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Procurement Trends in the Aviation Industry

Question 1

A performance based contract refers to a contracting method that emphasizes on results. It

usually focuses on elements such as outputs and quality that will determine whether a contractor

will receive payment or have his contract extended. This can only happen when the contractors

attain specific and determinate performance standards.

One common question surrounding performance based contracts (PBC) is the benefit that

they have over the traditional contracts. The question has remained unanswered to some people

because of the availability of only anecdotal evidence. The proof lacks because the success of

PBC has mainly been associated with the performance and payment contractors receive. Despite

the relative lack of evidence, PBC has shown its worth in many procurement situations. When

compared with performance based logistics (PBL), it has been noted that PBCs have certain

advantages (Gross and Schröder 35). PBLs can only deliver the low cost of services per unit of

performance when they are skillfully constructed and renegotiated.

The benefits of the PBCs have been highlighted by the IACCM who found that these

types of contracts can create a better relationship between buyers and sellers. In fact, PBCs have

allowed these traders to have difficult conversations that usually they look to avoid. Another

merit of a PBC is that by aligning the goals of a contract clearly, it leads to better performance.

Studies have also shown that PBCs can reduce the impact and likelihood of risk taking place. If it
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does, it can only do so up to the acceptable levels. PBCs have also allowed airline partners to

develop mature and long-term relations with each other. When the conditions for doing trade

change, PBCs can come up with creative solutions to deal with these problems (Gross and

Schröder 47). Such kind of contracts have also afforded carriers some form of flexibility while

choosing their inputs. PBCs have also allowed airline companies to align the interests of the

project partners with theirs.

Despite these obvious advantages, studies have also shown that performance-based

contracting has its shortcomings in the aviation industry. The IACCM led in listing these

demerits stating that a high level of complexity exists when these PBCs are assigned to

undertake certain roles. One of its biggest problems lies in defining boundaries when it comes to

identifying the “acceptable” elements in a contract. Aviation firms who use PBCs have also

claimed that such kind of contracts takes away some perceived control from them. While using

them, negotiators have complained about the complex nature of such discussions before

concluding a contract. PBCs have also been found to bring high uncertainty levels since the

contract does not prescribe the means of attaining the desired project outcomes. It is also

uncertain in that it fails to specify in detail how a desired project outcome will be attained. Some

businesses have complained regarding the costly of the performance-based contracts (Gross and

Schröder 51). These people argue that PBCs not only require a high level of coordination but

also high costs of monitoring. Due to their nature, PBCs call for an intense exchange of

information between trading partners. Businesses have termed this a tiresome and expensive

activity to undertake.

Question 2
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People differ in their personal characteristics. Some of these traits come to individuals naturally

while others do not. Just like in any other business, the professionals in the aviation industry

must understand the skills needed while indulging in negotiation activities with their partners.

Many negotiators when asked whether their goal in a negotiation is to build a relationship or

create a negotiated agreement, many of them always went with the latter because they consider

that the task at hand (Gross and Schröder 133). However, this has not been the case.

Great business negotiators are those who can negotiate continually. Just as negotiations

between countries continue after signing a treaty, the same applies for businesses after signing a

contract. A contract is nothing more than just words. However, a contract is based on a

relationship implies that connection is characterized by collaboration and trust that exists

between any two given companies. A business deal that lasts for a long times suggests that the

said companies are in a continuous negotiation. In most cases, it has been noted that elements

such as differences in culture and business sector can lead to failure during negotiation in the

aviation sector (Gross and Schröder 156). A good negotiator is one who seeks these sources of

conflict and deal with them before they can prove costly in the future.

Good negotiators, especially those in the aviation industry are those who seek to

harmonize interests of the parties concerned. They understand that building relationship lies in

understanding the concerns and priorities of the other parties. It is important that negotiators put

themselves in other people’s position (Gross and Schröder 161). In the aviation industry,

different airlines often have different apprehensions and precedence that another airline must

consider when entering into business deals with them.

Studies have also shown that great business envoys are those that have patience. In a

sector as big as the aviation industry, creating and managing relationships is not easy because it
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is a time-consuming process. In America, executives have been known to rush during their

business dealings often with the narrative that “time is money.” While this has worked for some

of them in some situations, some business deals have failed to go through because of this

unnecessary rush. Some of these executives have even gone ahead and reduced the negotiation

preliminaries in the name of completing a deal within a short time (Gross and Schröder 163).

Even though it is important to consider the time element while making these agreements, it also

important to note that hurrying up a negotiation can undercapitalize a deal.

A great business negotiator is also one who can listen aptly. One biggest assumption in

the negotiation business is that the process is mainly about talking. However, it is time people

understood that the best conversationalists are not usually the best mediators. Being successful in

this kind of work requires one to listen more and speak less. In fact, successful negotiators must

keep be vigilant about their words and behavior. Negotiations also involve keenly observing the

other party. Finally, a good negotiator in this field must also show respect to the other parties.

International diplomacy categorizes respect and deference as its fundamental norms. Since

negotiation in aviation takes place on such a wider scale, it is imperative that a negotiator learns

to show respect (Gross and Schröder 165). The negotiation between Northwest Airlines and

KLM that took place in 1993 showed how respect can help in forming a perfect alliance.

Northwest understood that KLM being the smaller airline was sensitive about its status. Despite

this, it still treated the organization with mutual respect.

Question 3

1. Pre-award Phase

In a typical negotiation for purchasing a good or service, three major steps are often involved,

including the pre-award, award, and post-award phases. Before buying jet fuel, for example,
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airlines must undergo this pre-contract phase. It is the most important part in all the phases

involved. At this stage, airlines often consider issues such as standards of ethical practice that

will govern how they conduct business with the jet fuel suppliers. At the pre-award phase of

buying a jet fuel, the contractors also consider the importance and objectives of the contract they

have made (Rudeloff 13). Other issues such as types of statement of work are also considered at

this point.

It does not stop there during the pre-award phase. The contractors also have to assess the

risk involved during the process of acquiring the jet fuel. In recent times, cases of jet fuel

hedging have hit the industry. These are some of the issues this chapter should look to solve. The

risk of the contract has also to be made at this point so as to govern how the airline and the jet

fuel provider will operate going forward. At this period, the airline can also discuss the type of

contract it will have with the fuel distributor. Another issue that the airline will have to discuss

with the jet fuel provider is the subject of economic price adjustments. The price of jet fuel often

seem to fluctuate depending on the economic situation. In the pre-award phase, the two

organizations can agree on how to handle such changes (Rudeloff 15). Other elements involved

in this phase include contractor qualification best practices and electronic valuations.

2. Award Phase

After the pre-award phase, the next stage is the award step and it also involves a host of

activities. Since it is purchase of jet fuel, two major issues will arise. The first one is the elements

of cost that will constitute the price. The airline and the fuel provider must determine this. The

two parties will have to determine whether the distribution cost will be included in the price of

the fuel or if the charges will be listed differently. While doing this, the two firms must also

discuss how they will both make a fair and reasonable profit from the dealings they do (Rudeloff
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23). During this phase, the integration clause must also be included to protect all the parties

involved.

During the award phase, the airline must indulge in other activities like inspection. After

scrutiny, the organization can choose to either accept the fuel offered or reject it. At this point,

the issues of warranty must also be considered. In any business dealing, it is important to

consider how to deal with changes or variations in a contract. This will help the airline if in the

future it seeks to obtain fuel from other vendors. The method of payment is another issue that the

airline has to consider during this stage (Rudeloff 31). For fuel, it would be advisable for an

airline to indulge in advance payment to avoid cases of shortages.

3. Post-award Phase

The post-award phase is the final stage of the contact management process. One of the most

important things is the contract administration process. It will determine various processes such

as how the performance of both organizations is monitored. For example, the airline must make

its payments in advance to allow the vendor to distribute the jet fuel in time. The liquidated

damages clause must also be prepared at this juncture to prepare the businesses for any

misfortunes that might occur to either business. They must also discuss the elements that might

constitute a breach of contract. The airline might suggest that if the fuel supplier provides low

quality fuel, then this should amount to a breach of contract. The post-award process for such a

business usually closes with reviewing the final contract and closing out the process (Rudeloff

45). If anything should happen between the jet fuel supplier and the airline, then the three

directives above will act in sorting out the situation.

Question 4
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Different businesses have their own ways of identifying their suppliers. Recent study of the

aviation industry has revealed that American airlines often consider supplier performance before

selecting them. These airlines do a number of activities, including working on communication to

improve the performance of these vendors. The airlines do not want to blame everything on their

suppliers when things go wrong because this has been the excuse they have always provided in

such situations in the past. Airlines today are geared towards making things by changing the

ways through which they select their suppliers (Rudeloff 56). Recent trends have shown that

airlines often look to create an adversarial relationship with their suppliers by being tough with

them in order to get a good business deal. However, this has not often worked.

The most profitable and successful airlines are those with trusting and collaborative

relationships with their suppliers. One things that many airline managers agree with is the fact

that this sector has some catching up to do when it comes to the subject of supplier relationship

management. The source selection criteria has changed much to the extent that airlines do not

look for the best suppliers, but rather those with whom they can develop the best of relationships.

The era of blaming errors on suppliers and then moving to the next one seems to be coming to an

end (Rudeloff 61). Today, it is a matter of having planned events with the supplier then

determining the one who can offer an organization the best business deal depending on the

dynamics.

Works Cited
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Gross, Sven and Alexander Schröder. Handbook of Low Cost Airlines: Strategies, Business

Processes and Market Environment. Berlin: Erich Schmidt Verlag GmbH & Co KG,

2007. Print.

Rudeloff, Tobias. Procurement Decisions in the Airline Industry: A Real Options Approach and

the Bargaining Problem. Hamburg: Diplom.de, 2009. Print.