Recently Lufthansa conducted an “academy” in New York around the fuel problems the airline faces. Invitees were all local media, and it was a small group. The airline brought in three high level executives who made presentations of how the airline is managing fuel challenges. Lufthansa is a well-managed airline and the insight from this event offers not only a view on this airline is dealing with the fuel issues, but also serves to educate on how the industry might be dealing with fuel related challenges.
The first presentation was on fuel management and we have a few slides to share from that event. The complexity of this function at the airline is best illustrated with data: 540 airports served globally, using 150 suppliers and consuming 10 million tons of fuel annually to fuel eight airlines in the group. To give perspective, Lufthansa uses as much fuel per year as Finland. How’s that for a statistic? For the passenger side of the airline, fuel costs are 28% of total costs. Because Lufthansa is the quintessential network carrier, this number is actually pretty low. For an LCC it would be nearer 40%. To get an idea of the logistics take a look at this chart. As you can see 44% of the airline’s fuel is processed at sites that are under 1% of the total.
Consumption by the airline by aircraft type was shared with the group and is shown in the next chart. The 747-8 is not reported because the data refers to average consumption in years before 2012. The take away here is that 10% of the fleet consumes 70% of the fuel. The long haul fleet consumption is eye popping.
However, the airline has done an exceptional job improving its fuel consumption as the next chart illustrates. This chart supports the major aircraft orders airlines are signing in an effort to drive down their fuel costs. Newer airplanes burn a lot less fuel and pollute less (noise and air). Lufthansa averages 58 miles per gallon, which exceeds most hybrid cars for fuel efficiency.
The next presentation was on fuel efficiency, which is a great segway from the previous chart. The tone for this presentation was “Rising fuel costs can only be absorbed by fostering efficiency”. Lufthansa has 400 projects in the works trying to identify fuel efficiencies. One example that caught our eye is called “Connex Info”. Using in-house software (Lido) the airline makes aircraft speed decisions based on how many passengers might miss a connection. This way a delayed flight is either accelerated or not. The airline has also developed a neat EFB-based calculator to enable pilots to perform real-time flight path optimization. This brings in a key item airlines are all working with – connectivity. To ensure optimal decisions invariably means providing the decision makers with current data. Lufthansa has “FlyNet” on its long haul fleet which allows crews to get the data updates they need. The airline was a pioneer in this field and is now harvesting benefits from this decision.
Aircraft suffer from rapid technology aging. Regulators cannot approve new technology fast enough and OEMs cannot update technology at the speed with which it becomes available. The iPad as EFB is the latest example. The FMS on the A320 was designed in 1978 and was delivered in 1979. (Remember the Commodore PET from the same era?) Airbus still installs this computer today. Is there any wonder that pilots jumped on the iPad bandwagon? Airlines are forced to discover solutions outside the constraints of aircraft technologies.
The final presentation was on biofuels, a subject of great interest to us. Lufthansa explained that Jet A1 has a carbon chain length of C9 to C13, this makes it nearly the same as diesel. The need to reduce carbon dioxide emissions is a big issue for IATA and Lufthansa intends to play its part. The airline feels that biofuels is a solution that may work. It is compatible with aircraft engines and the industry’s fuel supply infrastructure. Blending up to 50% is already an allowable fuel option. Biofuels have proven to be cleaner than fossil fuels. But there are challenges – availability and price. Lufthansa provided this useful chart.
There are clearly advantages for the airlines to find ways around the supply and pricing issues. But who will take the lead? The supply base is looking for a large customer who will contract for sufficient volume to justify investment. With that supply created, prices should start to decline – or so everyone hopes. The most likely leadership role here will be the US government by way of the US Air Force. The military has already started trials, but $59 per gallon is expensive. Moreover there are already signs of in-fighting. However, the airline industry should proceed with its tests. Because even initial trials by the US government is starting to attract the kind of interest that will drive up supplies which could reduce the long term pricing.
Some economists are predicting a long-term decline in fuel prices, as the US becomes energy independent through shale oil, and overall demand is reduced as automobiles become much more fuel-efficient after the next replacement cycle. Even if prices fall, fuel has become such a significant element of aircraft operations that mitigation efforts are essential to success. And should prices rise, these initiatives could make the difference between survival and failure.
Different airlines have different strategies, perhaps best contrasted by Delta Air Lines, which has chosen to continue to operate older types, and minimizing new fleet capital costs. But even Delta has purchased a refinery to eliminate the refining spread from their cost structure. Fuel is a critical element, and the aviation industry has led the way in fuel cost reduction in recent years. With the next generation of wide bodies entering the market, as well as the neo, Max, CSeries and E2 in the narrow-body markets, we expect that trend to continue as the industry leads the way in fuel cost reduction.