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. Last Updated: 07/27/2016

Price-Fixing at Airport Pumps?

Oil companies are under investigation on suspicion of inflating the price of aviation fuel, which has risen three times faster than the price of crude oil over the past year, outraging airlines and taxing travelers.

"We are looking at possible collusion by fuel producers," Federal Anti-Monopoly Service spokesman Konstantin Dorokhin said.

Collectively, airlines paid an estimated $1.5 billion more for fuel last year than the year before, as the price of kerosene soared 75 percent versus just 22 percent for crude, according to figures compiled by Moscow's Center for Oil and Petrochemicals Market Research, or Kortes.

"Oil producers must be out of their minds," said Ilya Novokhatsky, spokesman for Sibir, the nation's top domestic carrier and No. 2 overall after Aeroflot. Fuel now accounts for nearly half of the Novosibirsk-based company's operating costs, up from about a third a year ago, he said.

Oil-rich Russia's 19 major kerosene refineries charged an average of nearly 15,000 rubles ($535) per ton last year -- one of the highest rates in the world. And that does not include the 18 percent value-added tax and service fees airlines have to pay.

"It is a monopoly situation," said Lev Koshlyakov, deputy general director of flag carrier Aeroflot. Koshlyakov said Aeroflot paid an average of about $640 per ton at domestic airports last year, 40 percent more than it pays abroad.

Travelers are being hit in the pocket as carriers have been raising ticket prices across the board. In fact, it was the surcharges airlines began introducing last year that first caught the anti-monopoly service's attention, but once it became clear that the surcharges were justified, the focus of the investigation moved to fuel producers, Dorokhin said.

"There is no explanation for soaring fuel prices," Ilya Blinov, spokesman for No. 5 carrier UTAir, said in a telephone interview from his company's headquarters in the Siberian oil capital of Surgut.

While prices for most types of fuel are declining, kerosene continues to rise. The price of gasoline and diesel, for example, fell 9.4 percent and 2.5 percent, respectively, last month, but the price of kerosene rose nearly 2 percent, said Marina Kovalyova, head of price monitoring at Kortes.

As airport retailers take advantage of their local monopolies to increase their margins, the cost to airlines is rising even faster. Of Russia's 61 major commercial airports, only one -- Moscow's Domodedovo -- has more than one company that sells fuel to airlines. And it might not even have agreed to that if British Airways hadn't insisted on buying from Anglo-Dutch giant Shell as part of its agreement to leave cross-town rival Sheremetyevo. In the six weeks to Jan. 17, prices charged at the 61 so-called federal airports rose 5.8 percent on average, according to the Russian Airlines Association. Krasnoyarsk, home to No. 4 carrier KrasAir, led the way with a 25 percent rise, followed by Magnitogorsk (17 percent), Rostov-on-Don (15 percent) and Khabarovsk (13 percent), it said.

KrasAir last year sued Yukos, the main supplier to the Krasnoyarsk airport, demanding that it substantiate soaring fuel prices, KrasAir spokeswoman Olga Trapeznikova said. KrasAir is still waiting for a court date.

Moscow's three main airports -- Sheremetyevo, Domodedovo and Vnukovo -- charged an average of 15,989 rubles ($571) per ton last month, including VAT, 60 percent more than a year ago. "Call it collusion or something else, but the fuel market is clearly a monopoly in character," said Boris Rybak, head of the Infomost aviation consulting firm. "The stakes are high -- why not collude?"

Oil companies such as LUKoil, the market leader with a 26 percent share, according to Kortes, emphatically denied allegations of price fixing, saying airlines were simply being victimized by the free market. "There can be no talk of collusion. We all work in a competitive environment," LUKoil spokesman Dmitry Dolgov said. "I don't know what prices are like in Europe, but Lufthansa buys our fuel in Nizhny Novgorod."

The German airline confirmed that it buys fuel from LUKoil in Nizhny Novgorod, but it refused to say at what price.

Sibneft, which accounted for 10 percent of the aviation fuel market last year, said it did not even know it was being probed. "I am not familiar with the investigation," said Sibneft spokesman John Mann. "But I can say that Sibneft's prices for all of its oil and oil products are dictated by the market."

Even if the anti-monopoly service does determine that oil companies are colluding, which is extremely difficult to prove, there is not much it can do. Technically it can order companies to lower their prices, but that is something that has rarely been successful. The other option is to levy fines, but the legal limit is just 500,000 rubles ($17,900).

The head of the service, Igor Artemyev, wants to change all that. He told reporters Thursday that a new monopolies law will be submitted to the State Duma this month that will allow the service to raise fines for major violators while cutting red tape for smaller companies. If passed, companies that abuse a dominant market position could be fined 2 percent of their annual turnover, while those who form a cartel would have to pay 4 percent, Artemyev said. "Under this system, even if a company has 100 different businesses, if one of its units is caught in a cartel, it will be fined on the basis of total sales," he said.

In the meantime, surging fuel prices could be ruinous for the airline industry.

"Instead of growing and buying new jets, airlines are spending money on fuel," said Rybak of Infomost.

Koshlyakov, the deputy chief of Aeroflot, said it's a catch-22 for carriers: One way airlines can cope with rising fuel costs is by acquiring more modern, fuel-efficient jets, but the government slaps hefty duties on Boeings and Airbuses, so airlines cannot afford them, partly because their ability to borrow is hurt by rising costs.

Even so, the fuel prices are so high now that it now makes economic sense to acquire Western planes, Koshlyakov said. The workhorse of the Russian airline industry, the Tu-154M, burns 2.5 more tons of kerosene per hour than an Airbus 320, he said. As a result, Aeroflot is looking to add five A320s to the 18 it flies now, he said. The airline says the move would save $25 million per year in fuel costs -- $5 million per plane.