned in space 
and time as directed by the air traffic control system.
    Ideally, you would like an aircraft to move from the gate 
to the departure end of the runway and take off without an 
undue hold. So the ability to move more aircraft through our 
congested airspace today is fundamental to that desired 
efficiency. The aircraft are ready. The somewhat antiquated air 
traffic control system is a bit of a hindrance there.
    An example was cited by the FAA in panel one, referring to 
something called continuous descent approaches. That four-
dimensional navigation capability that could be enabled with a 
revision to the air traffic control system would allow an 
aircraft about 150 miles out to have a programmed path that 
would allow the aircraft to descend at idle power from the 
cruise altitude and make a turning descent to the runway, and 
not do what we typically see today, which is an intermediate 
step descent using increased power. That consumes more fuel and 
time.
    So a continuous descent allows aircraft to move in from the 
side to approach ends of the runway. That is one example.
    Required Navigation Performance is consistent with what was 
also cited by the FAA, the RVSM, the reduced vertical 
separation system. The airplanes are ready. We just need the 
air traffic control system in place to position those aircraft 
in time and space in the most efficient manner.
    Mr. Larsen. Mr. Felmy, as I understand refineries, and I 
took a tour of one of the refineries in my district a couple 
weeks back, and they showed me the chart, how the crude oil 
comes in and gets separated out into various lines and refined 
into various products, including jet fuel, in this particular 
refinery, and diesel, and of course the basic product that most 
of us use.
    Given the ultra-low sulfur diesel requirements that are 
coming on, do you anticipate, does the industry anticipate that 
squeezing out refining capacity, replacing refining capacity, 
say on jet fuel or any of the others? Or is the industry doing 
everything it can do to accommodate those requirements, so that 
you are still getting 1.6 million barrels of jet fuel a day, 
plus whatever else you need?
    Mr. Felmy. First of all, the industry is doing a lot on 
this program. It is an enormous challenge, going from roughly 
300 parts per million sulfur to 15 parts per million. We are 
investing on the order of $8 billion in terms of meeting those 
requirements. Not all refiners will choose to produce that 
fuel, so they could produce other things. One of the things 
they could produce is more jet fuel, because that is an 
alternative, or a more high sulfur heating oil, something along 
that line, or offer a diesel, things like that.
    It depends on the individual refiner. The smaller ones have 
more of a challenge in terms of the investments they have to 
put in place to produce those fuels.
    But the ultra-low sulfur diesel program is an enormous 
change and it has enormous challenges. I believe we have 
invested, required to produce sulfur levels in the refineries 
at well below 15 parts. But as was mentioned earlier in the 
discussion, when you transport it through long distances, you 
can have the fuel pick up more sulfur throughout. So we are 
working closely with EPA to have the appropriate policies and 
regulations and practices and trying to make certain that we 
introduce this change as smoothly as possible.
    Mr. Larsen. You don't anticipate any squeezing out of any 
other products?
    Mr. Felmy. Well, the one change that we are just uncertain 
about is that high sulfur jet kerosene is used for other 
applications, both as thinning diesel fuel, to keep it from 
gelling in the winter, and for some heating and so on. With the 
introduction of the ultra-low sulfur diesel, you will not be 
able to add that high sulfur thinning agent to the diesel fuel.
    So the individual companies are looking at how do they have 
a product to be able to market to meet those needs. I can't say 
with any confidence what the impacts would be, but it is 
something we are looking at very carefully.
    Mr. Larsen. Mr. Heimlich, a quick question. I don't know 
how quick the answer will be. One point six million barrels per 
day now, what is the projection per day over the next five 
years?
    Mr. Heimlich. I don't have that without the calculator. Our 
current run rate is 19.5 billion gallons a year. As volumes 
grow, I see that expanding a bit. Granted, that 1.6 is 
demanded. My figure for 19.5 billion is for U.S. airlines 
operating worldwide. So we also buy some fuel outside the 1.6 
overseas and foreign carriers and miliary carrier also buy some 
of their jet fuel in the U.S. So we could get back to you with 
a more precise figure.
    Overall, I expect the U.S. airlines total to probably grow, 
but grow at a lower rate thanks to fuel efficiency.
    Mr. Larsen. Thank you.
    Mr. Mica. Any other members? Mr. Pascrell.
    Mr. Pascrell. Thank you, Mr. Chairman.
    Mr. Felmy, according to the Congressional Research Service, 
in 2004, there was 25 percent profit among the independent oil 
refineries. That is what the Congressional Research Service 
says. My question is this. Does that jive with your numbers, 
Mr. Felmy? And number two, should there ever be any limit on 
profits? Two questions.
    Mr. Felmy. The first number I believe is a return on 
investment, which is a different measure than a gross return 
that I had given you earlier. So yes, they are absolutely 
consistent. If you look at the refiner's profit rate, if you 
will, it is probably even now only on the order of, I believe 
the last quarter was around 4 or 5 cents on the dollar. So 
there are two fundamental different measures of rates of 
return.
    In terms of limitations on profit, philosophically no. I 
think it is the marketplace that disciplines that. It is the 
marketplace that determines what supply and demand factors come 
together to yield a rate of return. The market giveth, the 
market taketh away.
    Mr. Pascrell. So whatever the profit is, and what sounds 
outlandish to me, this is simply a result of a free market 
system, granted there is a free market?
    Mr. Felmy. Yes, sir. And it is, from our perspective, it is 
a competitive market with, you mentioned 10 competitors with a 
70 percent rate. That is a competitive market. If you look at 
other industries, they have much higher concentrations of 
market concentration than our industry. In fact, if you look at 
the most concentrated industries, microprocessors, you have two 
competitors and they beat each other's brains out.
    Mr. Pascrell. I am familiar with some of the other 
industries, Mr. Felmy. But I can't come to grips with, I find 
it difficult to come to grips with your conclusion that 
whatever the industry, and we are talking about a very specific 
industry now, that whatever the markets will bear the markets 
will bear, and that even in tough times, even in difficult 
times, even if it means high costs to users, whatever you can 
get, you should try to get. I mean, this is a, in your 
interpretation, a free and open market system. There are no 
limits to profit.
    Mr. Felmy. Yes, sir. It is the marketplace that determines 
what are the prices. It is the management of the firms that 
determine what their costs of operations are. It is a 
combination of those factors. It is a combination of market 
operations and management.
    Mr. Pascrell. But when you have a product, Mr. Felmy, that 
the public needs, and if the public doesn't have it, it can't 
conduct business, and you choose to continue to increase the 
cost of that product, knowing quite well that demands have 
increased, knowing quite well that the consumer has no other 
place to turn, simply because you can get it at that particular 
moment, is that part of the free market system, Mr. Felmy?
    Mr. Felmy. It is the free market system that determines the 
outcome in price of the products that are delivered. The costs 
of fundamentals of our business is crude oil costs, which are 
determined by international market forces. As I said, the 
market giveth, the market taketh away.
    The alternative to not letting the market work is the 
disasters we faced in the 1970's with long gas lines, 
allocation scenes and the complete disaster of energy 
performance.
    Mr. Pascrell. Well, there was a number of reasons for that, 
Mr. Felmy. You know that. There were a number of reasons, not 
just one reason. And I am not an advocate of price controls. I 
am not talking about that. We want a market system. See, I want 
to make that market system more open, more transparent, more 
open so that we know where dollars are going and the reasons 
why prices are increasing. The average American, the average 
Congressman does not understand why certain prices increase 
when particular demand is not accelerating to that degree.
    And we have every right to ask about profits in a country 
where we not only believe in the free market system, we believe 
in fairness. That's what makes us different than the bad guys. 
So I am no so sure I can accept your definition of the open 
market or the free market.
    But I must say this: the President of the United States 
agrees with your definition. I noticed his response when we 
talked about Exxon's profits last year. I think that this is an 
absolute disgrace.
    Mr. Felmy. Sir, the marketplace determines what these 
prices are. If you look at our earnings as compared to other 
industries, we are above average, but we are well below other 
industries that do it. It is a fair rate of return for all the 
risk that we have to----
    Mr. Pascrell. I understand. I understand your position, and 
I have mine. I respect your position, I hope you will respect 
mine. Thank you, Mr. Chairman.
    Mr. Felmy. Yes, sir, I do.
    Mr. Moran. [Presiding] Mr. Pascrell, thank you.
    Mr. Heimlich, the privately held airport operating in 
London Heathrow International Airport recently began rationing 
jet fuel at Heathrow due to supply shortage due to a an 
explosion and fire at a major depot.
    Mr. Heimlich. Yes, sir.
    Mr. Moran. And there was some concern about discrimination 
for U.S. airlines. Can you bring us up to date on the status of 
that issue?
    Mr. Heimlich. Yes, thank you, it is a very important issue. 
I think it highlights that issues of supply disruption and 
their consequences are by no means limited to the United 
States. The Bunsfield fire outside of the Heathrow area in 
December did erase about 30 percent of supplies there. The 
supply situation really has not ameliorated and does not seem 
to be going to be fixed any time soon.
    BIAA, the airport authority, did impose a rationing scheme. 
ATA strongly opposes any rationing scheme. Our carriers bore 
the brunt of tankering in and cost to respond to hurricanes. 
The international carriers did not suffer at all. A similar 
thing happened outside of Sydney, when this happened in 
Australia, Qantas bore the brunt.
    The situation at Heathrow now, they have, well a physical 
fix is available. There is very little pressure to make one 
happen, which is frustrating. The degree of discrimination in 
the rationing scheme has abated somewhat, but a gap remains, 
particularly if fuel supplies on any given day fall below a 
certain level. So they basically, and the discrimination is by 
the flag of the airline. So it is home based carriers on long 
haul routes versus visiting carriers on long haul routs, and a 
similar scheme on short hall.
    The key is for us, it is a matter of principle. We don't 
want this to be thrown back in our face at any airport any time 
in the future. It flies in the face of what we experienced in 
the hurricanes.
    Mr. Moran. Is this the only instance in which this has 
occurred or is occurring?
    Mr. Heimlich. To our knowledge, yes. Every other precedent, 
I mentioned Australia and all through the hurricanes, we have 
had shortages elsewhere. We have always seen a cooperative 
effort between the airport operator, the suppliers, the oil 
suppliers and the airlines to work it out. There was just a 
natural expectation that those who were most operationally 
capable of bearing the brunt were those who took the lead. So 
yes, Heathrow's situation is unique in the history while I have 
been in this business.
    Mr. Moran. We will see if we can end this hearing on a 
positive note. Yesterday, the price of crude was less than $60 
a barrel for the first time this year. Is that an aberration or 
is there a signal in the market that jet fuel and other energy 
prices will be more stable or lower in 2006?
    Mr. Felmy. It is going to be very much a function of, as 
economists love to say, the supply and demand conditions to go 
into the price. Fortunately, we have had a mild winter, 
although Punxsatawney Phil had a forecast for a longer amount 
of winter.
    It is also going to be very much a function of the supply 
hot spots around the globe, which we have been watching for 
several years now, whether it be the latest being Iran, Iraq, 
Nigeria, Venezuela and so on. There is one thing that we can 
always hope, that markets will respond and we will see an 
improvement in the conditions.
    Mr. Moran. I think you took me back to my words earlier 
about supply and demand.
    Anything else?
    Mr. Felmy. No, I appreciate it. I would just add that the 
price, I usually like to wait two or three months before I call 
anything a trend. We have seen, as some alluded to before, a 
speculation about $80 or $90 or $100 a barrel. So we will wait 
and see. But the last couple of days are positive.
    Remember that jet fuel prices can sometimes stay high, even 
as crude falls down. Mr. Pascrell alluded to the crack spread 
earlier.
    And I would like to emphasize that any solution for us 
needs to consider both the elements of supply and demand, and 
that conservation in any refined product of crude oil or for 
crude itself has an ultimate flow-through to jet fuel prices. 
So when we are talking about alternatives or conservation, it 
shouldn't focus just on the demand for jet fuel itself. It 
should look at other products.
    Mr. Moran. Thank you. I thank the panel very much.
    Mr. Larsen, anything further?
    Mr. Larsen. No, thank you.
    Mr. Moran. I would ask unanimous consent that we leave the 
record open for 10 days for additional comments and responses 
from the witnesses at today's hearing. With that, the 
Subcommittee on Aviation is adjourned.
    [Whereupon, at 12:02 p.m., the subcommittee was adjourned.]
    




    
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