The aviation industry has some unsurprisingly big kit. But even the biggest jumbo jet is dwarfed by the size of the industry’s fuel expense management costs. From maintenance and staff to insurance and gas, the aviation industry has a lot of outgoings — and a lot of challenges when it comes to staying clear of financial turbulence.
Traditionally, the aviation industry pays for fuel through various methods, depending on the specific circumstances and agreements in place.
One common method is for airlines and other aviation companies to purchase fuel on the spot market, either directly from oil companies or through fuel brokers. And in this case, the aviation company will typically pay for the fuel using a combination of cash and credit.
Another method is for airlines to enter into fuel hedging contracts, allowing them to purchase fuel at a fixed price over a certain period of time. This can help airlines manage their fuel costs and protect against price volatility in the market.
Some companies also use aviation charge cards, which are payment cards specifically designed for fuel purchases. Fuel suppliers often offer these cards and include some benefits like discounts and rewards. However, they rarely come integrated with smart aviation expense management software, meaning that anything connected to receipt capture and storage, document chasing, expense submission, spend controls, is time-consuming and manual.
Finally, some airports have fuel farms, which are storage facilities for aviation fuel. In this case, airlines and other aviation companies can purchase fuel directly from the airport, typically using a fuel card or credit account.
Overall, the specific payment method used by the aviation industry to purchase fuel will depend on a range of factors, including the company's size, location, purchasing strategy, market conditions, and available options.
Aviation fuel hedging is a financial strategy employed by airlines and other aviation-related companies to manage their exposure to fluctuations in the price of aviation fuel. Fuel costs typically make up a third of an airline's operating expenses, and the price of jet fuel can be volatile, influenced by factors such as geopolitical events, supply and demand dynamics, and global oil prices.
Aviation fuel hedging involves entering into financial contracts, known as fuel hedges or derivatives, to lock in future fuel prices. These contracts are typically based on standardised fuel benchmarks, such as Brent crude oil or jet fuel indexes. By hedging fuel prices, airlines aim to protect themselves from unexpected increases in fuel costs and provide a certain level of price stability.
Different fuel hedging options are available, including futures contracts, options contracts, swaps, and collars. Each option offers various levels of flexibility and risk management and includes the following:
Futures contracts: Airlines can enter into futures contracts to buy or sell fuel at a predetermined price on a specified future date. These contracts help airlines secure a fixed price for fuel, regardless of market fluctuations.
Options contracts: Options provide the right but not the obligation to buy or sell fuel at a predetermined price within a specific timeframe. Airlines can purchase call options to secure a maximum fuel price or put options to establish a minimum fuel price.
Swaps: Fuel swaps involve exchanging fixed and floating fuel price payments. Airlines can enter into swaps to mitigate their exposure to fuel price volatility.
Collars: Collars combine options and swaps to establish a price range to manage the fuel prices. This strategy involves buying a call option to establish a price ceiling and selling to set a price floor.
Fuel hedging can help airlines stabilise their operating costs and protect against unexpected increases in fuel expenses. However, it's important to note that fuel hedging involves risk.
If aviation fuel prices decline below the hedged price, the airline may pay more for fuel than the current market rate. Additionally, fuel hedging requires expertise in financial markets and involves costs such as transaction fees and potential margin requirements.
Therefore, airlines carefully assess their risk tolerance and market conditions before implementing fuel hedging strategies.
The question of fuel subsidies depends on the country and specific circumstances. And while some governments can provide subsidies or tax incentives to support the aviation industry, the extent and nature of their contributions vary widely.
In certain cases, governments may provide direct financial assistance or tax breaks to airlines to help offset the high operating costs associated with fuel. These subsidies aim to promote air transportation, supporting local carriers, or ensuring connectivity to remote regions. Governments subsidise airlines in the form of reduced fuel taxes, grants, or other financial arrangements.
However, many countries don’t offer direct fuel subsidies to airlines, and instead, carriers operate in a competitive market where they are responsible for purchasing fuel at market prices. And in some regions, airlines may face additional costs or regulations to mitigate their environmental impact, such as participating in emissions trading schemes or complying with carbon offset requirements.
In the UK, for example, carrier airlines don’t pay VAT on fuel, whereas fuel used for private pleasure flying does incur duty costs and is often subject to rebilling.
Rebilling in the private aviation industry typically refers to transferring the cost of certain expenses incurred during a flight to the client or customer. When a private aviation service provider operates a flight for a client, there are often additional costs beyond the basic hourly rate or fixed fees. These additional costs include landing fees, fuel surcharges, catering, ground transportation, and other incidentals.
Rebilling occurs when the private aviation service provider passes these additional costs to the client by itemising them as separate charges on the invoice or billing statement. Essentially, the provider pays for these expenses upfront and then includes them as individual line items in the final bill to the client. The purpose of rebilling is to ensure that the provider is reimbursed for the expenses incurred during the flight. It allows for transparency in cost breakdown and ensures that the client understands the specific expenses involved.
Rebilling can be common in the private aviation industry, where the cost of operating a flight can vary depending on factors like flight duration, destination, and specific services requested by the client. It's worth noting that the specific terms and conditions regarding rebilling can vary between private aviation service providers. Each party should outline these in the contractual agreements or terms of service between the provider and the client.
The aviation industry runs into issues when paying for fuel with traditional corporate bank cards for several reasons.
The first issue is that aviation fuel is a high-value and volatile commodity, with prices that can fluctuate rapidly based on a range of factors, such as global oil prices, geopolitical events, and supply and demand dynamics. These fluctuations make it difficult for aviation companies to predict their fuel expenses accurately and can lead to unexpected costs that may exceed their traditional corporate card limits.
Another issue is that many fuel suppliers and Fixed Based Operators (FBOs) have limits on the amount of fuel that companies can purchase using a corporate card. These limits are in place to reduce the risk of fraud and ensure the supplier pays for the fuel delivered. However, such limits may not be high enough to meet the needs of larger aviation companies, which may require significant amounts of fuel regularly.
In addition, some fuel suppliers may not accept certain types of aviation fuel credit cards or may charge additional fees for their use. This can make it more difficult for aviation companies to manage their expenses and can create additional administrative work for their finance departments.
Finally, aviation companies may run into issues with their traditional corporate cards if they have poor credit or a history of late payments or other financial issues. In these cases, suppliers and FBOs may require additional guarantees or may refuse to provide fuel altogether.
Overall, the aviation industry can face several challenges when paying for fuel with corporate cards, including volatility in fuel prices, limits on corporate card usage, and supplier requirements for payment and creditworthiness.
As mentioned previously, rebilling is common for private airlines. And it involves gathering and itemising all relevant expenses to rebill them back to the client.
Although it sounds fairly simple on paper, private airlines may encounter several challenges when rebilling customers. Here are some of the most common issues:
To address these challenges, private airlines invest in robust reservation and billing systems, implement automated processes, conduct regular audits, and train staff to handle billing-related matters effectively.
By maintaining accurate records, ensuring clear communication with customers, and promptly addressing any billing discrepancies, private airlines can mitigate issues when rebilling to customers.
High-limit corporate Visa cards with integrated expense management software can make managing fuel payments much easier.
Firstly, high-limit cards give companies a lot more flexibility around payments which means they can keep moving without incurring delays and penalties from the bank around lending.
Secondly, unlike fuel cards which aren’t often connected to expense management software, high-limit corporate credit cards from spend management providers like Payhawk offer a completely integrated experience.
That means a big tick in the box for lending and cash flow management. And a big tick for popper expense management which allows the business to get and provide complete spend visibility (including fuel expenses) for rebilling.
The finance team can issue team cards to support project spend and it can even set custom expense fields within the expense management platform. Using these fields means that every time someone spends with a card they can choose from the fields and comprehensively itemise any payments.
Here are some of the biggest benefits of spend management (including high-limit cards) for the aviation industry:
Say goodbye to bank delays and hello to corporate cards with high limits, improved cash flow management, and spend control.
Trish Toovey works across the UK and US markets to craft content at Payhawk. Covering anything from ad copy to video scripting, Trish leans on a super varied background in copy and content creation for the finance, fashion, and travel industries.