Forecasting of Jet Fuel (ATF) consumption in India

Abstract
Airline companies, being the single largest user of jet fuel, are exposed to price
risk owing to extreme volatility in prices worldwide. Thus it is inevitable to
forecast the demand of aviation fuel turbine. In this project we did forecasting
of ATF consumption. The factors that affect the ATF consumption is crude oil
price, passengers carried for that particular time frame and ATF price. Many
methods can be used for forecasting ATF consumption but in most of the
literature review the method used was ARIMA method. We used ARIMA
method for forecasting the ATF consumption. More importantly the study
identifies the difference between the past actual ATF consumption and forecast.
We also try to correlate the ATF price and Crude oil price. This correlation
factor helps to find out the hedging ratio to hedge the ATF price with respect to
Crude oil price as jet fuel is no available on the trade exchange. This hedging
ratio helpful for speculation and forward and future contract of ATF.

Introduction
Aviation turbine fuel (ATF) or jet fuel is a specialized type of petroleum-based
fuel used to power aircrafts. It is generally of a higher quality than fuels used in
less critical applications such as heating or road transport. Aviation turbine fuel
(ATF) is extracted from the middle of fractional distillation process. Aviation
turbine fuel is a limited natural resource which is non-renewable and several
reports show that the world's crude oil production is close to the maximum level
and then it will start to decrease after reaching this maximum. It is estimated
that same effect on aviation fuel production as a crude oil production
declination. It is predicted by the aviation industry that aviation traffic will keep
on increasing.
Domestic production of jet fuel topped 22 billion gallons in 2012. However, the
consumption of jet fuel can vary, depending on imports and exports of the fuel.
Domestic fuel consumption by U.S. carriers was just over 17 billion gallons in
2012. Jet fuel purchasers include airlines, FBOs, airport owners and operators,
corporations with flight departments, operators of crop dusters and helicopters,
and the military. Traffic is predicted to grow by 5% per year to 2026, fuel
demand by about 3% per year in India. Indigenous production of ATF in India
in 2007 was 7,805,000 tones. India is self-sufficient in production of these
products with exports of 3,662,000 tones.
Airline companies, being the single largest user of jet fuel, are exposed to price
risk owing to extreme volatility in prices worldwide.The pricing of kerosene is
revised by these companies dynamically in tandem with international rates.
Typically, airlines have to either absorb the price volatility or pass the same to
consumers.
Thus it is inevitable to forecast the demand of aviation fuel turbine. The forecast
of demand will be carried out on the basis time series analysis which is based on
the past demand which help to find the future demand.
Factors affecting consumption
ATF prices
Efficiency
ATF consumption
Aviation industry demand domestic and international (air traffic, etc.)
3

 Environment friendly
In this project we are going to forecast the demand of ATF based on past data
analysis. The data we have taken is from ministry of petroleum and natural gas.

Rationale behind the project:

One of the reasons for the airlines industries struggling in India is the high price
of aviation turbine fuel (ATF) which has been eroding their bottom lines. The
prices of the ATF keep fluctuating which causes airlines to operate at a higher
cost and as a result their profit declines.
If reliable forecast of demand for ATF is known for the coming months or
years, then a proper planning can be done in terms of acquiring fuel using
different strategies such as hedging which helps in reducing the risk caused due
to variability of prices and thus helps in achieving sustainable growth.
Based on the issues mentioned below, we planned to carry out demand
forecasting of Aviation fuel in India:
Aviation Turbine Fuel (ATF) prices in India are higher than the international
market. The airline industrys operational cost component is dominated by the
cost of the (ATF). The ATF price accounts for nearly 45% of the operational
expenses. A 10% increase in fuel price would push up costs by at least 4%, thus
causing a damper on the financial health of an airline business.
The operational cost of an airline significantly depends on the fuel prices.
Rising fuel prices affect the airline profitability and have a cascading effect on
the other supporting services of the aviation industry.
Literature Review:
Majorly all the reports of aviation industries are based on the traffic forecast,
carbon dioxide emission levelforecast, trends in fuel price and efficiency. To
understand aviation industry and jet fuel consumption, we review various
forecasting reports of the aviation industry as well as other petroleum industries.

Name of Report

Forecasted Factor Publisher

Name
Forecasting
Automobile
Institute
of
Automobile
Petrol Petrol
Transport and
Demand in Australia
Logistics
Studies
Aviation Turbine Fuel Crude-ATF
MCX, India
Correlation

An Overview of
Aviation
-Fuel
Markets
for
Biofuels
Stakeholders
Demand Forecast of
Petroleum
Product
Consumption in the
Chinese
Transportation
Industry
Carbon Mitigation in
Indian Aviation by
Blending Jet Fuel with
Biofuels

Jet Fuel Price and National

Jet
Fuel Renewable
Consumption
Energy
Laboratory
(NREL)
Petroleum
energies
Product

Source
bic.asn.au/_literat
ure_93796/Foreca
sting_Future_Fuel
_Demand
http://www.mcxin
dia.com/Uploads/
Products/240/Engl
ish_atf.pdf
http://www.nrel.g
ov/docs/fy14osti/6
0254.pdf

www.mdpi.com/jo
urnal/energies

Jet
Fuel International www.ijerd.com
Consumption
Journal
of
Engineering
Research and
Development
Table 1: Various Litterateurs and their sources

Automobile Petrol demand forecasting:

Source: (Li, 2008)
In this report Australias automobile petrol demand from 2007 through to 2020
is presented under the business-as-usual scenario. Different types of
modelling methods have been used to estimate petrol demand, each having
methodological strengths and weaknesses. This paper consist an ongoing need
to review the effectiveness of empirical fuel demand forecasting models, with a
focus on theoretical as well as practical considerations in the model-building
5

processes of different model forms. It consider a linear trend model, a quadratic

trend model, an exponential trend model, a single exponential smoothing model,
a Holts linear model, a Holt-Winters model, a partial adjustment model
(PAM) and an autoregressive integrated moving average (ARIMA) model. This
paper concludes that for the seasonal data, the best-forecasting model is the
quadratic trend model and for the non seasonal data, the same model produced
the most accurate short-term forecast.

For Jet Fuel price Forecast:

Source: (Aviation Turbine Fuel, 2008)
Aviation Turbine Fuel report is prepared by MCX, India. This report helpful to
understand the crude price and jet fuel price correlation. Jet fuel price is highly
dependent on the price of crude oil. Jet fuel prices are higher than crude oil
prices and generally correlate with crude oil price trends. Overall, jet fuel price
is determined by spot market prices, the terms of purchase contracts, and the
location of the purchase. Other determining factors include outside influences,
such as refinery shut downs; sudden, localized changes or seasonal shifts in
demand; interruptions in supply (e.g., natural disasters); and market speculation
and environmental regulations. Factors affecting prices are mainly crude oil
prices, aviation industry demand, political risk, forex fluctuation, Globalevnets.
Source: (Carolyn Davidson, 2014)
This report is intended for biofuels stakeholders who are interested in, but
unfamiliar with, theU.S. Aviation industry and, in particular, the aviation fuel
market. It provides an overview of the state of the aviation fuel industry,
targeting background information for evaluating the potential of biofuels in
aviation. This report includes jet fuel prices, consumption of jet fuel data and
forecasting of jet fuel price.
Fuel Efficient Forecast: The need for airlines to be more fuel efficient will be
driven in the coming years both by high fuel prices and environmental taxes or
caps. Past trends in fuel efficiency vary considerably depending on the measure
and the period chosen. However, there are few forecasters predicting future
changes in efficiency of greater than 1-2% a year.

Demand Forecast of Petroleum Product Consumption in the Chinese

Transportation Industry:
Source: (Jian Chai, 2012)
In this paper, petroleum product (mainly petrol and diesel) consumption in the
transportation sector of China is analysed. This was based on the Bayesian
linear regression theory and Markov Chain Monte Carlo method (MCMC),
establishing a demand-forecast model of petrol and diesel consumption. They
forecast the future consumer demand for oil products during The 12th Five
Year Plan (20112015) based on the historical data covering from 1985 to
2009. In the process of empirical analysis in this paper, we introduce five
explanatory variables into the model: urbanization level, per capita GDP,
turnover of passenger in aggregate (TPA), turnover of freight in aggregate
(TFA), and civilian vehicle number (CVN).
By using these forecasting methods they conclude that with some confidence
that the level of urbanization is a comprehensive factor. Comparing household
per capita annual expenditures in transport and communication, urban residents
consumption level is far higher than that of rural residents.
Consumption of jet fuel:
Source: (Kowtham Kumar K, 2013)
Carbon Mitigation in Indian Aviation by Blending Jet Fuel with Biofuels
paper is prepared by Kowtham, B.Kaleeswaran, GeorgeMathew.K. in this paper
they forecasted the carbon mitigation level in the Indian aviation sector. The
International Air Transport Association has declared to cut its carbon emissions
to 50% by 2050. The National Biofuels Policy has also targeted to blend 20%
biofuels to its fossil fuel consumption. This paper aims in forecasting the jet fuel
demand for the Indian Aviation sector and the subsequent carbon mitigation
achieved by blending with biofuels. The utilization of the wastelands for the
biofuel production in various states of India has also been forecasted.To forecast
Consumption of jet fuel causal method can be used. This is the well-known
method available for forecasting and the most widely used. This method can be
used when historical data are available and the relationship between factors to
be forecasted and external factors are available.The linear regression method
was chosen over the causal regression because of the complexity. The linear
regression method involved a dependant variable related to an independent
variable by a linear equation.

Identify Gap:
This section will help us to differentiate our project with that available from the
different sources. The project that we found out over the web and what different
we are trying to do is briefed below:
One of the projects available was the forecasting of petroleum products based
on one of the forecasting method. We would be trying to use the same method
for the demand forecasting of ATF.
The other project we saw was showcasing the correlation between the price of
crude oil and ATF. On the same horizon we would like to obtain demand
forecast correlation between crude oil and ATF. This would help in planning
hedging strategies as crude oil traded in futures market while ATF is not traded.
We could use different methods to forecast the ATF demand. One available
paper used linear regression method to forecast the ATF demand, we would like
to use ARIMA technique of forecasting to do the same.

Relevance:
We came across many of the report based on forecasting of petroleum products
and correlation of crude oil price and ATF. We are trying to connect the
forecast of the petroleum products with forecast of ATF consumption based on
the trend analysis and on time series analysis. We hope the factors affecting
ATF consumption will be more or less the same as compared to petroleum
products. Also the methods used in petroleum product forecast will be helpful in
forecasting of ATF consumption.
The second paper we came across was forecast of crude oil prices, this paper is
relevant for knowing the trend analysis of the consumption of fuel and price
fluctuation based on it. This report on crude oil prices will provide the factor to
be considered in estimation of fluctuation of demand in crude which is similar
to estimate demand for ATF.

We will try to forecast ATF consumption based on the ARIMA and PAM
method which is used in automobile petroleum prices forecast , the paper which
we studied in literature review.
Contribution in the project
By studying various paper based on forecasting on petroleum products. The
forecast of ATF was not done and as the ATF industry is growing at fair rate
.The forecast for ATF will help for hedging.
We used ARIMA method to carry out forecast as in most of the paper studied
they used ARIMA, PAM, multiple regression method for analysis for trend
analysis. Our contribution to this forecast is different as compared to this paper
as we considered various variables that affected the ATF consumption.
Variables such as crude oil price, ATF price, passengers carried.
Research Design
Scientific problem
Forecasting of Jet fuel (ATF) consumption in India with the help of time series
data and finding the relation between crude oil price and jet fuel consumption
and price.
Research object
Forecast the Jet fuel consumption data for year 2015-2018 and find out
correlation between crude oil price and jet fuel consumption.
Research field
Forecasting techniques, correlation
Scientific hypothesis
If it develops a forecasting the jet fuel consumption based on past year data of
consumption and air traffic data, it helpful in speculating and hedging of jet fuel
consumption.
Independent variable
Jet fuel price, Crude oil price, air traffic data

Dependent variable
Jet fuel consumption
Research task
1.

Facto-perceptible stage
Determination of historical development of jet fuel and its consumption
Literature survey for the forecasting methods and correlation method
Finding historic data of jet fuel consumption, air traffic and crude oil
price.

2.

Data and analysis stage

Prepare data file in spps and other software
Create a forecasting model and analysis of data
Correlation between crude oil and jet fuel consumptio

3. Application stage
Validation of the results obtained by developed forecasting model in spss
Understanding of outcomes and result .

Methodological Design
Research type and general goal
The proposed research is applied, descriptive and time series analysis
The proposed research is developed from quantitative point of view.
Population and sample
The population of the proposed research is formed by ministry of oil and gas,
India.
The population represents a sample of yearly jet fuel consumption, air traffic
and crude oil prices in India.
Methods and Techniques
In this research we will use the following methods to accomplish the

10

Proposed tasks:
The Regression method will be used to relate the jet fuel consumption and air
traffic data.
The ARIMA method will be used to forecast the jet fuel consumption.

Tools
Statistical Package for the Social Sciences (SPSS) version 22
Data collection methods
The data collected is secondary data, also the data collected is
quantitative type of data.
Data collected is month wise data for consumption of ATF, ATF price,
crude oil price, passengers carried.
Data collected is from
o www.indexmundi.com
o www.indiastate.com
o www.dgh.com

Data analysis and interpretation

Hedging:
Hedging is a tool to reduce risk in the business by taking opposite position in
the spot and the futures market. Airlines companies face risk of fluctuating jet
fuel prices. ATF fuel is not traded in futures market and in order to reduce this
risk arising from price volatility, Airlines Company goes for hedging of crude
oil as ATF and crude oil prices are correlated. Recently it was in news that AIR
INDIA is conducting large scale hedging of jet fuel for the first time to take the
advantage of falling crude oil prices.
Correlation factor:
CORRELATIONS
/VARIABLES=ATF_PriceCrude_oil_Price

11

/PRINT=TWOTAIL NOSIG
/MISSING=PAIRWISE.

Correlations
Jet
fuel
Monthly
Crude
oil
price
in price
in
INR/gallon INR/Gallon
Jet fuel Monthly price Pearson
in INR/gallon
Correlation

Sig. (2-tailed)
N
Crude oil price in Pearson
INR/Gallon
Correlation

.992**
.000

156

156

.992**

Sig. (2-tailed)

.000

156

156

Table 2: Correlation
**. Correlation is significant at the 0.01 level (2-tailed).
Correlation factor can be calculated in the SPSS under the correlation between
bivariate. Here ATF price and Crude oil price are taken as variables and Pearson
correlation is taken under consideration.

std. deviation of ATF

std. deviation of crude

12

Correlation factor= 0.992

Standard deviation of ATF= 47.85
Standard deviation of crude oil =40.07
hedging ratio= 1.18048

= () ()

.
.

Hedge effectiveness= 0.97735

Forecasting by Time Series Models:

Sequence Plot
Model Description
Model Name
Series
Sequence

MOD_6
or 1

Consumption in gallon

Transformation

None

Non-Seasonal Differencing

Seasonal Differencing

Length of Seasonal Period

12

Horizontal Axis Labels

Date_

13

Intervention Onsets

None

Reference Lines

None

Area Below the Curve

Not filled

Table 3 Model Description

Applying the model specifications from MOD_6

Case Processing Summary

Consumptio
n in gallon
Series or Sequence Length

205

Number of Missing User-Missing

Values in the Plot
SystemMissing

0
49

Table 4 Case Processing Summary

14

The series exhibits numerous peaks, many of which appear to be equally

spaced, as well as a clear upward trend. The equally spaced peaks suggests the
presence of a periodic component to the time series. Given the seasonal nature
of Consumption, with highs typically occurring during the season, we should
not be surprised to find an annual seasonal component to the data. There are
also peaks that do not appear to be part of the seasonal pattern and which
represent significant deviations from the neighboring data points. These points
may be outliers, which can and should be addressed by the Expert Modeler.

ARIMA Model:

PREDICT THRU .
* Apply Time Series Models.
TSAPPLY
/MODELSUMMARY PRINT=[MODELFIT] PLOT=[ SRSQUARE RSQUARE]
/MODELSTATISTICS DISPLAY=YES MODELFIT=[ SRSQUARE RSQUARE]
/MODELDETAILS PRINT=[ FORECASTS]
/SERIESPLOT FORECAST FORECASTCI
/OUTPUTFILTER DISPLAY=ALLMODELS
/AUXILIARY CILEVEL=95 REESTIMATE=NO
/MISSING USERMISSING=EXCLUDE
/MODEL FILE='C:\Users\vivek\Desktop\QM2_Model.xml'.

15

Apply Time Series Models

Model Description
Model Type
Model Consumption
ID
gallon

in Model_ ARIMA(1,1,9)(0,1,
1
1)

Table 6 : Model Description

The model description table contains an entry for each estimated model and
includes both a mode identifier and the model type. The model identifier
consists of the name (or label) of the associated dependent variable and a
system-assigned name. In the current example, the dependent variable is
Consumption of Jet Fuel and the system-assigned name is Model_1.The Time
Series Modeler supports both exponential smoothing and ARIMA models.
ARIMA model types are listed using the standard notation of ARIMA
(p,d,q)(P,D,Q), where p is the order of auto regression, d is the order of
differencing (or integration), and q is the order of moving-average, and (P,D,Q)
are their seasonal counterparts. The Expert Modeler has determined that
Consumption of Jet Fuel is best described by a seasonal ARIMA model with
one order of differencing. The seasonal nature of the model accounts for the
seasonal peaks that we saw in the series plot, and the single order of
differencing reflects the upward trend that was evident in the data.

16

Model Summary
Model Statistics
Model Fit
statistics Ljung-Box Q(18)

Model

Number
of
Stationary Statisti
Predictors R-squared cs
DF

Consumption in
2
gallon-Model_1

.539

18.829 15

Sig.

Number
of
Outliers

.222

Table 7: Model Statistics

The model statistics table provides summary information and goodness-of-fit

statistics for each estimated model. Results for each model are labelled with the
model identifier provided in the model description table. First, the model
contains two predictors out of the three candidate predictors that you originally
specified. So it appears that the Expert Modeller has identified two independent
variables that may prove useful for forecasting. Although the Time Series
Modeller offers a number of different goodness-of-fit statistics, we opted only
for the stationary R-squared value. This statistic provides an estimate of the
proportion of the total variation in the series that is explained by the model and
is preferable to ordinary R-squared when there is a trend or seasonal pattern, as
is the case here. Larger values of stationary R-squared (up to a maximum value
of 1) indicate better fit. A value of 0.539 means that the model does a good job
of explaining the observed variation in the series. The Ljung-Box statistic, also
known as the modified Box-Pierce statistic, provides an indication of whether
the model is correctly specified. A significance value less than 0.05 implies that
there is structure in the observed series which is not accounted for by the model.
The value of 0.222 shown here is not significant, so we can be confident that the
model is correctly specified. The Expert Modeler detected zero points that were
considered to be outliers. Each of these points has been modeled appropriately,
so there is no need for you to remove them from the series.
Forecasting of Predictors:
PREDICT THRU YEAR 2018 MONTH 4.

17

* Time Series Modeler.

TSMODEL
/MODELSUMMARY PRINT=[MODELFIT]
/MODELSTATISTICS DISPLAY=YES MODELFIT=[ SRSQUARE]
/MODELDETAILS PRINT=[ FORECASTS]
/SERIESPLOT OBSERVED FORECAST
/OUTPUTFILTER DISPLAY=ALLMODELS
/SAVE PREDICTED(Predicted)
/AUXILIARY CILEVEL=95 MAXACFLAGS=24
/MISSING USERMISSING=EXCLUDE
/MODEL DEPENDENT=Crude_oil_PricePassengers_carriedATF_Price
PREFIX='Model'
/EXPERTMODELER TYPE=[ARIMA EXSMOOTH] TRYSEASONAL=YES
/AUTOOUTLIER DETECT=OFF.

Model Description
Model Type
Model
ID

Crude oil price in

INR/Gallon

Model_
1

ARIMA(1,1,0)(0,0,0)

passenegrs carried by Model_

india carriers
2

Winters'
Multiplicative

Jet fuel Monthly price Model_

in INR/gallon
3

Winters' Additive

Table 8 Model Description of predictors

18

Apr 2014

Model
Crude oil Forecast
price in
UCL
INR/Gallo
LCL
n-Model_1
passeneg Forecast
rs carried UCL
by india
LCL
carriersJet fuel
Forecast
Monthly
UCL
price in
INR/gallon-

May 2014

Jun 2014

Jul 2014

Aug 2014

150.20

150.55

151.26

152.08

152.93

173.93

190.69

205.38

218.54

230.65

128.97

117.06

108.54

101.96

96.60

6.59E+06

7.30E+06

6.89E+06

6.62E+06

6.71E+06

6.94E+06

7.73E+06

7.37E+06

7.14E+06

7.29E+06

6.25E+06

6.87E+06

6.42E+06

6.11E+06

6.14E+06

178.97

179.51

181.82

184.26

186.58

194.73

201.81

209.14

215.81

221.87

Table 9: Forecasted Predictors Values in Excel work sheet

The Data Editor shows the new variables Predicted_Crude oil price, Predicted
Jet fuel price and Predicted_passenger carried by carrier, containing the model
predicted values for the Crude oil price, jet fuel price and the passengers. To
extend our predictor series, we only need the values for April 2014 through
April 2018, which amounts to cases 157 through 204.

Forecast Excel Sheet (Double click on the below spreadsheet)

Apr 2014

Model
Consumpt Forecast
ion in
UCL
gallonLCL
Model_1

May 2014

Jun 2014

Jul 2014

Aug 2014

14840552.87 15170950.85 14443081.25 14454484.93 14302572.00

15360665.57 15767137.59 15156581.85 15248225.69 15177135.90
14320440.17 14574764.11 13729580.64 13660744.17 13428008.09

Table 10: ATF Consumption Forecast in Excel work sheet

For each model, forecasts start after the last historical period that was used in
estimation of the models applied, and end at the last period for which nonmissing values of all the predictors are available or at the end date of the
requested forecast period, whichever is earlier.

19

The forecast table contains the predicted values of the dependent series, taking
into account the values of the two predictors in the forecast period. The table
also includes the upper confidence limit (UCL) and lower confidence limit
(LCL) for the predictions.

Charts
Histogram
The figure of histogram below does not show the bell shape skew to anywhere.
Thus we can say that the normality are met

20

Based on Normal P-P Plot of Residual for Y shown above, the normality
assumptions met because all the points are lies on the straight line.

21

Scatter plot
This plot helps to identify the moderate positive relationship of ATF with other
parameters.

22

Conclusion
The analysis helped us in forecasting the Jet fuel consumption in
Indiaconsidering the affecting variables (Independent Variables) as crude oil
price, ATF price and the number of passengers carried from the fiscal year
2001-2015.The result showed us that the jet fuel consumption would rise to
17266566.52 gallons by 2018.The analysis gave us correlation factor of 99.2%
between crude oil price and ATF price which shows the linearity between the
two prices. The Hedging parameters such as hedge ratio and hedge effectiveness
which are important parameters in carrying out hedging had values 1.18 and
0.977 respectively. As ATF is not traded on future market, in order to secure
risk arising from pricing fluctuations it is advisable to trade 1.18 barrels of
crude oil in future market. This would help the company to reduce the risk
arising from price variation. The hedge effectiveness shows us that 97.7% risk
23

is secured arising due to fluctuation of prices if we go for hedging in the

prescribed ratio.
To whom the project can be useful
The project would be helpful to the Airlines Industry which will help them to
have a proper plan of the fuel requirement by having a proper forecast of the
number of passenger projected to be carried till 2018.This project will help the
Airline industry to hedge the crude oil in required proportion by having a proper
forecast of ATF requirement. All the companies in this sector will be benefited
with such kind of forecast as it would help them to plan their fuel requirement
and go for the appropriate hedge. Airlines Companies can also have an idea
about the increase in passengers for particular Months if the forecast proves to
be accurate and can decide the ticket rates after taking in account such factors.
Industry expert review:

24

Bibliography
(2008). Aviation Turbine Fuel. Mumbai: MCX.
Carolyn Davidson, E. N. (2014). An Overview of Aviation Fuel Marketsfor
Biofuels Stakeholders. West parkway: National Renewable Energy Laboratry.
(2014). Global Market Forecast. Airbus.
Jian Chai, S. W. (2012). Demand Forecast of Petroleum Product Consumption
in the . Xi,an: energise.
Kowtham Kumar K, B. M. (2013). Carbon Mitigation in Indian Aviation by
Blending Jet . International Journal of Engineering Research and Development
, 43-46.
Li, Z. (2008). Forecasting Automobile Petrol Demand in Australia . Sydney.
MCX. (2008). Aviation Turbine Fuel. Mumbai: MCX.

25