Avgas to the Fore ... Again
Itís possible to simultaneously make much of and nothing of last weekís announcement from the FAA that five entities have submitted nine proposals for an unleaded replacement for leaded avgas. Iíve spoken to several sources in the industry about this and no one seems to have much detail on the proposals. But one thing seems likely, at AirVenture, the bolt heads will be torqued off their stems putting a positive spin on this.
As we reported last week,†the candidate fuels come from five entities: Afton Chemical Co., Avgas LLC, Shell, Swift Fuels and a consortium of BP, the French refiner Total and Hjelmco, which is based in Sweden and has market distribution in Europe. Not on the list is General Aviation Modifications, Inc. Thatís not because theyíve given up on their G100 product, but because theyíre pursuing approval through an STC process.
Shell and Swift weíve heard about and we have an inkling of what fuels theyíll submit. The BP/Total/Hjelmco consortium, while a surprise, is composed of three known avgas producers so we can sort of imagine what they might come up with. Unknown is whether the play is aimed at a European strategy or something else. Joint ventures are big in the energy industry and this is one way of staying in the game, perhaps, without much investment.
Avgas LLC is a company no one seems to have heard of and my attempts to find out who and what they are came up dry. Afton is a maker of chemical petroleum additives whose corporate DNA extends back to the Ethyl Corporation, the original maker of tetraethyl lead created by General Motors and Standard Oil in 1923. It requires no great leap to imagine theyíre proposing some kind of additive to boost aviation alkylate to 100 octane. We may or may not find out. Ever.
The larger story is whoís missing from the list: ConocoPhillips, Exxon and Chevron. Between the three of them, theyíre responsible for a significant volume of avgas refining in the U.S., if not the majority of it. So what does it mean that theyíve decided not to submit a candidate fuel? In an era of eroding volume, are one or all three about to exit the business, ceding it to Shell? Or are they simply standing on the sidelines while someone else does the heavy lifting of getting a new avgas spec approval and waiting to cut a licensing or production deal? How will this impact distribution, competition and price? If you have the answer to this, favor us all with your wisdom in the comment section. Iím sure I donít know. But Iím highly skeptical of the argument that itís not significant that these three companies donít seem to have skin in the game.
Whatís next? The FAAís Piston Aircraft Fuels Initiative will now winnow this gang of nine down to a smaller gang, probably three at first, then just two. Those two will then go through a detailed fuels evaluation and testing process and, presumably, emerge at the other end as approved, marketable fuels. As I explained before, I think the entire PAFI concept and procedure is profoundly flawed and almost designed to subvert how free markets bring the best products to the fore. That doesnít mean I think it will run off the rails and fail to disgorge a workable fuel or two, maybe even within the proposed 2018 timeline. Anyone operating an aircraft requiring 100-octane fuel or thinking about buying one isnít at much risk for having no fuel to buy, in my view. Iíve always felt that something will come along.
But price, thatís another matter. No one Iíve spoken to thinks the unleaded replacement will be the same price or cheaper than 100LL. So if itís likely to be more expensive, how much more expensive? My wild-ass, blue-sky hope is that it will be within 50 cents of current avgas, but $1 more wonít surprise me. If itís more than that, that downward trend line describing avgas production might spiral further lower and those arenít the market conditions that give producers incentive to lower prices to increase volume. In other words, as this perverse industry has done in general, the less it sells, the more it charges.
At last Decemberís ASTM meeting in Tampa, the FAA revealed that it will consider the business prospects of companies submitting fuel as one of its evaluation points. Not surprisingly, this struck a sour note and appears to mean if the mysterious Avgas LLC has the best product imaginable, the FAA could still dump it because it doesnít like the companyís P&L. This is the antithesis of free market economics and but one flaw in the PAFI process. Another is that the FAA has funds sufficient to test only two fuels, possibly precluding the upstart thatís willing to invest its own capital in testing to prove that itís got the better mousetrap. Various interests in GA, by the way, signed on to this process. It wasnít solely an FAA decision but was ground out over months during the UAT-ARC group tasked with getting the fuels approval process off dead stop.
Hereís another unknown: what impact will the FAAís two-fuels strategy have on price and competition? In other words, are two fuel choices enough? My guess here is that yes, two probably are enough and more might not be a good thing. On the other hand, isn't that a question that the free market should answer, unfettered by FAA judgement of what's good for the market? In that sense, this is a shining example of how regulation the industry said it wants stifles innovation because the government doesn't have the money to do the oversight. Like I said, perverse.
The larger price/competition issue is how many refiners decide to produce the new avgas. One theory holds that since it wonít have lead, more refiners can and will make it, increasing choices and reducing transportation costs. But I donít buy this. To get to 100-octane, I think itís going to take a pretty good aviation alkylate base and not many refiners have that capability or interest. If fewer refiners are involved, there will be a predictable effect on price and distribution.
Last, the PAFI process itself now enters the opaque phase. Itís quite secretive because the FAA is following federal contract rules. Even industry people involved in it donít have a complete picture of whatís going on; it appears quite compartmentalized. And thereís no public advocate. Oil companies, airframers and engine companies can look after their own interests, at least somewhat, but those interests donít always align with those of the customers.
Six months ago, the buzz was that the FAA was worried that not enough companies would show interest in unleaded avgas. Now that five have, I suppose we can put that to rest. Personally, my disappointment is in not seeing ConocoPhillips take an interest. Phillips has had a long and glorious history in general aviation. Seeing them sit out the avgas competition could be interpreted as a Ö lack of confidence. Not that I can exactly blame them.