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16 May
2017

AVIAPORT.RU material was used during this article preparation

Demonopolization in the fuel supply market made it possible to reduce the cost of services for refueling and storage, though kero cost in the Russian airports actually made equal to indexes of the European air terminals. We do not expect a significant growth of prices for kero in Russia if only there are no violent fluctuations in the currency market. Vladimir Spiridonov, Aerofuels Group General Director, told AviaPort about a current situation and perspectives of the development.

The Russian market has approached the world indicators

- What tendencies do we see now in the world jet fuel market?

- The jet kero cost in the world market has stabilized within a range from $490 to $530 a ton, if to judge upon the main on-exchange indicators. Consequently, in big airports the cost per ton for into-plane refueling makes average $530-570. At the same time all international oil companies hoped for a significant growth of aviation fuels cost in 2016. In the beginning of the year it was supposed that the price would be increased up to $650-700 per ton by December but the prognosis failed: in February-March of 2016 the price fell up to $330-350. I would like to remind that it is four times less than the prices level of a peak year of 2007.

The Russian market has much approached the world indicators. If even 3-4 years ago the jet kero cost when delivered to big airports made about 80% of the European prices, today there is practically no difference. It goes without saying that it is quite a pleasant fact for oil companies. Though, that, to put it mildly, is not a rather positive aspect for the Russian airlines which in the course of time have lost advantages in relation to the Western market players: today they have to buy kero in the domestic market at the world market prices. In the future that may impact the Russian air carriers competitiveness in international flights. But today, as we can see, the tendency is quite positive the passenger flow has increased by 20%.

- If in the domestic market the kero price has got equal to the European prices, is it possible that we will have a situation when in some cases it is more profitable for the Russian airlines to be tanked abroad?

- Both in 2010 and in 2006 the Russian airlines switched to tanking in the international airport, in particular, in the Western Europe, UAE and South Korea. But today the Russian market is more flexible than it was 5 10 year ago, and our oil companies are less dismissive of air carriers because to reduce kero supplies is not for their benefit. The Russian price for jet kero has approached the West European level but we are not afraid it may increase significantly. The market has got quite competitive: over half of big airports have two or more jet fuel supply operators, and there the price has much reduced. An illustrative example is Koltsovo where four airlines are operating: Aerofuels, Gazpromneft-Aero, RN-Aero and LUKOIL-AERO. By the way, in Yemelyanovo there are three players. According to our prognosis, the competition decreases aviation fuels cost by average 15%.

- And what about the kero shortfall? Will we have it in the nearest future?

- Spring is not time for the shortfall. On the contrary, historically in spring the prices are either stable or even getting a little lower. Oil refinery plants change diesel fuel production from winter to summer. And consequently, aviation fuels production increases. Shortfall risk occurs within a period from late August till early November. Apart from the fact that oil refinery plants start winter fuel production, there are season obligations of the state to buy aviation fuels for the government reserve.

- Season price rise starts in summer but there were precedents when it started in March-April. Are there any prerequisites to early price rise this year?

- Actually, today the fuel price generally depends on its market value. In Russia the price in the Western stock exchanges is also important, as well as ruble and dollar rate. Unexpected growth starts during big fluctuations in the international exchanges, as well as during a high exchange rate volatility. But if these factors are in the equilibrium state, sharp changes, at least in April-May, do not occur.

- What is the situation in the oil products transportation market?

- Logistics is one of the key issues. During these years the pipeline system and Russian Railways developed airports uninterrupted supply procedures. Actually, for the last five years no significant logistics problems have occurred.

An acute crisis happened in September 2011, when some market participants had to deliver kero to the airports of the Moscow air hub from the oil refineries locating at the distance of 5000 km from Moscow. Fortunately, nothing like that ever happened. At the present moment the oil refinery plants of the Russian oil companies can satisfy all demands for jet kero, and at the same time they have capacity in the jet transportation abroad, including Central Asia, and to the traditional markets of the Northwest Europe. That deals with the fact that for the last 5 6 years practically all oil companies have passed through their production facilities upgrading and implemented up-to-date technologies. And basically they settled the problem concerning satisfaction of the demands in our domestic market.

- Today our market is guided by Platts to a great extent. On the other hand, there is Saint Petersburg Currency Exchange which had to take lead on generation of the indicative prices. How much did it succeed in becoming a significant market player, an indicator?

- Saint Petersburg Currency Exchange has become a significant marker and a real instrument in the jet kero purchase and sales, and this instrument showed good results. Moreover, it seems to be sometimes governing for some contracts between kero suppliers and consumers. And what is of no small importance, the exchange excludes possibility to manipulate the market.

- Summarizing the above, what shall we expect regarding the kero cost?

- Traditionally, by autumn the cost increases a little, but nothing dramatic will happen if only there are no force-majeure fluctuations in the West European exchanges. Basically, all airport demands are satisfied. At the present moment there is no shortfall and no emergency situations are noticed. If we suppose that the passenger flow will increase by 20% for 2 3 years, then the shortfall may occur. But only provided the passenger flow growth has, let's put it that way, an unexpected and explosive behavior.

Market needs rules

- What do you think about applicable regulatory and legal framework? What might one change in the standards and requirements?

- A while back all refueling complexes had to obtain Federal Air Transport Agency certificates for jet fuel supply, storage and laboratory analysis. In addition it was necessary to get a corresponding license. Five years ago licensing was cancelled, a year and a half ago certification was cancelled, and air carriers got fully responsible for TZK inspection. This practice has been working for many decades in Europe and America, and our TZK operators were ready for such transformation. Today TZK are inspected directly by their operators, airlines and international organizations via IATA special representatives for aviation fuels quality. Besides, there is a voluntary certification of the State Research Institute of Civil Aviation. Therefore, what was mandatory gets voluntary today, but at the same time the air carriers require such certificates for participation in tenders for refueling.

- There was a hard long period when alternative TZK launching was not easy, sometimes it was accompanied with court proceedings. Do you think the situation today has got easier from the airports operators point of view towards new bidders?

- Airports began to understand that development is absolutely impossible without aviation fuels of a high quality and at affordable price. When there is a fuel monopoly, the airport development is limited by a monopolist desire to make a maximum profit of each refueled ton. There is no need to explain that it leads to a ticket cost rise and transportation stagnation. A good transportation dynamics can be noticed where fuel supplies demonopolization has been carried out.

- How can you characterize operators pricing policy in the places where there are 3-4 market players? For example, in Koltsovo?

- Every operator selects its own strategy. This depends on the tasks: some operators aim at taking the maximum market share, others have a plan to get guaranteed 10-15% of the market but to save business marginality. In some airports competition is really very tough: in Yekaterinburg prices decreased by 10-11% even in winter.

- A year ago you said that there was still some amount of vacant airports and thus vertically-integrated oil companies (VINK) could grow, so to say, in width without getting involved into competition against each other. What do you think if there were still possibilities for such a growth?

- Vertically-integrated oil companies have already confronted directly. That happens in the airports of the Moscow air hub, as well as in Pulkovo, Yekaterinburg, Krasnoyarsk and other big air hubs. It is a positive situation for air carriers, as for many years they have been held like a vice by monopolistic TZK, and today they have a possibility and right to choose. Probably, that is one of the greatest achievements of oil products market liberalization in Russia. For this a tremendous credit also goes to our company which was the first to build alternative TZK in many airports..

- Do you expect some changes of rules for the game, appearance of VINK alliances?

- There are two TZK in Pulkovo and Yemelyanovo which belong to LUKOIL and Gazpromneft-Aero on principles of parity. But that is more like a local story than a strategy of development. For vertically-integrated oil companies, in any case, are competing against each other in other airports. That is why we think that in the nearest future alliances are not possible. Besides, I suppose FAS will not let alliances be formed.

- You have a successful experience of cooperation with Shell (in the airports of Domodedovo and Pulkovo - AviaPort), but for a long time we have not been delivered any news concerning new airports where joint ventures might be represented. How is this cooperation going on?

- We have plans but for 2018-2020. I can only say that in this format a joint venture can develop in the airports with a big amount of international flights being serviced.

Jet fuel supplies share is about 90%

- What did you manage to do within your program of TZK upgrading and how were the laboratory network development and refuelers fleet renewal going on? Any plans?

- This year we are finishing TZK upgrading in the airport of Sokol in Magadan where we came a year and a half ago with serious investment projects. I am speaking about a profound capital improvement of TZK: we will renovate the whole process chain from kero acceptance to kero delivery. In 2016 the first refueler based on Volvo was delivered, and in 2017 we plan to deliver two of such refuelers more. That will fully satisfy the market demands for refueling machinery norms. New TZK will appear in Yekaterinburg, Nizhny Novgorod and Izhevsk. Future modernization plans will be discussed at the end of the summer season which will show how much the passenger flow has grown and what perspectives we have for the end of 2017 beginning of 2018.

- You told about the joint venture development plans, about plans for 2018-2020 and refuelers purchase plans. Do you have any investment projects you are going to launch?

- Our plans are connected with the chemical industry which, as we think, has quite a good potential. I mean projects of chemical products manufacture facilities construction, and that, basically, lies adjacent to jet fuel supplies area. Besides, in Ulyanovsk we and our English partners are building a plant for anti-icing fluid (AIF) production. We are going to launch it during a calendar year and to start production of the whole complex of fluids for anti-icing treatment. I am sure we will manage to decrease these products cost by 15-20% and to help airports to make this service cheaper in the nearest future.

- If to look forward, what can be the relation between the main fuel supply business profile and new trends?

- In the nearest two years the jet fuel supplies in any case will keep prevailing. The jet fuel supplies share takes about 90% in the group of companies business regarding income and profitability. AIF production is a local project which share will make about 5%. As for chemical projects, their launching is planned for 2020: they require mobilization of the resources and big financial investments.

- How did the company finish 2016 in terms of production and finance? What do you expect in 2017?

- In 2016 the group of companies refueled about 800 thousand tons of jet kero. That deals with operations in the Russian market and in the international airports as well. We think it is quite a good and stable indicator in the years of a financial turbulence we managed to save our positions in all target markets. In 2017 we are planning to increase refueling volume by 6-8%. That, in our understanding, complies with our target: to demonstrate a stable and estimated growth of all indicators in revenue and refueling volume as well.

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