African airlines to jointly purchase fuel

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Nine airlines that are part of the African Airlines Association (AFRAA) have launched a programme to jointly purchase fuel in an attempt to cut down costs in the turbulent airline market.

Cost of fuel remains a major component of the operating expense of every airline, accounting for between 40-50% of total direct operating costs. In addition to the cost, the unpredictable nature of the fuel price makes it difficult for airlines to budget the cost of their operations.

The initiative was launched last Wednesday following an evaluation of tender bits from a number of fuel companies. The process, which began last year with the setting up of an AFRAA Joint Fuel Steering Committee, chaired Kenya Airways, sent out tenders to Jet A1 fuel suppliers around the world. Bids were analysed by a technical team comprised of participating airlines and the AFRAA Secretariat and two rounds of negotiations held with all suppliers.

Launching the Joint Fuel Purchase programme, the Group Finance Director of Kenya Airways, Alex Mbugua noted that the total volume of fuel to be procured by the 9 airlines across their networks through this joint initiative will be approximately 700 million litres valued at around US$1.5 billion. He said this initial phase of the project involves only 9 of AFRAA’s 32 member airlines and is confident that subsequent tenders will involve more airlines and more volumes.

The new fuel regime will take effect this year once existing fuel purchase contracts expire. However, it will not affect existent hedging contracts.

Though the negotiations were done jointly, contracting will be done by individual airlines with the successful fuel companies at the various locations. The contracts implementation dates will vary, with some airlines starting to purchase fuel under the negotiated terms in February this year. All contracts will, however, end in December and be replaced by new contracts for a full calendar year in 2013 (and subsequent years) following another bidding, evaluation, negotiation and awarding process to be carried out during the course of this year.

The airlines participating in the current Joint Fuel Purchase Project are Air Malawi, Air Namibia, Air Seychelles, Ethiopian Airlines, Kenya Airways, LAM Mozambique Airlines, Precision Air, Rwandair and TAAG Angola Airlines.

According to the Secretary General of AFRAA, Elijah Chingosho, the project is aimed at attaining better and stable unit price of fuel for the participating airlines, assuring quality of the product and supply reliability whilst the relevant fuel suppliers will benefit from higher fuel volumes purchased by airlines. Other areas of focus by the Committee include addressing the incidents of high taxes, charges and fees levied on fuel, especially in African airports, and lobbying stakeholders for the elimination of monopoly fuel suppliers at some airports.



Though it was not disclosed what savings airlines expect to make under this project, all participating airlines are confident of significant savings making the project very worthwhile, AFRAA said.
“We expect that there will be reasonable savings from the project,” Kenya Airways finance director Alex Mbugua said at a press conference in Nairobi on Wednesday.