Russia sets a good example in blockchain aviation innovation

(BTC Keychain // Flickr)

The difference between the mindset of the air transport industry and the aviation refuelling sector could not be more stark when one compares vision, innovation and digitalisation, writes Thelma Etim, editor of aircargoeye.com from Novosibirsk.

Russian aviation is undergoing a renaissance – and Gazpromneft-Aero (GPNA) is one of the architects of the technological transformation of that vast country’s aviation fuel industry – and beyond.

The aviation fuel operator of parent company Gazprom Neft has made history as one of the first firm to use blockchain technology in the Russian aviation market allowing airlines immediate payment processing at the moment of refuelling, without pre-paid charges or bank guarantees.

Why is this move so significant? Under the existing, costly, error-strewn and laborious paper-based processes, airlines are forced to make a pre-payment to banks without knowing all of the variables – which route its aircraft are taking and precisely how much fuel is needed, for example. In this old process, their funds are also ‘frozen’ for a prolonged period of time.

In the new process, the distributed ledger technology (DLT), commonly known as blockchain, allows transactions made in bitcoin, or other cryptocurrencies, to be recorded publicly on a database and this transactional information is then automatically shared between a network of computers.

DLT significantly increases the speed of financial transactions and in doing so reduces labour wastage costs for both airlines and suppliers, whilst bringing efficiency and transparency to the process, says GPNA.

The company has been working with S7 Airlines (Siberia Airlines), Russia’s second largest carrier, to introduce digital Aviation Fuel Smart Contracts (AFSC), using blockchain in a development supported by Russian Alfa Bank, which charges its own undisclosed fee for every transaction.

On 24 August this year, an S7 Airlines Embraer 170 was refuelled – for the very first time using the pioneering payment process – with approximately 4.5 tonnes of fuel, ahead of its flight to the city of Krasnoyarsk, which is 650 kilometres from Gazpromneft-Aero’s refuelling station at Tolmachevo International Airport (IATA code OVB), in Novosibirsk, Siberia.

The demonstration was witnessed by representatives from the International Air Transport Association (IATA), the Federal Air Transport Agency, together with eleven aviation fuel operators and airlines from a number of nations including China, Vietnam, Japan, Serbia, along with Russia.

Gazpromneft-Aero has been working with S7 Airlines to introduce digital Aviation Fuel Smart Contracts, using blockchain in a development supported by Russian Alfa Bank (GPNA)

It is apparent that Vladimir Egorov, chief executive (CEO) of Gazpromneft-Aero, harbours a remarkable new vision for his company, far beyond the ‘bottom line’. “Obviously, [utilising blockchain technology] is a competitive advantage, and a competitive advantage is something that makes a company stronger in terms of financial performance, and therefore a stronger player in the market,” admits the CEO.

“With blockchain, everything runs smoother, changing from using numerous paper-based stages to digital; the pre-payment is no longer essential, which is an operational benefit, so your costs automatically decrease, whilst your benefits increase because the airline pays for exactly the amount of fuel it needs, rather than overspending,” Egorov continues.

“This is not really about augmenting the status of the company, but we are very passionate about driving aviation forward. We are the first to implement [blockchain payments],” he proudly asserts.

Egorov’s views are echoed by Dmitry Korpachev, the head of GPNA’s international sales directorate. “[With blockchain] we want to be one of the first to be able to offer this improved process to our clients,” he reveals. “We are members of IATA’s XML standard digital group, which means we are not only taking a very active part in implementing the new standards but also in creating them.”

GPNA, which began working with IATA’s aviation Fuel Data Standard Group in 2016, is also involved in an ambitious plan to utilise new technologies to create XML standards for the entire aviation fuel industry, which points to the company’s broader ambitions.

“It is very important because we are representing the country,” explains Korpachev. “We see ourselves as having a very important role in creating a global standard with IATA and helping to make aviation more efficient. Like the Chinese proverb, the first step is always the most difficult, and we have taken it,” Korpachev concludes.

Under the new regime, the aircraft refuelling process is streamlined with the blockchain system. Using a digital smart contract, an airline is able to precisely manage the refuelling information and agree with its supplier on the preliminary amount of jet fuel required in that single transaction – and its price.

This data is then utilised to assign a fuel tanker driver at an airport and the aircraft’s captain is in a position to request the exact volume of jet fuel from the operator using the system.

Following this procedure, an online application is then sent to the airline’s bank to reserve the necessary funds in the carrier’s account.

Crucially, in an instant (just a few minutes, it is said), confirmation from the bank triggers the refuelling process. Once the service is provided, the funds are transferred, the open application is closed, and a report is sent to the fuel supplier and to the aircraft.

The significance of GPNA’s technological leapfrog comes as the company celebrated its tenth anniversary last December.

So why is Gazpromneft-Aero eschewing its prior paper-based stratagem for this new technology now? Dmitry Makarov, head of methodology of commercial accounting, reveals that the idea of introducing a blockchain technology platform was born in November 2017.

Makarov reveals that the company has been experiencing some resistance internally to such a seminal change in future processes. “Yes, of course, there has been some opposition within the company because blockchain, as with every new technology, has enjoyed a lot of hyperbole over the last two or three years and has been a popular subject of discussion in the Russian media, for example.

“So, it is understandable that there was and is a lot of scepticism within the company because the new technology actually touches upon every area of the company’s affairs, including operational work and finance – basically everything,” he explains. “For people who are used to working with paper, it is complex for them to switch to something more modern. GPNA is introducing these innovations step by step,” Makarov notes.

Streamlining operations in any traditionally-run business predictably results in a reduced number of employees. Digitalisation increases this possibility. But Makarov disputes this will be the case at GPNA. “The system has not been applied to a large scale, where there would be massive job cuts,” he asserts.

“The company does not expect massive job cuts because the responsibilities of staff simply change, they do not cease to exist. Instead, they find new, more efficient ways to apply their knowledge in different areas.”

Makarov is equally confident about any security risks posed by the company transitioning to using the cryptocurrency. “A lot of experts are unanimous that the encryption that is used in blockchain is secure enough. In relation to hackers, it does not make economical-sense, because even if someone hacks the system, the data is encrypted (in separate blocks) and it will take much more money to decrypt all the information than the value of the information itself,” he suggests.

However, research shows that human error when in-putting crucial information can undermine the blockchain process with wider consequences for other details stored on the database, for example.

International consultancy firm PricewaterhouseCoopers’ (PwC) observes that although the technology “brings transparency to transactions,” it also introduces risk and control challenges “that limit its enterprise potential”.

PwC also claims it has identified the three biggest risk issues for organisations and businesses making a foray into utilising (DLT). “While the technology chains together all of the transactions in a network, blockchain lacks a way to directly view and analyse historical transactions,” says PwC.

“Secondly, because there are no technology standards – each enterprise environment is different – there’s [yet] no established risk and control framework.

“Thirdly, few internal audit or risk teams have the skills needed to understand the design and control of blockchain business processes,” the firm concludes.

Nevertheless, GPNA clearly intends to forge ahead with DLT, which is only one of its lofty ambitions. The Russian entity aspires to become one of the top-10 global refuelling companies by 2030. Reaching a five-fold increase in international sales volume, is also amongst its goals.

Maybe the company’s performance this year could be the tipping point in assisting its ascension in the refuelling industry’s rankings from being among the top 20 fuel operators. GPNA’s total volume of jet fuel sales in the first half of 2018 exceeded 1.7 million tonnes. To-date, the firm refuels one in four aircraft operating in Russia and services more than 80 international airlines.

Gazpromneft-Aero also provided refuelling services to more than 13,000 aircraft carrying FIFA 2018 World Cup football fans and supplied a total volume of 140,000 tonnes of fuel for commercial, charter and special flights to and from the seven airports located in the host cities of Moscow (Sheremetyevo), St Petersburg (Pulkovo), Kaliningrad (Khrabrovo), Yekaterinburg (Koltsovo) and Saransk airports – a 15 per cent increase on average daily consumption, it says.