Potential breakthrough for industry (990 words)

Published: 7/25/2001

Sibir has announced the establishment of an aircraft-leasing vehicle, aimed at creating a non-government commercial leasing structure to allow Russian operators to lease, in the first instance, Russian aircraft. The announcement was made in conjunction with in conjunction with accountants, Ernst & Young and aviation consultants, Phoenix Project Management. Sibir's investment in the structure will comprise 20 Tu-154Ms, many of which have been acquired as a result of the merger with Vnukovo Airlines and the aircraft will be operated by the airline or leased to third parties. It is unclear exactly what this investment will constitute in shareholding terms, but the participants have said it will not exceed 50%. According to Peter Smith of Phoenix, the equity component of the scheme of around $40m will be raised primarily outside of Russia and he and his team are currently in the process of making presentations to a number of interested parties. According to Mark Jarvis of Ernst & Young, however, a letter of intent, at least, is expected from a potential investor, by next month's MAKS air show in Moscow. Smith said that the need and the opportunity for the scheme at this time is demonstrated by the fact that Russia is undergoing a large expansion in passenger numbers and he anticipates that the recovery will outstrip the capacity of the Russian industry to provide sufficient aircraft. The current leasing schemes available to provided affordable financing for both old and new aircraft are also inadequate. Smith further commented that the current situation is largely a function of an entity with a better credit standing borrowing from the banks and lending on for a turn. The intention of the leasing scheme, as yet unnamed, is to build a structure that fully exploits the tax and other benefits that normally accrue to such structures for the benefit of the lessee and lessor, so increasing availability, particularly to regional carriers and bringing down costs down. The leasing scheme's focus on the Tu-154M, that first flew in 1982, but which is derived from the Tu-154 that first flew in the late sixties, is explained by Smith as being due to the fact that, despite recent accidents, the aircraft still represented the backbone of the Russian fleet, with a reported 185 aircraft in service, according to the GSGA. How many are actually flying is more difficult to estimate but, Sibir's own experience with the acquisition of the Vnukovo Airlines fleet, revealed that only five of the carrier's 17 Tu-154s were reported to be available for service the balance requiring overhaul. The leasing scheme is, therefore, addressing a pressing issue for the Russian airlines over the next five years, given a severe shortage of aircraft caused by rising passenger numbers, with passengers up by 12.7% in the first half, and the need to find and upgrade aircraft to cover that growth. For Smith, the situation with the Tu-154M compares favourably with that of the Boeing 727-200 still in wide use in the USA, in both performance and cost terms, although production of the US aircraft ceased around the time the Tu-154M commenced production. Both aircraft have a large number of aircraft in service, with commensurate availability of parts, servicing and upgrade facilities. This makes the continued operation of the aircraft particularly attractive to carriers whose domestic routes were unlikely to be able to support the cost of imported aircraft even in a liberalised duty regime, and who are unlikely to find sufficient new aircraft from domestic producers. The familiar Tu-154M, however, can be had by the leasing structure for between $5-7m,although Smith expects the structure's price of aircraft to be below this. Followed by an overhaul and upgrade and leased at a viable rate to the carrier for continued profitable use for the foreseeable future. Referring to the aircraft being invested by Sibir in the scheme, Smith said they had been acquired on the basis of the aircraft's potential future cash flow and condition. He would not comment further on the actual price of the aircraft, although it would be unlikely to exceed current market rates. On the condition of the aircraft, Smith addedthat most required overhauls for either 10,000-hour checks or 4000 hours on engines, but had an average age of 10 years, with the price of an average overhaul of both airframe and engines in the region of $1.5m. To date, six of the aircraft have been refurbished and fitted with galleys and business class and are in service with Sibir. The balance of the aircraft will be overhauled at Aviakor, Varz 400 in Moscow and other facilities and these are expected to be available for leasing over the next 6-18 months. The emergence of a leasing vehicle with the commitment of a large domestic carrier and with considerable western support is to be welcomed. Jarvis also cites the apparent determination of Sibir's General Director Vladislav Filev,to make the undertaking a success. The vehicle also complements other leasing developments through the current tender for a government guaranteed leasing structure for new aircraft, which is currently in progress with both Sibir and Aeroflot participating. A successful structure that raises its targeted $40m will provide access to viable aircraft for those regional airlines currently struggling to raise the capital for updates and overhauls. It will also potentially eliminate the current situation of overhaul being traded for leases to upgrade facilities, or to so- called leasing schemes that, in reality, are simply expensive loans, which are the only option for desperate carriers. To date, the Leader Group has worked in conjunction with Aviakor in offering leasing options for refurbished Tu-154s, but no information is available as to the details of these financing arrangements or what the take-up has been. According to Peter Smith, the leasing of the Tu-154M fleet is the first step in what he sees as a much more encompassing business, providing leased western and Russian aircraft across all carriers and potentially acquiring displaced aircraft from companies, such as Boeing and Airbus, as they place products in the Russian market. Phoenix can be contacted on 007095-238-0588 and Ernst & Young on 007095-765-9292

Article ID: 2662