Strategic Innovation Opens a Closed Market

Accomplishing What was Thought to be Impossible

Gaining Access to a Closed Market by Creating Mutual Advantage for a Synergistic Solution

For an independent petroleum company to enter the business of selling Jet-A fuel to major U.S. airline, access is required not only to petroleum pipelines, but more importantly to fuel terminal facilities at major airports. In the early 1980s, this was viewed as an impossible task, particularly since terminal facilities were operating at near capacity and, following the two oil shocks of the 1970s, airlines were fiercely protective of their own fuel storage capacities.

Given this scenario, John singled out Chicago’s O’Hare International airport as an initial location to demonstrate a new marketing scenario for an independent petroleum company. Approaching United Airlines, the airline operating the most flights into and out of O’Hare, John requested that the airline begin purchasing a small portion of their total Jet-A requirements from the independent petroleum company. As expected, United refused, questioning how his proposal could possibly benefit them.

He responded with a unprecedented offer—the petroleum company would sell fuel to United within a previously agreed upon monthly quantity range, always holding available the specified amount of fuel, part in United’s O’Hare storage, with the balance being retained in the pipeline. In turn, United would agree to lease additional storage space to the company on site at O’Hare, which the petroleum company would maintain filled at a guaranteed minimum level. United Airlines accepted the proposal.

Why did the airline undergo a sudden change of heart? Because at that time, United’s primary concern was fuel security. After the two oil shocks of the 1970s, United’s first priority was to ensure its supply of jet fuel, without which all commercial airline operations would cease. United had come to equate security with fuel ownership, but John’s innovative proposal changed that paradigm.

Through this agreement, United not only maintained their fuel security position, but improved it by gaining access to the petroleum company’s fuel transiting the pipeline, as well as that scheduled for shipment. In addition, United gained added throughput and inventory turns in its storage, thereby reducing its own throughput cost per gallon as well as its holding cost, since fuel purchased from the company was not invoiced until used.

The independent petroleum company gained United Airlines as a new customer, while simultaneously obtaining access to fuel sales at the world’s busiest airport, which had previously been inaccessible to such private arrangements. John then proceeded to open Denver Airport, once again with United, as well as the three New York area airports (Kennedy, LaGuardia and Newark) partnering TWA with the independent petroleum company, each time relying upon the now-proven technique of utilizing the airlines’ storage facilities for a mutual benefit.

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