Paul Duffy/MOSCOW
The 1990s have been difficult years for the aviation industry of the former Soviet Union. In the previous decade, it had been delivering annually some 220 jet airliners and freighters, plus more than 80 turboprops, as well as combat aircraft and helicopters. In 1996, just five airliners were delivered. To many, the industry seemed to be on the verge of extinction.
The causes of the crisis are well known. They include the break-up of the Soviet Union, with its consequent money problems, inflation, tax shortfalls and lack of Government cash to support industry, the dramatic fall in traffic volumes and the huge shortage of money in an airline industry competent in operational and technical matters, but with little expertise of business management, commercial understanding or marketing skills, and the absence of an enterprising system to finance even vital industry in the too-rapid change from a command to a market economy.
Another problem which the industry is only beginning to address is consolidation. The Soviet industry had ten sizeable design bureaux working on new aircraft and helicopter models, plus some 20 production factories with little or no commercial connections to the designers. Recently, with considerable Government pressure, the major military industries have been formed into two aviation industrial-financial complexes, MAPO MiG and AVPK Sukhoi. Separately, Ilyushin has formed a loose alliance with factories in Voronezh and Tashkent, while through the Russian Aviation Consortium, Tupolev has links with the Aviastar and Kazan factories and with Aviadvigatel and Perm Motors, the designers and builders of the PS-90A engine.
The future of aviation
This is not enough, however. In a world shaping up to an aviation future with just two major civil-aviation producers, Boeing/McDonnell Douglas and Airbus Industrie, there cannot be much future for a multitude of small Russian, Ukrainian and Uzbeki companies. There is no reason why the former Soviet industries must follow exactly the same course as that of other nations, but it must be clear that the increasingly high cost of developing major new aviation products means that changes are necessary. No longer can Tupolev, with few resources, compete against Ilyushin and Yakovlev and Antonov to invent the same aircraft, two, three or four times, when a common approach can result in one that will be built and will sell, and not remain just a drawing-board dream.
Despite these problems, it looks as if the corner has been turned. There has been notable progress made in 1997 - certification has been achieved for the Antonov An-38 and the Ilyushin Il-114 regional turboprops, and for the Rolls-Royce-powered Tupolev Tu-204-120. The Pratt & Whitney PW2337-powered Il-96T should receive certification in October. In the CIS, however, certification does not mean that first deliveries take place the next day, nor that operations begin the following week.
"We have always taken a conservative approach," says Valentin Sushko, chairman of the Aviaregister, the CIS certificating authority. "When certification has been issued, we limit the life, then test the aircraft in a meticulous engineering audit before we increase it to the next stage. The Western system has been to give the aircraft a full life certificate, then to issue advice directives as needed. Now, we are under pressure from our industry to do the same. We will change, but only as fast as we are confident to do," he says.
Lev Lanovski, chief designer of the Tu-204, says: "The Tu-204C [cargo version] was certificated in March 1997, but the certification required some minor changes. With money shortages, these will take until October to complete, but I expect to see commercial operations begin that month."
Nikolai Talikov, chief designer of the Ilyushin Il-114, which was certificated in April, says: "Although there are some aircraft ready for sale, and certification was received in April, Ilyushin and the Tashkent production factory are now giving priority to creating a leasing company for the Il-114."
The Tashkent factory has had talks with several Western financiers and hopes to arrange customer finance for both its products, the Il-76 freighter and the Il-114. The Uzbekistan Government is anxious to see the factory achieving success, and has promised support.
Secondly, the market has begun to awaken. In the CIS, orderbooks are not the same as those in the West, where a substantial deposit is needed to confirm an order or an option. Thus, when the commercial director of a major CIS factory reported in 1995 that he had "orders" for 262 airliners, a Western director might have used the words "-had interest in", or "-had letters of intent for", the aircraft. Not one rouble had changed hands. The system of paying for an aircraft was that, when one became available and the customer had the money available, it was bought: if money was not available, there was no purchase. There was little project funding available either to develop a new aircraft or to buy one.
Those have been the main barriers to be crossed by both the producer and the operator: money and capital. Both have considered leasing to be a cure-all, and much effort went into trying to set up a leasing industry. Russian banks found a much more secure, and profitable business, however - investing in Government bonds. Why risk lending to industry with little guarantee of a return and a high risk? As a result, the Ìve or six leasing companies found it impossible to raise enough money to buy more than two or three aircraft and little impression was made on the market.
This year there have been some answers beginning to emerge. Firstly, the Russian Government gave guarantees to two lessors, which, although small and with limitations, nevertheless allowed the companies to attract foreign investors. The $30 million rotating guarantee for Kato Aromatic subsidiary Sirocco Aerospace, according to Sirocco chairman Dr Ibrahim Kamel, enabled his company to attract international investors. "We had a good product, we are building a good support programme, we needed investor confidence. The guarantee gave us that," he says. Sirocco received its first Tu-204 in May, while four more are expected to be delivered in 1997.
Moscow Aviation International (MAIL), after three years of setting up, received its leasing licence in February and a state guarantee for a non-rotating $150 million in March. "This has allowed us to find investors to enable us to fund 20 Tu-204s with Russian PS-90A engines," says chairman Gary Kasparov.
"Our intention is to lease these to Russian and CIS airlines to begin their fleet renewals. The upfront money for our Tu-204 will be less than the cost of an overhaul for a Tu-154 and, with the much improved operating costs and higher utilisation, operators will actually save money even after paying the lease costs."
MAIL's first customer, as yet unconfirmed, is likely to be major Russian domestic carrier Vnukovo Airlines, with reports indicating that it might well take all of the first 20 aircraft.
Another case where a Government guarantee allowed Western financing occurred early in 1997, when Izhavia, based in the small autonomous republic of Udmurtia in the Ural Mountain region of Russia, secured a Government guarantee from the local republic to fund a Yakovlev Yak-42 for its airline. The Yak-42 is perhaps the best of the old-generation aircraft in terms of operating economics, which are close to those of the similarly sized Boeing 737-200. It could, with minor modifications, still work as an excellent interim aircraft for the region's airlines.
New Yak-42 interior
"The Yak-42 is a Stage III-certificated aircraft," says Vladimir Chernaev, general director of Bykovo Aviation Services, its overhauler . "It has new interior and equipment options, and even early aircraft can readily be adapted to the latest modifications. It could be an excellent aircraft for a leasing programme."
Over the past few years, even though orders and money had dried up, many production factories continued to build aircraft, although not completing them where they had to pay for outside components such as engines or undercarriages. When a customer with money came along, this was done, otherwise the aircraft was simply put in storage.
This year, for example, started with 17 such aircraft, all Tu-154Ms, sitting at the Samara factory. Along came Bohjad Air and Mahan Air from Iran, which ordered a total of 12 aircraft. Some orders followed from other airlines and now just one aircraft remains unsold. Czechia and Slovakia each took one aircraft, and two went to Russian carriers.
Western consultants are playing a part in rebuilding the industry. Price Waterhouse has set up an aviation team in Moscow, which works with specialist aviation consultants such as Trace. Team leader Jean Michel Jefferson says that a major contribution made by his work to the Antonov An-38 was "-to add $1 million to its price tag, which was needed to cover the full costs of building the aircraft".
One major problem in understanding comes about when, for example, Western bankers come in, favourably disposed to lending to the industry or the airlines, but expecting the Russian side to have the same background and management capabilities as British Airways or American Airlines.
"When a Russian airline wants to lease an aircraft," says Derek O'Brien, chief executive of aviation consultancy Avia International, "it makes sense for the lease programme to include training in subjects such as how to maximise utilisation through good scheduling, careful marketing and adequate support. Thus, if it costs $300,000 per month to lease a Tu-204, that represents $1,000 per flight hour if 300 hours are achieved, or $3,000 if only 100 are achieved. In the latter case, the aircraft is likely to come back to the leasor very soon."
ARIA understanding
Aeroflot - Russian International Airlines (ARIA) is one of the few carriers in the region with a good understanding of business, money and commercial matters. With the break-up of the old Aeroflot, the new company inherited the International Commercial Department, or MKU, to use its Russian initials. The 680 staff there had dealt with all matters relating to international trade, and formed a good nucleus to develop business and financial arrangements.
"In the old days," says new director-general Valeri Okulov, "it was rare for anyone in Aeroflot to meet anyone from the Soviet aviation-manufacturing industry. Now, every week we have them visiting our offices to discuss aircraft in general and in detail."
Okulov says that, even with the Ilyushin Il-96-300, Aeroflot was expected to take what it was given - the old Soviet maxim being: "Don't give the customer what he wants - give him what we think he needs." Okulov says that now the manufacturers ask what the customer wants.
The manufacturers, plus the overhaul factories, are working to provide retrofits of interiors and avionics. "If we can't find suitable materials for this work in Russia," says Yevgeni Mousika, chairman of Vnukovo Aviaremont, the major overhauler of the Tupolev Tu-154, "we get it abroad - paints from Akzo in Holland, interiors we build in partnership with Diamonite of the UK, and avionics, radios and navigation systems can come from the USA. We have had to adapt to stay in business."
Other new aircraft are coming, too - the much-delayed Tupolev Tu-334 still has not had its first flight because of funding problems. Chief designer Igor Kalygin says, however, that more than 20 airlines have stated that they will buy it when it is ready. BMW Rolls-Royce is now participating in the programme.
Beriev's new business amphibian, the twin-engined Be-103, had its first flight on 15 July and has aroused considerable interest. The Beriev Be-200, a 64-passenger twinjet amphibian, is close to its first flight, and Beriev has secured orders for 20 from the Russian ministry of emergency situations. The aircraft will be offered also for use as a freighter, a combi or a firefighter.
Antonov's new An-140, also intended as an An-24 replacement, has aroused interest from Iran - the Iranians are anxious to build a local industry and are planning to build several Russian and Ukrainian aircraft and engines in their country if agreements are finalised. The An-74, a twinjet 10t freighter, now also available for other roles, has found Gaspron, the Russian energy industry, to be a growing customer, and is beginning to earn interest from potential Western customers. The second An-70, which is the world's first purpose-built propfan-powered aircraft, has begun its test programme. Seen as an Il-76 replacement, its prime market is expected to be military, although it is likely also to be used in civilian service.
Good news for orders
Other good news is coming from airlines seen by the Russian aviation industry as being users of foreign aircraft - at the Paris air show in June, Transaero signed a firm order with Ilyushin and the Voronezh Aircraft Production factory for six Il-96Ms, with first deliveries due in 2001, and a further option for another six. ARIA sees the Tupolev Tu-214, a higher-gross-weight Tu-204, as a likely choice to replace both passenger and cargo aircraft in its current fleet.
A lot of problems remain to be solved. How can 20 factories stay busy in today's market? Why are some aircraft being produced, even in different models, in two factories - the Tu-204 family is being built at both Aviastar in Ulyanovsk and at Kazan, the An-74 at Kharkov and Omsk and the Tu-334 is now on the production line both in Kiev and Samara, while Taganrog still expects to build it.
The tax regime in Russia and the other CIS states is complex and needs rationalisation; for example, an engine built in Russia attracts VAT (value added tax) if it is exported to a factory in the Ukraine for installation on an aircraft being built for a Russian airline. It gets a second VAT charge as it crosses back into Russia on the aircraft. Tax credits are not part of the system.
For the past few years, the economies of the region have been intent on redistributing wealth among the strong and much less so on the more important task of creating new wealth by getting people and industry back to producing marketable commodities.
Although much remains to be done by the CIS aviation and airline industries and the journey will be a long one, it is beginning to be apparent that a start has been made.
Source: Flight International