Key Drivers

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41 3.1.1. Airline Market Conditions

The European airline market is showing market inequalities regarding governmental and business stakes and subsidies. Subsidised airlines, as discussed in Chapter 1.1., affect the level of competition between airlines and changes the overall competitive environment.

This hinders a fair competitive environment and affects the profitability due to low ticket prices. Moreover, one characteristics of the European market is a general tendency towards a hedging strategy to reduce risk. While in other markets hedging is not used in an airline’s strategy, for instance in the United States, all European airlines have a hedging strategy.

Conventional jet fuel costs and how to finance them are generally an issue, also regarding the feasibility of routes and thus network planning.

3.1.2. Bio Jet Fuel Supply

As an alternative approach to jet fuel, bio jet fuel is an option considered in the European airline industry. So far, the technical availability has been tested, however, the commercialization sees some barriers especially regarding the supply quantity and price.

General developments in the area and other alternatives are investigated. Therefore, bio jet fuel might be an option to reduce carbon emissions and replace conventional jet fuel in the long run. Currently bio jet fuel can be used in a blend of 50% with conventional jet fuel.

However, present prices of around $1500-2500 per ton oil equivalent for bio jet fuel are reducing interest in development at current low oil prices of $400-500 per ton.

3.1.3. External Influence Factors

Several external forces and factors can be identified which cannot be directly regulated and still affect the conventional jet fuel market. These include decisions made by oil producing countries, for instance OPEC countries or Russia, and the transformation of the US as supplier due to the shale oil development. Especially in situations such as artificial restriction of production, external influence factors affect the price. The mentioned and

42 additional factors show a direct influence on the crude oil price which links to the jet fuel price.

3.1.4. Jet Fuel Price

The oil price cannot be predicted correctly and changed significantly over the last couple of years, for instance falling from US$150 to US$30 per barrel Brent crude oil. This affects the jet fuel price directly and leads to a volatile market, as jet fuel is refined crude oil with a crack spread of about 11-14% of crude oil. Jet fuel costs make up a significant part of the airlines’ cost structure, above $100 it can make up to 40% of the overall cost structure.

Thus, the jet fuel price is a critical issue for airlines. Due to its high proportion of the overall cost structure, the jet fuel price also affects the competitive environment. If high jet fuel prices are prevalent, it becomes more difficult to compete on a low price level and only airlines with a clear cost structure and successful strategy are able to be profitable.

3.1.5. Jet Fuel Availability

The whole process of jet fuel production is important. The refining process made from crude to the delivery to the aircraft play a big role in the airline industry. The production of jet fuel specifies that crude can only partially be refined to jet fuel. In the refining process other oil products are also extracted. The market situation of the refineries in Europe is deteriorating, more and more refineries are closing down. Due to strong competition of refineries from the Asian market, European refineries have difficulties to compete on the same price level. This declining tendency leads to a smaller supply directly provided in Europe and the focus of refineries producing other more profitable oil products rather than jet fuel is affecting the industry in terms of availability. To ensure the availability, imports of jet fuel from outside Europe are growing. Another relevant factor is the jet fuel quality.

With several different standards worldwide, the quality of jet fuel is difficult to manage and one international standard has not been developed. Accessibility issues mainly concern

43 land-based, remote airports. Especially small airports with recent growth have difficulties to supply jet fuel if they are not located near a pipeline or harbour.

3.1.6. Jet Fuel Procurement

The procurement and suppliers market is seeing changes in its structure by having a new component added, the reseller market. Imports from other countries play a greater role and the longer delivery routes affect the timely availability of jet fuel at locations more remote in Europe. Regarding the jet fuel procurement, another important issue is the necessary infrastructure in terms of storage and delivery to the aircraft and therefore induced costs which is needed to allow access to the supply. The regulations applied to ensure safe storage make airport jet fuel storages costly and require high investments. The so far carried out procedures by external stakeholders offer further possibility to decrease costs if they are integrated into the value chain. In case of high jet fuel prices, the credit limit of airlines can become an issue. If the jet fuel prices are high, being able to pay for jet fuel can lead to problems with the available credit limit. This can lead to additional intermediaries in the procurement process to diversify risk.

3.1.7. Regulations

Governmental and international regulations have a clear effect on the industry. The recently upcoming motion to introduce additional taxation brings more uncertainty.

Taxation will increase indirectly the jet fuel costs for the airlines and therefore, if implemented in only a few countries, cause inequality in the market. Regarding all regulatory issues, IATA acts as support function to represent the general market interest and support airlines in regulatory issues. Especially carbon emission trading schemes like CORSIA and ETS lead to a similar cost effect as a tax and will increase the jet fuel costs.

44 3.1.8. Sustainability and Efficiency

Sustainability is an issue, in particular the CO2 emissions and the environmental impact of aircrafts and the air transport. With a general public awareness of climate change, airlines are facing questions regarding environment-friendliness. Another aspect in this context is also the jet fuel efficiency. There are several methods to improve the fuel efficiency and generally all airlines have an existing jet fuel efficiency programme. This can reduce the jet fuel consumption, yet minorly. Jet fuel efficiency concerns the consumption of jet fuel and thus jet fuel itself does not get more efficient. By reducing the usage of jet fuel, the total cost of jet fuel decreases. A reduction of jet fuel consumption can be seen in big European airlines and can lead to a reduction of jet fuel usage of about 2-3%. Moreover, the market shows the demand for a lobby to support sustainability and efficiency.

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