Only a year ago Ilyushin Finance seemed in a very different position. A longstanding debate about its mixed ownership structure was finally poised for resolution. Negotiations remained active last summer with Bombardier about a proposal to buy 100 locally-built Q400 turboprops, as the Russian lessor waited for CSeries deliveries to begin in mid-2015.
But 12 months later Ilyushin’s split-ownership structure has only been adjusted slightly, with the biggest issue left unresolved. The Q400 deal has finally collapsed with Ilyushin Finance now involved in plans to revive the Ilyushin Il-114 regional turboprop or perhaps partner with China’s Xian Aircraft to import or locally source the rival MA-700. The Russian lessor is also re-evaluating its order for 39 CSeries aircraft over concerns about schedule delays and availability of financing.
Meanwhile, Ilyushin Finance’s key customers – mostly Russian airlines – are facing a financial crisis caused by a depreciating ruble that is forcing fleet cutbacks just as suppliers – mainly Russian manufacturers – count on the lessor to place dozens of orders for Sukhoi Superjets and Irkut MC-21 narrowbody aircraft over the next several years.
“This is our life,” says Ilyushin Finance director general Alexander Rubtsov only half-jokingly.
Ilyushin Finance was established in 1999 as the Russian aviation industry’s answer to manufacturer-owned asset management companies, such as Boeing Capital Corporation. But it was not created with the same clarity of ownership as many of its comparable Western entities. United Aircraft Corp (UAC) is the biggest shareholder with a 49% stake. Vnesheconombank (VEB) has the second-largest stake at 21%. The split ownership highlights Ilyushin Finance’s sometimes awkward triple mandate to act as an aircraft lessor, promote the sale of Russian-made aircraft and also be a successful business.
“We have been established by private investors, a government bank and manufacturers of aircraft not only as a company to make money but also to promote the sale or lease of newly developed types,” Rubtsov says. “That’s why this is part of our day to day operation, which is different from other lessors.”
Some of that complexity was expected to be resolved last year with reports of a potential deal by UAC to divest its ownership stake to VEB. Ilyushin Finance would lose the corporate parent of its namesake, but gain a single-minded ownership structure. As late as last January, it appeared the deal was poised to be signed, as UAC’s board of directors authorised the sale of the 49% stake to VEB. But the situation changed at nearly the last minute, and the deal was never consummated.
“It never happened because VEB had a choice either to acquire shares of IFC or to acquire shares of Sukhoi. At that time they opted for Sukhoi shares,” Rubtsov says.
That decision helped bolster the balance sheet of a key UAC subsidiary, but maintained the status quo at Ilyushin Finance. It once appeared likely that Ilyushin Finance would be rebranded to reflect its new ownership structure, but that talk has ceased.
“For us we have a very excellent relationship with UAC and a very good relationship with VEB,” Rubtsov says. “So it’s not a very big deal.”
Rubtsov also downplays the impact of tensions with Ukraine on the lessor’s position as the largest buyer of Antonov An-148/158 regional jets, with 16 aircraft delivered. Although designed in Ukraine, the aircraft are assembled with 60% content from Russian suppliers, Rubtsov says.
“Of course the traffic between Russia and Ukraine is somewhat more complicated,” Rubtsov says. “But otherwise this is a joint Russian-Ukrainian programme. We cannot live without each other. We have industrial links for years and years and years. I don’t think it will be easy for both partners to find a replacement or make an economically viable [substitution].”
The financial situation with Russia’s airline industry is also not as bad as it may seem, Rubtsov says. He agrees that the country’s financial crisis is causing turmoil for domestic airlines. But the two Russian airline bankruptcies so far – involving Polet and Vladivostok – had deeper roots than the year-long financial troubles, he says.
“The bankruptcy of Vladivostok was initiated by creditors a long time before the crisis,” he says. “Polet was the same story.”
Russia’s commercial aircraft manufacturing industry has also received a reprieve. The Sukhoi Superjet entered the year more than $2.5 billion in debt. But Russian government officials agreed in March to invest about $1.8 billion to stabilise the programme, reducing debt to normal levels. The Russian government also agreed to provide a further roughly $500 million to subsidise Superjet aircraft leases, as the collapsing ruble has inflated the cost of imported Western systems onboard the aircraft.
“That will make our lives easier,” Rubtsov says.
The Superjet’s declining debt level is expected to spur a round of performance upgrades for the Superjet, including the addition of winglets and a steep approach capability. But Rubtsov also has higher ambitions for a next generation aircraft with 135 seats and a new engine – potentially a geared turbofan supplied by Pratt & Whitney.
“That would be my preference. We know this engine well. We have selected this engine for a number of types, so we know it well,” Rubtsov says.
Ilyushin Finance is also signed up to be a major customer for the MC-21, although Rubtsov also has concerns about Irkut’s ability to execute the programme. The Irkut design features advanced avionics and unproven composite structural materials, which increase the risk. If the programme should falter, Rubtsov is keen to promote an alternative concept based on a re-engined Tupolev Tu-204.
But the most immediate portfolio decision facing Ilyushin Finance is how to proceed with the Bombardier CSeries order. The lessor has ordered 39 aircraft with the intention of filling a gap between the 90-seat Superjet and the 180-seat MC-21-300. But Rubtsov was counting on receiving a financing package from the Export Development Canada bank. However, the Canadian government has prohibited such deals for Russian companies due to sanctions. Rubtsov is also concerned that the CSeries' delayed scheduled – entry into service has moved from late 2013 to early 2016 – also erodes the business case for using the aircraft as a stepping stone for the larger MC-21, which is now scheduled to enter service a year later.
Source: Flight Daily News
