VLADIMIR KARNOZOV / MOSCOW
With Moscow set for its biggest MAKS industry showpiece, Russia's government is determined to create a leaner, fitter aerospace sector
Russia's government seems more determined than ever to restructure the nation's military-industrial complex and is working on options that will set the tone for the industry's future. One favoured solution is to establish a single national aviation corporation, an idea voiced at this year's Paris air show by Boris Alyeshin, recently appointed deputy prime minister responsible for the defence industry.
The government is due to decide on its strategy by the end of this year. By that time it plans to have worked out a mechanism for assessing intellectual property rights on aerospace designs and the contribution of the state to the base capital of aerospace shareholding structures.
More details on Moscow's thinking could emerge at this month's MAKS air show. The two-yearly event is set to be the biggest since it launched in 1992. Current planning is contained in the federal programme "Reformation and Development of the Military-Industrial Complex 2002-2006", compiled by Alyeshin's predecessor, Ilya Klebanov, now minister of industry and science. The strategy calls for a two-stage integration of Russian aerospace enterprises into about 20 "common technology" holdings by 2004-5, and the follow-on creation of a handful of larger mergers by 2007.
The Russian aviation sector comprises 312 enterprises with a workforce of 520,000, of which 29% are state-owned and 33% are shareholding companies with state stakes, the rest being denationalised firms without state interest. Mergers include Aerospace Equipment, Almaz-Antei, Aviapribor-Holding, AVPK-Sukhoi, NPO-Saturn, RSK-MiG, Tactical Missile Weapons and Tekhnocomplex. Expected to join the list are Ilyushin, Mil Holdings, NK Engines and Tupolev.
Last year the industry showed promising signs of revival, with production output rising by 25%, against 10% in 2001, to Rb147 billion ($4.8 billion). However, the increase came entirely from the military sector, where 83% of growth was achieved from exports. The Russian defence industry recorded exports of $4.8 billion and $3.7 billion in 2002 and 2001, respectively. Aviation accounted for 75% of those exports, with delivery of about 130 Sukhoi and MiG fighters and over 100 Mil and Kamov helicopters. The military orders backlog stands at $15 billion, combat aircraft accounting for a similar percentage.
In the first half of this year, state arms trading agency Rosoboronexport signed new contracts worth $2.7 billion, of which aviation took 60%. Sukhoi has already secured $2 billion worth of orders this year from Algeria, China, Indonesia and Malaysia, adding to the $10 billion worth of sales in the previous seven years. Since 2001 RSK-MiG has won orders worth $1 billion for 40 MiG-29 fighters from Eritrea, Myanmar, Sudan and Yemen.
Scarce customers
While in the military sector limited government orders are offset by rising exports, civil aviation relies almost exclusively on scarce local customers. Only 15 civil aircraft of all classes were manufactured last year, including two Tupolev Tu-204s, two Tu-214s, one Tu-154M, one Antonov An-74 and three An-38s. One Ilyushin Il-96-300 and two Tu-204s were completed in the first half of 2003. Alyeshin's single entity plan therefore targets the civil aviation sector first.
He believes the creation of a national aviation company would eliminate domestic competition and enable a "unitary technological chain for civil and military aircraft", bringing lower manufacturing expenses and a reduction in excessive manufacturing capacity while improving the investment climate for local and foreign capital. Klebanov's scheme for military reconstruction, on the other hand, calls for two entities - Ilyushin, Mil, Sukhoi and Yakovlev united in one merger; and Kamov, RSK-MiG and Tupolev in another, so that competition on the domestic market remains, mirroring the situation in US industry where Boeing and Lockheed Martin compete.
Alyeshin's plan takes as its prototype Europe's EADS, and finds its most enthusiastic support from the main commercial enterprises of Russian industry - the National Reserve Bank (NRB), NPK Irkut and Kaskol. The three have prepared a joint offer on forming a single commercial aircraft manufacturer encompassing a wide product range inclusive of the Il-96, Tu-204/214 and military transports. The proposed structure would be formed by the state handing over or selling at "reasonable prices" its controlling stakes in the Aviastar, KAPO and VASO plants and the Ilyushin and Tupolev design houses.
Make or break
NRB chairman Aleksandr Lebedev says a merger is the "last chance to save Russia's position as an aviation nation" and wants a deal to be forged by year-end, which he insists is a "final make or break point" for civil aircraft production. He believes unification is essential if lower costs and higher quality are to be achieved through the necessary standardisation and streamlining of commercial and military transport aircraft manufacture. At least initially it would also benefit from Russia's skilled labour, still available at just $200 a month and one of the only advantages left to Russian industry as it has to adapt to global electricity, materials and components costs.
Passenger traffic in Russia grew from 23 million in 2001 to 25 million in 2002, reaching only a third of the 1990 level. A shortage of internationally compliant Russian aircraft on the used market is starting to be felt. Tupolev Tu-154Ms and Yakovlev Yak-42Ds have to be fitted with additional noise-absorbing panels for Stage 3 compliance and with TCAS and other avionics items needed for international services. "We have restored all of our Tu-154Ms into a flightworthy condition," says Mikhail Koshman, director of Russia's second airline Sibir. "It is a profitable and predictable machine and we would lease several more if they were available."
Aeroflot faces a similar situation, and is seeking more Tu-154Ms. The type remains in low-level production at Aviacor in Samara, but airlines are wary of buying a marginally Stage 3-compliant machine for $7 million with tougher Stage 4 rules looming in 2006. Other airlines prefer to wait until the Tu-204 matures and is readily available on lease terms, or for the government to relax the 40% taxes levied on foreign types through import and VAT duty (only Aeroflot and Transaero have time-limited tax exemptions on imported aircraft).
The similarity in their political position over the Iraqi crisis has prompted French, German and Russian industry leaders to seek closer partnerships in aerospace programmes. The successful experience with using Thales and Sagem avionics on Sukhoi Su-30MK export fighters led to a raft of new agreements between Russia's Aerospace Equipment, Rosoboronexport, Sukhoi and Tekhnocomplex and Europe's Dassault, EADS, MBDA, Sagem and Thales. Fifth-generation fighters, supersonic business jets, unmanned combat air vehicles and modern avionics are all areas where mutual interest programmes might come about.
While Russian industrialists support the integration of the Russian and European aerospace industries, their very different economies are likely to remain a hurdle. Givi Djandjgava, chairman of Tekhnocomplex, a holding company uniting 16 avionics enterprises with 30,000 workers, says that on average one Russian employee generates $15,000-20,000 a year against $100,000 at European companies. "To stay competitive, I need to invest $10,000-15,000 [per employee] into development and renovation projects, the bulk of it to buy high-tech equipment in the West. That compares to $15,000-20,000 [per employee] European companies normally put into development," he says.
Consolidation challenges
"Consolidation in the US and European industries challenges the aerospace industries of other nations," says NPK Irkut chairman Alexei Fiodorov. In the past nine years, the value of joint Russo-European programmes amounted to €0.7 billion ($0.78 billion). He estimates co-operation with EADS will yield around €1 billion worth of investment and €2.1 billion turnover in the next 10 years.
There is also support for a Russian-Indian industrial union as an alternative to European and US dominance. Indian orders for Su-30 series fighters alone have earned Russia $5 billion and new orders are being finalised for MiG-29Ks, Mil Mi-17 helicopters, Ilyushin Il-78 tankers and Beriev A-50 early warning aircraft. Hundreds of MiG fighters assembled in India under licence are to be followed by 140 Su-30MKIs in the next 15 years. The countries are co-operating on development of the BrahMos PJ-10 Yahont supersonic cruise missile and MTA multirole transport, and Russian industry developed the Kamov Ka-31 airborne early warning helicopter for India's navy. Plans call for joining forces on a fifth-generation fighter and regional aircraft.
"It is time to start forming an independent Russian-Indian aviation sector of the global industry," says Fiodorov. "This could be self-reliant in many civil and military programmes for the two countries as well as making us interesting partners for today's aerospace giants."
Military exports
Together, Chinese and Indian orders account for two-thirds of Russian military exports. China has mastered local assembly of Sukhoi Su-27SK fighters (the intention is to build 200 aircraft) and has procured 100 Su-27 and Su-30MK series fighters from plants in Irkutsk and Komsomolsk. Talks are in progress on Mil helicopter, regional aircraft and manned space programmes. On the civil aircraft side, the aim is to fulfil the initial order for five Tu-204s, with the long-term aim of shifting preferences of Chinese airlines from Western to Russian suppliers.
Given the fragility of the global aerospace market, the future for Russia's industry is uncertain. All eyes are on the government, with the hope that it pushes through promised reforms to create one last chance for this once vast and always innovative industry to survive intact.
Source: Flight International