Aviation Fuel Pricing by Opis and Platts by iag19823


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									Jet Fuel Market Price Assessments - Is There a “Best” Provider?
Keith Carter Reporting

     The question of which jet fuel market price assess-    prices are needed on which to base supply contracts,
ment agency is “best” will once again come under the        with them being:
spotlight at IATA’s Fuel Forum in Los Angeles this
month.                                                      	   •	 Accurate	and	truly	reflecting	the	value	of		           	
     The issue is, of course, not new. As long ago as               market traded jet by region.
2001 Platt’s Peter Stewart had to defend his company’s      	   •		 Robust	and	consistent.
actions on the FOBMED quotation against a hostile           	   •		 Not	influenced	by	the	pricing	approach/		             	
airline audience at the Rome Fuel Forum. And few                    methodology, or open to manipulation.
who attended the Montreal IATA meeting in October           	   •		 And	above	all	having	the	confidence	of	the		          	
2003 will ever forget the lively debate there!                      users!
     Unfortunately, however, it would appear that few
in the industry fully understand the implications of the         Platt’s recognized the need for this service, and by
different methodologies and approaches used by the          being first into the market established itself as the lead-
assessment agencies such as Platt’s, Argus and OPIS.        ing provider – becoming the dominant agency for most
So debate has largely fallen on the shoulders of a small    users. This situation generally prevails today, despite
number of experienced airline fuel buying profession-       concerted efforts by the others to gain a foothold in the
als such as Helmut Fredrich of Lufthansa, Robert Bijl       business. But Platt’s is not the only show in town, and
of KLM-AirFrance and Bob Sturtz of United. It is odd        some airlines have moved to use Argus and OPIS as
that while airline fuel buyers will spend a huge amount     the basis for their pricing in certain markets and loca-
of time and energy negotiating the second decimal           tions.
places on their contracted price differentials, they give        The key difference between Platts and its two
little attention to the market assessments on which         rivals is that it uses a “Market on Close” (MOC) ap-
their prices are based, even though these can have a        proach that only considers actual trades conducted in
huge impact on their fuel bills.                            the time windows. They argue this makes the as-
     Ever since airlines moved to prices based on a         sessment more robust and auditable, but critics say
“market plus differential” back in the 1980s – replac-      this narrow approach fails to take account of the full
ing the individually negotiated prices by location          market activity, and with fewer trades it is less accurate
which few, if any, readers of JFR will remember! – the      and more volatile. Airlines are also unhappy and the
industry has needed underlying reference prices for         timings on the “windows” as they can cause problems
regions and airports around the world.                      for their normal working office hours. In terms of the
     If jet fuel was traded on public and regulated ex-     actual price assessments, over the longer term there
change, as is the case for crude and gasoil/heating oil,    would appear to be little difference in their quotations.
then there would be an accurate and robust price base.      For example, in the U.S. West Coast over a two year
But it is not, with most trades taking place between the    period the differences in the monthly averages between
various players in the market on a “private and confi-      all three was only 0.11 cents a gallon. However, in
dential” basis. So establishing the daily “correct” price   the shorter term the differences can be greater, with
is not easy, and full of potential pitfalls. However,       significant implications for risk management as well as
                                                            physical prices.
                                                                                                      (Continued on page 2)
    But though the assessed prices are similar, airlines       In this issue of JFR, both Argus and OPIS set out
want choice, and they have been unhappy with many          their approaches and methodologies (see pages 3 - 5).
of the decisions and actions taken by Platt’s in recent    Platt’s was invited to also provide input, but declined
years. So there has been some movement – albeit            to do so.
slowly, due to an inertia in the market combined with          It is hoped that these articles, along with the work-
the lack of understanding of the issues involved by        shops for those attending the IATA Fuel Forum, will
many.                                                      help airlines make more informed decisions on which
    Unfortunately, in the past suppliers have not          assessment provider, or providers, will best meet their
generally helped with making a change. While always        needs in the future. JFR will continue to monitor de-
claiming they will bid for business in line with airline   velopments in the future. JFR
customer requests, in practice they have often been
                                                                                                    (Continued on page 3)
reluctant to move away from their long-standing ar-
rangements with Platt’s. But things are changing!

                                                                                                    (Continued on page 3)

                                                                                                                Page 2
                                 Part One: Pricing Benchmarks…
                                 OPIS Expands to Gain International Jet Fuel
Airlines turned to OPIS
                                 AAG asked companies that provide the aviation fuel industry with jet fuel pricing
because of its long reputation   benchmarks to comment on their reporting methods.
covering U.S. jet markets as
the benchmark of choice on
the U.S. West Coast and              OPIS has expanded its staff,                Airlines turned to OPIS because
other regions.                   opened new offices, and added              of its long reputation covering U.S. jet
                                 several publications devoted               markets as the benchmark of choice on
                                 exclusively to jet fuel as it competes     the U.S. West Coast and other regions.
                                 to gain the international pricing               OPIS has been covering refined
                                 benchmark that is up for grabs.            product prices for more than thirty
                                     It was in the wings of a fuel          years, specializing in U.S. markets. The
                                 forum in 2007 that OPIS was asked          privately-held, financially sound compa-
                                 about bringing its approach to jet fuel    ny	has	made	a	full-fledged	commitment	
                                 pricing to Europe and Asia. The            to the European and Asian jet fuel mar-
                                 request came when a rival pricing          kets, opening offices on two continents.
                                 publication dramatically shifted its            The resulting staff expansion
                                 methodology and approach to price          means the company can now boast the
                                 assessment.                                                         (Continued on page 4)

                                                                                                     (Continued on page 4)

                                                                                                                Page 3
largest and most experienced jet fuel staff of any of the   outs in Europe and then the US. Chung has expanded
major oil pricing publications.                             his staff and the scope of coverage over the last three
     Additionally, OPIS has created stand-alone publi-      years.
cations for Europe and Asia specifically targeted on jet         “What I tell people is the time to act is now,” says
fuel, with a focus on pricing, supply, and downstream       Chung. “The whole fuel market is being moved in
refining, marketing, and distribution issues. OPIS’s        the Asian direction. Fuel costs represent 50% of run-
award-winning journalists cover a wide array                ning costs, and yet airlines are letting other people
of topics including alternative fuels, consumption          control their destiny.”
trends, refinery consolidation, pricing outlooks, plus           Chung says that airlines should take lessons from
jet fuel’s relationship to other products in the supply     how the oil industry defends its interests when it is a
chain mix.                                                  user, not a seller, of oil.
     Here’s how Air France-KLM summarized OPIS’s                 “Refiners are end-users of crude oil and we see
coverage when the airline carried out an evaluation of      them selling crude to defend the prices they need. I
the company’s pricing prior to subscribing to OPIS’s        think some of the large European airlines are
full international service at the end of 2009. “We          a good example of how one can be involved in the
reviewed it before Christmas,” said KLM’s Manager           market,” he said.
Trading and Logistics, Wouter Koomen. “I read it ev-             In Europe, OPIS tabbed Tim Lloyd Wright, a vet-
ery day and we’re pleased with it. It has everything we     eran fuels market reporter to lead its coverage. Tim has
need.”                                                      since expanded his team to include Cara Offterdinger,
     Today OPIS can count major airlines like Luf-          Joey Oakley, and Megan Kuhn – all familiar faces in
thansa and KLM-Air France, and most recently Eu-            airline and industry circles.
rope’s largest refiner, among customers now trusting             The team began a two-year consultation with the
its international pricing service.                          industry on its information needs and the result is a
     Back in 2007, faced with changes from the then         regionally specific product with a two-quote pricing
market leader that would assess the day’s price from        report, as Wright explains.
a 45-minute online auction, airlines and suppliers were          “In our European pricing, we give priority to the
looking for alternatives.                                   physical spot market, and we follow the market all
     OPIS stepped into the breech, fully committed to       day and then publish a price before the electronic win-
giving the international market the same kind of            dow opens, and one afterwards. Sometimes there’s
honest, independent coverage it provided in the U.S. –      trade in both slots, sometimes not, but it gives
full-day price discovery, complete with a well-defined      people a chance to see what kind of trading or mar-
methodology, combined with key pricing data points          ket direction transpires during the day when people
that provide a solid, reliable option to other services.    are simply managing their physical trading
     OPIS President Brian Crotty followed through on        needs.”
the commitment he made in 2007 to fuel forum                     Like OPIS in Asia, Wright says, there’s an em-
attendees. He had promised to move swiftly to fill the      phasis on reducing unnecessary volatility: “We can’t
pricing void.                                               and won’t set out to publish prices that might unduly
     “The strategy was to work with airlines and suppli-    benefit one side or another side of a market – but we
ers to focus on jet fuel – a product other services hid     do take a stand about anything that we
in their daily market commentary.” The strategy proved      think introduces hard-to-hedge volatility.”
successful in the U.S. and Crotty believed it could              An example is the move by the market-leading
work overseas.                                              agency to move towards making its own proprietary
     In Asia, Crotty hired Jiwon Chung, a veteran of        assessment of underlying futures market settlement
Platts since 1998, who had moved to work with pric-         prices.
ing at Reuters as the early ‘window’ system was being            “Heating oil futures are the major component of
rolled out, several years ahead of the successive roll-
                                                                                                    (Continued on page 5)

                                                                                                                Page 4
the jet fuel benchmark, and the exchanges conduct a           thirty years ago. Brockwell is frequently called upon to
settlement to average and smooth prices during the last       address industry and aviation conferences. He has been
few minutes towards the close,” says Wright. He says          a speaker at the well-known Boyd Aviation Summit,
this creates a fairer picture of the                          the Armbrust Aviation Group Conferences, the annual
market value, free of last-minute spikes.                     CAAFI Summit and has keynoted at a number of other
                         	 “Now	the	market	leader	has	        aviation and oil company events over the years.
                         dropped the exchange’s official           “I am proud of the scope of our jet fuel market
                         settlement to make its own as-       coverage,” Brockwell said. “Our goal is to cover
                         sessment as the basis for its jet    jet fuel as a ‘highlight’ product, to give it front-and-
                         fuel price,” says                    center significance. I am also proud of our customer
                         Wright, “but the problem is that     service group that supports our aviation products. They
                         people still use the                 are second to none.”
                         official settlement in their hedg-        Brockwell also stressed the importance of being
                         ing and invoicing. It can mean       “fully accountable to the market” in OPIS daily market
                         up to $3/mt of unmanageable          assessments. “We focus on doing our job and don’t
                         price risk on                        spend much time comparing our prices to the
a given day.”                                                 competition. Our customers make those comparisons
     Overseeing OPIS global jet fuel coverage is Ben          and that’s a primary reason they are feeling comfort-
Brockwell, who played a key role in starting OPIS             able with OPIS as a jet fuel pricing benchmark.” JFR

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