News from Patrick Flynn

Growth in the Anchorage’s air cargo industry has been a tremendous boon to our local economy so it was bad news earlier this week when UPS announced it would begin furloughing pilots.  There are quite a few pilots for UPS and FedEx “domiciled” in Anchorage and, while not every one of those pilots actually make their homes here, quite a few do.  But while it’s reasonable to shake our heads in frustration at effects of the global economic downturn on our local economy, it’s better to focus on factors closer to home that negatively affect us.

Regular readers may recall my post from October, 2008, where I discussed plans in northern British Columbia aimed at capturing part of Anchorage’s air cargo traffic.  I haven’t seen any updates on that effort, but I did recently learn that air cargo carriers are diverting flights away from Anchorage due to insufficient jet fuel supplies.  Those diversions not only cost the airport landing and fuel-flow fees, but can also impact a variety of jobs associated with ground support for those aircraft.  So how do we address the problem?

First off, we need to understand where ANC gets its fuel.  There are three primary sources:

1. Tesoro’s refinery in Nikiski, which ships jet fuel to the airport via a Cook Inlet pipeline.
2. Flint Hill’s North Pole refinery, which ships jet fuel by rail from the Interior to the Port of Anchorage, then to the airport via another Cook Inlet pipeline.
3. Spot market purchases – tanker loads of jet fuel traveling the “Great Circle Route” between Asia and North America that divert to the Port of Anchorage.  While this source is generally lower in volume than the two above, airlines’ access to this market forces Alaska’s in-state refiners to price more competitively.

There are other sources – Petro Star’s Valdez refinery, for example – but the three above provide the majority of the jet fuel that powers a significant portion of our community’s economic engine.  So when there are hiccups in that supply chain, and there are two big ones right now, the engine sputters.  Here’s what’s going wrong:

• You’ve likely heard about Flint Hills’ conflict with the State of Alaska regarding the price they pay for royalty oil (the share of North Slope oil the state receives from producers).  Because the state declined to offer price relief to FHR the refinery changed its operation and now only runs two of three units.  At that level of production FHR has shed the significant costs associated with operating the third unit and feels they can earn a sufficient profit but doing so deprives the market of the capacity offered by that unit.  (Editor’s note: this reduced volume is also a major contributing factor in revenue declines at the Alaska Railroad, which I know a little about.)
• The natural reaction to a drop in supply from FHR would be to boost volumes from other sources, but it’s not that easy.  Tesoro is at or near capacity, so they can’t make enough jet fuel to fill FHR’s gap.  And fuel tankers sailing in Alaska waters are required to have an oil spill contingency plan (known as C-plans in industry vernacular), which take at least six months to obtain.  This severely limits the spot market and means most available tankers can’t get their product to Alaska.

Someone who knows the fuel business far better than I offering the following observation about those working in that trade: if you pay too much for fuel, you get yelled at; if an airplane lands and there isn’t enough fuel re-fill it, you get fired.  Net effect?  Because there isn’t enough fuel at ANC to meet demands some cargo flights simply go elsewhere, much as they did during last spring’s eruption by Mt. Redoubt, only this time we can’t blame mother nature.

The airlines aren’t sitting on their hands, of course.  They’ve informed airport officials about the problem, presumably hoping the state will recognize the need to loosen one of the bottlenecks (no sign of that yet), and Flint Hills reportedly sent a letter to the airlines stating that if they gain commitments for 50% of unit three’s capacity they’ll restart it (no word on the airlines’ reactions).  In other words, there are solutions but first we have to recognize and then work to address the issue.

Regards,

Patrick