http://www.ft.com/intl/cms/s/0/ff37880a-d9f2-11e0-b199-00144feabdc0.html#axzz1XyEMp3kcProfile: Russia’s UAC seeks take-off in civilian market
By Charles Clover
Russia’s United Aircraft Corporation produces some of the world’s sleekest and fastest fighter aircraft, whose trademark wheeling and see-sawing “cobra” manoeuvre thrills audiences at air shows the world over. It also makes the Il-96 wide-bodied, long-haul airliner.
But for Mikhail Pogosyan, the new chairman of UAC, the future is in a dumpy, smallish airliner called the Superjet 100 – the first step, he hopes, toward his conquest of the world civilian airliner market.
The aircraft has seen an uneasy launch. Orders were slow coming in. Even Aeroflot, the Russian state-owned airline, had to be wheedled into buying 30, and for a time the only foreign orders came from friendly, ex-Soviet Armenia. Then the jet had to be grounded, soon after it took to the air for the first time in June, because of a safety flaw.
But, slowly, things are starting to look better.
Mr Pogosyan says there are up to 170 orders for the $31.7m aircraft. He seems ebullient, optimistic, and spins (off the record) jokes about everything from the size of the lavatories on competitors’ aircraft to the (again off the record) legendary infighting at UAC, an industrial juggernaut that spans Russia’s nine time zones. It was assembled in 2006 out of the ageing remnants of one of the country’s last competitive manufacturing industries.
Today, UAC, which produces virtually all Russia’s aircraft and is 17 per cent privately owned, focuses mainly on military aviation. Its Su-27/Su-30 fighter-bomber is the jewel in its crown and the main export money-spinner of the defence industry. More advanced aircraft are on the way, such as the fifth-generation T-50.
But Mr Pogosyan sees the future of Russian aerospace in civilian aviation. This is where 75 per cent of world aircraft sales are made today. He wants to right the skewed balance of aircraft produced by UAC: 90 per cent military, 10 per cent civilian. By 2025, he would like to see that balance reversed – 25 per cent military, 25 per cent transport, and 50 per cent civilian aircraft.
Mr Pogosyan’s ascendancy represents a victory for Sukhoi corporation in its legendary battle with the Irkut factory, the two powerhouses of the Russian aviation industry. Their uneasy marriage in 2006, along with a dozen other big-name companies such as Tupolev and MiG. formed UAC. The replacement of Alexei Fedorov, the Irkut-backed president, in February, with Mr Pogosyan, who hails from Sukhoi, represented “a sound, and possibly final, victory for Sukhoi over its Irkut rivals”, wrote Konstantin Makienko, an aviation analyst, in a recent issue of Moscow Defense Brief, a defence industry newsletter.
Mr Pogosyan steps warily around the issue, saying “some cadre decisions have been taken. But I wouldn’t say Sukhoi and Irkut are in opposition to each other. We both want to make great aircraft.” Russia’s reputation for making world-class military aircraft is established. However, in civil aviation, “we are slightly behind” he says, in what most of the industry would regard as a major understatement. Russia’s cramped and ill-ventilated airliners, with their rough upholstery, are sold almost exclusively in the former Soviet Union, Iran, and parts of Africa. Even Aeroflot, forced by the Russian government to buy six Ilyushin 96s in the 1990s, spent the better part of the decade trying to wriggle out of the contract in favour of buying Boeings and Airbuses.
The Superjet is the first attempt in a decade to penetrate this already-competitive market. It is a 100-seat, short-range airliner that will target the easy end of the market. The company’s main competitors are Brazil’s Embraer and Canada’s Bombardier, rather than Boeing and Airbus, and Mr Pogosyan reckons the Superjet is up to 15 per cent cheaper than other options. Of the 170 orders, perhaps a quarter come from outside the former Soviet Union: Indonesia has ordered 42, Laos three and Interjet from Mexico 15, he says. But over the long term, he aims to sell 70 per cent of UAC’s airliners abroad. He promises a “new level of comfort” for the aircraft, with a wider body that can accommodate, for example, a three-plus-two seating pattern, rather than the two-plus-two of the competition, more headroom, and business-class seats that are roomier than those of competing aircraft.
But penetrating the mainstream airline market will be hard, especially with Russia’s reputation for poor air safety. This was not helped by the crash last week of a Yak-42 aircraft in the city of Yaroslavl, killing 43, and a similar crash of a Tu-134 in June at a provincial airfield, killing 44. In the wake of these misfortunes, Dmitry Medvedev, the president, signalled that Russia might seek to buy more of its aircraft abroad, a blow to the domestic aerospace industry.
“Of course we have to think of our own, but if they are not capable of coping, then we’ll have to buy technology from abroad” he said.The Superjet started off with problems – in its first delivery to Aeroflot, a key piece of safety equipment broke down and the aircraft were grounded for a month.
But over the long term, Mr Pogosyan thinks that a new approach to manufacturing, based on the outsourcing practices of Airbus and Boeing, the global leaders, combined with unique access to cost-effective Russian engineering, will prevail. In Soviet times, the aerospace industry got the cream of the country’s engineers and scientists, and still enjoys a good reputation, with Boeing employing about 1,000 engineers in Moscow on contract.
But Mr Pogosyan says the key to being competitive is to get outside the “Russia-only” mindset.
“In the past, we tried to do everything in Russia, using all-Russian technology,” he says. “Now, we are using systems of the best world producers, as our competitors do. Russian producers participate, but now our aircraft are truly international products.”
He says that the Superjet 100, for example, is 50 per cent produced in Russia, and 50 per cent abroad. The engines are a joint product of Snecma of France and Saturn of Russia and assembled in Rybinsk, Russia.
“Boeing produces its aircraft in this manner, parts are bought from everywhere, so why can’t we?” he says.
The next step in the plan to penetrate the civil aviation market is more ambitious. The MC-21, a short-to-medium range aircraft which will directly compete with the Boeing 737 and the Airbus 320, aims to start test flying in 2015, with mass production in 2017.
“We think the market for these aircraft is growing faster than Boeing and Airbus can produce them. Already, the waiting list for Boeing or Airbus is four-five years. We think the market wants immediate gratification,” says Mr Pogosyan.
Analysts are sceptical. The Chinese, for example, are producing their own aircraft for this market segment, the C919, which promises to be even cheaper than the MC-21.
Meanwhile, Boeing and Airbus have far more resources and clout.
“On the one hand, it seems mad to take on Boeing and Airbus,” says Mikhail Ganelin, an equity analyst at Troika Dialog, the Russian investment bank. “But, on the other hand, Russian engineers aren’t stupid.”
The Russian state is stepping in to help fund the projects – UAC received $700m from the state to help develop the Superjet, while it will get $5bn to develop the MC-21, according to Mr Pogosyan.
One thing that will hurt the company is the end of protectionism. Russia has agreed to phase out 20 per cent duties on imported aircraft once it enters the World Trade Organisation. Mr Pogosyan says he is confident that UAC can survive, however.
“We can’t base our business model on trade barriers,” he says. “We’re not marketing only to the internal market, and in military aviation we have plenty of experience marketing abroad, our aircraft are very competitive, so why can’t we do the same with civilian aircraft?”
