SAA jet fuel plan may backfire

Plans by South African Airways (SAA) to procure jet fuel from black industrialists in South Africa could make the airline less competitive against rivals who  procure their fuel from global suppliers‚ analysts have said.

SAA announced last week that it would be allocating half of its R20-billion procurement spend‚ including on jet fuel‚ to black industrialists.

BUSINESS BOOST: Plans by SA Airways to procure jet fuel from black industrialists in South Africa could make the airline less competitive against rivals, analysts warn
BUSINESS BOOST: Plans by SA Airways to procure jet fuel from black industrialists in South Africa could make the airline less competitive against rivals, analysts warn

In a memorandum of understanding signed with the Department of Trade and Industry‚ the two committed to assisting black industrialists with financing and incubation.

SAA consumed 129-million litres of jet fuel a month in the financial period ended March 2013‚ up from 126-million litres in the previous financial period. The total cost is about 35% of SAA’s annual expenditure.

Transport economist and aviation expert Joachim Vermooten said SAA would have to ensure it paid market-related costs for fuel if it introduced new suppliers.

“You cannot impose additional costs on a national carrier. Otherwise its cost structure would be outside that of its competitors‚” Vermooten said.

SA Petroleum Industry Association (Sapia) executive director Avhapfani Tshifularo said that while there were no 100% black-owned producers of jet fuel in SA there were wholesalers that were 100% black-owned, including those owned by black women.

He said SAA had to  consider how to ensure it received jet fuel from suppliers who were not producers and importers of the fuel.  The storage of jet fuel was owned by the Airports Company of South Africa‚ he said.

Tshifularo said cost could be an issue.  “SAA will still want the best deal out of the transaction.

“They will still need the best price of the product.

And jet fuel is a very competitive market.”

SAA spokesman Tlali Tlali said the airline would be meeting with domestic suppliers of goods and services early next month when “clarity and details will be provided on a range of questions around transformation and supply by black industrialists”.

According to SAA‚ approximately 90% of domestic “jet fuel uplift” is at OR Tambo International Airport and is supplied by five major oil companies, amounting to about R10-billion per annum.

SAA’s jet fuel contracts are signed on an annual basis as suppliers usually avoid committing for lengthy periods due to exchange rates and commodity price fluctuations.

Vermooten said it would be difficult to introduce new players in jet fuel production because suppliers already existed and were mainly overseas.

He said a single refinery could produce fuels such as diesel‚ petrol‚ jet fuel and paraffin as products and byproducts.

SAA’s smaller size in comparison to some of the major airlines in the global industry limited its ability to create new industrialists for fuel production and aircraft manufacturing related production‚  Vermooten explained.

He  said the government needed to ensure the sustainability of the businesses after receiving the “boost” from SAA or localisation programmes.

SAA board chairwoman Dudu Myeni last week bemoaned the fact that jet fuel suppliers needed R1-billion of insurance to provide the airline with fuel‚ regardless of the number of litres‚ saying it was limiting local players from entering the market. — BDLive

 

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