The purchase of a blocking stake in Aviastar by a Russian industrial holding company Moscow-based holding Novoye Sodruzhestvo (NS/New Community), marks the entry of a new and major participant into the Russian aerospace industry.
The NS is reported to have acquired 25-26% through the issuance of new stock in Aviastar-SP (the aircraft manufacturing facility), which is currently majority controlled by OAO Tupolev (75%), with the Aviastar holding the balance, bar a few minor employee holdings. It has been suggested that the investment would be equivalent to the capital required in order to complete the nine Tu-204s and one An-124-100 planned for delivery this year. Pricing such needs is difficult to calculate, but it could be assumed the number is unlikely to be under $50m, depending on the level of pre funding those aircraft have received, although experience would suggest that this has been minimal. NS have also suggested that this initial investment is only the start and they may increase the holding in the future.
The interesting question lies in why an industrial holding company, with significant holdings in agricultural equipment controlling Russia's largest producers of combine harvesters, might commit substantial amounts of capital to an industry that, some would argue, is in terminal decline. Aviastar is currently fast running out of airframes produced in the early nineties. Recent announcements of financing guarantees from the government will undoubtedly make it easier to sell the remaining airframes, but will not eliminate the problem of building new aircraft in a factory that has wound down steadily over the last few years. This has been compounded by a marked deterioration in its supplier networks, which have decided, in the absence of orders, that there are other ways to try and survive in Russia's harsh industrial economy.
In macro terms, the demand profile of the Russian market continues to look encouraging given the usual criterion of size and dispersal of population. The story, in the short term, remains patchy and there remains an antipathy to Russian products among the major carriers, despite public pronouncements, loyalty is currently only assured through large tariff barriers. The introduction of leasing schemes, will also, for some operators at least, remove the excuse for not buying Russian aircraft.
The scenario is still not one of rampant growth or even reasonable returns for external investors. Kaskol, the dark horse of Russian aerospace investment, has made it clear that, despite its stake in Volga Dnepr, through which it operates considerable influence over the airline, it is not interested in major aircraft; instead focusing on the continued development of the Gzhel at Sokol. So why does NS wish to follow the route of the acquisitive Siberian Aluminium in expanding its holdings into areas with which it has little familiarity resulting in an investment at Aviakor that it is desperately trying to find a home for and is rumoured to have discussed merging with Aviastar as a producer of wings.
The decision to invest may be down to the NS's lack of industry experience and the influence of those in the industry that see Aviastar as the plant "most likely to succeed ". Top down analysis would suggest that it has a product that, although dated, appears to be close enough to Western equivalents to encourage interest even from hard-bitten express parcel operators. Its major market - the medium haul segment - has recently experienced a heavy reality check, in the form of the elimination of many aircraft from European flights for failure to install TCAS equipment, even after a lengthy extension. While limited dispensations have eased the situation, operators must be waiting in trepidation for the regulation on noise and emissions to be introduced next year. The stance of the Russian government also suggests that it will - in principle at least - force through the Russian adoption of international standards, as part of an ongoing programme to clean up Russia's weaker airlines.
The possible move of the serial production of the Tu-334 from RSK-MiG to Aviastar, which has been much rumoured over the last few weeks, also bodes well for the plant's future, given the substantial potential for the aircraft, if the Russian government continues to keep barriers high. The development the Tu-334 has been slowed, primarily because of lack of capital at MiG: something sources within the company freely admit. It must be assumed that the reports of the move, together with the issuance of the new stock from the plant believed to be the next producer, are not entirely coincidental. The Tu-334, with renewed financing activity and general government encouragement, could be a successful package.
With impeccable timing in the circumstances, Aviastar has also announced a deal with Siemens, apparently brokered through the Ministry of Railways, in order to begin production of new railway cars. The demand for rolling stock is reported to be good in Western Europe particularly in the UK and Siemens is reported to be capacity constrained. There is also the suggestion that the plant could become involved in the production of components for agricultural equipment.
Despite the slightly brighter future of late in Russian aerospace it will require significantly more substantial changes to change the long-term picture for large aircraft production in Russia. Without substantial diversification or international collaboration, it is unlikely that the massive Aviastar plant will make anything close to what could be regarded as a reasonable return on capital employed within the foreseeable future. As always in Russia, however, one is left speculating. Aviastar and the balance of the industry has existed in limbo for a log period of time and may have started to place more importance on small changes in the environment simply because they are reasonably positive when compared with the environment in the last six years.
A note of encouragement is that a commercial operator with a proven manufacturing record has seen the upside in the plant and is prepared to put its money down in contrast to the asset strippers of old. Without this kind of commitment from both government and industry, any kind of long-term survival is impossible.