Fundamental Considerations for Managing Inventory Adjustments at Airport
October 9, 2015
The Airline industry focuses on fuel from a standpoint of lowering their price per gallon through purchasing mechanisms and transportation tariffs. However, there is less focus at the airport level through operational excellence. Airlines are prone to jet fuel losses due to inaccurate measurement and inaccurate billing at airport locations. These are driven by deficiencies in process and behavioral considerations rather than structural and equipment considerations. As per the Airlines for America 123, any gain or loss that is in excess of 0.10% is out-of-tolerance and should be investigated.
Fundamentals of Physical Loss
Most loss control experts typically focus on the concept of a physical “envelope” balance prior to investigating the accounting practices of into-plane Fuelers. Physical loss can be defined as loss due to measurement inaccuracy resulting in the loss of fuel at the molecular level. At an airport, physical loss can occur from receipts, tank gauging (when used for custody transfers), and fuel disbursement.
Receipts: Measurement accuracy of receipts is dependent on the delivery measurement method of the hydrocarbon. Each delivery measurement method will have a different threshold for uncertainty due to the equipment itself, its installation, how that equipment is operated, and processes supporting the calculation and documentation transfer of ownership. See below for best-in-class inaccuracy thresholds:
- Meters: 0.0025 from the previous meter factor (Reproducibility)
- 0.0075 from the initial meter factor, after the last maintenance (Meter Performance Control Limits – Warning)
- +/- 2 standard deviations – action level (see if next meter factor will also exceed this control, if so then meter check is needed) (Meter Performance Control Limits – Action)
- +/- 3 standard deviations – tolerance level (check the meter after a single instance of reaching this level) (Meter Performance Control Limits – tolerance)
- WaterborneMovements: 0.50% (if not using a shore tank)
- Tank Gauging: 0.25%
- Tanker Truck Scaled: 0.0.50%
- Tanker Truck Metered: 0.05%
Since the most common fuel delivery method for airports is through pipeline, we will focus on meter accuracy. Typically, there are 4 considerations for meter measurement accuracy:
1) Type of meter being used: is the meter capable of API custody transfer accuracy?
2) Meter operation: is the meter installed and operated compliant to API minimum standards?
3) Proper volume calculations: are the volumes calculated correctly, correcting and compensating all conditions as provided by API standards?
4) Sample, Temperature, Pressure and Density data: are all data collected being done by NIST calibrated instrumentation, and are those instruments installed and operated correctly?
5) Proving frequency: is the proving frequency compliant with the American Petroleum Institute (API) guidelines regarding flow rates?
6) Water draw calibration: are water draws completed every 5 years (3 years for portable provers) as per API guidelines?
7) Process considerations: does the proving and water draw follow API guidelines for measurement and are the pipeline receipts entered correctly for temperature, pressure, and gravity?
8) Receipt accuracy monitoring: do the airport tank farms monitor receipts for inaccuracy through tank gauging and proving/water draw compliance? Are claims created when receipt variances occur between metered and tank gauged volumes?
Airport Fuel Farms need to be vigilant in their monitoring of receipt inaccuracies: since pipelines emphasize loss control, they may operate at a small gain which in turn results in losses for the tank farms. The best protection against receipt inaccuracy is a set of system tools that monitor proving compliance and track meter factor changes as well as repeatability per prove, which both indicate proving accuracy. Also, regular checks for measurement accuracy can be made by redundant measurement (tank gauging beginning and ending of receipt batches). Although the uncertainty is higher, the reduction of risk still adds value to reducing risk associated with measurement errors on the pipeline side.
In addition to system tools, it is imperative that Fuel Farms maintain the highest level of rigour in their tank gauging practices as it allows tank farms to recover measurement inaccuracy in the form of a claim.
Tank Gauging: Daily inventory fluctuations due to a Fuel Farm’s tank gauging procedures can mask losses and hinder the farm’s ability to isolate the sources of losses. Tank gauging accuracy is paramount to the ability to issue claims against third party Jet providers in a timely manner.
The inaccuracies associated with tank gauging variances are governed by the intent of the tank. If a tank is being used for custody transfer, API recommends that the calibration threshold be set at 3/16 of an inch; if it is being used for inventory, API recommends that the inaccuracy threshold be set at 1 inch. This can be found in API Chapter 3.1B.9.2.1, 3.1B.9.2.2, and 3.1B.9.2.4.
At airport locations, we recommend setting the threshold for inaccuracy to 1/16 of an inch. This can be reported during the issuance of a claim and increases the likelihood of success.
Disbursements: Losses can occur due to inaccuracies associated with Refuelers (Tanker Trucks) or Hydrant Carts procedures. It is not uncommon to prove hydrant carts less frequently than 2 times a year as recommended by API. Additionally, losses can occur due to leaks which should not be ignored: most airports do daily checks of hydrant pits/valves but overlook seal-related leaks. Despite being small losses, these can add up to up to $30-$70K per year depending on the sophistication of the airport operations.
Accuracy with tank gauging procedures combined with selective segmented operating conditions supports identifying the sources of loss: disbursement or receipts. The ability to identify the source of loss, and track it on a daily basis, supports continuous improvement. Once the facility is able to identify and track loss to the source, small changes in the process can be evaluated. The determination can then be made if the process changes are supporting an improvement on the overall loss profile.
Fundamentals of Accounting Loss
The main premise of accounting loss is that deficiencies within the accounting process misallocate fueled amounts, resulting in an airline paying for a competitor’s fuel. There are three considerations for inaccuracy: 1) are all tickets being submitted to accounting; 2) are the tickets accurate; and 3) is accounting reconciling these tickets accurately. For the purpose of this paper, the commentary will be focused on accounting considerations for into-plane Fuelers.
Missing Tickets: The first question that needs to be asked when evaluating accounting loss is:
“Do all my flights have corresponding tickets?” The answer may be surprising: Trindent has worked with airports that have had up to 4% of their tickets missing, which generates significant loss for the tank farms.
The next question that needs to be asked is: “Does my missing ticket percentage or volume differ from that of the other airlines?” Airlines have an incentive to put processes in place to lose more tickets than their competitors. This creates an overall loss pool, where the subject airline contributes a lion’s share to the write-offs, but only pays a small portion. Let’s look at an example.
Airline A Missing Ticket Loss = 100,000 gallons
Airline A Receipt Volume = 50%
Airline B Missing Ticket Loss = 50,000 gallons
Airline B Receipt Volume = 50%
Total Tank Farm Loss = 150,000 gallons
Airline A Tank Farm Write-Off = 50% x 150,000 = 75,000 gallons
Airline A True Write-Off = 100,000 gallons
Airline A Fuel Gain = 25,000 gallons
Airline B Tank Farm Write-Off = 50% x 150,000 = 75,000 gallons
Airline B True Write-Off = 50,000 gallons
Airline B Fuel Loss = 25,000 gallons
As you can see in the above scenario, since Airline A loses more tickets and has an equal share of tank farm receipts, it benefits from losing more tickets. In this scenario, Airline A passed on excess fuel expense to Airline B in the form of a write-off. This illustrates how airlines have an incentive to lose more tickets than their competitors in order to reduce their fuel expense. Let’s take a look at a second example.
Airline C Missing Ticket Loss = 100,000 gallons
Airline C Receipt Volume = 70%
Airline D Missing Ticket Loss = 50,000 gallons
Airline D Receipt Volume = 30%
Total Tank Farm Loss = 150,000 gallons
Airline C Tank Farm Write-Off = 70% x 150,000 = 105,000 gallons
Airline C True Write-Off = 100,000 gallons
Airline C Fuel Loss = 5,000 gallon
Airline D Tank Farm Write-Off = 30% x 150,000 = 45,000 gallons
Airline D True Write-Off = 50,000 gallons
Airline D Fuel Gain = 5,000 gallons
In Example 2, even though Airline C has lost more fuel, their total receipt volume is higher. Therefore, they pay for 5,000 gallons of Airline D’s fuel. If Airline C had lost 20,000 gallons more fuel, they would actually gain 1,000 gallons of fuel; this would result in a 1,000 gallon loss for Airline D. Even when you are the largest player in the Consortium, there is an incentive to lose more fuel than your competitors.
Although missing tickets may sound trivial, it may reduce or eliminate competitive advantages for airlines even in the smallest consortium and increase the fuel price per gallon.
Ticket Accuracy: The accuracy of the tickets themselves depends on the medium through which tickets are created. If a ticket is created through a mechanical register – we will call this a ‘physical ticket’ – there is a reduced risk for operator error. Since it is impossible to reset the totalizer volumes, there is no generation of an inaccurate ticket. On the other hand, if the ticket is input into an electronic handheld manually, the risk of operator error is increased. Some operators may have a sticky finger when entering figures (beginning totalizer, ending totalizer, fueled amount, etc). These errors generate inaccuracies in the accounting process and creates skips during the reconciliation process.
Reconciliation Accuracy: Perhaps one of the most direct methods to isolate and identify loss locations is the detailed accounting of the individual fuel carts. The reconciliation of each cart/truck that is used in a fueling operation is a critical success factor in eliminating gain/loss. The ability to determine a fuel amount using a mechanical totalizer provides the ability to troubleshoot missing tickets. It is important to examine the reconciliation process in order to ensure that totalizer volumes are input correctly.
Overall, there are many factors that contribute to the gain/loss at an Airport Fueling operation. Any losses that are in excess of the 0.10% AFA guidance should be investigated and examined to determine the extent of the fuel exposure. Some guidelines and standards are provided, but conflicting minimums can be found between API Chapter 6.4 and ATA Spec 123. The value of dollar losses are the same given any environment.
If your airport operation does not report a gain/loss, look closer: your airline could be carrying an off-balance-sheet liability. When those losses are being calculated as off-set imbalances and written off as balancing adjustments, this loss is virtually invisible to management.
By: Peter Hryniak & Gil Moore