Obstacles to entry in aviation fuel supply have not deterred energy trading firm Vitol from founding a new division dedicated to serving airlines directly - and cutting out the middlemen.

Vitol Aviation is a new element of a 44-year-old business that spans a storage and terminal company and some exploration and production activity, in addition to energy trading operations.

While other traders and the oil majors have traditionally served as Vitol's customers, a move toward "shaking the hands of the airlines" represents a "logical step" for a company that has not traditionally had a marketing face, says Vitol Aviation's general manager Toby Davies. "It's a business of a size that it now needs to become fully vertically integrated."

The Vitol initiative is rendered timely by a tendency among oil majors to strip assets and exit markets to focus on upstream businesses with higher margin potential. "It helps us, but we would have done this anyway," Davies adds.

Yet the European market remains highly problematic for any fuel supplier seeking to build its airline customer base. Davies draws a contrast with the US market, asserting that VTTI - in which Vitol holds a 50% share - achieved "significant on-air volumes" at a new terminal in Cape Canaveral in Florida, within a couple of months of it opening earlier this year. AirTran Airways is a customer of this facility.

"The US market is very open," says Davies. "You almost gain the airline contract and then backfill your logistics. Europe's the other way round."


While physical supply is the core of its business (Davies: "We're a supply and logistics firm... not a hedge fund"), Vitol Aviation can provide airlines with derivative products and also trades in the carbon credits issued under the European Union's emissions trading scheme. "To parts of the airline community that are concentrating on their core business, that one-stop-shop concept will be very interesting," predicts Davies.

Even if the price of oil has been relatively stable across the year, daily volatility therein still creates opportunity for airlines to gain advantage through careful risk management, he argues. With fuel expenses exceeding $6 billion for United and Continental last year and typically accounting for 25-30% of an airline's costs, their effective management can mean the difference between red and black.

Vitol gained a foothold in direct supply when, in early 2008, it acquired Pacific Fuels Trading Corporation from Japan Airlines. PFTC serves airlines on the USA's west coast, with annual volume running to roughly a million tonnes.

In August, Vitol Aviation conducted its first refuelling in Europe, with Frankfurt as entry airport. It has since entered the airport markets of Stansted, Brussels, Luxembourg, Liege and Manchester.

"The airline community's done a very good job, for many years now, of buying very professionally," says Davies. "They typically buy in bulk at single locations. It's real scale-economy type purchasing and, in turn, that's why we don't think this is a massive-margin market. It's a classic 'pile it high, sell it cheap' - without wanting to diminish the difficulty of getting to airport."


The root of that difficulty lies in ownership of infrastructure. "The ownership is your competitors," says Davies. "The ownership is the oil majors." And these companies will have different motivation from a typical US infrastructure owner, which will be an airport that wants its facility to be "cheaper than wherever the next scheduled or charter airline outlet is". By contrast, accessing Heathrow is "not very easy at all". Capacity is constrained, and incumbents lack incentive to invest in expansion.

The option of simply purchasing the infrastructure is ruled out by Davies. "Vitol will definitely invest in value. We can't actually invest in infrastructure which is anticompetitive because the value is zero."

Despite the hurdles to be vaulted, Vitol Aviation is hopeful of launching at Heathrow in April - and of persuading potential customers not to lock into long-term deals in the meantime.

Source: Flight International