Russian tender may open doors to West

 - October 4, 2007, 10:31 AM

The governments of Russia and Ukraine have so far managed to prevent Western manufacturers from penetrating their countries’ markets for regional aircraft in the hope that local producers could develop competitive products. But officials have warned that prohibitive import taxes will not hold forever, particularly as Russia pushes ever harder for accession into the World Trade Organization. The Kremlin has said that the import tax on new foreign-built aircraft, currently at 20 percent, will gradually fall, potentially generating much more Western interest in a market that has begun to show signs of recovery from its post-Soviet hangover.

Even today, some large second-hand airliners have begun to break through the Iron Curtain, with Ulyanovsk-based Volga-Dnepr awaiting delivery of two Boeing 747s and Moscow’s VIM-Avia up to twelve 757s. In the regional market, Bombardier Dash 8s and ATR 42s stand next in line for potential placement with Siberia’s UTAir, which has issued a contract tender for five airplanes to replace 10 An-24s. Of the two remaining Western turboprop builders, Bombardier projects a presence in Russia with several Dash 8-100s, which, under hire by Sakhalin AirRoutes, serve free economic zones in Russia’s Far East, notably Sakhalin Island, where international fossil-fuel giants help explore oil fields.

UTAir has also acquired a taste for Western designs: it operates a Gulfstream IV on behalf of its owner, the Surgutneftegaz oil company, and has expressed delight with its reliability. Nevertheless, UTAir general director Andrei Martirosov told AIN that the need to replace the An-24s does not lie in their mechanical condition (albeit they’ve flown 90 percent of their useful lifespan), but their deteriorating economics. “Some An-24s have 60,000 hours on wing, but they are still quite strong, and could fly another 10,000 hours or more. But the newer designs are lighter and they consume half the fuel. Besides, the An-24’s 500-hour check requires the same number of man-hours needed for a 5,000-hour check on an ATR 42.”

UTAir has postponed the choice several times. It now claims it will announce the winner next month– in time, it hopes, for delivery of all five airplanes this year. “All bidders declared themselves able to do it, but we suspect some of them are too optimistic,” Martirosov said. In March UTAir contracted with Ernst & Young and Denton Wilde Sapte to navigate through the vagaries of the Western legal system. Said Martirosov, “This tender is our first experience with Western suppliers, and we need help to make the right choice.” The consultancies will perform legislative and financial analysis of the offerings and advise on the “optimal” acquisition arrangement, as well as preparation of the contract.

Studies performed by UTAir before 9/11 showed that neither new nor used Western turboprops could operate profitably on its route network, primarily because of the VAT and 20-percent import tax. The airline asked for a donation from regional authorities, but they refused. However, since 9/11 prices have fallen to a level that has rendered Western turboprops feasible, despite the tax burden. The same cannot be said of regional jets, however, noted Martirosov.

The local competition comes in the form of Antonov, which has offered newly developed An-140s built by Kharkov, Ukraine’s KhGAPP and Russia’s Aviacor. Serving the oil-rich region of West Siberia, UTAir became the first Russian airline to open bidding on equal terms between Western and local suppliers.

Although Martirosov called the An-140 offer “quite competitive,” he also expressed dissatisfaction with its TV3-117VMA-SBM engines; it uses a “helicopter-style” core and a heavy and complicated gearbox that transfers the torque in the rear part of the engine to the Stupino six-blade propellers via a long shaft located above the core. The An-140 inherited the design from the reliable Klimov TV3-117VMA turboshaft engine used in Mil and Kamov helicopters.

“The An-140 is a newer design, with superior aerodynamics and better suited to operations in harsh environments,” Antonov general designer Piotr Balabuev insisted in an interview with AIN. “[UTAir’s managers] will only prove themselves fools by buying ATRs.”

In fact, the An-140’s interior contrasts starkly with the Spartan confines of previous-generation Soviet designs. Designed by business-jet completions specialist InterAMI, the cabin features award-winning Swiss seats, French upholstery and German toilets. But such luxuries come at a price: of the An-140’s $8.5 million price tag, the interior accounts for $2 million. Balabuev contends the airplane’s lightweight airframe–40 percent of which is made of composites–produces operating economics that more than compensate for the extra cost of the interior.

To support production, regional authorities have eased the tax burden on Aviacor and issued it a Rbs140 million ($4.7 million) interest-free credit line. Aviacor’s labor force has dropped from 22,000 in 1990 to 5,000 today, following closure of Tupolev Tu-95 strategic bomber production and a sharp fall in orders for the 160-seat Tu-154M trijet airliner. Located in the Volgan city of Samara, Aviacor embarked on the An-140 in 1996, when Russian oligarch Oleg Deripaska assumed control of the company. It expects to assemble most of the 23 airplanes prescribed in letters of intent from nine airlines. Last December the plant rolled out its first airplane; it went to local carrier Samara Airlines. Production schedules call for five airplanes this year and eight next year.

Meanwhile, Ukraine’s KhGAPP signed a new customer in March. Ilyich-Avia, the corporate shuttle arm of the Mariupol metallurgy plant, ordered a single An-140-100 due for delivery in May. The airplane features reworked engine nacelles and wings, as well as larger fuel tanks for an extra 160 nm of range. In operation since 2000 with Odessa Airlines, which flies two, Motor-Sich Avia, which flies one, and Aeromost-Kharkov, the largest operator with three, KhGAPP-made An-140s have so far amassed 8,000 hours during 5,400 flights. Air Libya, which late last year placed an order for five An-140s, remains the only foreign customer, while negotiations continue with Sudanese and Chadian carriers considering a joint order for between 20 and 25 of the 40- to 48-seat airplanes.

Under a coproduction agreement signed in the mid-1990s, the HESA plant in Isfahan, Iran, has accelerated production of An-140s with Kharkov-supplied kits for the Iranian market. Under the deal, HESA will build 100 airplanes, known as the IrAn-140. The plant recently delivered a pair of IrAn-140s to Safarin Airlines, after original launch customer Kish Air delayed its delivery due to money problems. Before finding a new customer, HESA operated IrAn-140s on cargo and passenger charters.