[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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28-261 PDF WASHINGTON : 2007
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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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