Russia - Market survey for production and maintenance

Transcription

1 Russia - Market survey for production and maintenance Deze marktverkenning is uitgevoerd door La Rive, in opdracht van de EVD, en in samenwerking met de Nederlandse ambassade te Moskou EVD oktober 2006 Nadere informatie: EVD Landenmedewerker Rusland Telefoon: (070) rusland@info.evd.nl

2 oktober Ministerie van Economische Zaken, EVD De EVD verleent deze informatie gratis. De inhoud moet gratis beschikbaar blijven voor onze doelgroep, het Nederlandse bedrijfsleven. Niets uit deze uitgave mag worden verveelvoudigd en/of openbaar gemaakt door middel van druk, fotokopie, microfilm of op welke andere wijze ook zonder voorafgaande schriftelijke toestemming van de uitgever. Ondanks alle zorg die aan deze uitgave is besteed, kan het ministerie van Economische Zaken/EVD voor eventuele onjuistheden niet aansprakelijk gesteld worden. 1

3 Table of Contents Table of Contents Introduction Executive summary The Russian air transport sector - key trends and problems History of the Russian air transport sector The reforms of the 90s Economic crisis Fleet based on ageing planes Come-back Key developments in air traffic Development of airport infrastructure Main hubs Investment projects Key developments in airline operations Replacement of ageing aircraft Consolidation in the airline sector Key developments in business aviation Need for western aircraft Off-shore fleet Moscow is the centre Key developments in aircraft production Fleet depletion Foreign aircraft purchases Restructuring of the sector International co-operation Key developments in aircraft maintenance, repair & overhaul (MRO) Increasing need for MRO services Prospects within Russia Summary Aircraft production & Maintenance Market segmentation and size Aircraft Production - Market segmentation & size Long haul aircraft segment size Regional aircraft segment size Small & Business Aircraft segment size Cargo segment size Maintenance, Repair and Overhaul (MRO) Market segmentation & size Summary

4 5 Russia based airline operators Key long haul and regional airlines Aeroflot Sibir (S7 Airlines) KrasAir/AirUnion UTair Pulkovo Airlines Transaero VIM Specialized cargo operators Volga-Dnepr Airlines Polet Business charter operators GTK-Rossiya Avcom Jet transfer Jet Foreign based players Summary Main foreign aircraft producers in Russia Airbus Russian stake in EADS Aeroflot deal EADS/Rosaviakosmos ECAR Share in Irkut Freighter conversions Local orders Boeing Co-operation with VSMPO-Avisma Freighter conversion plant Sukhoi Superjet Other foreign aircraft producers in Russia Embraer Bombardier Other Summary Main Russian production complexes Ilyushin production complex Deals in progress VASO Tupolev production complex Deals in progress Aviastar Aviacor KAPO Yakovlev production complex Sukhoi production complex Summary Key 1st Tier Suppliers

5 8.1 Key foreign 1st tier suppliers Snecma Pratt & Whitney Liebherr Rolls Royce Thales B/E Aerospace Intertechnique Messier/Dowty Goodrich Finmeccanica Key Russian 1 st tier suppliers NPO-Saturn Perm Motors Irkut Kaskol (Hydromash, ECAR) VSMPO-Avisma Other Russian suppliers Summary Suppliers in Maintenance, Repair & Overhaul (MRO) Foreign players Lufthansa Technik Snecma Services Exeltech TAT / Sabena Finnair SR Technik Air Canada Technical Services LTU Technik Russian players Avcom Domodedovo Aircraft Maintenance Base & East line technique Aeroflot Aero Technical Centre Transaero Summary Investment climate aircraft production in Russia Government policy United Aircraft Company Import duties Ownership Co-operation between Russia and the EU Bilateral programs with The Netherlands Major aircraft development projects Sukhoi Superjet-100 (SS-100) MS An TU Multilateral financing instruments IFC Projects EBRD Projects

6 10.4 Financing of aircraft Summary Market entry Business culture Distribution chain Local representation Branch Offices Accredited Representative Offices Companies Investing in local production Promotion Transactions Due diligence Intellectual property Payments Logistics Import regulations Certification Preparation of documents Customs clearance Customs payments Aviation regulation agencies Local support Key contacts Airlines Aircraft production companies st Tier Suppliers MRO Suppliers Fairs and Exhibitions Publications Sources Mainstream publications Sector publications Company websites Reports Government and Institutional publications

7 1 Introduction This report contains the results of a market survey on the Civil Aircraft Industry in Russia. The aim of the survey was to identify this market in Russia and derive business opportunities and prospects for Dutch trade and industry. The Civil Aircraft Industry can be defined as: all companies and organisations engaged in designing, developing, producing and maintaining of aircraft for civil (as opposed to military) purposes. The survey is covering the entire Russian Federation, and excludes any territory outside the Russian Federation. The survey took place in September and October of The research topics included the following: the structure and organisation of the sector, divided in maintenance and producers; the needs in the sector; the quality level in the sector; the technical and financial aspects in the market; the present institutional and relational structure in the sector; interesting regions; bottlenecks, and internal and external risks; opportunities and threats related to engaging in joint ventures; the services that can be provided to Dutch companies entering the market; the possibilities to establish a local office; the pre-conditions that are necessary to start or continue business activities. These topics have been covered in this report according to the following chapters: Chapter 3 discusses the most important trends and problems in the Russian aviation sector, the structure, the quality and the needs; Chapter 4 describes the structure of the demand size, its division into segments and an estimate of its total and segment sizes Chapter 5 describes the profiles, fleet developments and strategies of the most important aircraft operators in the different segments Chapter 6 describes the key foreign players that are involved in aircraft production within Russian territory, their projects and their strategies Chapter 7 describes the key Russian production complexes, their strategies and relevant developments Chapter 8 describes the key 1 st tier suppliers involved in aircraft production within Russia, their profiles, their projects and their strategies Chapter 9 described the key suppliers of Maintenance, Repair & Overhaul services within Russia, their profiles, their projects and their strategies Chapter 10 describes the investment climate for aircraft production in Russia, the government s policy, the major aircraft development projects, multilateral financing projects and the possibilities for aircraft leasing Chapter 11 describes the issues that need to be considered by Dutch aviation companies that are contemplating entering the Russian market Chapter 12 provides a list of contact data of Russia-based offices of all companies mentioned in the report Chapter 13 explains on which sources the information in this report is based - 6 -

8 2 Executive summary There are several reasons why the Russian aircraft production sector is in the spotlight recently. On the one hand a number of air safety incidents in combination with a depleting air fleet highlight the need for massive changes in the Russian aviation industry. On the other hand strong growth in air traffic and investments in air traffic infrastructure together with an active government policy to restructure the aircraft production sector indicate that there is the will and potential to achieve these changes. Whether these changes will materialize will depend on a number of factors. First of all, the government has singled out ten airports become modernized into major national hubs. For this purpose it has cleared massive sums in the federal budget for investments, which will be spent in the coming years. Secondly, the general perception is that the strong development of the airline sector depends on its ability to consolidate in a limited number of large national players. This is necessary in order to be able to compete internationally, and to be able to invest in the renewal of the fleet. Further, the restructuring of the sector encompasses the consolidation of the most viable production companies into a consortium. Within this consortium there are two powerful groups of manufacturers, Irkut and Sukhoi. The Russian government has singled out two major projects for new aircraft development: Irkut-controlled design bureau Yakovlev is in charge of developing the medium range seat MS-21. Sukhoi Design Bureau is in the lead of developing the seat Sukhoi Superjet-100 regional jet. These aircrafts are envisaged to become competitive on the international market, with secure orders from main Russian carriers as a solid base. It is noteworthy that both the Sukhoi and Irkut groups for the large part of their turnover rely on military purchases. Alongside these developments the Russian government is in a squeeze where it concerns the imports of foreign aircrafts. The current import duties and VAT on foreign aircraft together total 41,7% of the declared value and are considered extremely high. Nevertheless, the lack of viable local alternatives and the lower costs of operating is increasingly causing Russian airlines to chose to import foreign planes. These are mostly used, but increasingly new. On the one hand the Russian government would like to keep these constraints on import of foreign planes in order to promote the development of local alternatives. On the other hand it needs to provide access for Russian airlines to safe and commercially viable aircraft. The current debate on the lowering of import tariffs is not decided. The increasing number of foreign aircraft operating in Russia leads to an increasing need for services in the field of Maintenance, Repair & Overhaul. The existing infrastructure is not useful for MRO on foreign aircraft. Foreign providers are entering the market, with Lufthansa Technik by far in the lead. MRO activities by these foreign providers, besides those that need to take place on the spot by definition, are taking place in hangars abroad. Although there are opportunities for Russian airlines to develop skills in-house and for MRO providers to outsource some labour intensive low-tech activities to Russia, there are currently no signs that these developments will materialize in the near future. Civil aircraft production in Russia has virtually stopped over the last few years, with annual production not exceeding ten. Imports have been growing to 25 and 20 over the past two years. Estimates on the need for civil aircraft (new and/or used) of all kinds in Russia vary - 7 -

9 between 30 to 60 per year over the next ten years. This amount has to be divided into four segments: Long Haul, Regional, Business/Small and All-Cargo. Per 1/1/2006 there were officially 374 Russian-made and 51 foreign-made long haul aircraft in use within Russia, and 251 Russian-made and 40 foreign-made regional jets. The amount of foreign aircraft in use is probably understated by around 100, as many foreign-made aircraft operating in Russia are registered abroad for financial reasons. In the next ten years Russian carriers are expected to spend more than $20 billion on long haul aircraft to modernize their fleet. The estimations on the need for regional aircraft vary from 300 in the next five years (Ministry of Transport) to 230 and 525 in the next twenty years (Bombardier and Embraer). While there are 196 all-cargo planes in use in Russia (all Russian), it has to be noted that some long haul foreign aircraft in use have also been converted for cargo purposes. The small/business segment includes 717 Russian-made planes in use, against an official figure of 16 foreign-made planes. The real amount of foreign-made planes in this segment, however, is estimated to be more than hundred, since many of these business jets operate from a base abroad. Although no concrete estimations are available, demand in this segment is expected to grow robustly in the coming years. The size of the Russian MRO market for foreign made planes is estimated as follows: Segment Market size estimation ($ mln) Engine overhaul 135 Airframe heavy maintenance 66 Component maintenance 87 Line maintenance 114 Airframe modifications 35 Total 437 Considering the expected increase in the use of foreign aircraft in the coming years, this amount is expected to triple in the next ten years. Further, the survey explores the profiles, strategies and main projects of the most important players in the Russian aircraft production industry: airliners, foreign aircraft producers, Russian aircraft production complexes, 1 st tier suppliers and MRO providers. The described companies all have an active role in the investment projects that are going on whether they are investing themselves or are involved in the implementation of those investments. The investment climate in the Russian aircraft production sector is for a large part determined by government policy, new aircraft development projects, availability of multilateral financing and availability of aircraft financing. Next to promoting consolidation and protecting aircraft producers from foreign imports, the Russian government is actively trying to promote international co-operation, by involving foreign players in new aircraft development projects and buying a stake in EADS. It is also considering to ease ownership barriers for foreign investors in Russian aviation companies. Next to the priority projects of Superjet 100 and MS-21, the An-148 project by Ukrainian production company Antonov is expected to have spin-off for the Russian aircraft production sector. The chance of the newly developed Tu-334 to become a commercial success are - 8 -

10 expected to be limited, due to its limited innovative features and its consequent uneconomical operation costs. Aircraft leasing is increasingly available to Russian airlines, mainly through the main foreign players. Further, EBRD and IFC both have provided finance for a number of aviation related projects over the past years. The current situation provides a number of opportunities for Dutch companies including provision of MRO services (in particular component maintenance), subcontracting in new aircraft production both in Russia and abroad, and sales of second hand aircraft. Dutch companies that decide to make use of the developments in the Russian aircraft production market should make ample preparations before entering. All aspects of doing business in Russia should be carefully studied including business culture, distribution strategy, local representation, investing in local production, promotion, transactions, customs and aviation regulation. It is advisable to use the support of local professional service providers for services relating to contracts, legal procedures, (grant) financing, local management support, strategy and business planning

11 3 The Russian air transport sector - key trends and problems 3.1 History of the Russian air transport sector During the Soviet era the Russian civil aircraft industry impressively developed alongside the strong development of the military aircraft industry. The result was a broad system of civil aircraft production, by well-known complexes such as Tupolev, Ilyushin and Antonov. Although Russia still has a strong reputation in military aircraft, its image in civil aviation has deteriorated after the breakdown of the Soviet Union The reforms of the 90s The Russian government s reforms during the 90 s have seriously affected the Russian aviation industry. Starting in 1990 government subsidies to the industry were substantially reduced, and procurement of new aircraft, equipment and spare parts were lowered significantly. As a result Russian factories involved in aircraft production have been operating only at a fraction of their capacity ever since. By 1996 there were still over 300 companies in Russia involved in the design, development, testing and manufacture of aircraft and helicopters (including 133 engaged in R&D and testing and 131 in producing commercial aircraft) with a production capacity of approximately 650 aircraft. Despite of this in that year only 5 aircrafts were manufactured for Russian airlines. This constituted the lowest output in 50 years. In addition, after the break up the state-owned airline Aeroflot was further divided into the International carrier and numerous local airlines. Together with a number of dubious privatizations this added to the chaos in the sector, resulting in plunging demand for new aircraft from the airline sector. The industry further suffered heavily from brain drain as during the 1990s approximately scientists and researchers left the country annually. On average, the Russian scientific community has lost over 40% of its scientific potential, the aviation industry being one of the most affected Economic crisis In 1998 the country was hit by a severe economic crisis, after which a shake out started among the country s hundreds of airlines. Slowly but surely there was some consolidation in the sector and stronger players started to emerge. By 2001 approximately 90% of the national air transport was provided by 30 companies, and 50% of the total by the top-4 airlines: Aeroflot, Pulkovo, Sibir and KrasAir. At that time the country's aircraft fleet consisted of about airplanes and helicopters, 95% of which were designed in the 1960s and 1970s, and 70% of which did not meet international standards and needed upgrading or replacement. At the same time it was still virtually impossible for a Russian airline to purchase new foreign aircraft, as their cost was more than two times higher than their Russian counterparts. Stateowned Aeroflot was the only company to be able to purchase foreign jets with significant state support

12 3.1.3 Fleet based on ageing planes So Russian airlines have been forced in recent years to turn to older foreign planes, which flooded the market after the fall in air traffic between 2001 and The cost of these jets was low enough to compensate for the 20 percent import tariffs and higher costs for maintenance and the retraining of personnel. Whereas Russian companies imported 20 of these planes in 2005, that number could rise to from 50 to 70 per year in Come-back Although over the past 15 years the Russian aircraft producers failed to keep up with Boeing and Airbus, now the Russians are trying to stage a comeback in commercial aviation with the development of the Sukhoi Superjet-100 (formerly known as Russian Regional Jet). The Russian government is actively promoting and funding this project, which includes the unification under one entity of several aviation companies. Russia remains a country with tremendous market for aviation services. The huge proportions of the country, together with unsatisfactory railroad services and highway infrastructure will inevitably require more domestic air traffic. Moreover, after decades of restrictions on traveling abroad during the Soviet period, many Russians are now using the opportunity to travel extensively on business and as tourists in ever increasing numbers. In order to cater to this demand the Russian air transport industry needs to overcome the current obstacles and develop an improved aviation infrastructure. 3.2 Key developments in air traffic Russian carriers flew 35.1 million passengers in 2005, up 3.9 percent from 2004, according to Transport Ministry figures. This is 60% more than in the year 2000, when a total of 20,9 million passengers where transported. As the economy is stabilizing it is expected that the trend in passenger air traffic will continue to go upwards in the coming years Development of airport infrastructure Whether that will materialize will heavily depend on the country s ability to develop the airport infrastructure. Russia has a total of 394 airports, of which 70 are considered as international with the legal right to operate services to other countries. 62 of these are deemed to have Federal status and are granted development funds from the State Development Programme. The remainder of the airports are funded by Regions or city investment programmes. The Ministry defines ten airports as having priority status for investments from the State Development Programme. Those include Vnukovo, Domodedovo and Sheremetyevo in Moscow, Pulkovo in St. Petersburg and the airports in Rostov-on-Don, Krasnodar, Yekaterinburg, Novosibirsk, Krasnoyarsk and Khabarovsk. According to a wire from press agency RIA-Novosti, quoting the acting head of the Federal Air Transport Agency Alexander Yurchik, in 2005 $21.58 billion had been allocated from the federal budget on the development of airports. This includes the reconstruction of the Vnukovo ($35.03 million limit) and Krasnodar/Gelendzhik ($17.51 million limit) airports

13 3.2.2 Main hubs Currently the main airports are still located in Moscow, where Domodedovo has absorbed the main share of the growth in the last years: Domodedovo 3,9 6,7 9,4 12,1 13,9 (Moscow) Sheremetyevo 11,5 10,9 11,5 12,7 12,0 (Moscow) Pulkovo 3,2 4,3 4,6 (St Petersburg) Vnukovo 3,7 3,0 2,8 2,5 3,6 (Moscow) Koltsovo 1,1 1,5 (Yekaterinburg) Tolmachevo (Novosibirsk) 1,2 1,6 Source: airport data, UK Trade & Investment, Larive Russia The total annual amount of cargo shipped through Russian terminals exceeds tons, tons of which are international freight, and tons are domestic. Not surprisingly the main cargo terminals are also located in Moscow, again Domodedovo having the largest capacity: Cargo shipments in 2005 X1000 ton Domodedovo 145 (Moscow) Sheremetyevo 118 (Moscow) Pulkovo 23,9 (St Petersburg) Vnukovo 21,6 (Moscow) Koltsovo 20,9 (Yekaterinburg) Tolmachevo 17 (Novosibirsk) Source: airport data, Larive Russia

14 3.2.3 Investment projects The construction of the third terminal at Sheremetyevo Airport, which has been discussed since 2001 and postponed several times due to disputes between Aeroflot and Sheremetyevo, has finally begun. The terminal is well on track to be constructed by the end of Once in place, it should be a significant driver behind Aeroflot s expansion, given that the company will position the terminal as a transition hub for flights from Europe to Asia, and aims to significantly improve the quality of the airport s service. It is currently losing passengers because of the overloaded existing two terminals with poor service and long and inconvenient connections. Domodedovo is currently managed and operated, under a lease from the Russian government, by a private Russian development corporation, the East Line Group. Investment to date by the group has been US$500 million. Under its management growth of passenger and cargo volumes has been impressive. The proposed projects for the development of Domodedevo until 2012 are: 1. the design and construction of a Terminal 2 to increase capacity by six-seven million passengers; and 2. the design and construction of a third Terminal to boost passenger capacity by a further six-seven million. At Vnukovo International a massive reconstruction and strategic development program commenced in late 2003, following the transfer by the Federal Government of the controlling stake in the airport to the Government of Moscow. The prospective development program is intended to last until the year 2015 and is aimed at transforming Vnukovo International into a highly competitive air transportation hub of international significance. As part of the Airport Strategic Development Plan the following projects have been completed at Vnukovo International between 2003 and 2005: 1. April 2004: New Terminal B was opened, allowing for the annual passenger throughput capacity of four million; 2. August 2005: Vnukovo Express was opened: an inter-modal, direct speed line connecting Vnukovo Airport with Moscow's Kiev railway station was launched. The travel time from Kiev station to Vnukovo airport with the new speed express train is 35 minutes. The next phase consists of a new Terminal A which is due to be completed in 2008, increasing the throughput capacity to million passengers per year. Pulkovo is in the process of creating a Master Plan, which will deal with both terminals, the possibility of developing a third terminal, the further development of the cargo terminal and the creation of new facilities including car parking, hotels, commercial developments on the extensive surrounding land all of which is owned by the airport. There is also interest to develop a rail link with St Petersburg. At this moment, it is unclear to what extent and in which timeframe these plans will materialize. At Koltsovo in Yekaterinburg, which is managed by its 75% shareholder Renova, the terminal and airport infrastructure are desperately in need of development. Renova is a big industrial holding whose management is modern to Russian standards. In addition to its own financial resources, there is sufficient funding available for upgrading the airport from the federal government and the regional government

15 The major aim is to create a big transport and logistics hub on the basis of Koltsovo airport, which would connect other domestic and international flights as a transfer point. The projects are defined to include the following: 1. The construction of a new 15,400 sq meters international terminal (open December 2005); 2. The reconstruction of the existing facilities (2006); 3. The extension and reconstruction of runway one ( ); 4. Reconstruction and upgrade of the hotel Lyner (timing unclear); 5. Development of international cargo terminal (2006); 6. Construction of a third runway (timing unclear). 3.3 Key developments in airline operations Another key condition for the projected growth in air traffic to materialize is the development of the airline operator sector. Out of Russia s current 185 airlines, the government currently holds stakes in 61 joint-stock airlines and wholly owns 57 federal ones. Together Russian airlines flew 35.1 million passengers in 2005, 3.9 percent more than in Foreign carriers had passenger volumes on their Russian routes surge 20 percent last year, according to government figures. Passengers per Airlines in 2005 Airline Total no of passengers ( 000) Aeroflot Sibir (S7) KrasAir (AirUnion) (3.500) Pulkovo UTair Vim Airlines Transaero Source: UFG, RMG, Larive Russia The table above shows the companies that are represented in the top-5 airliners in domestic and or international transport. Aeroflot dominates the international market whilst in the domestic market it faces competition from the others

16 As the graphs below show, Sibir is the leading Russian domestic passenger carrier after Aeroflot. Domestic passengers in 2005 Pulkovo 7% Sibir 14% KrasAir 5% UTair 9% Aeroflot 17% Others 48% International passengers in 2005 Transaero 8% VIM 10% Pulkovo 9% Sibir 10% Aeroflot 31% Others 32% Source: UFG, Larive Russia Replacement of ageing aircraft Today, the availability of efficient and modern aircraft is the single most important growth-limiting factor for Russian airlines, because of high duties on imported jets and insufficient domestic production of airplanes. Estimates suggest that airlines will have to replace a third of their ageing fleets (around 95% of existing aircraft were designed between 1960 and 1980) over the next five years. Over aircraft in service do not comply with existing ICAO noise standards Consolidation in the airline sector In order to become more competitive on an international scale there are several plans for consolidation within the airline industry. The most ambitious plan is that where Aeroflot will acquire stakes in most of its main competitors. The original plan comprised of a share transfer in the summer of 2006 from the government to Aeroflot of the following companies: 100% state-owned Pulkovo, GTK Rossiya and Dalavia, KrasAir (51%), Vladavia (51%), and Sibir (25%). The current situation is that KrasAir is out of this deal, and that the plan will be implemented in stages. The first stage is planned for this year and comprises the consolidation of Dalavia and Vladavia into the Aeroflot structure. To what extent the plans will further succeed is unclear, as a result of resistance from the management of companies that do not want to be acquired, and disagreement between the various involved ministries (Property, Economic Development and Transport). In the meanwhile KrasAir has got the green light to proceed with its own alliance called AirUnion. This alliance contains five airlines: KrasAir, Omskavia, Sibaviatrans, Domodedovo Airlines and Samara Airlines. The government is planned to own 51% in this alliance. AirRUnion serviced 3.5 million passengers in

17 Some industry insiders suggest that it would be better for the Russian airline industry, considering it transfers only 35 million passengers annually, to consolidate into one large airline, which will operate both domestic and international flights. Like this it could benefit from economies of scale. Given that the airline business is very low margin, only one large player will be able to successfully compete with foreign carriers on international routes in the long term. There is also room for a couple of smaller regional airlines which will operate mainly domestic routes. 3.4 Key developments in business aviation Although it is clear that the Russian business aviation market is growing, there is limited availability of reliable data and statistics. According to ADA (Russian Business Aviation Association), the Russian fleet size of private-owned jets has already passed the one hundred mark, though this is disputed by some major local operators who claim that a more realistic number actually exceeds 200 jets and turboprops. According to ADA, VIP charter movements in 2005 climbed as much as 35% over 2004, exceeding increases in 2004 and 2003, when traffic rose by about 30% annually Need for western aircraft The bulk of the Russian-registered fleet is made up of aging Soviet-era Tupolev Tu-134 and Yakovlev Yak-40 jets. They are cheap to purchase, but no longer meet international noise standards restricting their operation to within the ex-ussr territories of Russia and the Commonwealth of Independent States. Further, due to their age these jets prove very costly to operate. With no planned newer Russian-made business airplanes in the pipeline, Western equipment is badly needed to cater for international travel needs. However, in order to prevent high import taxes and complex registration and operation compliance, few foreign aircraft enter Russian operators certificates, and far less get Russian registration. ADA says that western owned aircraft, and aircraft owned by Russians but operating under flags of convenience, plus fractional operators, accounted for 75% (!) of the Russian business jet market movements in 2004 with 15,000 flights Off-shore fleet Many Russian owned aircrafts are registered under flags of convenience, Currently approximately corporate jets are registered in this way. Many of these aircraft are based in Europe, or close to the CIS borders, with popular bases including Austria, Finland and the Baltic States Moscow is the centre Within Russia the business jet market is centered in Moscow, with 90% of the movement passing through Vnukovo and Sheremetyevo. In April 2006 Sheremetyevo temporarily cut back its business aviation services, when the airport began reconstruction of one of its two runways. These works are expected to finish before the end of The major bulk of operators temporarily are migrating from Sheremetyevo to Vnukovo and Domodedovo airports

18 3.5 Key developments in aircraft production Russian civil aircraft production has always been highly related to military aircraft production. Most Russian aircraft production complexes are involved in both. The Russian aircraft industry consists of about 300 design bureaus, plants and research facilities, and includes 10 major aircraft designers and over 20 major manufacturing facilities. The most famous Russian production complexes involved in civil aircraft manufacturing have been Ilyushin, Tupolev and Yakovlev (Antonov being Ukrainian). Further Sukhoi and Mikoyan (MiG) have produced civil aircraft, but are more widely known for their military aircraft. Nevertheless, Sukhoi is now involved in the major Russian initiative to revive the civil aircraft production industry: the development of the Sukhoi Superjet-100 (former Russian Regional Jet) Fleet depletion Despite of this huge production capacity output has totally collapsed after the break up of the Soviet Union. Since 2000 the yearly output of civil aircraft of all production complexes combined hovered around 10 deliveries per year. About half the Russian aircraft fleet has been in service for 15 to 30 years, whereas 3.5% has been in use for more than 30 years. It is expected that Russia s depleted aircraft fleet will be able to keep up current levels of operation for only another 5-7 years. By 2015 around 80% of the fleet will have exhausted its service life. The majority of aircraft needs upgrading or replacement, including replacement of engines and avionics. Only a few types of the existing Russian aircraft (Tu204, Tu214 and IL ) meet Stage-III noise standards currently in effect in EU countries and the United States. Further introduction of the Stage-IV noise standards will require heavy expenses by airlines in order to comply with new requirements. Moreover, under new EU regulations starting January 1st 2005, aircraft which is not equipped with EGPWS ground collision equipment is allowed to fly to European airports. Only about 2% of Russian aircrafts is equipped with EGPWS ground collision equipment which is required to fly to European airports, whereas about 300 to 400 aircraft should get equipped. One of the major delaying factors cited by Russian carriers is cost Foreign aircraft purchases Due to lack of financial resources, until recently Russian carriers have been mostly acquiring used Russian aircraft. However, technical depletion and high operating costs increasingly cause them to focus on the import of foreign aircraft. Although sales are severely constrained by high import tariffs of 20% plus VAT of 18% on aircraft and parts, for major Russian airlines the necessity to update their fleet is beginning to outweigh the prohibitive nature of the tariff, resulting in increasing purchases of (used) foreign aircraft over the past few years. Additionally, a section of the new Customs Code, which came into effect at the beginning of 2004, allows purchasers of foreign aircraft to spread the tariff payment over almost 34 months, making it less of an obstacle to imports. The Russian Government has been considering lowering import tariffs on aircraft for some years but so far has not done so

19 3.5.3 Restructuring of the sector The Russian government is increasingly looking for ways to restructure the Russian aircraft production sector in such a way that it can become competitive internationally. To this effect, it has planned for the assets of more than a dozen Russian aerospace companies to be brought together under a new entity called the United Aircraft Corporation (UAC). This company will focus initially on two programmes: the Sukhoi Superjet-100 and the Yakovlevled MS-21 narrowbody airliner. The Russian government hopes that combined, the listed aircraft manufacturers will have the power to increase their annual turnover from some $3-3.5 billion to $8.5 billion by Seven aviation companies, including publicly traded Irkut Corp., state-owned MiG, Sukhoi, Tupolev, Ilyushin, Kazan Aircraft Production Association and Sokol will be folded into UAC. The state will control at least 75% of the UAC, which is set to become fully registered by the first quarter of Among this consolidation, two powerful groups of manufacturers are starting to emerge: Irkut and Sukhoi. Irkut bought the controlling shares of the Yakovlev and Beriev design bureaus recently and is building further links with the Sokol Aircraft Production Facility and Ilyushin. Ilyushin is partnered with Irkut and Yakovlev on the MS-21 program. The other major group is Sukhoi, which recently acquired the assets of the Tupolev design bureau, has obtained important export contracts for and export funds from its range of Su- 35 military aircraft, and is starting to secure orders for its SS-100 (Russian Regional Jet) International co-operation Further, in order to revitalize the domestic industry and integrate it into the global aviation industry there is an increased trend for broader cooperation with foreign firms. Boeing and Airbus have a number of co-operation projects running in Russia, as well as there are joint projects involving large first tier suppliers such as Liebherr and Snecma. The Sukhoi Superjet- 100 (SS-100), for example, will include a number of foreign technologies, provided by companies such as Snecma, Thales, Liebherr, B/E Aerospace, Intertechnique, Messier- Dowty and Goodrich. Pratt&Whitney and Rolls Royce Engines, and Rockwell avionics are being used in some aircraft of Ilyushin and Tupolev. 3.6 Key developments in aircraft maintenance, repair & overhaul (MRO) The traditional infrastructure for MRO activities in Russia is based on the servicing of mainly Russian-made aircraft, and without much competition. Basically this means that each airport has its own line maintenance facility and components base, most of the time under ownership of its main carrier. Activities for airframe and engine MRO are mainly being performed at the respective factories responsible for producing this specific aircraft or engine Increasing need for MRO services Now that there is an increasing trend for Russian airliners to purchase western aircraft, it becomes increasingly necessary to develop an infrastructure for servicing them. Currently, there are no independent players active in Russia that can perform more than elementary line maintenance work. Most major airlines operating foreign aircraft have some projects running in co-operation with foreign MRO providers to increase their ability to perform MRO activities in-house. For the moment and in the foreseeable future, however, Russian airlines have to depend mostly on foreign MRO providers with facilities outside of Russia. These MRO providers generally do not plan to invest themselves in MRO facilities within Russia

20 3.6.2 Prospects within Russia There are two categories of work, which will most likely start to take place increasingly in Russia itself. By necessity line maintenance (A, B and overnight checks) will increasingly and to a greater extent be done by the major airlines themselves. Further, there will be opportunity for labour-intensive activities (airframe maintenance) to be increasingly performed in Russia. However, this development is part of a broader consolidation trend in the worldwide MRO market which involves competition with other countries with low labour costs. Further it is constraint by limited current hangar-capacity and a limited outlook on investments in them. 3.7 Summary In summary the key drivers behind the development of the Russian aircraft production sector are: Strong growth in air passenger and cargo traffic; The ability of Russia to develop the airport infrastructure; The need to replace the majority of the existing fleet; The ability to develop a strong airline sector; The increasing need for foreign aircraft in all segments; Government policy towards imports of foreign aircraft and parts; The consolidation of the aircraft production sector; The ability of Russia to develop commercially viable new aircraft and the need for international co-operation to accomplish this; The lack of MRO infrastructure for foreign aircraft; The ability to attract investments in the MRO sector. The purpose of this report is among others for Dutch companies to derive business opportunities in the Russian aircraft production sector. It is beyond the scope of this report to provide a detailed analysis of the strengths and weaknesses of the Dutch aerospace sector. Nevertheless, based on the previous sections a number of business opportunities and threats can be distilled for companies in the Dutch aviation trade and industry: Opportunities Sales of second hand aircraft to Russian airlines Sales of second hand business aircraft to Russian customers Subcontracting in new aircraft developments in Russia Subcontracting in new western aircraft production destined for the Russian market Provision of MRO services to Russian airlines; in particular the supply of aircraft components Threats Volatile economic growth, heavily depending on natural resource prices Constraints in the development of airports Uncertainty in consolidation of airlines Government policy towards imports of foreign aircraft and parts The fragile state of aircraft production companies The uncertainty of successful development of new Russian aircraft

21 It is difficult to make a general statement about to what extent Dutch based facilities can be used for the performance of MRO activities for Russian air carriers. It is a fact that most, if not all, heavy maintenance on foreign aircraft is being performed abroad. None of the large MRO players have facilities within Russia. Also the component maintenance provision is being managed from abroad, with the airline responsible for import formalities themselves. Local office of MRO providers, even the market leader s, are mere representative offices for sales and liaison purposes. This situation should provide opportunities for Dutch based MRO providers, but of course depends on the type of services

22 4 Aircraft production & Maintenance Market segmentation and size This chapter aims to make an estimation of the market size of the different segments of Russian aircraft production market and the Russian MRO market. 4.1 Aircraft Production - Market segmentation & size As per 1/1/2006 there were planes making commercial flights in Russia. The vast majority of these concerns old planes of Russian origin. Those planes were mainly inherited from the USSR and were left to present-day airlines as a result of breaking up the Soviet Aeroflot. The most widely used long haul plane is the Tu-154 and the most widely used regional plane is the Tu-134. The State Civil Aviation Research Institute has concluded that replacing the Tu-134's, which have been used in the fleet for nearly 40 years, will require nearly seat turbojet airplanes and mixed class with 90 seats. According to a long-range forecast by Airbus, in the next 20 years, Russia will need 620 airplanes of various kinds, mainly short- and mediumhaul with a seating capacity of 100 or more. The Ministry of Industry and Energy believes that a massive write-off of the regional aircraft fleet, including Tu-134's, will begin in , while the similar Tu-154M will keep going until Current production and import As shown in the following table the local production of aircraft has been minimal over the past years. At the same time there is a steady increase in the import of foreign aircraft reaching over 20 in This is mostly used aircraft. Production and import of civil aircraft in Russia Total Local Production of civil aircraft (units) Import of civil aircraft (units) Source: Federal Statistics Service

23 Russian aircraft production over the past few years is further specified in the following table. Tupolev is currently the most productive of all Russian production complexes. It also has the most outstanding orders. Russian aircraft production by model Model Il Tu Tu Tu Yak-42 1 An An Aviatica 2 1 Be Total Source: Rostransnadzor High fuel prices are making it difficult to profitably operate fuel-hungry Russian-built equipment. This is forcing more and more airlines to consider using Western aircraft, even though taxes & import tariffs make them relatively expensive. It is expected that production of current Russian models will stay at a minimum, while imports of foreign, mostly used but increasingly new, aircraft will increase. There are some new Russian models in the making, of which the Sukhoi Superjet-100 regional jet, seems to be the most promising. First deliveries are expected in Segmentation The market can be segmented either according to its range or its seat/cargo capacity. As a rule of thumb it can be said that the larger the capacity, the longer its range. Exceptions to this rule can be mainly found in the business jet segment where luxurious small seat capacity planes have a long range. In this report the market is divided in the following segments: Long haul aircraft (passenger & cargo): this segment is defined as all aircraft with a maximum seat capacity of 151 or more seats. Its range is usually over kilometers and can be as high as kilometers; Regional aircraft (passenger & cargo): this segment is defined as all aircraft with a maximum seat capacity of between 51 and 150 seats. Its range is usually between and kilometers; Small and Business aircraft: this segment is defined as all aircraft with a maximum seat capacity of 50 seats or less. Its range is usually less than kilometers. Business jets are often an exception to this rule with ranges that can be as high as kilometers; All Cargo aircraft: this segment is defined as all aircraft which is solely used for the purpose of transporting cargo. Main distinguishing factor between the planes is its payload, that is the maximum cargo weight it is able to transport

24 4.1.1 Long haul aircraft segment size As per 1/1/2006 the following Russian-made long haul aircraft were being used in Russia: Long haul aircraft (151+ seats) - Russian Model Range Seats Max. In use Registered Il Il Il Tu Tu Tu-154b Tu-154m Tu / Totaal Source: Rostransnadzor, Wikipedia, Airliners.net, Larive Russia According to United Financial Group there are currently around 180 foreign long haul and regional aircraft in use within Russia. This probably includes aircraft which is registered abroad for tax purposes but is effectively being used for the Russian market. 144 out of these 180 are Boeings. According to official figures, the following foreign long haul aircraft are in use in Russia as per 1/1/2006: Long haul aircraft (151+ seats) - Foreign Model Range (km) Seats Max. In use Registered Boeing DС Boeing / Boeing / А А Totaal Source: Rostransnadzor, Wikipedia, Airliners.net, Larive Russia In the next ten years Russian carriers are expected to spend more than $20 billion on long haul aircraft to modernize their fleet. Currently, Boeing is in talks to sell as many as 17 of its new 787 airliners to Russian carriers, not including Aeroflot. Boeing and Airbus have been recently in fierce negotiations with Aeroflot for the sales of 44 long haul aircraft. It was finally decided that Aeroflot will divide the order between the two companies. In the coming