Russian Aircraft industry reshuffling
JANE’S DEFENCE WEEKLY – OCTOBER 06, 2004
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Russia set to restructure aircraft industry
NIKOLAI NOVICHKOV & HENRY IVANOV JDW Correspondents
Moscow
The Russian government has appointed Alexey Fedorov, head of Irkut, to also run rival RSK MiG, a clear signal that the two companies are likely to merge to create Russia’s largest aviation company.
Irkut, a largely private company that makes Sukhoi fighters, in the past has faced heavy debt problems similar to what MiG is now experiencing.
If an Irkut and MiG merger goes ahead, this will lead to the creation of a powerful aviation company with potential exceeding that of AVPK Sukhoi, currently the largest Russian aircraft manufacturer with a design house in Moscow and production plants in Komsomolsk -upon-Amur, producing the Su-27SK, Su-30MKK and Su-35 fighter series and Novosibirsk, producing the Su-34 tactical bomber.
By merging the two, the government will also regain control over Irkut, where its current share is merely 12%. Certain top state officials have expressed interest in enlarging the state share in Irkut to 50% by giving it state-owned plants.
The government did not explain the change and no complaints were levelled against Valery Toryanin’s previous leadership of MiG.
Fedorov has a track record of success. Irkut, which suffered lean times in the early 1990s, retained its workforce and manufacturing capacity as well as developing new aircraft. He presided over the deal to sell the Su-30MK fighter to India and Malaysia and arranged credit to cover exports of the Su-27UBK, Su-30K and Su-30MKI fighters. Under his direction, Irkut has also developed and built the Su-30MKI/ MKM multirole fighter and the Be-200 amphibious plane for the Russian Ministry of Emergencies.
Observers are speculating that the government turned to Fedorov as the most suitable manager to raise the capital needed to resume production of the MiG-29 fighter.
MiG has won $1.4 billion in orders for the aircraft recently from India, Sudan and Yemen and more orders are in the pipeline with Algeria and Latin American countries. MiG estimates international demand at 400 MiG-29s and 200 MiG-AT jet trainers up to 2011. This is well above the predicted sales of Sukhoi aircraft.
However, considerable investments are needed to revive the MiG production line following its virtual closure in the early 1990s when the Russian air force stopped buying MiGs. Since then the company has been selling MiGs assembled from parts made before the break-up of the Soviet Union. The company amassed heavy debts, mostly for components, to the government banks that supported the production. Toryanin managed to reduce debt to between $300 million and $500 million from $1 billion, but still failed to come to terms with the creditors and investors on additional credits.
Attempts had been made to re-launch the type into production in the much reworked variant MiG-29M1/M2, dubbed the MRCA or Multirole Combat Aircraft and the MiG-29K/KUB carrier version.
Neither Toryanin nor his predecessor, Nikolai Nikitin, were able to raise the funds on the commercial market, which has increasingly worried the Russian government, which has been concerned that MiG would not be able to meet production schedules. It now puts its faith in Fedorov, who succeeded in raising the necessary funds for Irkut’s Irkutsk-based IAPO plant.
The plant made the Sukhoi Su-27UBK operational trainer, Su-30K interceptor and Su-30MKI/MKM multirole fighters in the 1990s, when Irkut was facing the same problems. Now Irkut has a $4.5 billion order book and is only $512 million in debt, of which about 70% is owed to Russia’s largest savings bank, Sberbank.
Fedorov claims that “dept payments are firmly linked to fulfilment of the export orders” that enable the company to repay between $100 million and $150 million a year.
By appointing Fedorov to MiG, the Russian government also resolves several other problems. By dislodging Toryanin, the government eliminates the only open opposition to the plan to consolidate the Russian aviation industry.
Previous MiG leaders strongly opposed the plan on the grounds that merging with Sukhoi would lead to loss of the MiG’s design bureau, which would be especially felt in the area of lightweight tactical fighters.
This would particularly affect Russia’s capability to create light front-line fighters, the demand for which on the global market has grown over recent years compared to a certain decline in sales of heavy multirole fighter aircraft.
They also claimed that the wealthier Sukhoi industrial group would move MiG-29 production to its plants, effectively eliminating the Voronin production centre’s livelihood.
Before his new appointment, Fedorov told journalists on 21 September that Russia’s aircraft industry is long overdue for an overhaul. Proposals have been submitted to the government for restructuring the industry into a single aircraft manufacturer.
The Russian government is expected to soon unveil a plan to restructure the aviation industry. There are two competing proposals. The first implies continuation of the Federal Specialised Programme launched in 1996. This provides for creation of two rival companies: one incorporating such companies as MiG, Tupolev and Kamov; the other embracing Sukhoi, Ilyushin and Mil. Companies like Irkut, according to the programme, were to join either of the two.
The second option is to establish a United Aircraft Building Company, or UABC, in Russia.
Fedorov’s appointment seems to indicate that the Russian government is leaning towards the second option of restructuring the country’s aircraft industry. There is no reason to believe the Russian market will be large and dynamic, which is why it makes little sense to establish two rival aircraft companies.
The lack of domestic orders has led Russian aircraft manufacturers to compete with each other in export markets. Since the government is aware that the domestic market cannot support the country’s aviation industry and that aircraft will mostly be for export, the establishment of the UABC looks reasonable, observers say. This will eliminate the in-country competition and make it possible to pool resources, boosting the odds of success in export competitions.
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