Russian industry special: Growing a great OAK

Is Russia's attempt to unite its aerospace interests around one organisation, United Aircraft or OAK - with Sukhoi at the forefront - beginning to pay off?

Harnessing the potential of Russia's creaking aerospace industry was never going to be easy. But, 18 months on from president Vladimir Putin's confident announcement of the official launch of United Aircraft Corporation (OAK) through the combination of legacy aerospace assets, how much progress has been made towards the goal of a more efficient industry producing commercial products that are attractive to overseas markets?

As government and industry alike struggle with the bureaucracy involved in merging state-run and privately owned assets, the shining star in the OAK galaxy, the Sukhoi Superjet 100 , is achieving some of the key objectives needed for the organisation to succeed.

Sukhoi was chosen as OAK's cornerstone in part because of its size - a turnover of around $2.2 billion compared with around $940 million for Irkut, the other candidate. Sukhoi is predominantly government owned and its closer links and ability to lobby the government played a part. Sukhoi also has a more capable design bureau than any of its counterparts within OAK, according to Matheus Salvadori, a consultant with Frost & Sullivan specialising in the Russian market.

But an even stronger reason for the weighting in favour of Sukhoi is its military heritage. The prestige associated with Sukhoi's combat aircraft history gives OAK a solid foundation on which to build its commercial business. Those involved in OAK know the importance of military production, says Salvadori.

OAK - a short history OAK is a government-owned corporation that covers design, manufacture and marketing of aerospace products. Russian president Vladimir Putin officially launched the enterprise in February last year, but the idea of consolidating the industry had been circulating for some time, with a proposal for the umbrella organisation first emerging in 1999. The process of integrating the different businesses that make up OAK began in 2005, and it brings together some of the best-known names in the Russian aerospace industry. Russia's defence minister Sergei Ivanov has been appointed as chairman of the board. Alexei Fyodorov (see below), former head of MiG and co-owner of Irkut, has been named director general. Analyst estimates of the value of the assets contained within OAK range between $3 billion and$4 billion. An initial public offering is due to take place later this year or early next year.

Military advantage

Although the company is initially focusing on commercial aerospace, a robust military product line would be an advantage to OAK, says aerospace expert David Pritchard of the USA's University of Buffalo. "OAK has a strong military context."

OAK's ambitious goals have been met with some scepticism, but it is already achieving one significant part of its ambitions: a higher international profile. "The government saw that it was producing only five or six aircraft a year for internal use and that it could secure a better place in the global market by unifying," says Salvadori.

OAK's hopes for international recognition are not limited to a conventional sales drive: it recently signed a series of agreements with EADS that will see the Russian manufacturer become a risk-sharing partner on the Airbus A350 XWB programme and establish a joint venture to set up freighter conversion centres for Airbus A320 family aircraft.

Airbus has offered Russia a 5% airframe participation in the A350 programme. EADS says discussions about which components of the aircraft will be designed and built in Russia are "still ongoing". OAK has also agreed to purchase Kaskol's stake in Moscow-based engineering centre ECAR, which was set up in 2004 by Airbus in co-operation with Kaskol.

Pritchard describes the contrast in certification processes between China, which has performed subassembly work for Western airframers, and Russia, which has not, as a major hurdle for Russian manufacturers competing in international markets. These agreements may not affect current Russian programmes, but will strengthen the position in Western markets for future aircraft.

But what will OAK need to do to ensure Russia's aircraft industry achieves its hoped-for success in international markets? Pritchard says it will take several criteria for a Russian aircraft to be successful in the wider market. Firstly, he says, OAK will have to follow China's lead, rationalising its product range so that different manufacturers' aircraft types do not compete with each other.

The umbrella organisation's product strategy emerged in February last year: OAK intends to base its "model range" on selected Ilyushin, Sukhoi and Tupolev types. Russia's industry ministry forecasts production of 50 Ilyushin Il-96s, 84 Tupolev Tu-204s and Tu-214s and 230 Superjet 100s by 2012.

By far the most advanced of the products set to be marketed under the OAK banner is the Superjet 100. This aircraft is fulfilling OAK's aims by opening up the global commercial aircraft market to Russian companies. Many of the aerospace industry's biggest players are on board the Superjet, including Boeing, Finmeccanica, Goodrich, Honeywell, Safran and Thales, and this Western input has made the aircraft appealing to a market outside Russia and the CIS countries.

Francois Quentin, senior vice-president for aerospace at Thales, says: "One day Russia could become one of our multi-domestic homes - within 10 years for sure, five years probably, subject to the regulatory environment. We believe Russian industry, and OAK, will succeed - they have significant resources and they don't waste them. It is a huge market - nine time zones compared with three in the USA and because of the environment you can't rely on trains - the only way to travel west to east is by air."

Other products

OAK intends to focus on other products too - seven in total put forward by the Russian aerospace industry as a whole. The 150-seat MS-21 is a proposed family of twin-engined short- to medium-range airliners being developed by Ilyushin, Tupolev and Yakovlev, which could enter service in 2015.

While the 95-seat Superjet 100 is aimed at customers looking for larger aircraft, Ukraine-based Antonov, which is closely linked to OAK, is focusing on the smaller end of the market and is forecast to produce 96 70-seat An-148s by 2012. Pritchard not only sees Russia following Chinese industry's lead, but also the possibility of a future collaboration between the two waking giants, possibly on the proposed MS-21.

For OAK to succeed, consolidation must not be limited to bringing together the famous names of Russian industry, he says. The organisation will have to address the vertically integrated structure that has historically characterised Russian industry, with separate design bureaux and production sites. "Over time, the design bureaux will have to integrate - at the moment there are three main strongholds. You can't have three or four main design bureaux operating - but they are sorting it out," he says.

The Superjet is also the focal point of two other key concerns for Russia's industry. "These aircraft can't sell in any kind of quantity without leasing companies as customers," Pritchard says. And for leasing companies to be interested, "Russia has to catch up with the Western certification process".

Here too, progress is being made, according to the Superjet camp. "We have very concrete discussions with at least two Western leasing companies," says Jean-Pierre Cojan, vice-president and general manager of Snecma commercial engines, whose Powerjet joint venture with Russian manufacturer NPO Saturn is providing the SaM146 engine for the regional aircraft. It is also vital for OAK's success that aftermarket spares and service meet Western standards, says Pritchard, who attributes the poor sales of Ilyushin and Tupolev aircraft outside Russia to their lack of Western-style support services. This guarantee of serious aftermarket support, which is being provided for the Superjet 100 by Italy's Alenia Aeronautica, is likely to be one of the key differentiators for Western airlines and lessors.

From KGB to deputy Prime Minister Sergei Ivanov was born in Leningrad (now St Petersburg) in 1953. He began working for the KGB in 1975 after graduating from the interpreting department of Leningrad State University, where he studied English and Swedish. During his training in the 76th Pskov Guards Airborne Division, he befriended Vladimir Putin. Later, in the 1990s, Ivanov became one of the youngest generals in the Russian Foreign Intelligence Service. And in 1999, Ivanov became secretary of the Russian Federation Security Council. In March 2001 he was appointed as Russian defence minister by Putin, who had been made Russian president in 2000. As Ivanov hadresigned from the military service a year before, hebecame the first civilian defence minister. In 2005, Ivanov became deputy prime minister, and in 2007 he stepped down as defence minister when Putin elevated his position to first deputy prime minister. In 2006, Putin created OAK and Ivanov was elected as chairman of the board.

Engineering talent

Will the idea behind OAK work? Industry opinions differ. Pritchard is optimistic the task is achievable and that progress is being made: "For a Western-style schedule, it is far behind, but for a Russian schedule it is ahead," he says. "They've got the blueprint and they know what they've got to do. These are major changes - but they need to be done. Russia has a great legacy and engineering talent, but it needs to raise its production capabilities up to Western standards," he adds.

Salvadori, is convinced the OAK structure will be successful: "Russia has potential, but is not sure how to use it. For the first time the Russian government has set everything out using Western standards - it is the right place and the right time." He says that success in the commercial domain for OAK should lead to a stronger presence in defence manufacturing. "Russia has been growing significantly - its role in defining global military strategy is moving in a different direction. It should now have a global defence presence like EADS. I believe [OAK] can be one of the five major aerospace companies in the world."

Industry harmonisation will have benefits across the supply chain, from the high-profile airframers to the smaller suppliers, Salvadori adds. "Unifying the aerospace industry is in the interests of everyone - especially the smaller companies. Before there were companies struggling for government procurement - now they are more likely to partner each other."

But doubts about the consolidation of Russian industry remain. Richard Aboulafia, of US-based anaysts eal Group, describes the Superjet as a "litmus test" for Russian industry, but argues there are major obstacles in the way of OAK. The most important of these is the fact that the company is state-owned.

But the commercial independence necessary for the venture is unlikely to materialise, Aboulafia says. "I don't see any hope on the horizon of this becoming a commercial company. But it is better than watching the other companies die. It is far better to integrate the companies and hope they can pool resources and make something commercially viable."

Aboulafia adds: "Sukhoi gets the keys to the kingdom - but it's hard to know where rational consolidation ends and a Russian government power grab begins."

Fyodorov's engineering pedigree Alexei Fyodorov was born in 1952 in Ulan Ude, the capital of the Buryat Republic, Russia. He graduated in 1974 as a specialised mechanical engineer and in 1989 became chief engineer for IAPO (Irkutsk Aircraft Production Association). Fyodorov went on to become IAPO general director in 1992, and in 1998, IAPO president. The chairman of Irkut and former chief executive of MiG was nominated by the Russian prime minister Mikhail Fradkov as general director of OAK. Russia's president Vladimir Putin backed the nomination.

 

Source: Flight International