Air fares of African airlines are likely to drop starting next year if the operators succeed in ongoing efforts to sign a joint fuel purchase agreement.
Such an agreement will enable them make bulk purchases of fuel and thus marginally reduce their expenses. The African Airlines Association is working on the project whose aim is to lower fuel costs. For most regional airlines, fuel costs account for over 30 per cent of their operational costs.
The association is working to complete discussions with interested airlines soon and start making orders for joint fuel in 2012. “We hope to send out the tenders this year and the first delivery on the project will be January 2012,” said Julie Indetie, the manager for corporate finance and accounts at AFRAA.
If successful, the agreement would enable regional airlines offer competitive fares in the market. Currently some African airlines offer much higher prices than their main competitors from Europe within similar destinations. “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,” noted AFRAA.
A committee composed of expert staff from various airlines and AFRAA officials has been set up to come up with an action plan towards dealing with the fuel crisis.
The action plan includes operational and technical ways of reducing fuel costs and boosting of negotiating power in the purchase of fuel. “A joint purchase will 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,” said AFRAA.
Though the association has not released the list of airlines that have shown interest in the project, it may face a challenge when it comes to convincing big airlines like Kenya Airways and South African airlines to join in the project to make the group more powerful. The association has 33 members currently.
Kenya Airways for instance, controls its fuel expenses through holding fuel hedging contracts which shield the airline in times of rising costs of fuel through a fixed cost agreed on during contract signing.
In June KQ released its 2010 financial results which showed an 87 per cent rise in pre-tax profits largely attributed to favourable fuel hedging and a weak shilling. The joint fuel purchase project will be on a voluntary basis for AFRAA’s member airlines but the current efforts to sign a joint fuel purchase pact will be a great test for the association to prove its relevance to members as this is not the first time such a project has been proposed.
Joint fuel purchase project is part of AFRAA’s three year business plan unveiled in February 2011 to give fresh impetus to the association’s efforts to lobby for a favourable business climate amid high costs of operations.