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Sky's the limit for Gazpromneft-Aero

Gazpromneft's jet-fuelling division has big plans for growth, domestically and abroad. Its chief executive, Vladimir Egorov, answered our questions over email

Q. In the first quarter of 2017, the company's "Into the wing" refuelling volumes rose by 3% more than in the same period in 2016. What does this increase tell us about change in Gazpromneft-Aero's business?

A. Gazpromneft-Aero is a young company by global aviation standards, celebrating its 10-year anniversary in 2017. It was launched as Gazprom Neft's dedicated jet fuel business in 2008, with the plan to grow retail sales, actively invest in state-of-the-art infrastructure and establish a global network of fuelling stations in Russia and abroad.

We are seeing the results of our business development strategy. Gazpromneft-Aero's 1H17 sales have continued to demonstrate dynamic growth following a strong start to the year. The company has maintained its leading position in the Russian jet-fuel market by volume of retail sales. The total sales in 1H17 exceeded 1.6m tonnes, of which retail sales accounted for 1.1m tonnes—a 13% increase year-on-year.

The company has invested $360m in developing its own infrastructure since 2008. The funds were spent on construction and modernisation of fuelling complexes that comply with the highest standards of the International Air Transport Association (IATA). Moreover, since 2010 the company has expanded its international business eightfold. Today we are fuelling customers in 64 countries worldwide.

Q. And what does this tell us about the state of the aviation fuel market in general at present?

A. Due to several macroeconomic factors, air transportation and fuel-consumption volumes in Russia decreased in 2015-16. However, the dynamic changed in 2017 and according to Russia's Federal Air Transportation Agency, passenger traffic in the country has increased by 20% in the first half of the year, and we expect this trend to continue.

Globally, we expect the demand for oil by-products, including jet fuel, to grow over the next few years. According to Boeing data, the global jet-fuel market is expected to expand by 38% by 2025, to 374m tonnes a year. Asia-Pacific, the Middle East and Central Asia will lead the growth.

The Russian market is expected to grow 30% by 2025. The level of jet-fuel consumption in Russia and the CIS is comparable to the Middle East.

Several factors underpin our confidence in the Russian air transportation market: the size of the country, state support for regional airport development, subsidies for air travel to the Far East and the development of tourism in Russia. In addition, we are witnessing an increased inflow of tourists to Russia, predominantly from China.

Q. What is Gazpromneft-Aero's strategy to maintain its strength in the Russian market over the next decade?

A. Modern infrastructure and Gazprom Neft's refineries in Moscow, Yaroslavl and Omsk make it possible for us to actively develop our business in the key strategic transport hubs of Russia-Moscow and several cities in Siberia. Most foreign airline and passenger traffic in Russia is concentrated in the Moscow aviation hub, while the Siberian airports are ideally located for refuelling cargo aircraft flying from Europe to Southeast Asia. In Russia alone, Gazpromneft-Aero has more than 40 fuelling facilities.

Over the next decade, we will continue with our investment strategy aimed at automating our production and commercial processes in accordance with international standards. The company plans to invest more than R30bn ($0.5bn) in the development of infrastructure and expansion of its distribution network.

Q. How do you see the demand/supply/price situation on the Russian market developing over the next five to 10 years?

A. After the introduction of a special tax move in Russia lowering the export duty for Russian fuel producers, domestic fuel prices increased. Kerosene prices in Russia are gradually approaching European levels, but are still lower than in large EU airports. Currently we see no pre-requisites for fuel deficit in Russia.

The company plans to increase its share on the Russian market by another 5% by 2025. Nonetheless, expansion into foreign markets will be the main driver behind business growth in the coming years.

We expect that demand for oil products will increase to 8.9m tonnes in 2017 and will reach 9.2m tonnes in 2020. This will continue to increase and will get closer to the pre-crisis levels (10.6m tonnes in 2014) at around 2025 and beyond.

Q. Gazpromneft-Aero is also increasing its presence at foreign airports. How important is this to the company and what is the strategy for expanding involvement at foreign airports and with foreign carriers?

A. Since the start of its operations, Gazpromneft-Aero has been the only aviation fuel arm of a Russian vertically integrated oil company that has business abroad, annually expanding its global network for fueling Russian and foreign airlines. In 1H17 we have seen growth in passenger traffic and, subsequently, fuel volumes for our customers in Asia (India, Thailand and China). We have also seen a recovery of the fuelling market in Turkey and Egypt.

The total volume of foreign fuelling provided by the company doubled in comparison with the same period last year and amounted to more than 90,000 tonnes of jet fuel. The airport network has increased from 178 to 187 airports. We are developing our international business in partnership with national fuel suppliers in local markets. They are fuelling our customers there, and we are supplying fuel to their airlines in Russia.

The Russian market also offers great growth prospects for foreign airlines. According to our estimates, they can increase their market share in Russia from 15% to 25% by launching direct flights from the Russian regions. The modern fuelling network of Gazpromneft-Aero will contribute to this.

Q. Which international markets are most important for Gazpromneft-Aero and why?

A. Our strategic objective is to become a top 20 global aviation fuel provider by 2025. The strategy is based on forecasts of fuel consumption growth in our target markets—Europe, the Middle East and Asia-Pacific. We plan to expand our business and increase sales in all areas, from further development of retail fuelling to fuel exports and purchase and construction of assets.

According to industry forecasts, the European market will remain in deficit and will need additional fuel supplies. Asian destinations will overall be in surplus. However, Gazpromneft-Aero is looking at specific regions, and we expect that Northern China, for example, will need additional fuel supplies, which we can deliver.

38% - Forecast growth in jet-fuel market by 2025

Q. Does the company have specific sales targets for coming years? If so, can you share them with us?

A. We are planning to expand our network of our own fuelling facilities by 50%, to 69 sites in Russia and abroad by 2025. We expect to double the volumes of our retail sales to 4.4m t/y of jet fuel by 2025.

Q. Last December, Gazpromneft-Aero became the first Russian company to join the IATA's Aviation Fuel Data Standards Group. What is the thinking behind this move and how does this benefit the company?

A. Modern digital formats of information exchange that replace conventional paperwork are the future of the aviation fuel industry.

The IATA initiative is ultimately aimed at improving data exchange between airlines and aviation fuel suppliers to make their cooperation more efficient and transparent. It will also quite simply revolutionise the industry, since at the moment there is no single standardised system that is used across the world by all market participants.

In March 2017, Gazpromneft-Aero cooperated with the IATA, to conduct Russia's first conference on standardisation of data exchange in the aviation fuel sector. New electronic formats developed by the working group Fuel Data Standards Group, which includes the largest global aviation fuel suppliers, will make it possible to significantly reduce labour inputs and accelerate document circulation by processing aviation-fuel operations online.

As part of this project, the company was also the first among the Russian jet-fuel operators to switch to automated commercial accounting during fuelling of aircrafts.

Q. What are the most significant trends we are likely to see developing in the aviation fuel market over coming years?

A. The market's long-term objective is to introduce unified global standards for production processes and data exchange during aircraft fuelling in any corner of the world. This will significantly increase the operational efficiency of airlines and fuel suppliers.

Introducing global quality standards in aviation fuel supply in Russia is one of our priorities. We are proud of the fact that we are the first in the country to develop and implement these technologies.

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