Aer Lingus Assess Supply Base Essay

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O'Leary's forthright comments might lead one to believe that the only green concern he has is the livery of Aer Lingus, against which Ryanair recently launched a hostile takeover bid. But the climate change debate is gathering momentum and the impact of air travel on the planet is increasingly coming under the spotlight. (Gray, 2006)

Purchasing as a Means to Manage Supply Chain Risk?

Procurement processes as an active means to reduce the risk in managing the supply chain is rather a common occurrence. The aviation industry relies on the natural resources that drive the production of aircraft parts and the cost of mining crude oil and the refining process to yield gas creates volatility, which in turn with supply/demand cycles, create constraints that spike prices making purchasing during certain periods, inopportune and potentially cost prohibitive.

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According to Rathbone (2003), "Other than this local carrier, a number of international airlines service Ukraine, including British Airways, Lufthansa and Air France. Aer Lingus has just announced that it will fly in from Dublin via Manchester." (Rathbone, 2003) The supply chain risk in the case of Aer Lingus are mitigated by expanding routes to the current supply of manageable resources. By increasing the velocity in the use of resources under management, the supply chain risk is inherently lower due to the increase in projected revenue from the increase in traffic generation. The increase in profit enables the development of inventory supply houses to store such necessities as fuel either in pumping form or in derivatives management to take ownership of a fuel contract at a specified date where fuel is purchased at a cost lower than prevailing market.

TOPIC: Essay on Aer Lingus Assess Supply Base Assignment

According to Ireland: Competition and Price Regulations (2011), "Exclusive distribution agreements are sometimes allowed, depending on whether there is competition in the supply chain for a particular product. (Ireland: Competition and Price Regulations, 2011) The EU is against anti-competitive mergers, as is indicated in the previous section using the merger and acquisition reference. However, the supply chain risk can be mitigated should competition exist in the supply chain. Fuel is such a supply constraint and is subject to exclusive distribution agreements.

Aer Lingus as a nationalized airline (Carey, 1985), established a diverse line of businesses, which added to the supply chain risk. However, at the time, supply chain risk was not the demon it is today. Therefore, Aer Lingus was able to operate at a marginal profit as these additional business lines added value to a relatively flat airline operation.

According to Carey (1985), "The airline faces major fleet-replacement costs, and can't count on either the government or its airline operations to fund a new $500 million short-haul fleet. Aer Lingus plans to wring more out of the airline and find more ways to diversify in an effort to double profits, thus paying the costs of keeping Aer Lingus planes aloft without dragging down its other profit centers. "The onus of fleet replacement rests on Air Lingus itself," warns an official of the Irish Civil Aviation Division." (Carey, 1985)

Air Lingus' activities in multiple industries facilitated supply chain risk to unprecedented levels as the business diversified into unrelated industries by buying businesses in different areas. According to Carey (1985), "Aer Lingus hotel business, in 1976, the airline bought Dunfrey Hotels Corp. In the financial and commercial field, Aer Lingus has spun off its expertise in computerized reservations systems into Cara Data Processing, a unit that sells payroll and records systems to banks and retailers, communications equipment to the Irish phone company and hotel reservation systems in Asia. The purchase ate last year of Altek Automation Ltd., a British company that distributes Japanese robots, is Aer Lingus's first foray into the robotics and automated-systems business." (Carey, 1985)

Risks Arising from Procurement

In the case of Aer Lingus, the risk is ostensibly in the regulations that prevent procurement. The airline Ryanair did seek to purchase Aer Lingus in a hostile takeover bid for the competing Irish airline. The procurement of Aer Lingus by Ryanair is a method to consolidate the industry and obtain new routes and increase market share. However, the merger was blocked by a convening commission.

According to Onno, Goyder, Mes (2008), "To defend the merger, Ryanair had calculated that the efficiencies from combining the operations would amount to more than EUR 200 million per year, to be achieved by reducing the staff, reduce aircraft operational cost through its enhanced bargaining position, reducing maintenance costs by negotiating better contracts, obtaining better airport charges through negotiations, reducing ground operational cost and reducing distribution and advertising costs by shifting the sales model to a near 100% online sales model. In relation to the transfer of the aircraft delivery options to Aer Lingus the Commission also found that this is only the transfer of rent between the shareholders of Airbus or Boeing and the merged entity." (Onno, Goyder, Mes, 2008)

The risk of government intervention is inherent in the operations of oligopoly markets. Airlines and Telecommunications are prime examples of procurement risk to supply chain management. Such risk prevents companies that operate at the margin from potentially increasing revenue by increasing economies of scale and scope by procurement.

According to Doherty (1997), "Typical of AlliedSignal's niche deals is the rumoured $36 million purchase of an aircraft-maintenance company, Team Aer Lingus, a unit of Ireland's state-owned airline Aer Lingus Group. AlliedSignal's reliance on growth through acquisitions poses some risks" (Doherty, 1997) Risks associated with risk management and growth through acquisition is corollary to supply chain management risk as the acquisition assumes the inherent risk associated with the current supply chain of the acquired company.

The additional risk is to assume that the acquisition company is able to increase the units produced by its current supply chain partners, should the acquisition company decide to no longer conduct business with the old supply chain vendors of the acquired airline. Other risks include speculating that oil prices will ride and thus purchasing contracts to take delivery of petrol at a given price, risk is seen should the market turn the other way, prices go down and prevailing market prices trend below the delivery price.

Further examples include innovation in aircraft engines or other mechanical parts that shift the technology curve to the right, effectively lowering the demand and market price for existing aircraft technology and parts. Inventory supplies of such parts may become obsolete and valued at or below cost, making sales to 3rd parties impossible and rendering use in current planes under operation as a facilitator of obsolescence. This is viewed as extremely negative by consumers and shareholders whom ostensibly pay competitive rates or even a premium to travel.

Commodity Hedge for Aer Lingus

The company can seek to hedge its commodity costs by tracking commodity prices against company forecasts and against global GDP forecasts, which provide an indication of consumption in the future. As of August 29th 2006, Oil futures priced at $70.61/barrel and gold at $615 per troy ounce. Additionally, the S&P index at 1301.78, the NASDAQ Composite at 2160.70, and the Dow Industrials at 11352.01 (Business and Finance, 2006)

When commodities hedging is either neglected or inappropriately applied, labour reductions and staff shortages are often the next step in supply chain management of commodities. According to Europe Report (2011), "Aer Lingus pilots represented by the Irish Airline Pilots Association accepted annual pay cuts of EUR 30 million that were recommended by an Irish Labour Relations Commission arbitrator." (Europe Report, 2011) Airlines are subject to tight margins and volatile commodities pricing. By tracking historical commodities pricing and engaging in strategies that reduce commodities pricing risk, the cost of inherent risk is reduced.

Higher commodity prices yield higher energy costs, which reduce profits. The appropriate hedging strategy for energy is to buy gold, whether it is the actual bullion or using the equity and commodities exchanges to buy the exchange traded fund, the derivative that trades the underlying value of gold, or equities that represent gold throughout the supply chain.

According to Phillips (2008), "Commodity and energy cost increases were higher than originally anticipated. Diesel fuel, phosphates and resins, just to name a few, increased significantly during the quarter. To offset this significant commodity and energy cost pressure, we have announced a number of price increases, which go into effect during the January-March quarter. On January 31, 2008, The Dow Jones Industrial Average rose to 12650.36, the S&P to 13780.50, and the NASDAQ to 2389.86, Oil futures receded on recession worries reversing five days of gains. The dollar strengthened against the yen and euro." (Phillips, 2008) Options contract and futures trading along with currency hedging provides a method to offset the risk of rising energy and materials prices.

References

"A Change of Direction." International Financial Law Review (2011): n/a. ABI/INFORM Global. Web. 25 Mar. 2011.

Brouwer, Onno W., Joanna Goyder, and Daniel Mes. "Developments in Ec Competition Law in 2007: An Overview." Common Market Law Review 45.4 (2008): 1167. ABI/INFORM Global. Web. 25 Mar.… [END OF PREVIEW] . . . READ MORE

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