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Jet Fuel Markets in Asia Take Tsunami Effect in Stride

by Kumar Amitav Chaliha

NEW DELHI (KWR) Relief efforts in the wake of the Asian tsunami are prompting a temporary upsurge in US military needs in the Indian Ocean and parts of the Pacific. The fact that commercial airlines are also involved in relief missions is offsetting any decline from cancelled flights to the afflicted areas. Logistical constraints pose the biggest hurdle to supply lines, as countries redouble their financial commitment to the world's largest-ever humanitarian mission.

The Defense Energy Support Center (DESC), the Pentagon's fuel purchasing arm, is relying on the flexibility of its fuel purchasing system to see it through a temporary upsurge in demand in the Indian Ocean and Pacific theaters. To support an increase in Department of Defense jet fuel usage, the DESC has engaged in two to three supplemental into-plane contracts at airports in the affected regions. In areas where the DESC has no current into-plane contracts, military pilots have been purchasing fuel with the Department of Defense's aviation fuel card. Known as the Aviation Into-Plane Reimbursement (AIR) Card, this system of military credit card payment provides refueling flexibility and is heavily relied upon in times of crisis.

Into-plane contracts at commercial airfields account for a relatively small 6% of the Pentagon's annual jet fuel purchases of 98 million barrels, most of which are procured through an extensive network of bulk jet fuel contracts with suppliers around the world. Airport facilities in parts of Indonesia and other regions affected by the tsunami are not equipped to support such a massive airlift, in terms of the size and scope of their fuel facilities. The US military has been concentrating its efforts in the hardest-hit parts of Indonesia, where C-40 cargo planes have been landing in Banda Aceh to distribute food, water and medical supplies.

Commercial carriers demonstrated remarkable agility in dealing with the SARS crisis in 2003, and that experience will serve them well in coping with this latest challenge. Airlines operated additional services to bring travelers home after the disaster struck. They are now working to overcome the tsunami's impact with competitively-priced fares and efforts to divert travelers to alternative destinations, according to the Sydney-based Centre for Asia Pacific Aviation. It said that airlines and tourism associations were reporting little or no operational impact from the disaster. Moreover, the growing role of low-cost airlines serving destinations in southern Thailand should lure travelers back to resorts such as Phuket following a temporary hiatus.

Commercial carriers were also using their aircraft for relief missions. Among others, AirAsia offered seats for relief and rescue workers, Austrian Airlines operated nine relief services to the area, while Indian Airlines has been providing relief services from Chennai to the Andaman islands. Qantas operated humanitarian flights to Thailand and Sri Lanka, carrying medical teams and equipment and bringing passengers back to Australia. Many carriers have waived cancellations fees through end January on flights booked to the affected areas. Lufthansa said the tsunami had no impact on forward bookings and its schedules remain unchanged.

India’s state-owned Indian Oil Corporation (IOC), which accounts for the largest share of refueling services at airports across India, said that its personnel have been working around the clock at southern locations since December 26 to refuel aircraft involved in relief efforts. IOC has re-deployed staff from other departments to assist in aircraft and helicopter refueling for government officials and the Navy, Air Force and Coast Guard. IOC is the only company that sells jet fuel and other products in the southern Andaman and Nicobar Islands, which were hard-hit by the tsunami. It operates a refueling station at Car Nicobar for the Indian Army and Navy, which was badly damaged and forced military planes to divert to nearby Port Blair for refueling. In the southern part of the country, IOC said that it had moved aviation fuel facilities to parts of Tamil Nadu and Andhra Pradesh.

"We have already positioned backup manpower and fuel storage at these places to help fuel the aircraft involved in search and rescue as well as relief measures. Until the situation is normal, Indian Oil will continue to enforce a "non-stop" refueling system with adequate manpower and material support," said N.G. Kannan, director of marketing for IOC. The Indian Ministry of Tourism pointed out that rather than spurring a drop-off in tourism, the tsunami had prompted an upsurge in interest in travel to India, with the Home Ministry approving visas on arrival for foreigners during this period.

With Asian cargo markets currently awash in jet fuel, the region should be able to handle the rise in offtake from the relief efforts without an upward price correction, market sources say. Traders expect that the "tsunami effect" of displaced jet fuel usage will be taken in stride given the currently weak outlook for jet fuel across Asia.

High refinery margins in Japan and South Korea have prompted refiners in those countries to produce flat out, helping to replenish stock levels. Mild winter weather so far has kept inventories ample and put a lid on regional demand. "We should see some shifting of demand patterns around the region from the tsunami, with military planes refueling in places that don't normally see a lot of commercial activity. This displacement effect should be easily absorbed by the market," said one trader.