Aeroflot board divided on RRJ

 - September 27, 2006, 4:53 AM

Sukhoi would have loved to announce an RRJ launch order from Aeroflot last month out from under the shadow of intrigue that seems to hang over every Russian aerospace project. But as so often happens in Russia, internal conflicts have a way of rising to the surface at the most inopportune moments.

During a grand signing ceremony held in Moscow last month, Sukhoi general director Mikhail Pogosyan and Aeroflot general director Valery Okulov heralded the long-sought-after deal that would cement the future of the $1 billion project. Unfortunately, they had to admit that the order for 30 RRJ95s hadn’t yet won approval from the Aeroflot board after one of the airline’s largest shareholders threatened to block the deal.

In fact, over the course of four years Sukhoi has announced “launch orders” on many occasions. Aeroflot, for one, ostensibly signed a letter of intent in 2001. During the 2004 Farnborough Air Show, then “launch customer” Siberian Airlines signed a 50-aircraft “delivery agreement,” which expired before the parties ever reached terms on a firm contract. Sukhoi introduced another pair of launch customers last year, the latest during the Dubai Air Show, when it identified Dubai-based leasing company Concord Aviation as a buyer for 20 RRJ95s. Concord’s letter of intent followed another “launch order” from Russia’s Finance Leasing Company for 10 airplanes announced during August’s Moscow Air Show.    

Despite all the other names bandied about, few outside Sukhoi would dispute that the program needs Aeroflot’s endorsement. But to Sukhoi’s dismay, conflicts of interest among Aeroflot’s shareholders have not allowed the sale to proceed unchallenged. Alexander Lebedev, a State Duma member and owner of 30 percent of Aeroflot’s stock, favors Antonov An-148s, which he claims “are 70-percent Russian, whereas the RRJ is only 40-percent Russian.” And why wouldn’t he? Lebedev also co-owns the National Reserve Bank–one of the founders of airplane leasing company Ilyushin Finance, a major investor in and marketer of the An-148.

Although ostensibly a Ukrainian program, the An-148 does, in fact, contain mostly Russian components, and in late November Russian airframe builder Voronezh Aircraft Association (VASO) sealed an agreement with Antonov to assemble the airplane under license. Until then Kiev’s Aviant remained the sole licensed builder. VASO hopes to produce 250 passenger and cargo An-148s within 10 years, starting with six this year and climbing to a rate of 30 airplanes annually beginning in 2008.

Industrial Progress

For the RRJ, the various suppliers have begun fabricating the long-lead-time components for the six prototypes planned for the certification program. The Knaapo plant in Komsomolsk-na-Amur in eastern Russia plans to assemble the test articles, scheduled to fly in March next year. Sukhoi now expects to gain Russian certification by the end of 2008, and to deliver the first production example to Aeroflot soon afterwards.

An-148 contractor VASO is also participating in the Sukhoi project, and has already begun building parts for the RRJ’s wing. Engine supplier PowerJet, a joint venture between Snecma and NPO Saturn, has started assembling the first SaM146 turbofan and plans to run the first core imminently. Sukhoi has signed all but five of the major suppliers to the program. As of last month, Goodrich, Messier-Dowty, Vibrometer, Honeywell and Hamilton Sundstrand accounted for the last holdouts.

Meanwhile, the management of Italy’s Finmeccanica has drafted a proposal to take a 25-percent stake in Sukhoi, worth some $250 million. Under the plan, Alenia would help market and support the RRJ project, as well as consult on design, development and manufacturing. India’s HAL has also expressed interest in following Finmeccanica’s lead with a 10-percent stake, but can do so only if the Russian government relaxes restrictions on foreign ownership of Russian companies.

Notwithstanding the protestations of Lebedev, Aeroflot’s Okulov insisted that the RRJ, despite its $27 million list price, made more sense economically and strategically than the An-148, the Embraer 175 or the Bombardier CRJ900. Of course, the amount of foreign content in the RRJ has raised questions about its exposure to Russia’s 20-percent import tax and 20-percent value-added tax on foreign products–the chief reason Western aircraft makers have failed to break into the market in any meaningful way.

Aeroflot has said it won’t pay more than $18 million for the RRJ. However, the Russian parliament is considering a proposal to relax or completely abolish the tax in a way that would benefit the RRJ but not necessarily create more competition from the likes of Embraer or Bombardier. It plans to finish drafting the document next month.