Ideas & Debate

Having one dominant jet fuel marketer is risky

OVI

While undertaking a regional aviation fuels consultancy recently, I came across a single oil marketer in Kenya with as much as 66 percent of total jet fuel sales, according to statistics from Petroleum Institute of East Africa (PIEA). For comparison, I also checked jet fuel sales of the two largest multinational marketers, and each had about 2.5 percent market share. When traditional kings of the industry are hardly selling Jet fuel, then there must be something amiss.

And we are talking of 66 percent of total annual jet fuel sales of about 800,000 cubic meters(M3) which is roughly 14 percent of all petroleum imported into Kenya annually. This is what competition experts would call risky market concentration.

Jet Fuel is by law imported jointly by all marketers at the same import costs and transported at the same cost from Mombasa to airport aprons by Kenya Pipeline Company (KPC). The fuel is fed to aircrafts through common hydrant systems owned by the Kenya Airports Authority (KAA). The only assets owned by any jet fuel marketer are small trucks called servicers which are mounted with fuel metering equipment. Therefore, all the marketers incur essentially the same supply and operational costs.

For a marketer to have such a large market share, chances are that there is serious price under-cutting, which puts the Jomo Kenyatta International Airport (JKIA) prices probably lower than many regional and international airports. The International Air Transport Association(IATA) protocols do not permit governments to regulate jet fuel prices. What are the risks of what appears to be a predatory pricing situation?

Firstly, if indeed there is serious under-cutting of prices, then the overall aviation fuels sector is in danger of under-performing on taxable profits, which means the Kenya Revenue Authority (KRA) could also be under-performing on corporate tax associated with aviation sales, which account for about 14 percent of total Kenya oil business.

Secondly, since the entire KPC jet fuel logistics facilities are public assets, value addition to the economy by these investments becomes negligible if indeed we are forgoing deserved profits. Further, the country is availing huge amounts of dollars to finance international jet fuel business with little value addition to these scarce dollars.

Thirdly, should the particular marketer, for whatever reason, finds itself in a sudden financial distress, the aviation operations would be compromised. All it takes is for one large airline to default on fuel payments to bring the marketer to its knees. Without ready alternative suppliers, this becomes risky. This is a case of too many eggs in one basket.

Finally, overly cheap fuels at our airports are assisting other regional and international airlines to unfairly compete with Kenya Airways (KQ) at its base location. If KQ was a dominant regional and international route player (which it is not) this would be a different story.

I will now rewind back to 1980 when Kenya faced a similar pricing scenario. Jet fuels at JKIA were the lowest between Johannesburg and London, and Caltex had about 60percent market share. Its airport prices were suspected to be below cost, probably recouping the loss through packaged prices at other airports.

This is when Kenya had a serious foreign exchange deficit due to a three-fold hike in crude prices pushing petroleum import bill to 30 percent of total imports. To stem loss of dollars through low jet prices, the Treasury decreed a “minimum airport price” which was above the average of prices along the Jo-burg to London route, and IATA of course made some noise. Kenya was finally making a return on the dollars allocated to import jet fuel, and not subsidising the international aviation business.

The irony is that overnight oil marketers, and in particular Caltex, were in significant windfall profits due to higher minimum prices. The Treasury devised a “hidden tax” to recoup the windfalls. It was labeled “Commissioner of Land Levy” on the KPC plot at JKIA, to be collected by KPC on jet fuel throughputs, and remitted to Treasury via Lands ministry.

This history mirrors the perceived low jet fuel prices situation we have today. It is a mystery which the Competition Authority should crack, unless it is an imaginary problem which I do not think it is.