- Nowadays one of the most acute issues is the dramatic growth of prices on aviation fuel in Russian airports. What is this price surge connected with? 

- As early as at the beginning of 2010 fuel market was stable and balanced, there were no price surges. However, in October transfer prices at oil refineries were increased and consequently refueling complexes at airports had to raise prices by the same amount as well. At Moscow Air Traffic Hub the prices have increased by about 1500 rubles per ton (the increase is 7-8%). In the Far East the prices went up on average by 3000 rubles per ton, which is more than 10% from the original cost. Transfer prices at a refinery in the Far East amount to about 25.5 thousand rubles per ton. Only a short while ago they were approximately 20-21 thousand rubles. In Nakhodka the prime cost of fuel including transferring into a tanker is 27.5 thousand rubles; as they leave Nakhodka the price increases to 30 thousand rubles. The prices in such regions as Kamchatka and Magadan are gradually approaching the level of 40 thousand rubles per ton. Such a surge was primarily connected with the fact that Russian oil companies have not missed the chance to raise domestic prices on aviation kerosene against the backdrop of an increase in oil prices at global markets. 

- What is the situation with fuel prices in Russian airports like in comparison with the situation in West European and Asian airports? 

- The prices which we have in Russia are at the same level as those in West European airports; in Asia they are sometimes even lower. Usually after a drastic surge in Europe the quotes on oil products decrease gradually. In spite of that, oil companies predict that in December and January the prices will be at the same level and probably even higher. Our company, taking this tendency into consideration, has made a decision to add shipments of kerosene from South Korea to the airports in the Far East to our immediate plans. This has not happened for at least a decade. Even though we will have to pay a tax of 5% on kerosene import, price consolidation in the Russian Federation will make it more profitable to import fuel from abroad. With the cost of the tax and shipment to the airports in the Far East we will achieve a 3-5% reduction in prices. If the cost of aviation kerosene in the Asian region keeps on going down (and there are such predictions) and will reach the level of $75-78 instead of $83 per barrel, we will be able to talk about a reduction of 7-8%. We are planning to import 3-6 thousand tons per month, which amounts to about 25% of kerosene consumed in the Far East. 

- Don’t you think that the reaction of Russian oil market to the global changes is a part of normal market tendencies and not the wish of oil companies to cash in on airlines? 

- I am sure that such price leveling was inappropriate. Western oil market is a market of import. Europe produces very little oil and exports it from Russia and Arab countries. Our oil companies have decided to catch up with the price growth at global oil markets, which is, to put it mildly, not very good for our airlines. We know that for Russian airlines things were going better than during the crisis. Passenger flow had increased by 20%. This profitability has been taken from them at the first chance without giving them any time to take a breather. In the long term our air carriers should get some advantages. There will be even more problems if prices in Europe and the world fall by 10-15%. In Russia, because the reaction of the market is so slow, they will stay at the same level for a long time. Thus, Russian airlines will sustain great financial losses since they will lose their competitiveness. They will undoubtedly practice refueling at foreign airports, but one should not forget that Russian air carriers perform not only international, but also domestic flights. 

Even if the price on aviation kerosene stays the same as in the whole world, Russian airlines lose their competitiveness in the medium term. They will not be able to compete with the leading international global companies. For example Lufthansa is not one company; it is a whole conglomerate with huge passenger flow and cheaper credit resources. The only thing that Russia, the country in which oil is produced, can offer its airlines in order to support them is a lower level of prices on aviation kerosene. Otherwise either Russian air companies will have to work at dumping prices and sustain losses, or the passengers will chose more attractive prices of foreign carriers and turn to them. Therefore the problem connected to the increase of prices on aviation kerosene is a complicated one. 

- In 2008 we witnessed a sharp surge and then a fall in fuel prices. Could this scenario be repeated?

 - In 2008 the price reached its maximum. In 2009-2010 the cost of kerosene in Russia decreased twofold and the global oil quotes fell by practically 3 times: from the level of $150 per barrel the price dropped to as low as $40. The existing practice of our oil companies is that during a sharp rise in the cost of kerosene and oil products at the global exchange prices in Russia skyrocket momentarily. As to a decline of prices, in Russia it is much more complicated: the decline can occur even with a six months delay. Moreover, the prices decrease not to the same level as in the world; oil companies leave themselves a “safety cushion” of about 20%. Meanwhile, the information that the prices have reached the same level as they were in 2008 is a slight exaggeration. We hope that oil companies will not try to destabilize the market completely as it happened in 2008. 

- Have any organizational conclusions been made and does the government have any means of affecting the growth of prices on aviation kerosene? 

- Indeed, during the last 2 years the government has obtained some means of influence. The first instrument is anti-monopoly proceedings. There have already been a few action proceedings connected with the growth of prices in 2008. Oil companies have received multibillion fines. Although oil companies appeal in court and are trying to avoid these decisions, the wheels have been set in motion. The second instrument is a package of regulating documents. These are: 

1. The regulations of equal opportunity access to the services of natural monopolies (Uniform Network Code) – Governmental Provision №599, which introduces governmental regulation of fueling complex services. In particular it outlines the regulations of forming fuel conservation and aircraft refueling rates. The rates are set by the Federal Tariff Service. This is a very important document which determines the accession order of new refueling companies to airport services. 

2. The Program to Support Competitiveness of the Russian Federation, approved by a Governmental Edict

3. Transport Strategy of the Russian Federation, created by the Ministry of Transportation and approved by a Governmental Edict 

Earlier this industry had lived according to the regulations developed at the early stages of market economy. Now there is a basis, which is right and done in time, and at the least it is possible to start our work on this basis. 

- Have air companies learned anything since 2008? Has such thing as hedging appeared, is aviation kerosene exchange trade being developed? 

- Unfortunately, none of these instruments is practically used or used to its full extent. And I believe that airlines are really interested in exchange trade. They want to see real minimum cost, to understand how the prices are formed. Oil companies place only small amounts of kerosene at the exchange, and so the quotes at the Russian exchange are unrepresentative. Only 2% of daily kerosene consumed by Russian aviation is sold at the exchange. 

There is no real progress with hedging either. As far as I know, no Russian airline is working on this principle. And this concerns refueling in the Russian Federation as well as in international airports. Large air companies use depository cards in their base airports. Aeroflot used to purchase kerosene at Sheremetyevo, Siberia – at Domodedovo, at small airports airlines purchase the amount necessary for small refueling complexes which belong to these airports. 

- You have mentioned a possible decrease of global prices by 10-15%. Is it an expert forecast? 

- There are many forecasts on the global oil market; one might suppose that the prices can probably decrease, but the situation changes every day and nobody knows what will happen. The prices can become $70 as easily as $100 per barrel. However, according to most studies there will not be a price boom. An increase is usually predicted towards summer. At the present moment it is possible to talk about market stabilization. 

- And how do matters stand with infrastructure at airport refueling complexes? Has anything changed there? 

- The major problems with infrastructure are the same as they were 2 years ago - it is the low level of competitiveness. One can hardly tell that airlines have a choice of a refueling operator. Nowadays only 300 Russian airports have alternative refueling complexes. Therefore, despite all the measures that I have mentioned earlier, the process of market demonopolization is proceeding rather slowly. This is connected to many factors. The first one is of course the high cost of constructing a refueling complex: interest rates at Russian banks and the cost of monetary recourses in Russia are fundamentally different for the worse from the whole world – Europe, America and even Asia. 

The second problem is connected with town-planning activities – acquiring all necessary documentation and the capacity to build a refueling complex on quite a tight schedule. The third problem is that all land within airport perimeter has recently become national property. This has seriously complicated construction of refueling complexes, practically declaring a moratorium on it. 

What is the situation at Moscow Air Hub now in terms of competitiveness like? As far as I know, in two Moscow airports good competitive atmosphere is being created. Thus, it has recently become known that Sheremetyevo is selling its own refueling complex and is entering into an agreement with Rosneft on building a new refueling complex, and Gazpromneft is doing preparatory work on building its own refueling complex. 

- What is your attitude towards these processes? After all, if this refueling complex is bought by one of the above-mentioned operators, it will lead to market redistribution. 

- According to the tender conditions of selling the refueling complex at Sheremetyevo only companies that have production facilities in the European part of Russia can take part. I do not think it impossible that the winner will be a company that will represent several oil operators at once. At the same time one should take into account that even if the refueling complex goes to LUKOIL, Gazpromneft or TNK-BP, it will not lead to monopolization of Sheremetyevo International Airport, and for airlines this is a positive factor in itself. 

If earlier Sheremetyevo refueling complex used to sell independently about 50-60% of all fuel consumed at Sheremetyevo by airlines, now the percentage realized at the complex has slumped. To my knowledge now it is not more than 10-15% of total realized volume. It means that the rest of fuel simply goes through the system. Nowadays Sheremetyevo refueling complex is a classical example of a refueling operator. “Aeroflot” has an opportunity to flush its own kerosene. Gazpromneft and TNK-BP have depository cards. 

Even if the complex is sold, depository cards of these companies will remain, and maybe new depositaries and owners will appear. “Rosneft” in particular has mentioned such plans and this company is an active member of this market. In any case, selling Sheremetyevo refueling complex help to demonopolize the market as the airport will cease being the major shareholder and thus will be more interested in allowing some other companies to this market. As to Domodedovo, all large companies have depository cards there. The situation at Vnukovo is somewhat different, but I would prefer not to comment on it because we do not work with this airport. 

- Since we have started talking about Sheremetyevo and Aeroflot, could you please tell us about the principals on which this largest company purchases kerosene? 

- It is not a secret that Aeroflot conducts tenders and turns with its purchase options to market. Typically up to 10 companies take part in a tender. Finally some of them supply rather small amounts, some of them huge ones. Therefore, whoever is the winner of the tender to buy Sheremetyevo refueling complex, we are talking here about operating. In our opinion nothing will change for Aeroflot; fuel purchases will also be conducted by tender, but maybe with a larger or a smaller number of suppliers. 

- Apart from Aeroflot, does any other Russian airline purchase fuel by tender? 

- One way or another all companies resort to tenders – single tenders, closed tenders, open tenders...

- These tenders practically substitute exchange trade...

- Nowadays it seems like that. 

- Let us dwell upon your business. In how many airports is Aerofuels Group represented, both in Russia and abroad? 

- In Russia these are 24 airports; in 14 of them we have our own refueling complexes. We have agreements with operators in 900 foreign airports and we can organize refueling there. Geographically they are quite diversified – Europe and America, from Spitsbergen to Caracas. 

- How has your company lived through the previous 2 years? 

- The company has forged ahead. For example, not more than several days ago we started fuelling airlines at the airport in Kursk. It is quite a small airport but with a good potential, a good air port with growing passenger flow. Many governmental organizations have their bases at the airport: the Ministry of Defence, the Ministry of Emergency Situations, the Ministry of the Interior and we work closely with all of them. At present we are finishing the reconstruction of storage facilities in Ufa in which kerosene pipes will be connected directly to oil refineries in Ufa. This in fact will be the first time a new refueling complex will be connected to a pipeline since the time of the Soviet Union. We are planning to set the pipe working in the first quarter of 2011. 

We should not forget about the new investment programs into the existing refueling complexes which involve supplying airports will all the necessary machinery. New fuel dispensers for the airports in Ulan-Ude, Ulyanovsk, Blagoveshchensk, Perm, and Kemerovo have been bought. We are making constant replacement of refueling equipment at all airports in which the Group works. We aim at complying not only with Russian, but also international standards of the International Air Transport Association. And it pays back. In particular, in October the International Air Transport Association gave a positive evaluation of our work in Kamchatka – Aerofuels-Kamchatka conforms to the high level of service recommended by the International Air Transport Association. This is extremely important because we fuel not only Russian, but also foreign air companies, as well as airplanes for the Ministry of Defence of the Russian Federation. 

- What happened to your company in the midst of the world financial crisis? Some airlines were reducing their fleets, there were redundancies. Did you have any anti-crisis program? 

- The year was very difficult for the whole aviation industry and, of course it was difficult for our company as well. Fortunately, we stood the trial, notably because our company was striving to develop not only out of loaned funds, but also out of its own assets. Loaned funds of the Group never exceeded 10% of the turnover. 

We had to ease our debt burden, pay significant means to some banks that behaved inept in that situation. We managed to solve all financial problems during one most difficult month of the crisis. Owing to the stability of the financial situation, the Group lived through the crisis without major disturbances. Sales volume went down of course, but they did so in the whole industry; tourists did not fly as much as they had done before the crisis. This year there has been a significant rise. In Russia the realization volume rose by more than 20%, refueling volume in foreign airports rose by about 15%. 

- Has the problem of airlines’ debts to your company stabilized? 

- Yes, it has. The airlines which did not live through the crisis, well, it was obvious at the very beginning. For example, even if such projects as “KD-Avia” were making efforts to get out of the red, as early as in 2009 it was clear that they would not be able to do it. Any economist understands that it is impossible to pay bank interests of 2 billion rubles a year with the profitability which that air carrier had. At the moment we are crediting some airlines, but they have been our partners for many years. We evaluate a company on a number of factors. The first one is the financial position of the carrier, the second one is its on-time fulfillment of contractual obligations, and the third one is our confidence in this or that partner. 

Nowadays we are viewing the situation on the market positively; it is developing according to an optimistic scenario. If we take into account that at the beginning of the 90s the passenger flow was about 90 million people and now it is 50 million, there is much space for development.

- Do I understand correctly that after TOAP (Airport Fuel Supply Trading House) went bankrupt you are running a unique kind of business? 

- I would prefer not to compare us. We have always worked in related markets. Our major difference is that TOAP focused on large fuel deliveries, serious refinery discounts, wholesaling to airlines, usually to their cards. We work in retail market and do “into-plane fueling” for airlines. And we have our own infrastructure in Russian airports which allows us to provide discharging, depositing, analyzing and “into-plane fueling” services. 

As to the unique nature of the business, our company really is unique in its own way. Today it possesses the widest network of refueling complexes in the Russian Federation and at the same time it is not integrated with any other fuel or oil producer. This indicates that in Russia there have been created objective conditions for development of competitiveness for smaller and larger companies. 

- What do you think about the prospective that operators which are integrated with large oil companies may come into the sphere of refueling complexes? 

- Oil companies came to this market slightly later and that is why their presence in the sphere of fuel supply is not so prominent. For example, LUKOIL has about 10 refueling complexes. Gazprom has approximately the same amount, and there are 300 airports in Russia. It would be wrong to say that oil companies have reached the stage of “into-plane fueling” throughout the country. They still concentrate in large airports, and they simply do not have the money and resources to reach further. The appearance of new refueling complexes in airports should be accompanied by favorable treatment and liberalization in terms of their construction. At the moment these factors are lacking. 

The construction of new refueling complexes takes, even with the lucky turn of events, at least five years – from the project stage to the first fueling. So far there is no talking about a rapid development of one company or several players. One oil company claimed three years ago that it would arrange its presence in 24 Russian airports. Nowadays it claims that it will appear in 48 airports. Aviation industry has faced the problem that some companies have succeeded in advertising more than in real action. When companies announce that they are building something in practice it results in collecting the first of 600 signatures. I will give an example: the conciliation process on documentation concerning the construction of our refueling complex in Nizhni Novgorod took 10 years and only recently we have started building the object, and we will officially announce it only after its completion. 

- Could you tell us about your immediate plans? 

- One of our long-term projects, which we have been bringing to life since the beginning of the 2000s, and for which we have received all the consent documents, is to finish the refueling complex in Nizhni Novgorod (the cost is about 400 million rubles). It will be not only a refueling complex, but also a large base for storing light oil. This year we are finishing work at a railway dead end, next year we are starting building the oil base itself. We are hoping to have finished by the first half of 2012. There are plans to appear at a major Russian airport and they will be announced in 2-3 weeks’ time. Everything is ready for that; we have received all the certificates. It is possible that the company will enter the segment of business aviation in Western Europe. Agreements with oil companies, for example Exxon Mobil Corporation about fueling Russian business jet-planes through their network have been signed. The volume is not large, but it is constantly growing.