On the way to the global Top 20

Gazprom Magazine

Gazpromneft-Aero CEO Vladimir Egorov answers our questions

Gazprom Magazine №12, December 2017

Twice as many passengers

— Vladimir Egorov, your business has been running for 10 years. How has the Russian aviation refuelling market changed in that time?

— There have been massive changes over the last 10 years. In 2007 there were a lot of domestically produced aircraft on the Russian market — Tu-134s, Tu154s, lots of “Il” planes — which tended to have fairly high fuel consumption. The majority of these planes have been decommissioned since then. Today, all long- and medium-haul flights are covered by Boeing and Airbus vessels. The latest Russian planes — Sukhoi Superjet 100s — have started appearing at several airlines. Fuel consumption has decreased during that time.

Passenger traffic has increased twofold, standing at 45,000 million people a year in 2007, and reaching 88.6 million in 2016. And the 2016 figure, moreover, was not just lower than the pre-crisis peak of 2014 (at 93.2 million people), but was also below the 2015 figure of 92 million.

If we’re talking about current trends, then the market has begun to recover, at a rate we were not expecting in 2016. Growth in passenger traffic, according to Rosaviatsiya data, totalled 19 percent in the first six months of this year, and reached 20 percent over the first nine — with more than 80 million people flying between January and September. If this growth is maintained in Q4 then this will significantly exceed the pre-crisis peak. We expect Russian aviation to breach the 100-million-passenger barrier in 2017.

Again, if we’re talking about the domestic market, then it’s very promising. Because of the huge distances involved, we in Russia simply have no choice but to use aviation extensively, in order to move about the country comfortably. The more mobile the population , the more fuel is used, and the better for fuel companies. And — and by no means least — the popularity of air travel among the public is growing, due to government support for air transport. This is particularly important for the Russian Far East and the remote regions of the Russian Far North.

In-bound international tourism is also increasing. Particularly from China. I think that growth will continue. We recently had a discussion with some Chinese colleagues, who shared with us ambitious plans for the construction of new airports in the People’s Republic of China; they are also counting on an increase in passenger transport between our two countries. Our company has seen a quite significant increase in refuelling volumes, both within China and for Chinese aircraft in Russia.

— Passenger traffic has increased mainly due to international flights?

— No, internal and tourist traffic has increased at the same level.

Guests from the Celestial Kingdom

— And what’s the reason for this growth?

— Internal tourism has been showing excellent growth in recent years. The economy is reviving, and with it, business activity. Fuel prices remain reasonably stable. And this, too, promotes more air flights. It’s important to note here that the state has become much more effective in following the fuel market over the last 10 years — having become much better at monitoring the fuel price, as well as at pricing air transport, which also promotes market stability. Stability means that both airlines and passengers can plan their expenses in advance. In which context, there’s nothing miraculous about the growth in 2017 — we’re simply seeing the return of those processes that were showing a positive impact on the industry prior to the crisis.

We’re now seeing enormous potential in international tourism, for Russians flying abroad. During the crisis, a number of foreign airlines reduced their flights; and, thus far, by no means all of them have been reintroduced. And the demand is there. According to our estimates, international airlines could increase their market share of inbound Russian flights by 15 to 25 percent by opening up direct flights from Russia’s regional airports. Gazpromneft-Aero’s cutting-edge refuelling network, among other things, could help with that.

If you take foreign tourism, for example — then experience at the biggest airports in Siberia and the Russian Far East (Novosibirsk, Ekaterinburg, Irkutsk) is instructive. You can see significant growth here, driven by Chinese tourists. Not all tourists use direct flights between capital cities. May make stopovers. Added to which, not everyone is interested in Moscow — and these people fly to other cities.

The Asian refuelling market is developing steadily, and fast. Our company has been developing its partnership with China’s national fuel supplier, China National Aviation Fuel (CNAF), since 2015. Initial cooperation between a CNAF subsidiary and Gazpromneft-Aero, actually, coincided with active growth in passenger traffic between our two countries. According to Russiatourism data, in 2015 tourists from the People’s Republic of China took more than one million trips to Russia; in 2016 this figure had increased by 63 percent.

Under a new agreement, we opened our own airport network to CNAF and, from 1 February 2017, began refuelling Air China planes at Sheremetyevo International Airport (Moscow). At the same time, thanks to a cooperation agreement with CNAF, we have been able to refuel our own clients at 17 major airports throughout China. Since early 2017 our company has doubled refuelling volumes in that country, year-on-year, to more than 9,000 tonnes.

As regards Russia, regional air travel continues to grow. This means airports in Povolzhye, Siberia, and the Russian Far East. In 2007, it was difficult to fly from one city to another if you were bypassing Moscow. And it costs you. I personally, in order to fly from Ekaterinburg to Chelyabinsk, and then on to Orenburg, had to fly via the capital. Now regional airlines are starting to appear. There’s even a flight (on a L-410) from Ekaterinburg to Orenburg. Planes might not be flying every day, but they are flying.

10 million tonnes

— Between 1990 (which I understand is seen as a benchmark in the industry) and the 2000s, two thirds of airports were closed. And if passenger traffic is now close to record levels, then how do things stand with infrastructure?

— The number of airports remains stable. New airports are being built in Saratov and Rostov. New terminals are being erected in Moscow (Sheremetyevo) and Simferopol. Major runway refurbishment is underway at many airports. Development is ongoing.

The outlook for these investments can be judged by fuel expenditure. Which is growing. That means that existing airports are in demand.

— How has fuel consumption changed in recent years?

— Fuel consumption has increased over the last 10 years. In 2007 it stood at 7.4 million tonnes; there was a short-lived downturn in 2009 (during the previous crisis) to 6.5 million tonnes, but by 2014 this figure had reached 10.2 million tonnes. There then followed another drop — to 8.8 million tonnes — in 2016. But demand for aviation fuel stood at 7.5 million tonnes over the first nine months of 2017 — which is 13 percent up year-on-year. Retail sales volumes increased by 10 percent, to 6.5 million tonnes. I would suggest the Russia-wide figure will increase to 9.86 million tonnes this year.

If we’re talking about our own company, the sales over the first nine months of this year stand at around 2.5 million tonnes — up five percent year-on-year. We have maintained our leading position in the Russian market in terms of retail sales, increasing “wing-tip” sales by 17 percent, to more than 1.8 million tonnes.

Our reputation works in our favour, as does the fact that we invest a great deal. Total investment this year will be about RUB2 billion. That includes both the refurbishment of refuelling complexes, and the construction of new ones. We’re investing in automating production, in automating sales processes, and so on. We’re currently in the process of developing a new IT strategy, and want to keep abreast of international projects. Our specialists have, this year, visited many refuelling complexes abroad, in order to see how our company stacks up, and to get up to speed on the latest experience. We haven’t found anything particularly cutting-edge that we don’t already have in place. Yes, our European colleagues are outpacing us slightly, while our Asian colleagues, conversely, are learning from us. But we’re all developing along the same lines.

An international company

— And where are the Europeans outpacing you?

— In automating production, and in updating the regulatory framework. The regulatory framework in Russia doesn’t match the realities of life. We’re now able to automate a great many processes, and reduce human involvement but, legally, people are needed here. And in those circumstances, why would you invest in automation and improving efficiency, in reducing operating costs?

It’s not a hopeless situation. We’re working with government agencies in order to improve and update regulation. Unfortunately, by no means all of our Russian colleagues are ready for automation. But our company is finding solutions in order to reconcile regulation with improving efficiency.

— And what’s changed in the international markets?

— We signed our first contract abroad in 2009. And then began refuelling aircraft outside Russia for the first time. We’ve now got 187 airports, in 60 countries worldwide, on our accounts. Becoming an international company was always our objective, from the beginning. It’s impossible to achieve that goal without engaging with colleagues. Which is why our company has begun collaborating with the International Air Transport Association (IATA).

Its membership now totals 265 airlines, covering more than 80 percent of air travel worldwide. A working group, including air carriers, fuel suppliers and service providers, has been formed within IATA. The specialist Fuel Data Standards Group (FDSG) is setting new standards for electronic data interchange (EDI) throughout the international aviation refuelling industry, based on the universal XML digital format. Standardisation here will touch on all of the most important stages of the refuelling process, from tenders to billing. Gazpromneft-Aero has joined the FDSG, and is leading the way in implementing IATA standards in Russia.

Our clients now include more than 150 Russian and international airlines. We keep a close eye on which flights are most in demand and offer air carriers profitable terms on refuelling, in popular countries.

International refuelling volumes over the first nine months of 2017 have more than doubled year -on-year, to 140,000 tonnes.

For the first time in its history the International Aviation Fuel Forum was held in St Petersburg last year, allowing us to consolidate our ties with our Chinese partners, who have adopted our experience in automation.

Predictions

— Transaero’s bankruptcy last year, if I’m not mistaken, impacted your own activities: you no longer allow airlines to accumulate debts in respect of fuel, and monitor counterparties’ financial standing very closely. But how is the situation with VIM Airlines impacting you?

— The situation with VIM Airlines isn’t as sad as that of Transaero. We are genuinely “online” and monitor all payments and, in the event of any delay, take all possible measures. Right up to stopping deliveries. Fortunately, all airlines understand this, and will meet you halfway. VIM Airlines’ financial situation had been common knowledge for a long time, so we collaborated with them solely on the basis of payment in advance.

Our company intends to offer Rosaviatsiya the scoring system implemented by us here. This would allow Rosaviatsiya and other market players to take a rational assessment of these airlines, and others.

— How much is that system going to cost?

— It’s not going to cost Rosaviatsiya anything. They will simply need access to certain information that we currently draw from open sources. This will allow them to assess airlines’ current standing more accurately, and forecast any changes thereto. If Rosaviatsiya isn’t interested then we’ll expand the system for ourselves.

— How quickly can such a system be put into operation?

— Developing a system like that only takes a few months. We could implement it in 2018. Precise lead-times depend on Rosaviatsia. We’ll be developing this project in any event. It’s time to look forward, not pick a fight with problems coming out of thin air.

One million tonnes more

— How is your domestic (Russian) market share likely to change?

— Thanks to the modernisation of Gazprom Neft’s refining facilities, we’ll have an extra million tonnes of kerosene by 2020. After which our market share will grow.

— And the Russian market will be expanding, up to that point?

— For sure. But we’re not just relying on that. Going back to our Chinese colleagues — against a background of new airport construction and future growth in passenger traffic to 2020, we expect increasing demand for kerosene. We are seriously discussing exports of aviation fuel to the People’s Republic of China after 2020 with our Chinese partners. Thanks to its geographic location, our Omsk Refinery is ideally suited for this. I should emphasise that kerosene has not, hitherto, been exported to China.

— What sort of volumes might we be talking about?

— The Chinese are ready to import 1.5 to two million tonnes. On which basis, as soon production of aviation fuels is expanded at Gazprom Neft’s facilities, we’ll have a genuine sales channel.

—What are the plans for development on the international markets?

— We’ve set ourselves the task of joining the world’s top-20 biggest fuel operators. We’ll be putting a particular emphasis on the South—East Asian markets here. Our resource is vital there.