The price of fuel remains the most significant cost of any carrier’s operations, currently accounting for up to 40% of the total costs of some carriers. The increasing exodus of the major fuel suppliers from Africa has compounded the problem and coupled with the current political crisis in some the oil producing countries, any hope of lowering oil prices in the foreseeable future seem remote. Besides, fuel supply reliability and quality is a major problem in some of the African airports and requires the concerted efforts of airlines and suppliers to address the problem.
Through a Steering Committee, AFRAA strongly believes that a successful airlines’ Joint Fuel Purchase Programme could be launched with substantial financial benefits to participating airlines through bulk purchase discounts at better terms and conditions of supply.
AACO, who AFRAA will be working closely with on this project was able to realize an estimated savings of USD $40 Million in 2010 for its members. AFRAA is targeting to realize similar savings as well as work with the relevant authorities to address the issue of fuel supply reliability and quality.
In the business plan presented and approved by the Executive Committee, the Secretariat undertook to work closely with the members to transform AFRAA and realign its activities with the needs of members and delivering value added services to airlines. AFRAA recognised the negative impact of the high fuel prices and got together some of its members to relaunch the joint fuel purchase project.
The skyrocketing of fuel prices in the year 2007 and 2008 were tremendous concerns to all air operators. The cost of fuel doubled in 2007, and at that time it became imperative for the industry to be very creative and use various strategies to manage the high fuel costs. As a result of the high fuel prices, AFRAA brought together some of its members to pioneer a Joint Fuel Purchase Project in 2008. The Project aim was to lower fuel costs for participating airlines through pooling of their volumes and negotiating better discounts.
The mission accomplished a landmark phase when the JFP Committee was officially launched after putting in place the entire legal framework to enable it function. Eight Airlines signed the MOU to officially initiate the project. However in the process the resolve and commitment of some of the member airlines started to waiver and their participation declined under various pretext resulting in a decreased number of participating airlines, to only two. As expected with the positive strides made and the project close to success, some suppliers and their agents put pressure on member airlines prompting them to abandon the project which reflected in declined enthusiasm and reduced participation in the JFP Committee work.
Justification for the Relaunch of the Project (2011)
The cost of fuel remains the most significant cost of any carrier's operations and the airline industry is perhaps the most affected by high fuel costs as prices have skyrocketed within a short span of time. Increases in fuel prices affect the airlines as there is a direct impact on the cost of operation, and fuel cost increases have repeatedly triggered economic recessions, which in turn result in a substantial decline in demand for air travel and air cargo services. The rise in the price of Jet fuel is prompting airlines to raise fares, and to consider offering fewer flights or flying smaller planes.
In Africa fuel prices are generally higher than other regions due to various reasons among which are the relative small volume required by airlines and their weak negotiating power with fuel suppliers, who in some cases, may be government sanctioned monopoly providers. A joint purchase approach by the airlines would address both the issue of low volume and the weak negotiating power as individual airlines pull together their fuel requirement at various stations thereby greatly increasing the group's total volume.
There is also a new concern about the increasing exit of the major fuel suppliers from Africa resulting in a very limited number of suppliers in some of the locations and also raising concerns about the quality of fuel. At some locations, the major suppliers in their exit strategy teamed up with local suppliers before eventually exiting the market. Some of the fuel suppliers do not meet the required international fuel quality standards, specifications and into plane operating safety standards. Fuel is an important component for flight safety and Airlines in some instances are forced to tanker fuel which adds to the cost.
AFRAA members took the long term and strategic view that despite the fluctuations and upward and downward swings, fuel price on the average will trend upwards over time. In any case, fuel being a substantial portion of the cost of an airline operations, any reduction in its pricing will contribute to an airlines cost efficiency and competitiveness.Therefore, in jointly placing tenders for Jet A1, airlines strongly believe they will substantially reduce their overall fuel bill while using their bargaining strength to lobby for improvements in fuel quality and supply reliability.
Membership to the Committee is open to any Member of AFRAA who meets the eligibility criteria established under the rules and procedures of the Committee. The following airlines are the founding members of the project having signed an MOU, committing to the project:
1) Air Malawi
2) Air Namibia
3) Ethiopian Airlines Enterprise
4) Kenya Airways
5) LAM Mozambique Airlines
6) Precision Air Services
8) TAAG Angola Airlines
9) Air Seychelles
Kenya Airways was elected a chair deputized by Ethiopian Airways for the Committee's activities for the period 2011 to 2013.
Tender Process and the Negotiation Phases
Each member committed volumes at the various locations and provided the Secretariat with their fuel suppliers at the various locations. The airlines also notified their fuel suppliers of the joint tender to be issued through AFRAA via a communique. Upon receipt of the bids, a technical team led by Kenya Airways as Chair of the Committee, analyzed the bids and this paved way for the negotiations to commence. Other airlines who participated in the technical team included Rwanda Air, Air Malawi, TAAG Angola, Air Namibia and Precision Air.
The negotiations were in three stages:
• 1st round of negotiations where the fuel suppliers had an option of either calling in or having a face to face negotiation, 13th to 16th Dec.
• 2nd round of negotiations where the suppliers had the opportunity to improve on their bids or using the chairman's phase "they had to sharpen their pencils"4th to 6th Jan
• The final stage involved the suppliers providing their best final bids which were not subject to further negotiations, 10th Jan
• The technical team reviewed the bids prepared the final report for the Committee and making recommendations on the awarding of the tenders to the most competitive suppliers.
A precondition is that the price is to be uniform to all the members but the contracts would be signed between the fuel supplier and the participating individual airline. Payment terms would be agreed and included in the individual contracts.
The first contract will start 1st February 2012 and run to December 2012, however as different airlines have different contract end dates, they are expected to transit to the project on expiry of their existing contracts. The first year would be a challenge but the time lines would be harmonized by 2013, when the contracts are expected to run from January 2013 to December 2013 for all participating Airlines.
AFRAA's role is to ensure fair play and the Members would be required to adhere to the contract terms as negotiated by the Committee. AFRAA would also hold regular meetings with Jet fuel suppliers and airlines to address any concerns as this is intended to be a win-win project for all the stake holders.
AFRAA in recognition that price is not the only factor affecting the cost of fuel is also planning to host a fuel forum together with IATA to review high fuel charges and taxes levied by various Governments in Countries where African airlines do business (in and out of Africa). AFRAA and IATA agreed to work closely on this issue as charges and taxes on fuel especially in Africa is prohibitively high. The team will also set the agenda and action plan for such a forum in 2012.
The Joint Fuel Steering Committee is the vehicle which members use to coordinate, facilitate and manage the joint purchase of fuel enabling participating airlines to reduce cost of fuel and favorable terms due to economy of scale.
• To coordinate, facilitate and conduct joint negotiation of aircraft fuel purchase in order to achieve favorable price and terms for participating airlines from various locations to which such airlines operate.
• To assist participating airlines and other members of AFRAA achieve lower fuel cost, better and efficient utilization and management.
• Coordinated joint activities in other commercial areas relating to fuel such as, fuel hedging, supply reliability, etc.
• Spearhead, coordinate and manage joint negotiations and purchase of aircraft fuel at a price favorable to participating airlines compared to individual purchases.
• Develop fuel purchase and negotiating methods and procedures in keeping with the requirements of the industry and update the same from time to time.
• Provide expertise to participating members in fuel purchase and management, utilizing available experts within the members and/or in the industry.
• Gather data and information, conduct surveys and research and disseminate the same to AFRAA member airlines on fuel price, market trends, best industry practices and new fuel related technical developments.
• Provide and/or coordinate training of airline staff in the negotiation and handling of fuel purchases as well as fuel cost management and other areas relating to commercial aviation fuel.
Any member of AFRAA that is willing to participate in joint negotiation of Fuel purchase at one or more airports and meets other eligibility criteria set in the detailed rules may be a member.
• The criteria for membership and procedures for application and acceptance for membership shall be as set forth in the Detailed Rules.
• The initial signatories to these Rules, Guidelines and Procedures shall be the Founding Members of the Committee
AFRAA Members other than the Founding Members may become a member of the Committee on approval and acceptance of their application in accordance with the provisions of the Detailed Rules.