Agreements for Russian projects

Published: 6/9/2000

On 5th June, Boeing signed two important agreements coinciding with the visit of President Clinton to Russia. A Boeing management team led by Harry Stonecipher, Chief Executive Officer and Tom Schick, senior vice-president of Boeing Commercial Airplanes, however, were confronted by what could be described as a some what cool political environment due to the failure of the previous administration and the Americans to develop the agreement over the funding of the development of the Il-96T/M in return for favourable customs treatment of Boeing products adopted by Aeroflot and Transaero. The Russian press particularly attached great significance to the absence of Eximbank officials in the President's party, as reflecting as Exim's low priority on the programme and are currently blaming the Americans for potentially killing the programme. According to US sources however, the current policy stance of Eximbank, the main funder of the US content in the aircraft, is to try and make the programme work, whether they want it to or not. The drive to demonstrate Russian success is coming, according to reports, from the office of Vice President and presidential hopeful Al Gore. Gore is reported to be keen to establish a successful track record on foreign policy issues and sees Russia and the Il-96T/M programmes as good examples of successful cooperation, in which he had direct involvement. Eximbank is therefore now being charged with achieving 'deliverables' in this area and according to reports, were so keen to touch base on restoring the impetus to the Il-96T/M programme, even tried to visit Moscow before the new cabinet was even in place and had to delay their trip. There are also other reports that the various constituent parts of the deal, primarily Rockwell Collins and Pratt & Whitney, are dusting off their files and looking at proposals for funding the new aircraft. One source has suggested that in an effort to make the deal structurally more palatable to those involved. A separate offshore vehicle may be created into which Eximbank would provide the financing and remove the need to take their collateral out of the aircraft produced, therefore avoiding the problems of leaving adequate collateral for further funding from other parties. The discussions of this new structure are reported to be underway, with the intention of bringing other financial institutions into the deal. For some commentators the economic basis of programme remains shaky, given that the aircraft is seen as being simply too large for the needs of its primary market, Russia and the CIS. There is also the view that Aeroflot would rather not have it, and is simply playing along because of political pressure. The only possible routes that are therefore seen as justifying the aircraft in current conditions are heavy volume summer tourist routes to Russia's southern holiday resorts, which are unlikely to need more than five aircraft according to one source. For Aeroflot, already having trouble according to reports in maintaining its load factors on the 767 and 777, the additional capacity is simply not required in the immediate future. For Boeing in the form of Tom Schick, the objective appears to have been to demonstrate growing commitment of Boeing to the Russian industry by offering its Russian partner Ilyushin additional contracts relating to production of the company's aircraft with the promise of further work. According to Schick the number of Russian engineers, including engineers from Ilyushin and other contractors working in its Moscow design centre, is set to rise from the current 100 to 150 by the year-end and to 250 in 2001, with increased investment bringing the number of design workstations up from 60 to 90 and then to 130 in 2001. The Russian engineers will design a new crew rest compartment for the 777, improve the 757's pressure deck, participate in compiling component and maintenance manuals and convert the original 757 and 767 drawings into 3-D colour digital images. Work will also continue on ongoing projects, including the 767 conversions into freighter, the re-design of 777 interior packages and the development of 767 and 747 manufacturing assemblies. Although not enough work to stretch the capacity of the 3500-strong Ilyushin Bureau, it will provide valuable revenue for the company and allow it to keep at least part of its design team together. Unusually the agreements were signed on behalf of Ilyushin by General Director Victor Livanov, and not by General Designer Genrikh Novozhilov who is reported to have been unhappy with the US policy towards the Il-96T/M. The other agreement was that with VSMPO titanium supplier. It does not call for increase in titanium deliveries (their volumes worth $250 million remain as determined in a five-year agreement); it provides a legal base for Boeing to work with VSMPO and the research establishments on development of new titanium alloys and manufacturing technologies. For Boeing, its activities in Russia, in contrast to some Western producers, have been reasonably fruitful. Russia has resolved its titanium shortfall at then time of the 777 launch and now 20% of titanium parts on production models are from Russia (and 25% on new 777s). Russia also continues to offer the company with access to high trained personnel and in the case of programmes such as the Tu-144LL, access to technology and experience they would not easily find elsewhere and will prove invaluable if the company goers ahead with SST projects. The market, despite current softness, also demonstrates potential in the medium term for its product, with Aeroflot currently an operator of 17 Boeing aircraft. The only completely new element in the Boeing presentation was the section dealing with the company's dealings with technology companies in Russia and the recent selection of two Russian companies specializing in software packages, information technologies and e-commerce to work with the company. Chosen from 15 contenders identified in 1997-1998, and through five pilot projects in e-commerce launched over the past, have allowed Boeing to identify contractors with the capability to meet their needs. IBS (Information Business Systems) and Parallel Graphics (Paragraph) were awarded contracts for software packages in e-commerce and information processing, digitizing Boeing manuals and creating on-line databases in a 3D environment. Tom Schick commented that the reason for choosing the Russians for the job was 'their outstanding quality and cost performance shown in the first five projects with us'.

Article ID: 1852