Could the Russian aviation industry at last be on the verge of staging a recovery? The evidence is admittedly still a little patchy, but there are some encouraging signs of life from an industry which was left for all but dead following the unceremonious collapse of the Soviet system six years ago.

Certification of the next generation of Russian-built airliners is moving back on to course, having virtually come to a standstill a couple of years ago because of a lack of funds. A series of sizeable sales are also tantalisingly close from the new breed of aircraft-leasing companies, backed by the promise of hefty loan guarantees from the Russian Government.

Perhaps most encouraging are signs of a new sense of realism becoming evident within the region's aerospace and airline sectors. Go back only a few years and it seemed that the intent among the bulk of the industry was to sit tight until the worst of the chaos had passed. There was a distinct air of unreality about the talk of pushing ahead with new aircraft designs and little by way of contemplating major structural change to the old Soviet machinery.


Changes afoot

That, it seems, is beginning to change, as demonstrated at the Russian Aerospace '97 conference, hosted in Moscow on 20-22 May by Flight International and Aviaexport, which handles international marketing for Russia's civil-aircraft industry. The talk was of the need for radical restructuring of an industry which is still fragmented into a bewildering array of design bureaux, production plants, research institutes and more besides.

The tone was set by Andrew Svinarenko, first deputy minister of economics, who has been charged with seeing through the restructuring. The fact that the economics ministry was chosen earlier this year to head the re-organisation sends strong signals by itself that the industry can no longer rely on the old certainties of the military industrial complex.

Svinarenko, speaking for the first time since taking on the new role, made no secret of plans to bring a touch of hard commercialism to the debate. He believes that the aim must be for the aerospace industry to regroup around no more than "two to four" leading players. These would be integrated companies bringing together research and development, design and production under a single roof.

Svinarenko goes further, to suggest that these broad coalitions may include non-aviation businesses - possibly in areas such as oil and gas - to help create the sort of financially strong and independent groupings which are able to invest in new products, deal more openly with customers and eventually attract outside investors.


Prospective partnerships

Partnerships with the country's banks and emerging leasing companies are clearly on the agenda, while the economics ministry is keen for the industry to "-take advantage of Western partners in aerospace and aviation".

Beneath the top tier of companies, there would be a second level of "ten to 12" suppliers of engines and systems, which would again have to be broad-based, integrated companies. All of this raises some delicate questions over which enterprises and personalities will emerge out of the re-organisation and what they may eventually look like.

A partial lead has come from the military-aircraft sector. It has already been regrouped, within the military industrial complex, into two broad alliances - VPK MAPO and AVPK Sukhoi - built around the Mikoyan and Sukhoi design bureaux. VPK MAPO, for example, pools 12 enterprises, from the Mikoyan fighter-aircraft and Kamov helicopter-design bureaux through to engine-production plants, and even includes a bank.

Alexander Ageev, head of strategic planning at VPK MAPO, admits that the grouping falls short of a fully integrated organisation, but stresses that the eventual goal is for "100% internal integration".

The defence industry, more than its civil counterpart, is painfully aware of the competition it faces in critical export markets from Western giants such Lockheed Martin and, soon, Boeing/McDonnell Douglas. Ageev acknowledges that, while the trusty MiG-29 may have another 20 years in service, it will not last for ever. The priority is to find the collective resources to pump the necessary billions of roubles into fresh research and development, he says, pointing to the need to develop products such as the advanced MiG-35 fighter and MiG-AT jet trainer.

"Domestic demand will not re-emerge soon, so we are doing everything to satisfy our export customers," he adds. That also means developing a "network of services" beyond, including military transports, helicopters, engines and non-aviation products, such as oil, to give room for broader trade deals and offsets.

"We need to become a diversified and wide-ranging concern-a kind of constellation. A federation led from the centre," he says.

Ageev argues that these alliances should be engineered within state ownership rather than leaving consolidation to the vagaries of Russia's fledgling private sector. "Within a state-owned corporation, we can manage integration in a controlled way," he says.

Alexey Federov, head of the Irkutsk production plant, and now general director of AVPK Sukhoi, agrees that the "fashionable" flirtation with private-investment vehicles has so far failed to deliver consolidation. "The Government should show leadership and create restructuring under state ownership," he says, adding that there is a need for Government to push through the initial vertical integration of design and production before attempting to form a joint stock company.

"This has to be developed a step at a time and first you need viable companies," he says, giving a bleak warning that some enterprises "-may have to be declared bankrupt" in the process. Federov believes that the consolidation will also have to see mergers between the major defence houses and the largely civil bureaux of Tupolev and Ilyushin, as well as helicopter operations and others. He says that talks are taking place, but concedes that it will be at least another two years before deeper alliances materialise.

"We destroyed the old system, but haven't replaced it yet with a system that would work in the free market," he says, warning that, without some radical measures, there is little prospect of the industry re-emerging. He points to the increasing "inferiority" of Russia's technical base and the leaching away of skilled personnel.

He hints that it may need action at Government level to overcome the political rivalries and personal ambitions inherent in the fragmented Soviet system.

"The top managers believe that they are operating in their own private fiefdoms-I believe that this is the Achilles heel of restructuring in our industry," says Federov, who faces his own battles in attempting to push through vertical integration within AVPK Sukhoi. The Sukhoi design bureau itself had been supporting a legal challenge against the decree establishing the new grouping.

There is still plenty of scepticism evident, including among leaders of some key design bureaux. Tupolev general designer Valentin Klimov publicly rejects the vertical integration being pushed by Svinarenko at the economics ministry. "Design bureaux and production companies would work as self-contained enterprises, keeping their different traditions and expertise," says Klimov, who is now reported to be in a struggle to defend his own position within Tupolev.



The economics ministry, however, is potentially in a powerful position to push through consolidation by way of its all-important control of the Government's purse strings. Svinarenko makes clear that there will be help available, but not on the old basis of Government hand-outs. "In the past, the industry has always relied on Government funding, but that is wrong," he says. Instead, the emphasis will shift to helping the industry restructure itself and look for "new forms of financing" through partnerships and financial institutions. He also warns that the volumes of state funding to the leading aerospace players will simply "-not be at the same levels as in the past".

Some debt write-offs are possible, but not a wholesale underwriting of restructuring.

Svinarenko does pledge to maintain the funding programme already in place through to 2000, but suggests that, in future, the new breed of "integrated market-oriented" companies will have to ensure that they are in sufficient shape to find their own funding, including that from outside investors. There are also warnings that civil spending will be more carefully targeted on "a number" of key programmes, suggesting that other pet projects will at last have to fall by the wayside. Neither will the successful programmes be selected by the aerospace industry. Instead, a review is to be carried out in consultation with the transport department and the airline industry. In short, the customer will decide.

The front runners are already clear enough. The Tupolev Tu-204 narrowbody family, the Ilyushin Il-96M/T widebodies and the Antonov An-38 are already on track, with certifications already signed, or in hand. Aeroßot-Russian International Airlines (ARIA) also says that the Ilyushin Il-114 turboprop will form part of its plans for regional hubs across Russia.

The state help needed to get sales moving is also in train. The 1997 Russian budget includes provision for 4,000 billion roubles ($700 million) of Government guarantees, which could be used to back up to 40% of the purchase price of new aircraft. Although the budget provision will not be officially approved until mid-July, airlines and leasing companies have already been busy drawing up business plans justifying their claim to some of the guarantee.

More than 40 aircraft could be underwritten by the partial guarantees, says Victor Samokhin, who heads the technical department at Russia's new Federal Aviation Service (FAS)- the agency overseeing the project. He says that the initial batch is already likely to include eight Tu-204s and five each of the Il-96, Il-114 and An-38, as well as other types such as the Yakovlev Yak-42D and the Mil Mi-8 helicopter. That should include Il-96-M/T and Tu-204 Western-engined models. "Without the Government commitment, airlines could have purchased only around ten aircraft," he says.

The Government has already underwritten part of ARIA's $1.5 billion order for three Il-96T freighters and 17 Il-96M passenger types, with Western avionics and Pratt &Whitney PW2000 engines. The first of these, two Il-96Ts, are due to start arriving towards the end of the year, following scheduled certification around October. The Russian Government is guaranteeing about $30 million of the purchase price of each of the $75 million aircraft, with the remainder underwritten by export credits from the US Exim Bank and others from the European Bank of Reconstruction and Development.

In fact, the initial seven ARIA aircraft will be delivered under full sovereign guarantees, to help the aircraft "establish a track record" as it moves through Russian and, it is to be hoped, US certification, according to Alexander Rubtsov of Russia's National Reserve Bank. After that, there should be room for asset-based financing on the back of the aircraft itself and from cashflow generated by the airline.

Vladimir Romashkin, deputy chief of civil-research institute GosNIIGA, believes that opportunities for internal fund-raising will also begin to improve, with the domestic airline market more stable and interest rates down from the massive 50%a year of previous years. He says that it should be possible to arrange rouble loans on the basis of around 10-12% interest, with US dollar deals as low as 7%.

Other leasing operations are emerging to fill the gap. The Sirocco consortium, backed by Egypt's Kato group, has firm orders for 30 Rolls-Royce-engined Tu-204-120s, and options on another 170, with plans to exploit export as well as domestic markets.

The Moscow Aviation International leasing company, set up by the Russian Aviation Consortium and led by the Kasporav consultancy, has also pledged to help raise Western funds to help get an initial tranche of 20 Perm PS-90A-powered Tu-204s into service. Despite these efforts, demand is still far outstripping supply. GosNIIGA, which has been helping airlines to prepare business plans for the pending Government-guarantee project, says that there have already been prospective requests for "in excess of 100 aircraft". Given that there are only 38-40 likely to be on offer, some will not succeed.

There is general agreement that less than half of the ageing Russian-built fleet of some 8,000 airliners will be retired by the year 2000. Figures for 1996 show that aircraft in the civil fleet had, on average, completed 72%of their active life and many were up to 80% or more. Samokhin, at the FAS, adds that the plan after 1991 was to replace about 50 aircraft a year, but that, in 1996, only 12 were in place and some of those were helicopters. That still leaves another 650 aircraft purchases to go, including an estimated 440 airliners.

It is that target, more than any other, which is focusing minds throughout Russia on the business of bringing its civil-aerospace industry back to life.

In the words of Federov: "The situation today is dramatic. We've been talking too long and now it's time to do something. The biggest difficulty is in changing minds."

Source: Flight International