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Air North, Yukon's Airline Fuel Surcharge Web Message

February 02, 2009

During recent months we have seen fuel prices decline dramatically. More recently we have seen one of the major carriers eliminate their fuel surcharge and "adjust base fares to cover the total cost of fuel", while another states that they "will no longer collect one way fuel surcharges". I have been asked if we intend to discontinue our fuel surcharge as well and while the initial temptation was to follow the competition, we have, for several reasons, chosen to continue using our fuel surcharge formula to adjust our pricing to reflect changes in fuel costs.

The primary reason for sticking with the formula is because we used it to adjust pricing as fuel costs were rising in order to ensure that the impact of rising fuel prices was passed on exactly to our customers. Now that prices are falling, it only seems fair to continue to use the same formula for downward adjustments so that our customers can be sure that they are receiving the full benefit of declining fuel costs.

Another reason that we chose to stick with the formula is because I do not believe that the market volatility is over for fuel prices as I look at the continuing turmoil in the stock market and currency exchanges, both of which have an impact on oil prices.

Our fuel surcharge is very transparent and we do not try to hide it or to mislead customers with it. The total cost of travel with us is the fare, the fuel surcharge, the fees and the taxes. When you travel with us you can be assured we have done our best to stay competitive. From time to time we find that market pricing is less than consistent, and if you are able to find a better price, please let us know and we will do our very best to match.

The following paragraphs will provide some explanation and useful information with respect to fuel consumption and also with respect to our fuel surcharge formula. Hopefully you will find this to be interesting and informative.

Aircraft Fuel Consumption

During the election campaign in Canada last fall there was some discussion in the media about aircraft types and their relative fuel efficiencies. Some of this struck pretty close to home as the Boeing 737-200, chartered by the Liberals from a northern carrier, was being criticized as being fuel inefficient (in one newspaper it was referred to as a "gas guzzling pig!"). In watching and listening to the various media reports it occurred to me that there is much misinformation and some confusion about fuel efficiency and I thought that our customers might be interested in learning some of the facts.

Firstly, virtually all modes of transportation burn fuel. With particular respect to aircraft, it takes fuel to keep them in the air. In general, the bigger the aircraft, the more fuel it takes to put that aircraft into the air and to keep it in the air. Furthermore, the more payload carried on that aircraft, the more fuel it will burn. Does that mean that a large aircraft carrying maximum payload is fuel inefficient? How do we measure fuel efficiency? One often hears about "greenhouse gases" with reference to aircraft and their relative impact on the environment. Greenhouse gas is a by-product of combustion and greenhouse gases are produced by pretty much anything that has a motor, including cars, trucks, buses, ships, trains and aircraft. Greenhouse gas emissions relate fairly directly to fuel burned, so to simplify the discussion, lets stick to fuel burned, and to measure efficiency lets talk about fuel burned per unit of payload or fuel burned per passenger.

As an aviator, I will immediately concede defeat to buses and trains with respect to fuel efficiency. No aircraft can compete with a bus or a train, in terms of fuel burned per available seat, but aircraft are much faster than other modes of transportation, and often travelers require and are willing to pay for speed. Furthermore, in northern Canada, other modes either do not exist, or they are not practical (the highway distance between Whitehorse and Vancouver is almost twice the air distance, and a bus trip takes two days!).

With respect to aircraft, new technology is constantly improving the design and fuel efficiency of jet engines, but the efficiency improvements afforded by more modern engines and aircraft are measured in percentages, not orders of magnitude. Capital cost differences, on the other hand, are often much closer to orders of magnitude. In a small northern market this is a trade-off that can be difficult to justify and one, which if not carefully managed, could result in higher operating costs and higher fares.

Significant efficiency improvements in any air market can also be achieved by using a larger aircraft and by ensuring maximum load factors. This tactic often requires a sacrifice in frequency that would not be well received in northern markets that have no alternative means of access. Northern carriers typically maximize efficiencies afforded by larger aircraft and maximum loads by transporting passengers and cargo together. This results in a frequency and cost of service that could not be achieved by transporting passengers and cargo separately, as is often done in southern regions.

Following are some approximate fuel consumption statistics with respect to a one thousand mile journey on different types of aircraft as well as on other modes of transportation:

Aircraft Type # Seats Approx Fuel Consumption
litres/available seat (1,000 mi)
B737-800 162 42
B737-700 126 47
B737-400 147 47
B737-300 126 50 (with winglets)
B737-200 120 60
CRJ705 70 60
CRJ200 50 70
DHC8 37 70
HS748 40 89
B1900 19 100
DC3 25 109
Your Pickup Truck 4 80
Motor Coach 45 20
Train 550 10

From the foregoing it can be seen that different aircraft types have significantly different fuel consumptions per available seat with larger aircraft and more modern aircraft providing the best unit economies. To illustrate, the B737-800 and the B737-700 are both new aircraft, but the –800 with 28% more seating capacity, provides 10% better unit fuel economy than the –700. Remember that the efficiency measurement used is available seats not filled seats because the improved fuel economy of the –800 disappears immediately if the extra seats are not filled. With 100 passengers on each aircraft, the fuel consumption per passenger is actually 15% higher on the –800. Similarly, a new –700 has the same fuel consumption per available seat as a 15 year old –400 which has 17% more seating capacity. Again, the economy disappears if the seats are not full. With 100 passengers on each aircraft, the fuel consumption per passenger is 17% higher on the –400.

Looking specifically at the B737-200, it can be seen that its fuel consumption per available seat is 17% higher than the slightly larger B737–300 and 22% higher than the B737–700, but it is comparable to the CRJ705 and 17% better than the CRJ200. The B737-200 is also significantly more fuel efficient than either the DHC-8 or the HS748 turboprops.

The foregoing data also illustrates that it is more fuel efficient to fly than to drive in your own vehicle, but if you wish to maximize fuel efficiency and if you have the time, then you can't beat the bus or train.

For a northern airline there are more efficiencies than just fuel to consider. Some of the aircraft on the foregoing list are simply too big to serve a small northern market with an acceptable frequency; most of the aircraft on the list are not capable of operating on gravel runways or runways that have limited length; and many of the aforementioned aircraft have limited passenger/cargo capabilities at best. The most suitable aircraft in any scheduled market in the north is generally one which provides a good balance between fuel economy, size, capital cost, freight carrying capability, runway capability, and cold weather capability.

Fuel Consumption in Air North's Operation

On average it takes about .41 litres of fuel to move each pound of payload along our scheduled service routes. While the Boeing 737 (B737) jet is more fuel efficient than the Hawker Siddeley 748 (HS748) turboprop, the B737 scheduled routes are about twice as long as the HS748 routes and so the fuel consumed for each pound of payload is very similar on both routes. In terms of passengers, .41 litres/pound works out to about 86 litres of fuel per revenue passenger (using an average weight of 210 pounds per passenger and baggage).

The foregoing relates fuel consumption to payload carried. Even with no payload an aircraft still burns fuel. In fact we even burn fuel to carry the fuel in the wings. Each ten pounds carried in the air on our routes takes a little more than one pound of fuel. As an example, a typical flight from Whitehorse to Vancouver might depart with 19,000# of payload and 20,000# of fuel in the wings. The empty aircraft weighs about 65,000# before fuel and payload giving a takeoff weight of 104,000#. We will burn approximately 14,000# on this flight giving a fuel burn of .74#/#payload, or .41litres/#payload, or stated another way, .13#/#total wt, or .007 litres/#total wt.

Whether the objective is to reduce passenger ticket costs, airfreight costs or to reduce greenhouse gas emissions, in todays world it is in everyones best interest to use fuel as efficiently as possible. At Air North, Yukon's Airline, we are always trying to do whatever we can to reduce our total fuel consumption as well as our fuel consumption per pound of payload.

Our scheduled service strategy has always been to operate the largest aircraft offering the best unit economics that the route will justify at an acceptable level of frequency. Cargo is integral to this equation. Looking forward, we plan to upgrade our fleet with more fuel efficient aircraft during the next 6 to 12 months. Additionally, we are employing strategies such as global positioning system navigation, single engine taxi, and reduced auxiliary power unit use, all designed to reduce fuel consumption We are also investigating ways to remove unnecessary weight, like excess catering supplies and print materials, from our aircraft. Our passengers can also help to save fuel by leaving unnecessary items at home when they fly. We will soon be offering discounts to those who travel with no checked baggage and we are reviewing our free baggage allowances and excess tariff.

Our Fuel Surcharge Calculation

Getting back to the fuel surcharge, one might wonder why we choose to show this as a separate item, instead of just including it in the fare. We do this because we take great pride in our ability to control those costs that we have some control over and because showing the fuel surcharge separately allows our customers to reconcile changes in their cost of travel to changes in fuel costs. Our passenger and cargo tariff has not changed since 2002 when we launched our jet service. At that time, our best base passenger fare to Vancouver was $195, and today our best base fare to Vancouver is $193.

Most of our fuel cost changes are relative to the LA Pipe Index which is a published base price for jet fuel. In December 2003 the LA Pipe average cost for jet fuel was $.348/litre. In June 2008 it peaked at $1.065/litre, an increase of $.717/litre. During that same period (February 2004 to Aug 2008 due to a formula lag in the adjustment), our passenger Q increased from $20 to $82 and our cargo Q increased from 7% to 40% (cargo adjusts as a percentage based upon an average tariff of $.90/lb). Based upon the fuel cost increase of $.717/litre the Q adjustment shows as follows:

Passengers - $20 + 86 X $.72 = $82
Cargo - 7% + (.41 X .72)/.90 = 40%

In January 2009, the LA Pipe Index dropped to $.449/litre and so for March 2009 (the same formula delay going up applies going down), Q is calculated as follows:

Passengers - $82 - 86 X ($1.065 - $.449) = $29
Cargo - 40% - .41 X ($1.065 - $.449)/.90 = 12%

Historical changes to the LA Pipe Index and to our Fuel surcharge may be tracked as follows:

LA Pipe Index Passenger Q Cargo Q
November 07 $.710
December 07 $.704
January 08 $.694 $51 24%
February 08 $.733 $51 23%
March 08 $.838 $50 23%
April 08 $.904 $53 25%
May 08 $1.017 $62 30%
June 08 $1.065 $68 33%
July 08 $1.039 $77 38%
August 08 $.938 $82 40%
September 08 $.843 $79 39%
October 08 $.761 $71 34%
November 08 $.609 $63 30%
December 08 $.478 $56 26%
January 09 $.449 $42 19%
February 09 $31 13%
March 09 $29 12%

The foregoing illustrates the tremendous fluctuations in fuel pricing experienced during recent months and it also shows that our customers are receiving the full benefit of reduced fuel costs.

The most commonly tracked petroleum statistic is the per barrel price of oil, and it is not always easy to relate what you hear on the news about the cost of oil to what you see above with respect to the cost of jet fuel, or what you pay at the pumps for gasoline. Perhaps the following explanation will help.

During January, crude oil averaged around $44/bbl. This is US dollars, and our dollar averaged about $.82 US during that same period. This would put oil at about $54/bbl Cad. The "crack spread" describes the difference between the cost of the raw oil going into the refinery and the cost of the finished petroleum products coming out of the refinery. During the last ten years the crack spread has ranged from a low of less than $4/bbl to a high (in 2008) of more than $30/bbl. Using a crack spread of $15/bbl US or $18 Cad would give a cost of $72/bbl Cad coming out of the refinery. A barrel of oil contains 42 US gals or 159 litres, so $72/bbl Cad is $.45/litre coming out of the refinery, and that is pretty close to the January 2009 LA Pipe Index price for Jet fuel.

Applying this same formula to gasoline, allowing for approximately $.18/litre for transportation to the Yukon, approximately $.10/litre for taxes (including gst), and a 10% vendor margin, will put you pretty close to what you are currently paying at the pumps for gasoline.

Thank you for taking the time to read this rather lengthy and detailed explanation. I hope that it has been helpful to you.

Joseph Sparling, President
Air North, Yukon's Airline

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