Aviation Industry Overview
During the Soviet era Ministry of Aviation Industry [MAP: Ministerstvo Aviatsionnoi Promyshlennosti] supervised over 400 enterprises. Of these former Ministry of Aviation Industry, 15% were lost overnight when Russia shrunk to its present borders. During the 1980s 70% of the output of the ten major airframe design bureaux and the 20 major production factories was for the military. During the 1990s the reduction in military budgets effectivly ended military aircraft procurement. The remaining 30% was civil, for Aeroflot and some foreign airlines, and represented approximately 100+ jet and turboprop airliners and airfreighters per year - plus several hundred helicopters.During the Soviet era aircraft such as the Tupolev Tu-154 or the Ilyushin Il-62 were transferred from one government department, the Ministry of Aviation Industry (MAI) to another, the Ministry of Civil Aviation (MCA), for a national value of one million roubles (approximately $150,000 at the then [unofficial] rate of exchange widely available). The Ministry of Civil Aviation then allocated it to an Aeroflot unit, which regarded the aircraft as being 'free of charge'. As such, it did not much matter if the aircraft sat, unused, on the ramp for months on end.
Beginning in 1990, the Russian aviation industry was divided into four agencies: Ministry of Aviation Industry, Ministry of Industries, State Committee of Defense Industries and Ministry of Defense Industries. The latest change occurred in May 1997 when the Ministry of Defense Industries that was responsible for the military-industrial complex and civil aviation was dissolved and incorporated into the Ministry of Economy in the form of a Department of Aerospace Industry and Shipbuilding. On August 21, 1997 the reorganization of airspace and defense industry was formally announced to enable it to have a more equitable share of foreign arms sales. By the end of 1997, just five airliners plus seven helicopters were delivered to Russian airlines and about the same to foreign customers.
In early September 1997 after heated debates at the Ministry of Economics the plan entitled "Concept of Restructuring the Russian Aviation Industry Complex" was finally made public. Essentially the plan presupposed vertically-integrated structures and large-scale merges and consolidation among aerospace organizations and research institutions. At the initial stage the program called for integrating 39 major enterprises involved in the research and development, testing, and manufacture of aircraft engines, and 47 enterprises which develop and manufacture avionics and major aircraft system components. The immediate aim was the increased competitiveness, development of new technologies and designs, production of new aircraft and improved aftersale service. Four core enterprise groups were to emerge to promote 5-6 families of Russian aircraft within the country and in the world market: MiG-MAPO complex (military industrial group); the Sukhoi group; the Tupolev group and the Ilyushin group.
While the Russian government considered aviation a strategically important sector of economy and erects considerable protectionist barriers to aircraft import and investment, it also lacked the resources to support aerospace industry, provide subsidies, finance big orders and allow it to adjust to a competitive market economy. In 1999 aircraft manufacturing companies in Russia planned to produce a total of 23 airliners. This number included ten Tu-204, which will be built at the Ulyanovsk aviation plant; three Tu-214 airliners, to be built in Kazan; three Il-96-300, production of which is underway in Voronezh; and three Tu-154M, to be manufactured at the Samara aviation plant. According to the analysis published in "Aviation Week", "Russia may lose both Air force modernization and the industrial capability to rebuild the military... The nation could skip a generation in aircraft development. The result of this technological pause could be unparalleled aerial supremacy for the U.S." (April, 1997)
According to analysis in the late 1990s, the total production capacity of Russian aviation engine manufacturing plants exceeds that of the whole world. Considering relatively inexpensive and highly skilled labor, these factories may become attractive for the long-term investment or joint ventures once they are privatized and new management takes the necessary but extremely unpopular decision of cutting down the excessive workforce.
In 1996, the United States and Russia concluded a Joint Memorandum of Understanding (MOU) reflecting US concerns about barriers to the Russian civil aircraft market and the application of international trade rules to the Russian aircraft sector. The MOU stated that US aircraft manufacturers will be able to participate in the Russian market and share in its growth. The MOU also makes clear that the Russian aircraft industry will become fully integrated into the international economy over time. Russia pledged to eventually undertake the same international trade principles in the aircraft sector as the United States and many others have done, as embodied in the Agreement on Trade in Civil Aircraft.
Since the end of the Cold War, Russian and American companies have participated in several major aviation design and production projects. Ilyushin, UTC/Pratt & Whitney, and Rockwell Collins jointly designed and upgraded the Ilyushin 96-M/T airplane. In 2001 Boeing, Sukhoi and Ilyushin started developing the joint Russian Regional Jet (RRJ) project. Boeing has also worked with the Tupolev Design Bureau on the potential development of supersonic civil transport technology and explored a feasibility study with Sukhoi for a Supersonic Business Jet. General Electric supplies engines and UTC/Hamilton Sundstrand provided propellers for Sukhoi’s Su-80 aircraft. Honeywell supplied engines to Novosibirsk Aircraft Production Amalgamation for An-38 aircraft. The Ilyushin-114-100 was outfitted with UTC/Pratt & Whitney engines, UTC/Hamilton Sundstrand propellers, and Honeywell Auxiliary Power Unit and avionics. The Honeywell Traffic Collision Avoiding system, installed on around 300 Russian built aircraft, helped Russian airlines to increase safety and comply with US and European mandates. UTC/Pratt & Whitney engines power the Kazan Helicopter Plant’s “Ansat.” UTC/Pratt & Whitney is a strategic investor in Perm Motors Factory and Aviadvigatel and participated in modernization of the PS-90 aircraft engine. Boeing operated a design and R&D center in Moscow and UTC/Pratt & Whitney had a design bureau in St. Petersburg. UTC/Hamilton Sundstrand manufactured components for Boeing aircraft in Moscow. Honeywell and Rubin operated a joint venture to supply wheels and breaks, which were certified for Tu-204/214 and IL-96M/T aircraft. In addition, Boeing, General Electric, and UTC/Pratt & Whitney purchased titanium for airframe and engine manufacturing from the VSMPO enterprise in Verkhnyaya Salda.
Many of the Russian-flagged carriers have aging fleets and use outmoded avionics and engines, and several are seriously considering significant purchases or leases of foreign aircraft in an attempt to be more competitive with Western airlines. The domestic civil aviation industry cannot keep up with the airlines’ demand for modern, relatively fuel efficient aircraft, so Russian airlines are looking to foreign manufacturers despite a 20 percent import tariff plus VAT imposed by the GOR.
In 2001 Rosaviakosmos intended to set up the following specialised holding companies: "Combat Tactical Aviation", "Heavy Aircraft", "Russian Helicopters", "Aircraft Engines and Aggregates", "Aircraft Armaments", and "On-bBoard Equipment". In accordance with the federal program, two holdings were to be created to merge Russia's biggest aircraft building companies. MiG, Tupolev and Kamov were to be merged into one of the holdings, and Sukhoi, Ilyushin and Mil were to form a second holding. Aircraft building plants in the Voronezh, Ulyanovsk and Kazan Regions have been specified as basic aircraft building plants.
As of 2006 Russian law stipulated preferential treatment (tax holidays and guarantees on investment) for Russian and foreign investors in aviation-related research and manufacturing ventures. The law, however, limited the share of foreign capital in aviation enterprises to less than 25 percent and required that board members and senior management staff be Russian citizens. There was speculation that the 25 percent limit could be raised or eliminated to facilitate further investment. Some observers, however, doubt that recent to raise the limit to 49 percent would be sufficient to attract capital from abroad for Russia’s aircraft industry from abroad.
Several Russian airlines operate Western aircraft, however, despite the import tariff plus VAT. Two airlines, Aeroflot and Transaero, previously received tariff-waivers and discounts for these planes, but have exhausted their tariff discount and are now purchasing aircraft at full tariff rates, just as other airlines have always had to do. Russian airlines and foreign governments have been vocal about seeking further tariff waivers. For the first time in 2005, Russian Ministers have suggested that the Russian domestic aircraft industry is not capable of producing the number of high-quality passenger jets Russian airlines want in a timely fashion. Discussions within the Russian government on possible tariff reductions continue.
By 2004 the combined annual turnover of Russian engine production was about $1.5-2.0 billion, or less than 1% of global output. This has to do, above all, with the virtual demise of engine production for civilian aircraft and plummeting production of military engines. Russia's biggest engine manufacturers are the Ufa Engine Production Association (Russian acronym UMPO), Salyut Moscow Machine-Building Production Association (MMPP Salyut) and Saturn Scientific Production Association Joint Stock Company (Saturn NPO JSC). Designers capable of making the first draft a new engine remain in Russia: Viktor Chepkin (Saturn), Mikhail Kuzmenko (head of Saturn civilian programs), Alexander Inozemtsev (OSC Aviadvigatel) and Alexander Sarkisov (Klimov Corporation).
The Russian government is also looking to reorganize and revitalize Russia’s aircraft industry in the context of a larger restructuring plan for Russia's defense industry. Specifically, large-scale consolidation of the aircraft industry took place with the government creation of the Unified Aircraft Corporation. Government officials have suggested using proceeds from Russia’s Stabilization Fund to support this new corporation. The Government of Russia expected it to fulfill no less than twenty contracts in 2007 for helicopters, sports planes, and engines (worth approximately $380 million).
At a session of the Military Industrial Committee, headed by Russian president Vladimir Putin, fundamental decisions were taken in August 2007 regarding the engine industry's consolidation. Initially, 40 existing companies — out of which seven are manufacturers of finished products — will be merged into four holdings with centers in Moscow [MMPP Salyut], St. Petersburg [Klimov], Samara and Perm [Perm Motors ].
