19 June 2008
Scandinavian Airlines (SAS) has asked its suppliers to reduce their prices by 10 per cent in an effort to cut costs.
Vendors were asked to play their part in helping to turn around the company's finances after it suffered a fall in earnings at the start of the year, affected by the rising cost of jet fuel. They learned about the initiative in a letter from chief procurement officer Patrik Knutsson.
"We're under pressure because of rising fuel costs and talking to our supply base in the need to make reductions," he told SM. "One of our goals is to co-ordinate and consolidate the number of suppliers."
He said the company would honour existing contracts and would not be enforcing the reductions on vendors. It hopes to strengthen relationships with suppliers who co-operate and contribute to the price reductions.
As Knutsson stressed: "No supplier is responding with a negative point of view and we're being open about the reductions because we don't believe we're doing anything unethical."
SAS also plans to take 11 aircraft out of service and cut up to 1,000 full-time staff as part of its scheme to combat the "economic slowdown" it is experiencing.
Suppliers to the industry were not surprised by the action. Ulf Pettersson, managing director of Swiss materials supplier EMTC Aviation Services, said the request was not uncommon.
"Asking for a 10 per cent reduction in prices is admitting you have no clue of what goes on in the industry that you are a part of," he explained.
"Suppliers will always try to beat each other with better services and lower prices and if you are a good purchaser you should know when you have reached the limit of what you can get."
Knutsson said he would not be surprised if other airlines introduced similar measures in the future.
John Armbrust, chairman of consultancy Armbrust Aviation Group, said the current market is tough for buyers in the industry. In the US some suppliers are demanding airlines pay cash deposits for fuel, because of tightening payment terms.
He argued fuel prices were unlikely to fall in the foreseeable future and this would have to be factored into logistics costs as well as direct fuel supplies.
He added SAS's bid to cut costs was not unusual. "This happened years ago and suppliers went home saying the airlines were crazy. They will have to decide if they want SAS's business or not.
"It can ask for the reduction but it won't necessarily get it. The only way it can bring prices down is if it reduces consumption. If SAS cuts capacity by 20 per cent, that would have real meaning."