On the eve of the MAKS air show, there are encouraging signs for Russian aerospace, with strong helicopter exports and rising air travel boosting airliner orders
This year has delivered a rude awakening to the Russian aviation industry. For the first time in recent history, aviation’s share of Russia’s annual $5.5-5.8 billion in defence exports fell from 2004’s 65% to an estimated 20% in 2005.
At the same time, this year’s 25% increase in Russian defence spending, to Rb187 billion ($6.5 billion), largely bypasses the air force, which comes a lowly fourth on the budget spending list after strategic missiles, space and the navy. This means the air force focus is on mid-life upgrades rather than acquiring new aircraft: five Sukhoi Su-27s were upgraded to -SM standard in 2003, seven in 2004 and 20 will be upgraded this year. Tupolev strategic bombers will also receive upgrades, while Su-25 attack and Su-24 interdiction aircraft wait for better times.
Meanwhile, Russia’s fifth-generation fighter concept is being revised after India signalled its preference for an aircraft smaller than Sukhoi’s proposed T-50. The 30-35t “medium-to-heavy weight” class design is being resized down to 20-25t, with MiG and Sukhoi discussing joint development with the French and Indian industries. At the same time, Russian defence ministry officials are talking to their French counterparts in a search for mutual solutions on new fighters, trainers and unmanned combat air vehicles that would satisfy home markets and compete internationally with new US systems.
Prospects for the MiG-AT and Yakovlev Yak-130 advanced jet trainers depend on developments in China and India. If indigenous designs do not proceed, these countries, traditionally the largest buyers of Russian weapons, will again go shopping. This year, the Yak-130 won the largest-ever order from the Russian air force, for 14 units with options for up to 48.
With deliveries worth $500 million a year, Russia’s helicopter manufacturers remain the aerospace industry’s healthiest sector, producing large numbers of Kamov Ka-27/28/31/32 and Mil Mi-8/17 and Mi-35 helicopters. A recent development, the Ka-31 radar picket helicopter, has won repeated Indian orders and is being eyed by Russian and Chinese customers.
Helicopter successes
Next-generation Mi-28 attack and Mi-38 utility helicopters are undergoing trials aimed at domestic and international markets and Kazan’s 3-4t-class Ansat and Kamov’s Ka-226 light twins are finally operational. South Korea has received three Ansats and awaits more. The first “fly-by-wire” Russian rotorcraft, the Ansat, has also won Russian civil and military orders. The similarly sized Ka-226 is going to launch customer Gazpromavia in increasing numbers.
Oboronprom, founded last year, is on its way to becoming a nationwide helicopter holding company. It already has controlling stakes in the Mil design house, Kazan Helicopters, Rostvertol and the Ulan-Ude Aviation Plant. The next step is the inclusion of the developers and producers of Kamov helicopters. The merger aims to capture 15% of the world’s helicopter market.
Due to high fuel prices, the growth in Russian air traffic will slow to 6-8% this year from 34 million passengers carried in 2004 which saw a year-on-year rise of 14.5%. The big five – Aeroflot (7 million passengers), Sibir (3.8 million), Pulkovo (2.7 million), KrasAir (2 million) and UTair (1.8 million) – have plans to acquire additional Western-made jets despite Russia’s prohibitive 20% import tax and 18% VAT. Despite having reached the government’s “tax-free” limit of 27 Western passenger jets, Aeroflot has signalled its intention to procure an additional 20 Airbus A320s and four to eight Boeing 767s.
Since the last MAKS air show, the club of Western jet users has substantially grown. In addition to Aeroflot and Transaero, widebody jets went to KrasAir (two 767s) Sibir (five Airbus A310s) and Volga-Dnepr (four Boeing 747-200Fs). VIM-Avia has bought 12 ex-Condor Boeing 757s, while Boeing 737 Classics went to Kaliningradavia, Pulkovo, Sakhalin Air Routes and Sibir. Used Western jets have succeeded in the Russian market thanks to a doubling of fuel prices impacting the operating economics of Soviet-era aircraft.
In addition, for the first time, Russian airlines are reporting a shortage of Antonov An-24s and Tupolev Tu-134s and Tu-154Ms following older jet withdrawals and rising demand for air travel. As a result, the airlines have also turned to the cash-starved domestic manufacturers. Incomplete Ilyushin Il-76/96s and Tu-154M/204s at the Samara, Tashkent, Ulianovsk and Voronezh plants have been dusted off, assembled and sold to Avialinii Kubani, KrasAir, VladivostokAvia and Volga-Dnepr. The new demand has led to the four plants recalling workers and building new Antonov An-148, Ilyushin Il-96 and Tupolev Tu-204/214 airframes. Plant directors say the bottleneck now is the shortage of skilled workers.
The aircraft leasing business is up and running after the Russian government invested up to Rb3 billion into Ilyushin-Finance (IFC) and Finance-Lease (FLK) and promised a further Rb6 billion this year, enabling them to attract more commercial funds. Aeroflot has finalised a long-negotiated deal for six Il-96-300s, setting first delivery for 2007. Atlant-Soyuz and Volga-Dnepr ordered four Il-96-400s for delivery in 2006-7. Dalvavia has boosted its Tu-214 fleet to four and expects a fifth later this year. KrasAir took two Il-96-300s and two Tu-204s last year and a single Tu-214 this year. Transaero has signed up for 10 Tu-214s with first delivery this winter. Vladivostok Avia has taken three Tu-204-300, and awaits a fourth later this year.
For the first time in recent years, the Russian industry has exported a widebody airliner. Under a $110 million deal, Cubana will take delivery of two Il-96-300VIPs in October-November, taking advantage of a long-term $95 million intergovernmental credit line. Iran Air is seeking a similar arrangement for 10 Tu-204s.
China hope
IFC is reaching out for China, hoping to sign a deal for at least two Il-96-400s with the Chinese aviation import agency at MAKS 2005. China is also ready to shift from Rolls-Royce-powered Tu-204s to PS-90A-powered variants, with five firm orders and 10 options. Further export deals are expected after IFC, Ilyushin and R-R signed an agreement for the use of R-R Trent engines on the Il-96, promising to cut fuel burn from 7.5t/h to 6t/h and substantially improve Il-96 competitiveness.
Other deals expected at MAKS 2005 include orders from Aeroflot and Sibir for up to 100 Sukhoi-led Russian Regional Jets; from Aeroswit and Pulkovo for 20 and 18 An-148s respectively; and KMV for three Tu-204-300s.
This year, Airbus and Boeing gave their assessments of the Russian market for the first time. Airbus forecasts that Russian airlines will take delivery of 620 of its aircraft over the next 20 years, in a market it values at $46 billion. “We see Russia as one of the fastest growing markets,” says Christopher Buckley, Airbus senior vice-president. Today, Baltic and CIS airlines operate eight A310s and 29 A320-family aircraft.
Airbus’s assessment does not give a split between Russian and Western designs. It only says that “a bigger half” of Western jets going into the market will be Airbuses. “The majority will be in the A320 size, to replace Tu-134s and Tu-154s. There is a substantial market for A330/A340s to replace Il-86s operated by Aeroflot, Pulkovo, Sibir and other airlines,” Buckley says. He points to “strong positive results” achieved by the largest Russian airlines over the past four years. Airbus anticipates growth in passenger numbers of over 6% annually. Says Buckley: “If the taxes remain as high as they are, we will see airlines buying used aircraft. So more than half of the intake will be used jets. If the taxes go away, we can easily see that 60-70% will be new aircraft.” He cites Aeroflot and Sibir as primary customers in the near future.
Admitting that Boeing aircraft are more often chosen when it comes to the used market, Buckley says: “It is purely a function of timing and availability. The used aircraft that are coming to Russia now are 737 Classics. Many of those aircraft were built before A320 production started and they are available at much lower lease rates. We are frustrated with the fact that few A320s are available.” When it comes to new acquisitions, Airbus leads in the narrowbody sector. Aeroflot is looking for an additional 12-16 A320s and low-cost start-up Aurora plans to acquire as many as 40. In the widebody sector, the A310 is widely available and hence popular with Sibir. New rather than used A330/A340s will appear in Russian service due to a shortage of used aircraft.
Boeing’s vice-president sales Russia/CIS Craig Jones predicts that, in dollar terms, US-made jets will account for 65% of all CIS sales. Boeing foresees sales of 800 large regional and narrowbody aircraft alone, plus 400 widebody jets, in the CIS market over the next 20 years. “In the beginning the focus will be on narrowbodies. There is a huge need for 100-seaters as lots of Tu-134s and Tu-154Bs retire,” he says. Il-86s and Il-96s will be operating for sometime, so the widebody sector is “a further goal”.
Smaller choice
Kaliningradavia, Pulkovo and Sibir have taken 737-500s. “The -500 satisfies the market better. When [Russian airlines] are looking for a family of narrowbodies, they first look for a 100-seater. In many cases they choose the 737-500,” says Jones.
Aeroflot and Transaero are “natural” customers for the Boeing 787 as they could take advantage of government tax breaks, says Jones. Other sales are restricted by import duties. “With the tariffs in place I am sure anybody would be able to afford such aircraft. It is just difficult with a 20% import tax and 18% VAT to make the economics work with any aircraft. It is a roadblock to the airlines, not for us.” This means cheaper, used 767s will be a more popular choice.
Yet Jones believes the Russian government, concerned with flight-safety issues, would prefer Russian airlines to take new rather than old equipment and that a solution will be found during World Trade Organisation entry talks. “The government has to do something with the taxes. They cannot leave them in place for ever,” he says. The need for replacement and additional aircraft will move the taxes out, he believes. “The passengers will fly regardless, and they do. Lufthansa, Air France and German low-cost carriers [German Wings and Germania Express] have been developing routes into Russia and increasing frequencies. Some joke that Lufthansa is the fastest-growing airline in Russia.”
But removing the tax barrier is not going to be an easy decision for the government, which will have to calculate how many jobs would be created and how many lost. If the taxes are removed, it will be a major blow to the plants in Kazan Ulianovsk and Voronezh, and factory managers naturally support the taxes. They could only tolerate their lifting for specified models of Western aircraft that have no Russian equivalents.
IFC general director Aleksandr Rubtsov speaks for the industry: “Why should we widen the issue of tax removal to the whole range of aircraft? This will decrease the local market interest in our newly developed aircraft that are being mustered in production and those undergoing flight tests.” He agrees that taxes could be removed or softened for the “747 and larger aircraft” and there could be “a narrow window” for A320 and 737 family members. Such an option is being considered by the government.
The An-148 and Il-96-400 would survive tax removal “because they are very competitive”, Rubtsov adds. The Il-96-300 and Tu-204-100 would be most affected. “They live in their own niches, competing primarily with discontinued types of Western aircraft,” he says.
Rubtsov says Airbus and Boeing are preparing “sweeteners” to what will be a bitter pill, with Boeing promising to invest $2.5 billion in the next six years into unspecified “Russian programmes”. Airbus has offered Russia “full-rights participation” in the A350. Annual purchases for Russian-made parts, titanium purchases and joint development effort would rise from $80 million in 2005 to $110 million in 2007.
National drive
Meanwhile, there are signs that a national united aviation corporation, OAK, is on the way. Boris Alyeshin, head of Russia’s federal agency for industry, has led the drive to establish OAK, which would merge Ilyushin, Irkut, MiG, Sukhoi, Tupolev and leasing companies FLK and IFC and, with a 60% state interest, undertake development, production and sales of aircraft. Its creation has been repeatedly postponed, but the “first phase of creation” is set to be completed in December 2006.
Critics say the government has failed to create conditions for the private sector and foreign investors to participate in Russian aviation. By keeping import taxes high, the government has preserved rather than protected the local industry. Inefficient state management remains at most aviation enterprises, while other industries have accepted more efficient commercial approaches. Aleyshin says “there have been some obstacles” and admits “we have dragged out the process [of OAK creation]”. Time will tell if it is to make any significant difference.
VLADIMIR KARNOZOV/MOSCOW
Source: Flight International
