MOSCOW. (Yuri Zaitsev for RIA Novosti)

On February 20, 2006, Russian President Vladimir Putin signed a long-awaited decree on the establishment of the United Aircraft Corporation, which is to be completed by the end of the year.
The government will control over 51% of the merged company, which will unite 19 legal entities. Almost all of them are products of the industrial era with a full one-site production cycle. This means about 100,000 people will be employed in manufacturing and about 20,000 at design bureaus.
The share of private capital in the holding will at first be around 25%. The second stage of its development envisages a new issue of shares and, in March-May 2007, a merger with the Russian Aircraft Corporation MiG and the Kazan-based Gorbunov aircraft production association, which are now being converted into joint-stock companies. In addition, talks with a large number of private shareholders have shown that they are willing to convert their shares in the corporation's and its enterprises' stocks. So the share of private capital will gradually increase to 40%.
The current situation in the Russian aircraft industry is as follows: military and civil airplanes are produced at 13 specialized plants. Their average volume does not exceed 35% of capacity, while the equipment and technology remain at 1970s levels. The active part of their fixed assets (about 83% of equipment) is outdated. Out of 10,000 assembly machines, only 3% have a speed of above 5,000 rpm. The average age of the personnel employed is over 50. Less than 10% of workers meet current qualifications standards, and the industry's computerization lags terribly behind modern requirements.
Valery Bezverkhny, president of the non-profit partnership United Aircraft Consortium, which was set up as a transitional stage for the United Aircraft Corporation, says that the industry needs to be drastically overhauled on the basis of new principles and technologies. But financing for this major overhaul has yet to be found. At the same time, the excess capacity leads to huge overhead costs and does not allow even the most successful companies to feel confident. Some aircraft manufacturing plants are on the verge of shutting down.
Civil-aircraft production faces the most serious problem. Demand for air carriage is forecast to grow by at least 7% annually over the next 20 years. To meet it, the country will need about 1,500 airplanes, but the Russian industry produces only about 10 airplanes a year; one a month on average. For comparison, Boeing and Airbus produce one airplane a day.
Such airplanes as the Il-96, Tu-204 and Tu-214 were developed in the Soviet era, but fifteen years after the Soviet Union's breakup they are being produced in tiny numbers. The only exception is the version of the Tu-204-120 with a Rolls Royce engine and Honeywell onboard equipment. The Tu-334, work on which began in 1985 and which is eagerly awaited on the Russian market, has still not been launched into mass production.
The new version of the Federal Target Program "Development of Civil Aviation" adopted in 2005 sought to improve the situation, supporting promising domestic projects. It introduced such notions as ‘transitional’ and ‘breakthrough’ products, which were to receive the bulk of investment. One transitional project is the Russian Regional Jet (RRJ) developed by Sukhoi. Its design is almost complete and it is now being prepared for mass production, which, however, will not start until 2007 at the earliest. This means that it will appear on the market five years after the creation of the similar Embraer airliner and later than Ukraine's An-148. Obviously, RRJ should not be developed as a 70-passenger aircraft, but rather should enter the 95-seat niche, and the next project should be for 110 seats.
A ‘breakthrough’ Russian product in civil aviation is still only being considered.
What airplanes carry Russian passengers today if the domestic industry does not produce any?
Russia has about 180 airlines, with the top 25 controlling about 90% of the market. As many as 75% of flights use outdated Soviet planes, 18% use Western airplanes and only 7% use new Russian-made aircraft. At present the Russian fleet numbers some 675 civil aircraft, of which 500 will be scrapped by 2012. The Tu-154 and Tu-134 form the core of the fleet, but most of them will become obsolete within the next 2-7 years.
Still, Russian airlines outperform their foreign rivals in the number of domestic and international flights they operate. In 2005, they transported 35 million people, while foreign airlines only carried about 10 million. Yet given its outdated fleet and failure to meet international requirements established by other countries, Russia will lose its position fast. A vacuum is never left empty, and the niche will be immediately occupied by foreign companies.
The U.S.’s Boeing and Europe’s EADS hope to see a surge in orders for passenger airliners from Russia and are getting ready for a competitive struggle on the Russian market. Airbus, for example, plans to supply 300 aircraft worth $20 billion between now and 2024. If it does, it will edge out Boeing, which is now the leader on the Russian market mainly due to sales of used aircraft. Out of the 180 Western passenger planes now used by Russian and CIS airlines, 144, or 80%, were made by Boeing.
Competing for both the Russian market and their prestige, both Boeing and Airbus are actively developing cooperation with Russian aircraft producers, taking advantage of their facilities and qualified personnel. Irkut, of which EADS owns 10%, produces some parts and units for Airbus, which is EADS's subsidiary. The concern has also offered Russia a 10-15% stake in the program to modernize the A-320. Boeing is likewise cooperating with Sukhoi on the development of the RRJ.
Still, Europe seems to be closer to Russia, and not only in geographical terms. The latest news, announced by President Putin, was that Russia had bought 5% of EADS. This was perhaps the reason for the reduction in Russian airlines' planned purchase of Boeings from 40 to 20. Instead, they will acquire 22 Airbuses.
Yet Russian air carriers will have to pay double the price of Russian planes for their Western counterparts. Only large and sufficiently solvent companies will be able to afford it, but they will save on operational costs. For example, the Tu-154M needs 2.5 metric tons of fuel more an hour than a Boeing 737. As a result, fuel accounts for 20-22% of the cost of an airplane ticket in the West and for 45% in Russia, and this with the constant growth of global oil prices! Saving on fuel makes flights more profitable and allows opening new routes that at least break even.
However, a new airplane requires a big sum of money up front, which not all airlines can afford. Experts say that liberalized leasing would be a good solution, but only as a temporary measure while the Russian aircraft industry recovers. So the government should both reduce tariffs on imported aircraft and introduce deadlines on the exploitation of Western planes by Russian airlines. Otherwise, the domestic market will again be awash with used foreign-made planes, creating a serious obstacle to the revival of the Russian aircraft industry. It will also jeopardize sales of the domestic competitive aircraft, which are expected to go on the market in 2012. But future successive sales will only be possible given a sensible development strategy and support for the aircraft fleet through cooperation between airlines and the United Aircraft Corporation.
As for civil cargo transportation, the sector now faces three priority tasks, says Gennady Pivovarov, director general of the Volga-Dnepr airline. They need to preserve their leadership in charter flights by using their unrivalled ramp aircraft, secure a foothold on the market of regular cargo shipments and develop the Russian market for express deliveries. They also have to continue production and start using cargo versions of the Il-96, Tu-204 and An-148. "Air transportation infrastructure should be organized in line with market demand and oriented toward providing transit and import-export cargo flows, as well as the creation of a system of proper maintenance and servicing support for companies engaged in cargo shipments," Pivovarov said.
Valery Okulov, CEO of Aeroflot Airlines, says that the Russian government has not allocated sufficient funds for the modernization of airfields in the eastern part of the country, which limits the possibilities of using Russian-made wide-body aircraft for passenger transportation in those regions. In addition, the absence of reserve airfields prevents Aeroflot from achieving an acceptable cost-effectiveness on domestic passenger flights.
The merging of Russian aircraft, helicopter and engine makers has long been necessary. A helicopter-making holding company has already been established. The integration of engine makers is ongoing. The United Aircraft Corporation will allow state investment to be combined with private capital, eliminate domestic competition and facilitate a more active effort to sell Russian-made aircraft on the international market. Experts estimate that production will grow 2-2.5-fold within the next ten years and Russia will be able to win about 10% of the global aircraft market.

Yuri Zaitsev is academic consultant with the Russian Academy of Engineering Sciences -0-