Russian industry renewal edges forward: as industry consolidation moves forward, OAK has big ambitions but faces many obstacles.

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Every other year, the MAKS International Aviation and Space Show in Zhukovsky opens a window on recent trends in the Russian aircraft industry. And at each event, headlines announcing "Russian aircraft industry transformation" proliferate. This year, the transformation relates to the continued consolidation of the aircraft manufacturers into a single United Aircraft Company (Obyedinyonnya Aviastroitelnaya Kompaniya or OAK).

Since the mid-1990s a variety of plans have been proposed to achieve aircraft industry consolidation in Russia, but these plans are only now being transformed into action. The current idea of establishing OAK Company, first formulated in spring 2003, was initially promoted by private shareholders of Irkut Corporation. At that stage, they expected to have a major share in OAK (only 25.5%-50.1% were to remain in the hands of the state). Gradually, however, the balance began to shift in favour of the state. On 22 February 2005, the idea of establishing OAK was approved by President Putin, who ordered the preparation of appropriate documents for signature within weeks. However, the decree was not signed for another year, on 20 February 2006, with many alterations. The most important of them decided that the state-owned share would make up "at least 75% of OAK's seed capital".

The assets of the individual companies were evaluated by Deloitte & Touche. This assessment, based on order backlogs, proved to be advantageous for private Irkut and unfavorable for state-owned Sukhoi. Unhappy bureaucrats promptly set about adjusting the assessments. They added to the state-owned assets the planned investment in the civil aircraft industry through 2015, plus investments for research and development work, as well as the "Air" part of the state programme for armament purchases, GPV-2015. In this way, the state's share of OAK assets was estimated at 90.1%, with only 9.9% remaining for the private shareholders of Irkut. As a sort of compensation they were promoted to high positions in OAK--Alexei Fedorov was appointed president, while Valeriy Bezverkhniy received the post of Vice President.

The constitution of the OAK assets has not been completed yet. In particular, two major state-owned enterprises are being prepared to be integrated into OAK: Russian Aircraft Corporation MiG (consisting of the MiG design bureau in Moscow and the production plant in Lukhovitsy), as well as the KAPO factory in Kazan, the manufacturer of Tu-214 airliners. The initial public offering of OAK stock is planned for 2009-2010.

Strategic goals

OAK has established a number of strategic objectives for the coming decades. Russia aims to become the no. 3 player on the international commercial aircraft market, after the USA and Europe. According to declarations from 2004, "up to 2015, Russia will capture 10% of the world market for civil aircraft". This target was subsequently scaled back to its current level of 5% of the world market by 2015 and 10% by 2025.

The main objective in the combat aircraft sector is to ensure that the Russian Air Force is properly equipped. Within the domain of transport aircraft, the needs of Russian armed forces are the priority, but the commercial effect is also important. By incorporating all enterprises into OAK, the aim is to consolidate manufacturing capacity, avoid internal competition and focus activity on key projects. Annual production of the Russian aircraft industry is expected to increase substantially (see table); plans for 2015 provide for $6.9 billion of aircraft sales compared with the present $2.8 billion (2006). The OAK sales forecast for 2007-2025 amounts to $250 billion, including 83% for new products and 17% for currently manufactured aircraft. In 2025, the Russian aircraft industry should be producing 300 passenger aircraft, 100 transport aircraft and over 100 combat aircraft per year.

The internal organisation of OAK will be structured accordingly. Current plans call for the creation of three business units: Civil Aviation, Military Aviation and Transport and Special Aviation. Each division will include a design bureau, assembly plants, sales centre, and service centre. In addition to these three divisions, OAK will include a component manufacturing group, as well as experimental, scientific and other centres.

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The first division to be created will be "Transport and Special Aviation" in 2008. The process will be relatively straightforward since it will be organized around MAK Ilyushin Company, including Ilyushin design bureau and production lines in the VASO factory at Voronezh and in Aviastar-SP in Ulyanovsk. The main products of this division will be the IL-112 lightweight transport aircraft, which has been ordered by the Russian Air Force. The aircraft, which will be built in Voronezh, is expected to make its maiden flight in 2009. This division will also be responsible for the MTA medium transport aircraft (IL-214), developed in partnership with Irkut Corporation and India's HAL, production of which is expected to start in 2014. It will also pursue the modernised IL-76 heavy transport aircraft (so-called project "476"), which will be manufactured in Ulyanovsk, Russia, from about 2010.

Large and stable profits

The "Military Aviation" division will be created in 2010. The Russians are being very cautious about this structure, because the military sector of the aircraft industry is bringing large and stable profits from export sales; it also played a pivotal role in ensuring the survival of the Russian aircraft industry during the difficulties of the 1990s. Hasty reorganization could be harmful. The main products of this sub-holding will be two intermediate-generation fighters--the MiG-35 (manufactured by the RSK MiG factory in Lukhovitsy and the Sokol factory in Nizhnyi Novgorod) and the Su-35 (manufactured by KnAAPO in Komsomolsk-on-Amur)--and (from about 2015-2020) the Sukhoi T-50 (KnAAPO) new-generation fighter (see article p. 34). The Su-34 tactical bomber (NAPO in Novosibirsk), Yak-130 combat trainer (Sokol in Nizhnyi Novgorod and IAZ in Irkutsk) and UAVs (including UCAVs) are also included in the production plans.

Greatest potential

The "Civil Aviation" division, which will be established in 2009, is focusing most of the attention of OAK management, because its situation is the most difficult but it is seen as having the greatest potential.

In Soviet times, sales of passenger aircraft to Russian allies followed similar principles as the provision of military aircraft. Soviet-era passenger aircraft still carry this legacy. After 1991, the old mechanism of selling Russian passenger aircraft stopped functioning, but it could not be replaced by new principles due to the lack of competitive products in Russia. Two (then) new-generation passenger aircraft--the Tupolev Tu-204 and Ilyushin I1-96--were not yet mature enough to enter the market. Especially, as the demand for new aircraft in Russia dropped to zero. Now, Russians intend to create a competitive product for the global market, including Western countries.

The programme for production of passenger aircraft by OAK will be settled by company managers in autumn 2007, but it can be already estimated on the basis of earlier information. According to a working document from spring 2007, in the next five years (2008-2012) some 437 passenger aircraft with more than 75 seats should be produced in Russia. This is a huge number if one remembers that as recently as 2004, 2005 and 2006, Russian aircraft industry produced only 8, 6 and 8 aircraft, respectively. In addition to new regional aircraft (SSJ- 100, Tu-334 and An- 148), production of the larger IL-96-400 and Tu-204/Tu-214 will be continued at a slower pace. Production of passenger aircraft will be concentrated in the VASO factory at Voronezh and Aviastar-SP in Ulyanovsk, as well as at KnAAPO at Komsomolsk-on-Amur.

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The low volume of production in 2004-2006 should not mask certain successes in recent years: the partner companies eliminated former debts, two leasing companies began functioning, and the Tu-204 and IL-96 were adapted to international requirements.

The embryo of a new civil aircraft industry in Russia appeared where nobody had expected it: at Sukhoi, which in 2001 launched its ambitious Sukhoi Superjet 100 programme (SSJ-100, formerly known as the Russian Regional Jet or RRJ). At that time Sukhoi was the only company with sufficient resources to take on such a venture. RSK MiG subsequently also tried to enter the civil market, but with the wrong product, the Tu-334.

SSJ advancing rapidly

The SSJ-100 was rolled out on 26 September. The aircraft is set to make its maiden flight before the end of 2007. Russian certification is targeted for the end of 2008, with European certification to follow in early 2009. Work on the Superjet--the most international programme in the history of the Russian civil aircraft industry--has allowed Sukhoi to acquire know-how previously unavailable in Russia, including cooperation with foreign companies, new design and production technologies and, in the future, marketing and after-sales support. The strategic partner of Sukhoi within the Superjet project is Alenia Aeronautica, while Safran is the partner for the SAM146 engine and Boeing is an advisor on the project.