Question
Produce and present a procurement and supply related business project which:
Identifies clear benefits through a business case for your organisation or/and the wider supply chain uses comprehensive research methodologies showing clear understanding of outputs
uses knowledge, synthesis of good practice and research outputs to develop positive measureable outcomes
demonstrates and outlines recommendations and implementation strategies
will be presented to your senior management by way of an oral presentation consisting of a question and answer session
Note – This project must be a non-existing piece of work
Solution
Table of Contents
1.1 Project title (Key Terms) 7
2.2 My Role in the Organisation. 13
2.3 Why this Project Matters and its Objectives. 14
3.1 EAG Operations in Australia. 15
3.2 Analysis of the Fuel Contracts by Etihad Airways in Australia. 16
3.3 Analysis of the Fuel Supply Market in Australia. 17
3.3.2 Supplier Positioning Analysis. 22
3.3.3 Supplier Preferencing Analysis. 25
3.3.4 Shareholders of Fuel Suppliers Analysis. 27
4.1 Different Options and Evaluation of Options. 28
5.0 Analysis of the Findings. 32
5.1.2 Legal Risk: Anti-Competition/ Anti-Trust 32
6.1 High Engagement of Etihad Airways Partners. 40
6.2 Messaging to Airlines Fuel Suppliers Representatives. 40
6.3 Airlines Fuel Suppliers Representatives Responses. 42
6.5.1 Selected Fuel Suppliers in different Airports. 44
6.5.2 Australia Fuel Supply Overall Evaluation. 44
7.1 Best Practice Recommendations. 47
7.2 Recommendations for Future Projects. 48
Appendix 2: Estimated Total Cost of Ownership. 55
Appendix 3: Etihad Airways Legal Guidelines for Joint Procurement Projects. 56
List of Figures
Figure 4: Procurement and Management Strategy Source: Etihad Airways, year 2016. 13
Figure 5: Etihad Airways Kraljik Matrix Source: Adapted from Kraljic 1983. 14
Figure 6: A Strategic Source Framework Source: Etihad Airways 2017. 17
Figure 7: Sydney Jet Fuel Supply Source: Shell Presentation year 2017. 20
Figure 8: Melbourne Jet Fuel Supply and Structural Issues Source: IATA Fuel Forum year 2017. 21
Figure 9: Brisbane Jet Fuel Supply Source: Shell Presentation year 2017. 21
Figure 10: Brisbane Jet Fuel Supply Source: Shell Presentation year 2017. 22
Figure 13: Supplier Positioning in Australia Fuel Supply Source: Adapted from Kraljic 1983. 25
Figure 14: Supplier Preferencing/Customer Positioning Source: Adopted from Steele & Court 1996. 28
Figure 15: Etihad Airways Sourcing Options for Aviation Fuel 33
Figure 17: The Tuckman’s Stages of Group Development Source: Adapted from Tuckman & Jensen, 1977) 39
List of Tables
Table 1: Essential Improvements of the Contracts Source: Observation from the Author 17
Table 2: Fuel Supply Market in Australia Airports Source: (Etihad Airways, 2017) 21
Table 3: Etihad Airways Profile at the Australia Airports. 24
Table 5: Etihad Airways Selected Fuel Suppliers in different Airports. 45
Table 6: Etihad Airways Australia Fuel Supply Overall Evaluation. 46
Table 7: Etihad Airways Fuel Supply Evaluation provided by Chevron email year 2017. 47
| Abbreviation | Full Meaning |
| EAG | Etihad Aviation Group |
| EY | Etihad Airways |
| BNE | Brisbane |
| IATA | International Air Transport Association |
| ITP | Into-plane |
| JUHI | Joint User Hydrant Installation |
| MEL | Melbourne |
| PER | Perth |
| SYD | Sydney |
| USD | United States Dollar |
Executive Summary
The primary aim of this project was to explore the different supply chain options for Aviation Fuel at Australian Airports to optimizing the overall benefits for Etihad Airways. Achievement of this aim lead to the attainment of the following goals;
- Establishing appropriate working relationships with the new and critical stakeholders in Etihad Airways group including the biggest supplier in Australia.
- Delivery of increased value evidenced through tangible savings and improved service quality to Etihad Airways through self-supply.
- Shaping the overall direction of the procurement partnership with the airlines in Etihad Aviation Group by developing new entrant in the market.
- Tankering fuel to ensure they are getting the best price of fuel for Etihad Airways.
- Leveraging on the opportunity of changing their aircraft type to a more fuel efficient type for mitigating the risk of exposing Etihad Airways to the high fuel cost.
The focus of fuel supply has been informed by the fact that fuel represents a critical aspect of the airline’s operations. This is the highest area of spend US$ 337 million in the company hence characterized by high risk and business impact. In Australia, there has been a shortage of fuel, therefore, limiting the success of Etihad Airways and their partner airlines operations. In the analysis, the tools used included the Porters 5 Forces for complexity, supplier positioning, supplier preferencing and analysis of the shareholders. From the analysis, it has been observed that fuel supply in Australia, being a mature market is extensively complex and challenging for the airlines leveraging from a significant advantage. From the analysis, an improved understanding of the fuel supply in every airport inclusive of the respective strategic potential and risks linked with the suppliers.
There are possible strategies for increasing the supply that has been suggested and the integration of different regional tender for encouraging an increased competition. The primary risks of the recommended options included the partnership, legal, operational and commercial risks. In this case, relevant strategies and measures for mitigating the risks were taken into account and subsequently implemented.
Additionally, to establish the Etihad Airways Group Joint Procurement Team, a Tuckman’s model (adapted from Tuckman & Jensen, 1997) for accelerating the development and productivity of the team was done through phases of forming, storming, norming and performing. Distinct concerns were significantly addressed with clarity being emphasized in all their stages. Also, situational leadership was critical as it harnessed the collaboration of experienced professionals, a collaborative approach and harnessed communication, engagement and supportive behaviors in team leadership. From the analysis, there were close relationships established to be in existence in the airlines shaping a favorable direction of joint procurement partnerships in collaboration with the biggest supplier in Australia, self-supply, developing new entrant in the market, improving their overall procurement and service management reputation. The recommendations suggested include consolidation of their business volumes in diverse categories to harness self-supply, earlier market engagement through developing new entrant in the group, and collaboration with the biggest supplier in Australia. Also, it has been recommended the inclusion of Emirati Graduate Manager for successful future projects to decide whether to change the aircraft type to a more fuel efficient to mitigate the risk of exposing the airline on the high fuel cost. Hence, the changes would have on the implication on value creation and saving accrued costs.
1.0 Introduction
1.1 Project title (Key Terms)
Aviation fuel represents a significant level of expenditure for different airlines. In this case, it represents a substantial element of the management of any airline. As shown in figure 1 , it is evident that the different components of the fuel price are platts index/formula price, differential, taxes and fee, and credit terms, approximately 89.16 % of the overall fuel costs. In this case, the statistics for platts index/forumula price is 89.16 %, the differential is 10.39 %, taxes and fees 0.33 % and credit terms being 0.12 %. These prices and other components are pegged in US dollar.
Figure 1: Airline Total Fuel Cost Breakdown Source: (Means of Platts Singapore (MOPS) and Etihad Airways Fuel Plus System year 2017)
More than 60% of the overall airline cost base is passed to the suppliers. Admittedly, a successful reduction of these costs is a challenging endeavor (Yayla-Kullu & Tansitpong, 2013). This is informed by the fact that the majority of the suppliers are oligopolies for instance there exist two caterers in the majority of the airports, two aircraft manufacturers, and two main choices of the host-system providers.
Additionally, the majority of the accrued costs are not negotiable such as the fixed tariffs for the airports and the air-traffic-control charges. The phenomenon is complex by the contracts being long-term. Nevertheless, modern airlines have endeavored in setting elaborate structures that would lead to the development of strategic partnerships with their suppliers as a strategy of driving down the costs and optimization of the products and service levels. Taking into account the above analysis, the title of the current study is exploring different supply chain options for aviation fuel at Australian airports to optimize the benefits for Etihad Airways.
In this case, as part of exploring the various supply chain options for the Aviation Fuel, aspects of purchasing and supply chain management. As noted by McKinsey & Company (2017) a supply chain option with a potential of optimizing the benefits to Etihad Airways must be aligned with the overall airline strategy, engaging skilled teams of professionals in procurement, adopting an innovative approach to category management and supply chain design and structures encouraging progressive business-procurement partnerships.
1.2 Project Scope
As previously mentioned, this study intends to explore the different purchasing and supply chain management opportunities in Australia that can be used in the delivery of the best value to Etihad Airways. In this case, the location of the study would be in Australia with the company of focus being the Etihad Airways. Through a focus on this scope, the dynamics of Australian fuel market, other airlines such as Qantas and Virgin Australia, and strategic suppliers would be evaluated. The best option available for Etihad Airways would be explored on the basis of the extent in which the fuel acquisition price is competitive, streamlining and efficient contracting and facilitating the sourcing of fuel at short notice in alternate and ad-hoc locations globally.
1.3 External Environment
The external environment pertaining to the subject of focus is the Australian Jet Fuel Supply. Currently, Australia imports more than 40% of their jet fuel needs. This is a phenomenon that is projected to grow as a result of the consistent decline in the domestic production and significant growth in the requirements of the jet fuels. As noted by O’Connell (2011), a supply of the jet fuel in Australia’s major international airports is a complex and costly business. The complexity arises from the significant barriers to venture into the fuel industry supply chain in a timely and sequenced manner. The domestically produced jet fuel in Australia is stored at the Clyde and Kurnell refineries were from the storage facilities, the jet fuel is transported to Sydney Joint User Hydrant Installation (JUHI) either by pipeline or by truck. Also, in Australia, the supply chains are significantly owned and controlled by the companies providing jet fuel to airlines either individually or through strategic joint venture arrangements as shown in figure 2.
Figure 2: Australia Aviation Fuel Supply Chain Source: BARA (Board of Airline Representatives of Australia Inc.)
2.0 Background
2.1 Etihad Airways
Etihad Airways initiated its operations in 2003 and involved in the transportation of more than 18.5 million passengers in 2016 (Etihad Airways, 2018). From its Headquarter in Abu Dhabi, Etihad Airways is engaged in flying in more than 116 passengers, and cargo destinations staggered in the Middle East, Africa, Europe, Asia, Australia, and America. The progress of the company is evident from the fact that it currently has a fleet of 121 Airbus and Boeing aircraft with more than 200 aircraft on firm order.
Additionally, the Etihad Airways possess equity investments in Airberlin (AB), Air Serbia (JU), Air Seychelles (HM), Alitalia (AZ), Jet Airways (9W), Virgin Australia (VA), and Etihad Regional (F7). The airlines equally actively participate in the Etihad Airways Partners which is a newly established brand that is tasked with collaborating like-minded airlines in offering their clients an increased choice. The choices would be provided through an improved level of networks and schedules with a positive implication in enhancing frequent flyer benefits as shown in figure 3.
Figure 3: Etihad Aviation Group and Etihad’s Minority Share in EAG Airlines (Source: Etihad Airways, 2018)
The Etihad Aviation Group (EAG) which is comprised of Etihad Airways and all their partner airlines is the seventh largest grouping of airlines globally with more than 330 destinations and more than 700- aircraft and 100 million passengers annually. The group is characterized by concerted efforts of ensuring that they are building integrated networks and schedules, development of conventional products and services and more critically identification of business and cost synergies. Also, in terms of purchasing and supply management, there is a significant emphasis on practicing joint procurement for the delivery of real and significant savings in all the airlines in their group offering all the involved airlines with a real competitive advantage through lowering of the unit costs.
Etihad Airways intends to become the best airline globally. For the sake of attaining this, Etihad Airways must be a World Class commercially profitable and is an enabler in the attainment of the Abu Dhabi 2030 growth plan (Etihad Airways, 2018). One of the strategies already put in place by the company procurement and management is setting an elaborate strategy cascaded from the corporate entity strategy towards the set aim and based on the Balanced Scorecard as shown in figure 4.
Figure 4: Procurement and Management Strategy Source: Etihad Airways, year 2016
Considering Figure 4, it is evident that the company procurement and supply department has the role of becoming a trusted partner for their internal clients, engaging and harnessing the overall supplier relationships and performance.
The procurement and management strategy is usually a 5 years plan and as such it is still in an active implementation today. This is with a strategic and oriented focus on the innovativeness of their services. Additionally, the procurement strategy ensures compliance with the overall set company policies, delivery of projects strategically and punctually, accelerating and embedding the overall Emirati talent.
In contemporary high-pressure aviation environment, procurement and management strategy plays an instrumental role as an additional relevance. The approach is harnessing the improvement of the services quality while significantly reducing the overall costs. As a consequence of the Etihad Airways marginal profitability, it is relevant for their procurement and management department to make a realization of their overall savings targets and cost avoidance through leverage on their equity partner synergies through the joint procurement.
Fuel is the first highest spend category US$ 337M, approximately 40% of overall spend under the procurement and supply management. It is a significant category characterized by the existence of enormous risks and considerable business implication. It has a direct influence on the operations of Etihad Airways as the issue of transport directly impacts them. It directly influences their check-in, safety and departure time, critical to airline performance, high cost and brand impact. The relevance of fuel area of spend is evident from the Kraljic Matrix as shown in figure 5.
Figure 5: Etihad Airways Kraljik Matrix Source: Adapted from Kraljic 1983
2.2 My Role in the Organisation
The researcher is part of the procurement and supply management department team. The specific role is procuring fuel for Etihad Airways in the Asia Pacific and Southeast Asia outstations in an ethical, strategic and on-time manner while ensuring that the organisation maintains its position as a procurement and supply management brand, fulfilling its strategy and set goals.
A significant part of the author roles is acting as a hub of interest’s coalition in the facets of the organisation. The collaboration of interests often tend to target their partner airlines and suppliers and active facilitation of collaboration to harness the following objectives;
- Linking the objectives of the procurement and management team and regular communication and effectively to partners and suppliers.
- Leveraging a strategic alignment with other categories and airline partners in tandem with corporate strategy and overall objectives.
2.3 Why this Project Matters and its Objectives
The main aim of this project is improving the supply of fuel in Australia, mitigating the barriers faced at Melbourne to optimize the benefits for Etihad Airways. The objective is generally a strategy of ensuring the improvement of fuel supply for Etihad Airways in Australia.
Over the past, Etihad Airways faced a problem of fuel shortages in the Australian Airports and particularly Melbourne (The Guardian, 2016). To mitigate this, in most instances, Etihad Airways has been forced to tanker fuel and taking considerably larger fuel load into Melbourne and as such only a small top-up has been necessary at Melbourne. This is significantly impacted by the vulnerability of the Australians fuel supply which is substantially dependent on the imports after the closure of their refineries (Curran, 2012). This has been as a consequence of intense competition from direct fuel imports from the lower-cost operations in entire Asia. In this case, it is essential for Etihad Airways to edge the competitiveness available and have a constant fuel supply.
Etihad Airways reported a US$ 1.52B loss in 2017. A similar phenomenon occurred their partner airlines apart from Air Serbia (JU) and Air Seychelles (HM) which recorded profits. According to Gulf News, Aviation (2019), Etihad Airways would continue facing significant challenges as a consequence of the continued increased in the fuel costs. This is evident from the warning provided by industry body International Air Transport Association (IATA) on labor and fuel comprising of half of the airline’s operating expenses as a significant problem in 2018. This is evidenced by the IATA report that has cited increased fuel prices as a significant challenge affecting the aviation industry. Prior to partnering with Virgin Australia, the company had all high-cost increases in their fuel consumption leading to their operations in Australia to be deemed almost impossible. This is a critical concern since the costs increase in the fuel category elicits a significant implication on the Etihad Airways and Etihad Aviation Group Direct Operating Costs. It is essential to ensure that the costs increases are maintained at the very minimum values and as such if there is a possibility to harness cost reduction.
Currently, the Etihad Aviation Group is still in its infancy stage of growth. In this case, despite Etihad Airways having a joint procurement project in its areas of operations with Air Seychelles and Jet Airways in Asia, it is their initial collaboration with Virgin Australia. Hence, this is a critical chance of establishing a closer and detailed procurement partnership with Virgin Australia and furthering the strength of their common procurement foundation with other partners.
3.0 Current Situation
3.1 EAG Operations in Australia
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