Western aircraft finding new market in Russia

 - October 4, 2007, 8:25 AM

Rising oil prices and Europe’s ban on Soviet-era airliners have created a new market for western business jets in Russia. Russian businessmen have purchased a considerable number of western aircraft in the past two years.

Russia’s oil sales account for a significant amount of surplus hard currency in the country now, with oil prices surpassing all forecasts. In late August crude oil was selling for  $50 a barrel, more than twice the Russian government’s prediction of $20 to $22 per barrel. Last year,  Russia produced 240 million tons of crude oil, twice the Soviet Union’s record and surpassing Saudi Arabia’s production. The prosperity of the fossil fuel companies, which account for 20 percent of the nation’s economic output, stimulates growth in other industries, increasing the market for business aircraft.

Business aircraft built by western manufacturers are particularly popular in Russia since companies’ VIP-converted Yakovlev Yak-40/42 and Tupolev Tu-134 passenger airliners no longer meet Western Europe environmental regulations.

According to the Russian Business Aviation Association (ADA),  last year Russian clients purchased four BBJs, five Gulfstream Vs, seven Global Expresses and more than 10 Challengers. But many of the buyers registered their airplanes in other countries to avoid the 20-percent import tax and 20-percent value-added tax levied on imported aircraft. Today, more than 60 top-class business jets belonging to Russians are based outside the country. According to the Russian civil aviation authorities, in early 2003 the Russian register listed only 10 western-built business jets: two Falcon 900s, a Falcon 50 and a Falcon 20, a Gulfstream IV-SP and five Hawkers.

However, the ADA statistics are not comprehensive. Other sources assert that at least two Falcon 900s should be added to the list. In 2003 and 2004 Russian businessmen also purchased many pre-owned aircraft, but these acquisitions are difficult to monitor.

A dozen air-taxi companies and corporate air departments operate more than 50 Tupolev and Yakovlev conversions. The Russian fleet, including the aircraft registered abroad, consists of some 150 VIP jets. Last year ADA counted more than 20,000 flights by VIP jets in Russian airspace, an increase of about 40 percent over the previous year. The growth continues this year. Sixty percent of the flights were to Western Europe and 30 percent of the flights were within the CIS. Flights to the Middle East and North America are flown rarely; when they are, they are flown mostly by owners of BBJs, Gulfstream IV/Vs and Global Expresses.

Business travelers rarely request intercontinental services from air taxi companies, said ADA president Eugeny Bakhtin, because of the expense and inconvenience; under current rules, a flight must stop at the nearest U.S. airport before it can proceed to the destination. “Besides, even in the Global Express one can experience claustrophobia when flying from Moscow to the U.S. There are many airlines that offer first-class seats on intercontinental flights, and businessmen prefer them to business aircraft.”

The Growth of Business Aviation
Managers of large companies have been long-standing clients for charter companies. The growth in the business aviation market is a result of owners of smaller businesses entering the business aircraft market as they see airline tariffs increasing and business aviation prices declining.

The threat of terrorism is also a factor in the expanding business aviation market. “Top managers do not feel safe when they are with other travelers in airports or aboard airliners,” Bakhtin said. “Besides,” he added, “business aviation gives them more flexible scheduling and flies them directly to the destination.”

Many new business jet owners previously flew with charter companies, whose words of advice and, of course, services influenced their aircraft purchase choice.

Jet Aviation, TAG and other European charter companies offering Challengers, Falcon 900s and 2000s and Gulfstream IVs receive half of the requests for these types from Russia, Bakhtin claims. Falcon 900s, 2000s and 50s and Challengers are also available from Moscow companies Avcom and Jet2000. When clients of these companies decide to buy an aircraft, they sometimes hire the charter company to do a comparative study and offer advice about the aircraft purchase. Sometimes, Russian buyers “outsource” selection to reliable companies in the West.

Five years ago, image was an important criterion for choosing a charter service or a business aircraft. Recently, that consideration has lost some of its importance. “Roughly 70 to 80 percent of the buyers and charter clients exercise a pragmatic approach to buying business jets,” said Jet2000 chairman Leonid Koshelev. “When Yeltsin was in power, it was a time of crazy oligarchs. Now, with Putin at the controls, it is the time of pragmatists.” During Putin’s time, “oligarch structures” have been losing power and influence, and medium-size businesses have been growing.

Today, businesses often ignore image considerations and select a less expensive charter aircraft to save a few hundred dollars. “It is not because the travelers are short of funds. Rather, our clients have started to spend their money more carefully,” Koshelev explained. When buying an aircraft, medium-size companies in Russia are no different from those in the West: they look for a good price/quality ratio, the best deals and the lowest operational expenses.

Medium-size businesses require frequent flights within the CIS to meet local agents, suppliers and partners. “Until you fly there and settle things yourself, nothing happens in the province,” said a Moscow businessman. A group of frequent CIS fliers is growing; they fly five-day “tours” from Moscow, visiting one city each day. “Such clients look for a suitable airplane with the lowest and most predictable operating costs, while meeting a certain standard of comfort. It does not matter whether it is a Russian or imported airplane,” Koshelev said. For instance, the Moscow city government uses a Yak-40 or Tu-134 for in-country flights and a Gulfstream IV-SP or Falcon 900 for European visits.

Despite the real threat of terrorism, Russian businessmen do not ask for protection from the shoulder-launched heat-seeking missiles that are sometimes found in the hands of Chechen separatists. “It is not [a cost] issue for those who buy a $45 million airplane to add the [$2.5 million] system for safety,” Bakhtin said, “but no one has chosen to do  it.” Anti-missile systems are offered for large-cabin Gulfstreams (the Matador) and the VIP An-74TK300, but these protective systems do not give the aircraft a marketing advantage in Russia.

Bakhtin is skeptical about the value to the Russian market of innovations like the Rockwell Collins Airshow 21 integrated cabin electronics system being developed for the Global 5000. “Russian top managers, the people who have enough income to fly high-end business jets, use only mobile phones and calculators. They do not take a notebook into the airplane.” Businessmen often ask for satellite telephone lines, and Moscow companies have installed satellite communications systems on some of their airplanes. But their Internet channels are rarely used.

Peter Edwards, president of Bombardier Business Aircraft, disagrees with Bakhtin. “The new generation of business leader in Russia is very demanding. He expects the best, and expects modern technology. He will find in our new aircraft all the things he requires: a very advanced cockpit, the best cabin in the world, and all the features to take his office in the air with him and continue to work.”

During the Global 5000 presentation at Farnborough International this past summer, Edwards mentioned New York and Moscow among other city pairs that have “become increasingly relevant for international business travel.” He told AIN, “A growing portion of our business is coming out of Russia…[The Global 5000] has all the attributes that a Russian company or business leader would be looking for. It has the speed, the range and the size to go places where they do business. It is a rugged aircraft, with a strong undercarriage, and it can handle rough runways and weather conditions.”

Although neither the Global nor the Challenger was officially imported to Russia, Edwards noted that “Russia is an increasingly important market for us. There are quite a number of Global Express customers...The rest of the product line is growing as well.”

Bombardier jets are most numerous in ADA statistics and they far surpass the competition. “The success of Bombardier airplanes is due to the fact that Challenger cabins meet the requirements and trends of the Russian market. The Russians prefer large, spacious cabins,” asserted Edwards. “The Challenger cabin cross section is the largest in its class. The Global Express is the best-seller [in Russia] in the top-end segment due to good range and, again, the largest cabin in its class,” said Edwards.

The size of some of the aircraft that compete with the Global in the business aviation market limits their success. For example, the Boeing Business Jet and Airbus ACJ are “clearly oversized” for business aviation, which does not escape notice on the ramp. “They look big and draw too much attention, a lot more than a Global Express,” Edwards said. In some countries BBJ or ACJ flights require special permission because the aircraft are the same size as the 737 and A319 airliners. In practice, nobody refuses that permission, but the fact that a special procedure is required reduces the appeal of those airplanes.

Since more than half of business aviation flights from Russia are to Western Europe, the size of the BBJ is hard to justify. “Both the BBJ and ACJ are great to fly from Moscow to the U.S. or Japan, but a smaller airplane is preferable for European services. A Challenger can take four or five people from Moscow to anywhere in Europe comfortably.” Russian owners of BBJs, Global Expresses and Gulfstream V-class aircraft tend to fly them across the ocean. But all of them also own a Challenger or a Falcon for shorter itineraries.

Business aviation was non-existent in the Soviet Union, so it is growing at a high rate in Russia. But the period of brisk sales may soon be over. “The market demand is not yet fulfilled, but we expect the moment when all the rich individuals, large corporations and banks have enough business aircraft,” Bakhtin said. Most of Russia’s so-called “oligarchic structures” have already acquired top-end business jets, and in that market sector the high sales season is seen as coming to an end.

Nonetheless, growth potential remains in other sectors. The market for midsize business aircraft is expected to develop quickly during the next eight to 10 years. “I think the Challenger 300, Gulfstream 200, Falcon 2000 and Embraer Legacy will sell well,” Bakhtin said. “The medium class of entrepreneurs is expanding. For them a midsize jet is a business tool.”

Dassault has attempted to establish a maintenance station in Russia. Dassault Falcon Service (DFS) teamed up with Vnukovo Aircraft Repair Plant No. 400 (VARZ-400), located on Moscow Vnukovo Airport, to perform line maintenance for the Falcon series. A dozen Russian mechanics, qualified to perform the work in the late 1990s, served Jet2000’s three Falcon 20s, Gazprom’s two Falcon 900s and various Falcons belonging to international corporations, including Philip Morris.

To attract these operators, VARZ-400 allowed them to house their aircraft in the plant’s vast hangars. But the number of Falcons at VARZ-400 remained small because newly acquired Falcons were registered in other countries, which influenced the operators’ choice of maintenance facility. Furthermore, the Russian civil aviation authorities required that each aircraft operator must have its own engineering department to do line maintenance, which further reduced the customer base for VARZ-400.

Orders were below expectations, and VARZ-400 finally reassigned the Falcon mechanics to mainline airliners. One by one the operators shifted to Swiss-based TSA Transairco and DFS facilities in Europe.

More recently DFS attempted a union with Moscow-based property developer Capital Group, to jointly build an FBO with maintenance facilities. DFS initially considered Vnukovo, then Sheremetievo, but there has been no outcome so far.

Russian Falcon operators say that while Dassault’s strategy to establish a maintenance station in Vnukovo was right, the company did not handle it correctly.

Other manufacturers never considered a service center in Russia. Bombardier instead promoted Lufthansa-Bombardier Aviation Services (LBAS) at East Germany’s Berlin Schoenefeld Airport. Bombardier jets serving Russian clients often visit this maintenance center, which is close to the Russian border. The convenient location of LBAS is another factor in Bombardier’s success in Russia.

Avcom has recently attempted to establish a comprehensive repair and maintenance facility for business aviation in Moscow. The company has built a large hangar complex in Domodedovo, where it offers floor space to maintenance specialists interested in providing services to local business jet operators.

Since Russian policies still keep doors closed to imported aircraft, however, there is little reason to build maintenance facilities in Russia.

Market Contenders
Bombardier and Dassault are the two names that first come to mind when a Russian considers buying a business jet. Both have their own sales employees living in Moscow. (A Gulfstream spokesman told AIN the company has a sales employee living in Germany, and an agent who lives in Moscow.)

Russian clients describe Bombardier’s sales system as “nothing special, but more workable than the competition’s.” One client called it “a sales system without internal drawbacks.” Sales managers are Russian natives with a narrow focus on Bombardier products. They take care of Russian clients, with welcome touches such as presenting, on request by the customer, documentation and offers in Russian rather than English.

Personal relationships are also an advantage for Bombardier. Bob Horner, regional vice president of sales for Europe business aircraft, in 1995-97 acted as a sales director responsible for Russia, learning the ropes of doing business in this enigmatic country.

The Challenger’s success can be attributed in no small part to the fact that the aircraft is well known to the Russian traveling public through its service as an air taxi. Five or six Challengers are available on the Moscow charter market on short notice. Well suited to serve most popular routes, the type has won a reputation as a reliable and affordable machine, a workhorse–an image that appeals to the owners of medium-size businesses.

The Challenger’s primary competitor, the Falcon 2000, is not as well known. However, the French aircraft is also available on the Moscow air taxi market, but in most instances it has more luxurious cabin completions and comes with a higher price tag. These traits can make the Falcon look less “practical” than a Challenger in the eyes of money-conscious banks and medium-size businesses.

In Moscow businesses can charter a Challenger 601 or 604 for between $5,000 and $5,500 per flight hour, while a Falcon 50 commands $6,000. There are no Falcon 2000s currently based in Moscow serving the charter market. If a client charters one from a European operator, he pays for flight time to Moscow and then back to home base. As a result, a typical European Falcon 2000 charter costs between $60,000 and $80,000, compared with $25,000 to $35,000 to charter a Moscow-based Challenger or Falcon 50.

Russian operators list pilot friendliness and the proximity of crew training centers–in France rather than in Canada or the U.S. for the Challenger–as advantages of the Falcon 2000. Russian users say that while the Falcon has lower direct operating costs than the Challenger 604, the French airplane’s maintenance costs are higher than the Challenger’s.

There are no Falcon 2000s or Challengers on the Russian register. At least one Canadian-made jet is expected to be officially imported later this year, after the Russian civil aviation authorities relax the type certification regulations.

Dassault was the first western manufacturer to sell a business jet to Russia. Gazprom officially purchased and imported two Falcon 900Bs in the late 1990s. In 2002 Surgutneftegaz took a Gulfstream IV-SP.

Cessna products have a very small presence in Russia, primarily because the company appears not to be intent on developing sales in the region. A Citation III and a Citation Excel are in service as corporate transports, but Citations have not been a popular choice with Moscow charter clients.

The hit of 2004 is the Embraer Legacy, three of which have arrived in Moscow. Reportedly, state arms vendor Rosoboronexport acquired one, while banks involved in weapon export programs purchased the other two.

More Russian banks and some air taxi companies are also considering the Brazilian aircraft. They expect it to be a “practical” airplane, a cost-effective solution to their needs through low operational costs and the advantages of airframe and engine commonality with Embraer’s regional jets. The $20 million Legacy offers a large cabin and range sufficient for European destinations.