Fuel Savings?

Much has been written about the impact of rising fuel prices on the airline industry. According to the Air Transport Association, a one cent increase in the the price of a gallon of jet fuel drives an additional $190-200 million in fuel costs for U.S. carriers.

It's one reason that the airlines have, in recent years, waged a (somewhat) successful war on aircraft weight and other factors that result in greater fuel savings. For example, removing magazines from jetliners (other than the airline's own, in-house publication) produces a measurable savings in fuel. So does carrying less ice on the service carts.

As you might expect, the U.S. Air Force is facing a similar fuel dilemma. The service burns approximately half of the fuel consumed by DoD each year; its annual budget for jet fuel and aviation gas more than doubled in three years, climbing from $2.6 billion in 2003, to $5.8 billion last year.

And, unlike the airlines, the Air Force has less control over such factors as aircraft weight and fuel efficiency. Many of its largest aircraft--including older C-5 and KC-135 airframes assigned to Air Force Reserve and Air National Guard units--are among its least efficient. Yet, Congress has blocked efforts to retire some of these airframes, and a modernization effort for C-5A models faces an uncertain future, at best.

Additionally, there's not much the service can do about its high operations tempo, or the size of certain, out sized cargoes that move on Air Force transports. Senior leaders frequently observe that the Air Force has been at war for 17 years, meaning more sorties and more fuel burned. Reducing consumption in the USAF involves more than removing magazines, or carrying less ice.

That's one reason the service is experimenting with synthetic fuel, as a hedge against spiraling jet fuel prices. As the Tacoma (Washington) News-Tribune reported over the weekend, that experiment was expected to pass a major milestone today, with the scheduled cross-country flight of a C-17 transport, burning a 50/50 mixture of synthetic and traditional jet fuel.

According to Paul Bollinger, Jr., a special assistant to the Assistant Secretary of the Air Force for installations, logistics and the environment, the service has purchased a total of 290,000 of synthetic fuel so far. It hopes to certify its entire fleet--transport, bomber, fighter and support aircraft--to fly with the new mixture by 2011.

Currently, the Air Force is paying $3.41 a gallon for the synthetic fuel, versus $2.31 for the same amount of JP-8 now used by the military. The service believes that the price will come down as its annual "buy" increases, and more producers come on line. By 2011, Mr. Bollinger says, the Air Force hopes to buy 400 million gallons of synthetic fuel a year, at prices below the current average.

While the service should be commended for its experiment, it does beg a couple of questions. First, what guarantees--if any--does it have that domestic producers can meet that demand? The synthetic fuel used in today's C-17 flight came from a Shell plant in Malaysia. Relying on overseas production facilities, even for the near term, is hardly reassuring.

Secondly, we wonder what efficiencies (if any) the Air Force can gain in a market that will be limited at the onset, particularly in terms of supply and demand. While commercial carriers are monitoring the USAF experiment, there are major certification hurdles in using synthetic fuels in airliners and freighters. In other words, the airlines and FedEx won't be using synthetic fuels for at least another decade, limiting demand--and the incentive for other producers to enter the market. Against those realities, the Air Force may not realize the savings it hopes to achieve with synthetic fuels.

Finally, there's the thorny issue of what the service can (and cannot) do to encourage lower prices from fuel producers. One of the Air Force's great contracting success stories over the past 30 years can be found in ammunition for its A-10 attack aircraft. Originally, the service was prepared to pay more than $80 for each round of depleted uranium ammunition fired by the A-10's GAU-8 cannon (full load for a single jet = 1,174 rounds).

An Air Force Colonel named Bob Dilger thought $80 a round was excessive, to say the least. Breaking most of the service's contracting rules, he promised the lion's share of the annual A-10 ammunition contract to the firm which could deliver the most reliable rounds at the lowest price. With that incentive, the two primary ammunition suppliers (Aerojet and Honeywell) pushed each other hard, cutting prices and improving efficiency.

The result? The Air Force wound up paying about $15 a round for A-10 ammo, versus the $80 originally proposed. And, despite producing a surplus of $124 million on the GAU-8 ammo program, Dilger was passed over for promotion and retired from the Air Force in 1980.

Given the military's long record of over-paying for commodities and systems, taxpayers can only hope that there's a Bob Dilger somewhere in that synthetic fuel program. We're not optimistic.