Southwest strategy paying dividends

Advantage: The airline's decision to expand storage and revamp fueling operations at BWI may prove more valuable than expected.

August 23, 2005|By Meredith Cohn | Meredith Cohn,SUN STAFF

About two years ago, a piece of cleaning equipment got lodged inside the pipeline from Texas that transports the 650,000 gallons of jet fuel pumped into airplanes daily at Baltimore-Washington International Airport.

Southwest Airlines, BWI's dominant carrier, had to bring in costly fuel by truck and plane for several days to keep its fleet of Boeing 737s in the air. Airline officials decided right then they had to build more storage capacity and a new fueling system to minimize the chances of another such event.

But record travel demand and soaring jet-fuel prices maymake the upgrades, which will go on-line in the first part of 2006, even more valuable than originally envisioned.

The extra storage space will allow Southwest to keep its planes filled with fuel that, thanks to use of complex financial hedging strategies, it can buy for less than half what rivals have to pay in spot markets - extending what may already be the airline's biggest competitive advantage.

The new high-tech system will better control flow and emissions by using hoses that tap underground pipes instead of trucks. There will be less risk of trucks driving in the way of airplanes. And it will take only about 7 minutes to fill a plane, compared with the current average of 11.5 minutes. That will make it easier for Southwest to extend another of its competitive edges, its ability to rapidly get its planes in and out of gates and back into the air.

Fuel cost and availability have been growing concerns this summer for all airlines as travel demand rises and the pipeline system that feeds most airports strains to keep up. Other airlines at airports including Washington Dulles International have begun regularly trucking in extra fuel at great cost.

"It's a problem that will continue to grow as long as the level of demand continues and as long as the fuel storage and distribution systems aren't enhanced," said Robert Mann, president of R.W. Mann & Co. Inc., an airline industry analysis and consulting firm.

"There will come a time when we have rationing or need to structure tankers almost constantly to continue to increase the level of activity at certain airports. That's very inefficient and, in this environment, very costly."

Southwest currently trucks its fuel from a tank farm maintained by all airlines that operate at BWI. The farm is fed by a large pipe running from Texas to New York. Many airports along the way get their fuel from that pipe, operated by Colonial Pipeline Co.

Under the new system, Southwest will add another tank on airport grounds and build its own small system of pipes that will run fuel directly to each of its 31 gates, eliminating the need for trucks.

BWI officials would like other airlines to invest in similar upgrades over the next few years. Until they do, Southwest said they will be able to tap its reserves if their own supplies grow short.

Together, three tanks at BWI will be able to hold about 90,000 barrels of fuel, or close to four-days worth, up from 55,000 barrels.

Southwest goes through about 238,000 barrels, or 10 million gallons, of jet fuel a month at BWI. A Boeing 737-700, for example, burns about 2.25 gallons a mile.

For the airline industry as a whole, soaring fuel costs get most of the blame for continuing huge losses even as a record number of people are flying and fares are going up. Fuel costs are now eclipsing labor costs as the biggest expense at many airlines, according to the Air Transport Association, an airline trade group.

With demand so high, airlines can't cut flights, but they have been taking other steps to cut their fuel bills. Some airlines are filling their tanks on the East Coast, where fuel is cheaper. The price for a gallon of jet fuel, which is similar to diesel, is about $2 in California, $1.78 in the Gulf Coast and $1.80 in the Northeast.

The airplanes also are flying slower, cruising at higher altitudes, and even changing their paint to minimize heat absorption that requires more energy for cooling.

Southwest reported that in its second quarter, ending June 30, fuel costs were up about 25 percent from the corresponding quarter last year, and that's with its discounts.

It would have been much worse if it had to pay market prices like its weaker rivals, which couldn't afford the hedging contracts Southwest was able to finance. Southwest paid about $26 a barrel for approximately 85 percent of the fuel it bought this year under its hedging program. Others pay about $66.

Glenn Hipp, director of fuel purchasing and inventory management for Southwest, said the airline is investing $20 million to $30 million in the storage and delivery system at BWI and building more storage at other airports. Hydrant systems for fueling planes are in place at most major airports, but only Houston Hobby and BWI will have the high-tech version.

But, he said, better pipelines for transporting the fuel to the airports are still needed.

"We're feeling the pinch now across the country," said Hipp. "We made improvements. ... And we'd like the pipeline companies to make improvements to the infrastructure."

Colonial Pipeline said it has been making improvements. It completed work this summer on a new pipe and booster to that can bring about 30 percent more fuel to BWI.

It also has projects in other states, but Steve Baker, a spokesman for Colonial, said the pipes are up to 40 inches in diameter and it's difficult to win easements, plus environmental, government and neighborhood approvals for a lot more.

Benjamin Cooper, executive director of the Association of Oil Pipe Lines, said the system currently moves about 15 billion barrels a year of crude oil and refined products including jet fuel. About 6.5 billion barrels of refined fuels are used every year.

"There hasn't been a lot of change over the last several decades," he said. "We'll enter a period in the next five to 10 years when we'll have to expand capacity. "

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