CIS interior shops seek Western market

 - July 29, 2008, 7:03 AM

A little more than a decade after perestroika, interior completion and refurbishment companies in the Commonwealth of Independent States (CIS) are flexing some muscle and looking to the West for partners and clients as demand levels off in their home markets.Business aviation in the CIS is a relatively young phenomenon, with a history going back barely seven years. And so the list of interior specialists is likewise new, with only about 30 shops offering interior completion and refurb services and ranging from large facilities providing everything from aircraft maintenance to green cabin finish work. Of these, only four prominent companies are in a position to offer

turnkey service from design to installation–AKKO, InterAMI Interior, Kvand and Vemina-Aviaprestige. Along with Western firms, primarily from western Europe, they are competing fiercely for work on as few as 100 business aircraft in Russia. Because the business aviation market is relatively small, the most successful facilities are those with the skills and certification to build and install airliner interiors.

A recent but increasingly popular trend is for aircraft operators to put interior jobs up for public bid. By law, state companies are required to do so, but now larger commercial companies have adopted the practice.

One of the peculiarities of the CIS market is the practice of dividing the cabin into three compartments–an executive/VIP forward section, a center compartment in first-class configuration and the aft compartment laid out similar to coach class.

It is worth noting that none of the interiors companies above has its own hangar facilities. Rather they work in close cooperation with aircraft repair stations, known in Russia as ARZs (some state-run). This allows customers to choose a variety of work options in addition to the completions job. During this period, all work may come under the supervision of ARZ flight safety and quality management.

The result is an interesting partnership between the ARZ and the independent interiors shop. It is also indicative of a growing interest by CIS investors in independently owned companies. “It is difficult for a repair station to master high-quality interiors,” said Kvand chairman Oleg Ponomarev, who is well aware of the limited investment resources in the CIS. “Our business [of high-quality interiors] requires considerable investment [and] small independent companies are more attractive to investors than big plants where initiative may be lacking.”

It is possible to pay as little as $60,000 for the conversion of a Tu-134 or Yak-42 by one of the state-owned ARZs, but such conversions are rather straight-forward and the materials are basic. And while the workmanship is solid, any resemblance to a true VIP interior is often cosmetic and purely incidental.

According to Ponomarev, in just the last two years the interior requirements of wealthy Russian clients have grown considerably. “Russian businessmen spend much time aloft now, meeting with Western counterparts and traveling with them on their business aircraft. When they return they want an aircraft with a similar or better interior.” Rather than invest the significant amounts necessary to buy a Western business jet, they will pay between $1 million and $3 million for a used Tu-134 or Yak-42, and then invest approximately the same amount or more in the VIP interior, sometimes including satcom (a $400,000 to $600,000 option).

Charter Refurbs

Charter operators are normally more circumspect in their cabin interiors, balancing costs with customer satisfaction. Charter aircraft typically come in for refurbishment every three to five years, and spending is usually in the $100,000-to-$150,000 range. These operators have become more aware that a quality interior translates directly into more business. A Tu-134 amassing 70 to 100 flight hours a month may allow the operator to recoup an acquisition cost of $1 million in 12 to 18 months.

One of the problems facing interior shops in the CIS is finding local sources of high-quality interior components. Basic “airline type” items are inexpensive, but typically of poorer quality. High-quality items may be found, but at prices often two or three times those of similar Western interior components. And even when less expensive interior items can be found abroad, an import tax of 20 percent and a value-added tax of another 20 percent drive the cost up.

Among the few CIS-made items being used in VIP interiors are metal parts; load-bearing structural elements; panels; plated-metal items, such as drawer pulls and locks; and fire-blocking fabrics. “We would love to find more local items, provided they are competitive,” said Kvand general director Vladimir Kolominsky, “but we will use only those of the highest quality.” According to Kolominsky, about 75 percent of materials are imported, accounting for an average of about $15,000 to $20,000 of the value of the typical interior.

Certification: the Easy Way and the Hard Way

There are two routes to achieve Russian certification of imported items.

For materials such as fabric, it is relatively simple. Applicants file for permission to use a particular item, backing the form with a packet of relevant Western documentation, usually from the FAA or JAA. This is also the process for items for installation that were certified in the 1960s and 1970s to old Soviet standards. Approval is usually granted without undue difficulty.

The path to Russian AP-25 certification for an item certified in accordance with U.S. FAR Part 25 is more of a challenge. This is normally done by the Western manufacturer of the item via the company’s Russian representative. The process begins with the chief aircraft designer for the OEM. With his support, the item is subjected to full-scale tests required by aviation authorities, and payment is the responsibility of the applicant.

CIS interior providers are convinced they can supply certain
high-quality items, such as seats, divans, and tables, to both local and
Western end-users. Long a dream, it is now becoming a reality. Recently, Moscow-based AKKO received Russian certification for a first-class passenger seat for airliners that is also approved for use in VIP interiors.

Kvand is nearing completion of its own VIP seat and expects 16-g approval. The Moscow-based company, with facilities in Minsk, Belarus, anticipates AP-25 certification next month. The seat incorporates state-of-the-art solutions, including a unified attachment platform. The expected unit price is $12,000, of which Kvand expects $6,000 to $7,000 will be represented by the cost of imported components, such as shock absorbers and control mechanisms. The launch aircraft for the new seat are three Yak-42s undergoing VIP conversion at its Minsk completion and refurbishment center.

The VIP seat is at the top of some 22 items Kvand plans for certification. These include a remote sensor-operated water-supply system for lavatories, a divan, various LED lighting and cabinetry items, as well as electric power converters.

Kvand, Vemina-Aviaprestige and InterAMI are considering “transformable” interior design concepts. Such interiors would be modular and adaptable to fit the number of passengers on any one flight, or simply as a means occasionally to provide a fresh appearance for frequent travelers in that aircraft.

Interiors Shops Look To West for Survival

Interior completion and refurb centers in the CIS see tough times ahead. While demand for business aircraft continues to build, the market for Tu-134 and Yak-40 conversions is drying up. The larger and newer Yak-42 and An-74TK-300 have only limited potential, and the Tu-324 and Yak-48 remain only “paper airplanes.”

The interior shops therefore want more access to the market for completion and refurbishment of Western aircraft. Kolominsky is blunt in his assessment: “In the next few years we will have enough work on indigenous aircraft, but a time will come when their number in the business aviation fleet stops growing. To stay in business, we must master Western airplane [completion and refurb quality].”

The shop managers believe they are already competitive in many respects, and that they can offer the same quality at prices two to three times less than those demanded by Western competitors. This has been a major factor in winning contracts to complete and refurbish CIS-made aircraft. But access to the Western markets is restricted by certification and tariff barriers.

The shops do not always agree on the best approach. From an economic perspective, specifically high tariffs, the licensed production of Western interior components “is not the way,” according to Kvand. “Besides,” said Kolominsky, “we can produce better products.”

InterAMI does not share this view. It has mastered the assembly of Swiss-made seats for Antonov aircraft. InterAMI believes that integration into the world community is best achieved through partnerships with Western companies.

It makes a certain amount of sense to do design work in the CIS, taking advantage of lower labor costs, and to do the interior installation work in the West to escape regulatory and customs requirements. Among the regulatory problems: CIS companies must obtain authorization from OEM and civil aviation authorities to work on Western aircraft types that will fly on foreign registry. To date, CIS interior specialists have not received clear guidance on how to achieve this. Also, if a foreign-registered aircraft comes in for interior work in the CIS, taxes must be paid on imported materials and components.

There are rare examples of Western-made business jets being operated in the CIS, but such aircraft are often leased from a Western owner. This complicates the process of getting interior refurbishment done in the CIS. In fact, there is only one known instance in which a Western-built business jet–a Hawker–underwent an interior renovation in the CIS.

The barriers are many, and some of them high, but the shop executives generally agree that their survival lies in somehow gaining access to the business aircraft completion and refurbishment market in the West.