Paris Air Show

Critics suspicious of Russian consolidation plan

 - December 12, 2006, 7:26 AM

There are those in Russia who ask if the state’s plan to create a Unified Aircraft Corporation is a 21st century repeat of Stalin’s failed collectivization experiment of the late 1920s. “In the same way that you cannot throw a bunch of farms together at gunpoint and expect them to become record-breaking producers, it is not clear if anything positive will come out of this plan to force all of us into one large aerospace concern,” said a Russian aerospace industry official, speaking to Aviation International News on condition of anonymity. “If a camel is a horse designed by committee then this could end up as an aviation industrial camel.”

The brainchild of the Russian Federal Industry Agency headed by Boris Alyoshin, the program combines RSK-MiG, Sukhoi, Tupolev and Ilyushin into one large conglomerate. Under the plan announced earlier this year, once these firms combine they will operate under the aegis of a central management company that oversees all of the production and design components. Alyoshin said he wants to see the consolidation completed by the end of 2005 and starting to function as a single entity by March 2006.

Known by its Russian acronym OAK, the program would create four business units based on the type of aircraft each produces– combat aircraft, military transports and special-use aviation, commercial aircraft and major components. The four companies would each operate as a subsidiary of the OAK corporate parent.

Under the arrangement envisioned by Aloyshin and others, the Russian government would eventually retain only 25 percent of the shares of the conglomerate. According to the architects, government orders would constitute part of the company’s portfolio, but the majority of the business would come from export orders, as it has for the last 15 years.

The concept behind the OAK structure and formation traces its roots to the model established by the companies that created the European Aeronautics, Defense and Space (EADS) group. But critics insist that a direct comparison of the two consolidation models is folly.

EADS came into being as a means to unify the common business base and technological skills of several European nation states, which saw that the economies of scale necessary could preserve the smaller aerospace enterprises of the European nations. The consolidation was as much about retaining the industrial base in one country by combining its operations with that in a neighboring country as it was about creating synergies between them.

However, critics point out that OAK, an all-Russian venture, will only keep production plants from shutting down by shuffling business from one to the other, and shifting from more expensive labor markets such as the Moscow area to cheaper ones in the provincial cities of Russia.

In any case, most of Russia’s aero engine and avionics firms will not become part of OAK. Many of the avionics and radar firms already maintain ties with the Almaz-Antei air defense conglomerate or the Aerospace Equipment Corporation. Questions have arisen about how much efficiency can come out of the program if those industry sectors do not participate in the new grouping.

The question of who will run the new mammoth company has created another battle royal, as the principal contenders have long been traditional rivals of Sukhoi general director Mikhail Pogosyan and Aleksei Fyodorov, general director of both Irkut and RSK-MiG. Fyodorov’s 45-year old Ukrainian-born deputy at Irkut, Valery Bezverkhny, has surfaced as a possible compromise candidate.

Bezverkhny has served as the acting CEO at Irkut since Fyodorov took over as general director at RSK-MiG. He is largely credited with organizing a $200 million contract with EADS for Irkut’s factories to produce parts for Airbus aircraft. In the past he has said that about half of the aviation industrial production centers in Russia would have to close by the end of 2007, but has never identified which ones–or whether his opinion has changed now that he may have to run the whole show.

The status of RSK MiG also emerges as an issue. Officially a federal state unitary enterprise, RSK MiG must privatize before it can become part of OAK and be turned into a joint stock company. Under Russian corporate law, this process could prove quite laborious and pose a challenge to complete all the necessary steps by the March 2006 target date for establishing OAK.

Changes in political personnel have interrupted previous attempts to restructure Russia’s aerospace industry–such as those during President Boris Yeltsin’s tenure. Some observers in Moscow predict that the companies that could lose standing through the creation of OAK may employ stalling tactics in the hope that the leadership of the Russian Federal Industry Agency may change before the new company comes into being.