May 1st, 2012
04:20 PM GMT
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Delta Airlines' decision to buy an oil refinery has caught the imagination. It seems to make a lot of sense and if the numbers actually come true it will look like a stroke of genius.

Delta says that it could get savings of $300 million a year by cutting out the middle man and refining its own jet fuel, all for the cost of one medium-size new airliner. It sounds like a no-brainer so I put the question to a CEO of an Asia airline: did he think that individually or as a group that Asian airlines would get together to look at a similar arrangement.

It does make some sense. According to Cathay Pacific Airways, fuel costs accounted for 41.5% of total operating costs last year. That's a lot higher than the 30% average for global airlines. The reason why Cathay and other Asian arilines have proportionally higher fuel bills is that they are mainly long-haul operators, and the fuel component of a long-haul flight can be twice as high as a short-haul flight - 60% fuel cost on long-haul versus 30% on short haul.

Fuel costs were the main reason by long-haul budget airline AirAsia X to cut back its services. Its short-haul flights are still performing strongly.

But buying a refinery is not on anyone's agenda among Asian airlines. Not yet at least. But what is on the radar relating to fuel costs is fracking - the process of extracting gas and oil through hydraulic pressure fracturing of rocks. It has revolutionized the gas industry in the U.S. Gas prices are at a 10-year low, prompting oil-energy users such as power companies to look at switching to gas-fired plants, a relatively easy transtition.

As oil users switch to gas, airlines are hoping there could be a knock-on effect to the price of oil as demand starts to fall. It may be a long shot at this stage, but in the airline industry it's one of the very few bright spots on an otherwise bleak outlook for controlling one of the biggest costs in the business.



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    In the US oil is not used to generate electricity (except for a tiny percentage, mostly "peaking" facilities used to generate power when demand is highest).

    Natural gas from "fracking" is a short term boom, unlikely to last long as fracked wells deplete much faster than conventional wells.

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