ANALYSIS: Will sanctions affect Russia's aerospace integration with the West?

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At first glance, the Russian presence at this year’s Farnborough reflected the confidence of the country’s resurgent aerospace sector – and the value with which its key players regard the biennial air show.

All the industry’s big names had sizeable chalets or stands – including United Aircraft (UAC), the holding company for most of the country’s aircraft brands – as well as Russian Helicopters and defence export agency Rosonboronexport.

UAC company Irkut had its own exhibition area – featuring a mock-up of the in-development MC-21 narrowbody – while another subsidiary, Sukhoi Civil Aircraft (SCAC), put two Superjet 100s on static display alongside its Italian partner Superjet International.

However, closer inspection revealed just how seriously the Russian contingent had been affected by the Ukrainian crisis.

There were no thrilling flying displays from the thrust-vectoring Sukhoi Su-35 or Russian Helicopters’ coaxial Kamov Ka-52 Alligator – as there were at last year’s Paris air show, when both types made their overseas air show debuts. In fact, sensitivities over the situation in Ukraine meant military aircraft were kept well away.

The cluster of Russian chalets had a distinctly empty feel. Almost half the Russian executives who wanted to be at the show were either not granted visas in time to attend or refused them outright.

The UK Foreign Office says that while foreign delegations are invited to attend Farnborough as official guests of the government, this year no invitations were issued to representatives of the Russian administration because of the country’s “actions in Ukraine”.

Speaking at a briefing during the show, a consultant advising UAC blamed UK government budget cuts – rather than any political response to Ukraine – for the majority of the no-shows. The agency that handles visa applications for the embassy in Moscow simply did not have enough staff to process them in time, he suggested.

The Foreign Office statement provoked a furious response from Russian deputy prime minister Dmitry Rogozin. “I recommend our delegation to wind up its participation in the show and return home,” he tweeted at the start of the show. That did not happen. By contrast, Mikhail Pogosyan, United Aircraft’s president and the most senior figure in Russian aerospace, was putting on a brave face.

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The Su-35 made its overseas air show debut at Paris in 2013

United Aircraft

Speaking at a briefing midway through the show, he insisted that the extensive links between UAC units such as SCAC and Irkut and Western aerospace companies would continue.

“The aircraft industry is focused on long-term co-operation, and this will not be affected by changes in the political situation,” Pogosyan said through a translator. He drew a distinction between Russia’s military programmes – where “our main suppliers are domestic, and foreign suppliers can be quickly matched in the domestic market” – and commercial projects, where the country’s industry is “highly integrated” with the West. “All our international partners,” says Pogosyan, “are keen on further co-operation.” These partners include Snecma and Alenia Aermacchi on the Superjet and Pratt & Whitney, Rockwell Collins and United Technologies Aerospace Systems on the MC-21.

Pogosyan was speaking before the latest round of US and European sanctions imposed in the wake of the Malaysia Airlines MH17 incident. However, it is true that – short of a total breakdown of relations between Russia and the West – there is mutual interest in these relationships continuing.

Russia’s emergent industry may need Western support more than US and European heavyweights rely on Moscow’s still slow-selling aircraft programmes, but Russia does hold some aces – as Pogosyan was keen to point out. Russia is a major world exporter of titanium, including to Airbus and Boeing. “We are all interested in co-operation,” he notes.

Russia’s industry has gone through a painful transition since the fall of communism. In Soviet times, the country’s vastness and a captive market of client states meant a steady demand for its commercial aircraft – which were insulated from competition from the West – while the Cold War ensured that military production lines were kept busy.

The economic chaos and peace dividend of the 1990s was a disaster for Russia’s aerospace sector. When the country’s fortunes, and those of its neighbours, began improving it was to Airbus and Boeing – not to Ilyushin, Tupolev and Yakovlev – that airlines turned when it came to renewing their fleets.

The creation of United Aircraft in 2006 was an attempt to inject life back into Russia’s industry by bringing its independent design bureaus under one management structure – along with dozens of production plants across the country.

Military programmes – still one of Russia’s huge strengths – would come under one umbrella, even as Western input was already being sought to develop regional and narrowbody aircraft families with the same build-quality, brand integrity, comfort levels and aftermarket support as their counterparts in Europe and North America. However, while the Russian industry has come a long way in less than a decade, it is still very much a work in progress.

Much of that effort involves internal reorganisation. In Soviet times, aircraft production was allocated to factories around the country as part of a command economy. However, Russia’s design bureaus remained fiercely autonomous. These usually Moscow-based entities tended to be named after their inspirational founding chief engineer – the likes of Sergey Ilyushin, Andrei Tupolev, Georgy Beriev and Alexander Yakovlev. They also had their own cultures and competed for the best talent. Ensuring these bureaus work together – as well as integrating them vertically with production facilities – has proven one of the toughest tasks when it comes to industrial consolidation.

Several changes are under way or have already been completed. Sukhoi – the design bureau behind a range of military fighters, as well as the Superjet 100 – is being integrated with Irkut, which is responsible for the MC-21 and already has Beriev and Yakovlev – maker of the Yak-130 jet trainer – under its wing. Tupolev is being merged with Kazan-based production facility KAPO into a single entity. Likewise, military aircraft designer Mikoyan (MiG) is being integrated with Nizhny Novgorod-based factory Sokol – responsible for building many of its fighters over the years. Ilyushin and Ulyanovsk-based production plant Aviastar will together form a new unit called UAC Transport Aircraft.

Pogosyan wants to create an Airbus Group-type structure in Russia. It would retain the brands and autonomy of the design houses, but group the businesses into divisions representing the main markets: military and commercial as well as transport and specialised – which would take in Ilyushin and Beriev.

UAC already has a unified management structure and set of accounts, however, those accounts do not look too healthy. In 2013, pre-tax losses rose to Rb12.9 billion as a result of rising investment costs for the SSJ100 and MC-21. Revenue was Rb220 billion ($6.2 billion), but Pogosyan wants to grow that to $20 billion by 2020, as well as deliver consistent profits.

Internal streamlining will only get Pogosyan so far towards that objective, however. United Aircraft must convince not just the country’s own carriers, but foreign airlines also that its aircraft are as good – if not better – than anything from the USA, Europe, Canada, Brazil, Japan and even China.

It is not proving easy. While SCAC has had reasonable success within the former Soviet Union and in Southeast Asia, there remains just one Western customer for its partner Superjet International – Mexican low-cost carrier Interjet. The vast bulk of orders too for the MC-21 are from Russian customers.

That is no disaster – domestic demand from airlines anxious to replace ageing Soviet types is considerable. But both SCAC and Irkut will be keen to broaden their international customer base if they are to be taken seriously as a competitor for the likes of Embraer, Bombardier, Airbus and Boeing. In its 2013 report, Sukhoi reported 182 Superjet 100 orders, 154 of them from identified customers. It has now delivered around 40 Superjets – 21 of them last year. However, its orderbook has already been overtaken by Embraer’s E2 E-Jet, which was launched only last year. With the MC-21 due to fly next year, its tally stands at around 175 firm orders.

However, Pogosyan believes the two programmes can deliver 800 and 1,000 aircraft, respectively, giving United Aircraft an ambitious 15% of the regional market and around 7% of narrowbody sales.

Both the Superjet and MC-21 have to shift between 300 and 400 units for the programmes to recoup their investment, he says. With production of relatively modern legacy aircraft such as the Tupolev Tu-204 and Antonov An-148 – designed in Ukraine but assembled in Russia – in low single figures, it remains to be seen whether airlines will take Pogosyan at his word when he says: “We offer not copies but modern, innovative products which move the market forward.”

Not that Pogosyan has it much easier when it comes to the military market. United Aircraft’s flagship, the Sukhoi T-50 PAK-FA, is a fifth-generation stealth fighter that made its debut at the MAKS air show in 2011.

However, the Russian government has still to commit to an order, and a fire on a prototype in June delayed efforts to have the aircraft ready for delivery by 2016. Pogosyan believes that together with a possible order from Russia’s biggest export customer, India, the PAK-FA could amass as many as 600 sales. Production of the Su-30 and Su-35 continue, and Irkut is finally delivering Yak-130 jet trainers to its domestic customer, with export deals coming in too.

No one knows how long the Ukrainian crisis will last, but some of the goodwill that surrounded Russia’s efforts to rebuild its commercial aerospace industry and increase foreign co-operation has certainly eroded.

Iran-style pariah status appears a long way off – few in Europe or the USA are in a rush to block Russia’s exports of gas and titanium – but pressure could increase on US and European aerospace firms to ease back on co-operation.

Booking is well under way for the 2015 Paris air show. Russia’s presence – after 2013’s show of force – will be an interesting gauge of whether its integration with the West has taken a step backwards.