This archive report was first published on 19 November 2019.
On November 19, 2019, a regional aviation fuels consultancy revealed a disturbing trend in Kenya's jet fuel market. A single oil marketer dominated the market with a staggering 66% of total jet fuel sales, according to statistics from the Petroleum Institute of East Africa (PIEA).
For comparison, the two largest multinational marketers had a mere 2.5% market share each. This stark contrast raises concerns about market concentration and the potential for predatory pricing.
Jet fuel sales in Kenya amount to approximately 800,000 cubic meters (M3) annually, which is roughly 14% of all petroleum imported into the country. This significant market share is a cause for concern, as it may indicate that the dominant marketer is engaging in price undercutting.
Jet fuel is imported jointly by all marketers at the same cost and transported by the Kenya Pipeline Company (KPC) to airport aprons. The fuel is then fed to aircraft 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.
Given that all marketers incur essentially the same supply and operational costs, a marketer with a large market share is likely to be engaging in price undercutting. This could lead to predatory pricing, where the dominant marketer sets prices below cost to drive out competitors.
The risks associated with this situation are numerous. Firstly, if the dominant marketer is indeed engaging in price undercutting, the overall aviation fuels sector may underperform on taxable profits. This could result in the Kenya Revenue Authority (KRA) underperforming on corporate tax associated with aviation sales, which account for about 14% of total Kenya oil business.
Secondly, the value addition to the economy by the investments in KPC's jet fuel logistics facilities becomes negligible if profits are being forgone. Furthermore, 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 dominant marketer experience 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 a risky situation.
Finally, overly cheap fuels at Kenyan 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, this would be a different story.
History has shown that Kenya faced a similar pricing scenario in 1980, when jet fuels at JKIA were the lowest between Johannesburg and London, and Caltex had about 60% market share. The Treasury decreed a 'minimum airport price' to stem loss of dollars through low jet prices, and the Competition Authority should crack this perceived low jet fuel prices situation today.
