Russia & CIS Observer July 2012

www.ato.ru/rco

Russia & CIS Observer â„– 1 (34) july 2012

Russia & CIS Observer № 1 ( 34) j uly 2012

from the publisher of

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Russia/CIS Observer Quarterly is produced by:

Publisher Evgeny Semenov EditiorinChief Maxim Pyadushkin Art Director Andrey Khorkov Commercial Director Sergey Belyaev

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•AEROSPACE INDUSTRY

•AIR TRANSPORT

Irkut is contracting key MS-21

More passengers,

suppliers ..............................................2

more empty seats................................16

Ansat helicopter gets

Russian MRO providers

a new flight controls ............................4

gain strength ......................................22

Interview with Andrey Sharnin, Ilyushin Finance eyes regional Progresstech Deputy General Director ................................6

leasing market ....................................23 Top 20 Russian airlines in 2011 ..........24

Advertising Manager Oleg Abdulov Translated By: Andrey Bystrov All rights reserved.

•DEFENSE •BUSINESS AVIATION

Russian arms export: the end of a «golden age»? ....................8

The Russian business aviation market

New applications for

is recovering ......................................25

No part of this publication may be reproduced in whole or in part without the written permission of

Phazotron-NIIR radars......................11 The Russian Defense Ministry continues

•SPACE BUSINESS

A.B.E. Media.

© № 1 (34), July 2012

its UAV procurement efforts ..............12

Reviewing Russia’s space strategy ......27

Tel./Fax: +7 (495) 933 0297 Correspondence: P.O. Box 127, Moscow, 119048, Russia

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RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

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AEROSPACE INDUSTRY

Gaining pace The Irkut MS-21 developer is contracting key suppliers.

fter a protracted period of no news about the effort to develop Russia’s new Irkut MS-21 short- to mediumrange passenger aircraft, the program now appears to be gathering pace. Irkut, a subsidiary of United Aircraft Corporation (UAC), signed a final agreement in early June with the US engine maker Pratt & Whitney to select the PurePower PW1400G turbofan engine as the sole foreign-made powerplant for the future aircraft. Also in June, Bombardier subsidiary Short Brothers was identified as the supplier of the engine nacelle.

The latest development indicates that the MS-21 program has moved to inking firm contracts with the key suppliers that were selected back in 2009 г.

The first deal of a kind was the contract signed in November 2011 with Nizhny Novgorod-based Gidromash that will develop and manufacture landing gear components for the MS-21.

According to industry sources, the agreement with Pratt & Whitney envisages the development of engines for two planned members of the MS-21 family,

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the 150-seat MS-21-200 and the 180seat MS-21-300. The only difference between the two aircraft’s powerplants will be in the power settings within the 11-14.5 t (25,000-32,000 pound) range.

The largest version, the 212-seat MS21-400, will require a different, more powerful engine. The first PW1400G prototype will be assembled this year; Irkut expects to first fly it on an MS-21 prototype in 2015, followed by the service entry in 2017.

The next step was the agreement for promotion of MS-21 variant with a Russian PD-14 engine signed by UAC and Russian Technologies Corporation.

The first customer that selected this version was Aviation Capital Services, a subsidiary of the Russian Technologies, that converted into a firm order its option for 35 such aircraft at the end of June.

PD-14 design is currently under development at Perm-based Aviadvigatel, a part of United Engine Corporation, also controlled by Russian Technologies. Aviadvigatel started testing a PD-14 technology demonstrator on June 9. The company’s CEO and chief designer Alexander Inozemtsev says tests on an Il-76 flying testbed will

In June Irkut received first order for MS-21 version with Aviadvigatel PD-14 engines

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RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

ATO.ru

Maxim Pyadushkin

begin in 2014. The engine’s certification is now scheduled at 2015; its serial production is to be launched in 2017.

The baseline PD-14 model with 14 tons of thrust, intended for the 180-seat MS-21-300 airliner, will be the first from the new turbofan engine family in the thrust class of 9-18 t. The downrated 12.5-ton PD-14A is being proposed for the MS-21-200, and the uprated 15.6-ton PD-14M — for the MS-21400. The PD-14 is a two-shaft bypass engine with an unmixed exhaust. The designers aim for a 12-16% fuel economy over the existing equivalents.

According to an Irkut source, the contracts with the key MS-21 suppliers should be concluded by the end of 2012. This program involves leading international specialists, including Rockwell Collins (avionics), Hamilton Sundstrand (APU, anti-icing, and air conditioning), Intertechnique (fuel, inert gas and oxygen systems), and Eaton (hydraulics).

The MS-21 orderbook now stands at 235 firm orders and commitments. The major customers are Russian statecontrolled lessors. In 2011 Aviation Capital Services ordered 50 aircraft with the delivery in 2017-2022, the new batch of 35 airliners is planned for 2022-2025. These airframes will be let to Aeroflot for an operational leasing under the framework agreement signed in August 2011. Other MS-21 customers include the lessors Ilyushin Finance Co. (28 firm orders and 22 options) and VEB Leasing (15 and 15).

Irkut also has a tentative order for three aircraft from Nordwind Airlines with an option for another two; Irkutskbased IrAero Airlines has ordered 10.

Malaysian launch customer Crecom Burj Resources has signed a contract for 50 MS-21 airliners in the summer of 2010.

AEROSPACE INDUSTRY

Ansat helicopter gets a new flight control system Maxim Pyadushkin lthough Russian helicopter manufacturers have a historically strong position on the heavy rotorcraft market, they do not leave attempts to advance with smaller models. The Russian Helicopters holding company, the umbrella organization for this country’s rotorcraft designers and manufacturers, is developing the re-en-

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ground tests that have been on since 2011, the other for flight trials.

According to the designers, traditional hydromechanical controls could simplify promotion of the helicopter to the commercial market since the basic version’s fly-by-wire system faces certification limitations.

The 3,300-kg MTOW twin-engine Ansat was developed in Kazan in the 1990s and became the first Russian flyby-wire rotorcraft design. It was also

ATO.ru

This Ansat variant with a hydromechanical flight control is to be certified by the end of 2012

gined 3,600-kg Kamov Ka-226T coaxial-rotor helicopter, and has also ventured the program to revive production of the piston-engine Mil Mil-34S. The third product in this filed is the light Ansat helicopter developed by the holding company’s subsidiary Kazan Helicopters. Kazan is known as the production plant for Russia’s best-selling medium helicopters of the Mil Mi8/17 family; it also takes part in the program to develop the new 15,600-kg MTOW Mi-38 transport helicopter.

At the end of April, Kazan Helicopters unveiled a new version of Ansat with a hydromechanical flight control system instead of the baseline version’s fly-by-wire controls.

According to Kazan Helicopters CEO Vadim Ligay, two prototypes have already been assembled: one for the 4

the first in this country to get a foreign powerplant – a pair of 630-hp PW207K turboshafts. This light helicopter can carry up to nine passengers or 1,300 kg of cargo inside the cabin, and has the maximum range of 635 km.

Ansat made its first flight in August 1999; it was awarded a Russian AR MAK type certificate in 2004.

Because of its fly-by-wire controls, in early 2000s the Russian Air Force selected Ansat as its new training helicopter. Deliveries of the Ansat-U training version to the Russian military started at the end of 2010. At present the Air Force Training Center in Syzran has about a dozen of the type.

Ansat’s commercial record however was not as successful — ironically, due to the same fly-by-wire controls. Five helicopters were delivered to South

RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

Korea in the early 2000s for the local forest service and police force.

Problems began when one of them crashed into a wooded area in 2006, killing the pilot. “After this incident the certification requirements for fly-bywire helicopters have been tightened,” explains Ligay. The Russian aviation authority issued a new type certificate for the improved Ansat-K variant in 2010.

However, the modified version was not allowed to carry passengers, which seriously limited its commercial prospects.

According to Ligay, full certification of the Ansat baseline will only be possible once the certification requirements are determined for helicopters with flyby-wire controls. This is why the Kazan designers decided to switch to traditional hydromechanical controls in order to simplify certification of Ansat as a passenger transport. According to Kazan sources, the flight control system replacement does not affect the helicopter’s weight and performance.

Ligay expects the new Ansat version to be certified by the end of 2012, after which the sales campaign will be officially launched. The manufacturer plans to eventually reach production rates of 20 airframes per year.

In parallel, Kazan Helicopters is looking into further evolution of Ansat.

A few years ago it showcased the tandem-seat Ansat RC military reconnaissance version, but now the company’s efforts seem to have shifted to a stretched variant. Kazan is currently working to significantly upgrade this model, bringing its MTOW up to 4,500 kg. Ligay says this variant will require new engines; he does not rule out the possibility of using the 800-hp VK800V turboshaft which is under development at the St Petersburg-based Klimov company.

AEROSPACE INDUSTRY

Russian engineering expertise for the global aerospace industry ThE RUSSIAN

COMPANY

PROgRESSTECh IS ThE LARgEST PROVIDER OF AEROSPACE EASTERN EUROPE. SINCE ITS ESTABLIShMENT IN 1999

ENgINEERINg SERVICES IN

ThE COMPANY hAS TAkEN PART IN VIRTUALLY ALL ThE MAJOR INTERNATIONAL AIRCRAFT DEVELOPMENT PROgRAMS. IT hAS OFFICES IN

ARMENIA AND UkRAINE, AND ALSO SPIRIT AEROSYSTEMS OF wIChITA, USA. ANDREY ShARNIN, PROgRESSTECh DEPUTY gENERAL DIRECTOR FOR BUSINESS DEVELOPMENT AND AEROSPACE PROgRAMS, ShARED wITh RUSSIA & CIS OBSERVER ThE SECRET OF hIS COMPANY'S SUCCESS.

— Progresstech has experience working with many leading international aerospace manufacturers. what projects are you currently involved in?

— Our company continues cooperation with Boeing on a number of their programs, including the Boing 787 Dreamliner model and its future modifications. In cooperation with Spirit AeroSystems we provide support for the Airbus A350 XWB program and for wing design and manufacturing for Gulfstream G280 and G650 aircraft. Jointly with Spirit we are actively involved in designing pylon components for the Bombardier CSeries and Mitsubishi Regional Jet airliners.

Apart from these current projects we have also been involved in supporting

sify our competency we have formed a team of specialists with prior rotary-wing experience; they are working successfully on a number of Kamov commercial products. Our cooperation with Kamov started with the program to drastically modernize the Ka-226 light helicopter. Another Kamov commercial product we are involved in is the Ka-62 medium helicopter.

— That makes an impressive list of projects. how do you avoid conflicts of interests in working with so many manufacturers?

— You have raised a very good topic; aerospace integrators are extremely strict when it comes to the possibility of conflicts of interest. In my experience, such conflicts are avoidable for as long

“We are in a position to offer our customers a range of business models for cooperation” the Bombardier Learjet 85 program.

Domestically, we continue to actively participate in the Sukhoi Superjet 100 program. Our other priority in the Russian aerospace sector is the project to create the MS-21 single-aisle family, which we also hope to take part in.

Our activities are not confined to fixedwing aircraft. As part of an effort to diver6

as you observe the customer’s requirements to the letter with regard to confidentiality and protection of intellectual property. The only solution here is to physically separate the different engineering teams and the information resources they use. We do not hold a monopoly on this knowledge; foreign companies practice a similar business

RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

Progresstech

RUNS A JOINT VENTURE wITh

model, providing a range of engineering services to a variety of customers both integrators and Tier 1 suppliers rather than working with a single client.

— what is the secret of Progress tech’s global competitiveness?

— I would mention the following two most important factors of our competitiveness. First, we employ qualified engineering personnel that have undergone additional training in order to be able to provide quality services to a variety of customers. Second, Progresstech offers turnkey solutions.

I would like to specially emphasize the high qualifications of our specialists, who were educated at the top Russian and CIS universities.

Progresstech has now reached a new qualitative level; apart from providing high-quality engineering personnel who are capable of completing the most complex tasks, we are in a position to offer our customers a range of business models for cooperation.

This interview was prepared

by Maxim Pyadushkin

DEFENSE

Leonid Faerberg / Transport-Photo.com

Russian arms export: the end of a «golden age»?

konstantin Makienko he nominal value of Russian arms exports continued to grow in 2011, reaching 13.2 billion dollars against the previous year’s 10.4 billion. Nevertheless, there are hints at a systemic crisis on this front. Russia lost three important arms procurement contracts last year. It did not even get shortlisted in the Indian MMRCA tender for 126 medium multirole fighters; it also lost the Indian contract for 22 combat helicopters; and perhaps most devastatingly, Moscow failed to sell Kilo-class submarines to the Indonesian Navy, which opted instead for three examples of the obsolete Korean Project 209 design built under a German license. Each of these failures has its own explanations, but taken together they indicate an accumulation of negative factors affecting the prospects of Russian arms exports.

A more precise indicator of something being quite wrong in Russia’s arms exporting business was last year’s reduc-

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tion in the size of the orderbook, for the first time since 1999. The value of orders landed by the Rosoboronexport stateowned arms trader shrank from $38.5 billion as of late 2010 to $32.5 billion by the end of 2011. According to Mikhail Dmitriev, former head of the Federal Service for Military Technical Cooperation, the overall value of Russia’s standing export contracts reduced from $48 billion as of late 2010 to $40 billion in late 2011.

It is clear that for the first time in years, the value of the new contracts signed in 2011 proved lower than the value of deliveries made that year. We may assume with confidence that the trend will continue into 2012, when the overall value of deliveries may reach about $14 billion thanks to the planned handover of the aircraft carrier Vikramaditya and two Talwar-class frigates to India, and also the recently completed delivery to that country of a Project 971I submarine. It is highly unlikely that new contracts will be signed to a commensurable total sum, mean-

RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

ing that the value of the Russian export orderbook will continue to decrease. In several years from now this trend will result in shrinking deliveries.

Russia’s traditional markets: saturation, reorientation, and embargoes The first set of factors affecting Russia’s positions as a global arms exporter is related to the situation on Moscow’s traditional export markets.

China, which remained the largest customer of Russian armament until about 2005-2006, has considerably reduced purchases of Russian weaponry due to the continuing development of its domestic defense industry. In 2000 and 2001, China accounted for 60% in the overall volume of Russian arms export; at present the figure hardly exceeds 4%.

China these days is almost exclusively interested in Russian aero engines and rotary-wing aircraft in various roles.

Even though Chinese interest in the newest Russian armament developments, including Su-35S fighters and S-

DEFENSE

400 SAM systems, has somewhat re-intensified of late, the volumes of potential contracts from Beijing will never again reach the levels of the 1990s or even the early 2000s. Furthermore, China is increasingly competing against Russia on the international arms market.

The competition in the Indian arms market is getting ever fiercer. All the major arms exporters except China are currently represented in India. The country’s growing financial capabilities prompt New Delhi to increasingly shift its interest to the higher price segment, in which Russian products loses the competition to hi-tech Western and Israeli offerings.

The recent wave of Arab Spring revolutions has cost Russia the promising Libyan market. The value of recently signed (but never implemented) arms contracts with Tripoli stands at 1.3 billion euros; together with the potential contracts, Russia’s overall losses reach $4.5 billion. It is quite possible that Russia will similarly lose the Syrian arms market; the standing orders from Damascus are valued at $3.5-$3.8 billion. Interestingly, the Arab Spring has boosted Algerian demand for Russian armament, which may eventuate in the signing of contracts equal in volume to the 2006 package. On the other hand Algeria, with its secular nationalist military regime topped by an authoritarian gerontocracy, is itself a possible candidate for the next Arab Spring victim.

President Dmitry Medvedev’s decision to join the international sanctions against Tehran lost Russia the Iranian

arms market worth up to $1 billion a year. The economic hardships and uncertain political future of Venezuela make the possibility of new large contracts from Caracas quite dubious.

As we can see, Russia’s traditional arms export markets are either oversaturated, partially or completely reoriented to alternative suppliers, or inaccessible due to international sanctions.

The only remaining customers with a steady interest in Russian arms are Vietnam and, to a lesser extent, Algeria; together these countries may purchase $2 billion to $3 billion worth of Russian arms a year. Combined with Indian contracts and the demand from other customers Russia could be annually exporting weapons to the tune of $6-8 billion — much lower than the levels of the previous years.

Competitive offers: a three-year pause?

Another negative factor is that Russia’s prospective weapons systems may only be offered for export in three to five years from now. In some cases this is due to the continuing development efforts, whereas in other cases Russian defense enterprises have their production capacities filled with contracts in the interests of the national armed forces.

In the heavy fighter segment, the current Su-30MK2 export fighter has grown too obsolete to be marketed successfully. The Su-30MKI/MKM/MKA family is more recent but also requires modernization. Only one more large-

RUSSIA’S DEFENSE EXPORT 15000 Total deliveries Deliveries via Rosoboronexport

$ million

12000 9000 6000 3000

0

2 2006

2007

2008

Source: CAST

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RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

2009

2010

2011

scale delivery of these aircraft is still possible: India is set to buy an additional 42-ship batch of Su-30MKI fighters.

The program to develop the more advanced Su-35 fighter will take another three to four years to complete. In addition, the international heavy fighter market, limited to a relatively small number of countries, is fairly saturated, and Russia currently has nothing competitive to offer in the medium and light fighter segments.

In the military transport aviation segment, production of the Ilyushin Il-76 transport, which still enjoys a high market demand, will not be launched in Ulyanovsk for the next two to three years. This production facility will most likely be quite busy working on domestic orders. An upgraded version of the Il-76, known as the Il-476, will have a price tag of up to $100 million, which will limit its chances on the international markets.

New development paradigm for Russia’s military aviation industry On the other hand, a possible reduction in the size of arms exports may only affect the Russian defense industry in terms of revenues, since the profitability of export contracts is normally much higher than that of domestic orders. In fact, domestic demand for weaponry often grows at a very high rate, with annual growth in the size of contracts for individual systems sometimes reaching 300%. Overall, under the state armament program through to 2020, some of the Russian defense enterprises will have to ramp up their output by 10 times in order to keep up with the orders.

Russian aerospace manufacturers, for example, in the past months alone received Defense Ministry contracts for 92 Su-34 frontline bombers, 30 Su-30M fighters, and 24 MiG-29K shipborne fighters. The export business model, which was driving the domestic defense industry for most of its post-Soviet history, is now getting replaced by a more traditional paradigm, under which the national armed forces act as the defense industry’s primary customer.

DEFENSE

New applications for Phazotron-NIIR radars — which area of business is particularly important to Phazotron-NIIR today?

— This is a tricky question. From the commercial standpoint the most important activities would be the ones which have the potential to bring profit.

From the scientific standpoint we concentrate on meeting, or better yet exceeding, the design specifications.

Good products sell themselves.

In the field of aviation applications our top priority at the moment is developing the Zhuk radar family for the MiG-29SMT and MiG-29K fighters, and also for the upgraded MiG29UPG variant. The second most important area of work is related to rotary-wing aircraft. The Arsenyevbased Progress factory manufactures Kamov Ka-52 helicopters, which are fitted with the Phazotron-NIIR Arbalet millimeter-wave radar. This contract is very profitable for our corporation.

Another helicopter-related program is to upgrade the Ka-27M helicopter with our Kopye-A radar; this design is currently undergoing flight tests, we are aiming to complete the trials in August, after which series production should start. Kamov plans to develop the Ka-27PS SAR version of the helicopter, which would also need a radar.

As for maritime applications, which is a new field for us, we began tests of a ship-based AESA radar in June. The radar ensures total situational awareness around the ship and provides its artillery systems with target designation against low-flying aircraft and anti-ship missiles.

— Phazotron-NIIR has also started work to develop a radar for the Yakovlev Yak-130 combat trainer.

— This is correct, it was decided to fit the Yak-130 with a radar so it could be used as a light strike aircraft, armed with guns or unguided ordnance, against terrorists and smugglers. The armed version could be offered to those countries which currently buy the baseline Yak-130 trainer. Since installing AESA radar would considerably increase the price of the aircraft, the decision was made to use a centimeterwave design with a mechanically scanned slotted array. We have started development of such a radar, currently known as FK-130. Flight tests are expected to begin in 2013.

— what about your key product, the zhuk-AE AESA radar?

— We currently are building a ZhukAE example with a full-scale, fully functional AESA for the MiG-35 fighter. Its assembly will be completed in August. We have seen a change of heart on the part of the customer: previously the Russian Air Force did not consider an AESA-equipped MiG-35 but now, under the government armament program, deliveries of this radar are to begin in 2014. This is something we have long been looking forward to — having Russian warplanes fitted with the most advanced radar possible.

We have effectively completed development of this variant, the only thing left now is to launch its series production. I am already beginning to talk to personnel, preparing them for a change in approach to AESA technology. We should change the design of the trans-

Phazotron-NIIR

YURY gUSkOV, gENERAL DESIgNER OF RUSSIA’S LEADINg RADAR DEVELOPER PhAzOTRON-NIIR, TOLD RUSSIA & CIS OBSERVER ABOUT ThE APPLICATIONS FOR ThE CORPORATION’S PRODUCTS AND OUTLINED ThE FUTURE OF RADAR TEChNOLOgY.

mit/receive modules by moving to a 3D ceramic manufacturing process; this would dramatically reduce the size of the radiating surface. Many enterprises in Russia are prepared to manufacture such modules. I hope that we will start their development this year. A further step would be to move on to digital AESA technology. It provides numerous advantages, and from there it would be easier to transition to conformal AESA radars that could be made to better fit within the outlines of the fuselage. We are conducting active research in this field because conformal radars would be very well suited for both fixed-wing, rotary-wing and maritime applications.

If we see this technology through to mass production we will be able to make it sufficiently reliable and bring its cost down, because cost is often a very important factor.

This interview was prepared

by Maxim Pyadushkin

RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

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DEFENSE

Seeking out tactical unmanned capability The Russian Defense Ministry continues its UAV procurement efforts

Denis Fedutinov ussian President Vladimir Putin in mid-June said the country must develop a range of new unmanned aerial vehicles (UAV). Consequently, on top of purchasing foreign UAV designs several years ago the Russian Defense Ministry will now shop for unmanned systems domestically.

It appears that in terms of mini-UAV requirements the ministry has settled for the systems readily available on the domestic market. This class is currently well served by Russian manufacturers.

In the MALE (medium altitude, long endurance) UAV class, two programs were started in Russia last year, led by St Petersburg-based specialist Transas and by Kazan-based Sokol design house. Transas is developing a system weighing up to 1 t, whereas Sokol is working on a heavier vehicle with up to 5 t MTOW. The companies signed a strategic partnership agreement to ensure cross-platform commonality of the control system and mission equipment. Flight tests of both vehicles are set for 2014; deliveries should start in 2016.

There is however one more class of unmanned aerial systems, fitting in between mini-UAV and MALE: tactical vehicles. It is exemplified by the AAI RQ-7 Shadow. The Defense Ministry’s procurement plans for such systems are as yet unclear. The Russian military obviously needs the capability, which cannot be provided by the several obsolete designs currently in service. Russian UAV developers have analysed the combat experience of foreign countries that used tactical unmanned aircraft in

The Russian military are now choosing between domestic UAV designs and foreign products like this Forpost unmanned aircraft based on IAI Searcher Mk II model

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various military conflicts of the past several decades. The results of this study indicate a high effectiveness of such systems.

The Defense Ministry has two options in procuring tactical UAV: it may decide to purchase some of the systems available on the market, or it could request the industry to develop a new one to its specifications. The latter seems to be the more probable scenario. In this case the ministry will have to first identify the designer for the new UAS. There are several options to choose from.

Possible contenders One possible candidate is Vega Radio Engineering Corporation, which still formally leads all UAV development efforts in Russia. On the other hand, Vega’s reputation could not be described as exactly positive: the Defense

RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

Ministry certainly has not forgotten the corporation’s previous failed attempt to create the Tipchak tactical unmanned system, a design developed by its Rybinsk-based subsidiary Luch.

Funded by the Russian military, the system received negative feedback from initial operators.

Another Vega subsidiary, the Kulon research institute, could take part in the development of tactical unmanned aircraft. Back in the Soviet times Kulon created the Stroy-P system equipped with Pchela remotely-piloted vehicles.

On the other hand, the Vega management might decide to prevent competition between its subsidiaries.

Several companies which are part of Russia’s United Aircraft Corporation (UAC) stand a chance to get the potential UAV development contract from the Defense Ministry. The most probable candidate is Tupolev, one of

DEFENSE

Izhevsk-based ZALA company, known for its mini-UAV solutions, attempted several years ago to break into the larger unmanned class by proposing two tactical unmanned projects of 70 kg and 200 kg MTOW. However, practise shows that no matter how enthusiastic, a company which originally specializes in what can essentially be described as little more than RC models will usually lack the resources for creating more complex systems.

In theory other contenders may emerge from among businesses without prior tactical UAV experience – but this is exactly the circumstance which makes their chances of seriously contesting the possible contract fairly slim.

Possible requirements It would be safe to assume that in designing the specifications for a future tactical UAV the Russian Defense Ministry will be guided by the characteristics of existing foreign systems of the same class.

High reliability could be one of the primary requirements. In terms of operational specifications the future system could be expected to operate in harsh climates, in the temperature range of 40 to +50 degrees Celsius. It is highly likely that the system will be expected to

ATO.ru

Russia’s UAV pioneers. In the Soviet times Tupolev designed a range of large unmanned aerial vehicles, including the Reys, Reys-D, and Strizh models.

Some of these aircraft continued service with the Russian army until quite recently. Tupolev attempted to develop new unmanned systems in the mid2000s; at one of aerospace exhibitions the company demonstrated a project to build a 200-kg tactical UAV. The project never took off owing to financial difficulties at Tupolev.

Irkut Corporation, another UAC subsidiary, also has experience developing tactical unmanned systems, including Irkut-200, which was initially meant to use ADS Aerostar airframe.

The Israeli manufacturer subsequently pulled out, forcing Irkut to create an unmanned vehicle on its own. This circumstance considerably affected the development deadlines. The uncertain future of the program seems to have influenced Irkut’s decision last year to delegate all UAV work to its subsidiary Irkut Engineering. This move suggests that the Irkut-200 program will now be funded solely from the corporation’s budget, which is not going to improve Irkut’s chances of getting the Defense Ministry’s contract for the development of a future tactical UAV. Transas, a relative newcomer to the UAV market, merits a special mention.

Originally a specialist in training simulators, the company ventured into the field of unmanned systems several years ago and quickly created a range of Dozor unmanned aircraft. Transas’ most successful model, Dozor-100, is a tactical UAV. Modernization of Aviation Complexes (MAK) is another simulation specialist that has diversified into UAV development. In the past few years MAK has repeatedly showcased its short-range Colibri UAV at various trade shows; at the MILEX 2011 exhibition in Minsk the company demonstrated the Chibis tactical UAV. Flight tests were originally set for autumn 2011 but the current status of the Chibis program is unknown.

operate from unprepared sites, implying that catapult launch and parachute-assisted recovery will have to be supported at least as an option. Another important capability that will probably be required is navigation using both the GPS and Russia’s Glonass systems.

The requirements are likely to include a high quality of imagery transmitted by on-board sensors, which is essential for target identification. The precision of target designation is also very important. Other capabilities might be a plus, including intelligent automated data processing, automatic target recognition, automatic map stitching, etc.

Another important requirement is for the vehicle to have a low acoustic, thermal and radar signature. It is possible that the vehicles will be required to carry IFF transponders, and also ADS-B units to enable operations in airspace shared with other UAV and manned aircraft. The future tactical UAV will probably also have to be able to communicate with existing and prospective net-centric information management systems of various levels.

The possible timeline for the creation of such a UAS is difficult to predict. If the relevant decision is made, the program will probably take at least two years to complete.

Transas’ most successful model is the tactical UAV Dozor-100

RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

13

MARKET SUPPLEMENT

WELCOME TO RUSSIA RUSSIA CREATES A SpECIAL ECOnOMIC zOnE fOR AvIATIOn

Russia is known for its solid aerospace competencies, particularly in the fields of military aviation and rotary-wing aircraft.

In the past few years, the Russian government and industry have been making serious efforts to put this country back among the leading global manufacturers of commercial aircraft. production is ramping up for Russia’s new Sukhoi Superjet 100 and Antonov An-148 regional airliners, and the program to develop the Irkut MS-21 mainline passenger aircraft is well underway.

However, in contrast to the olden days when virtually all aircraft components would be indigenous, at present the Russian aerospace industry heavily relies on international cooperation. Many European and American companies supply components for the Superjet 100 and Tupolev Tu-204 jetliner models as well as for a range of Russian-built helicopters; these manufacturers plan to further expand their business in Russia.

Sooner or later the management of such companies will start to think about setting up parts pools and MRO centers for their aircraft in Russia. Other companies take even more serious decisions to organize production joint ventures here. The latter include Liebherr, AgustaWestland, and Hamilton Sundstrand, which have built production facilities in Russia — independently or jointly with local partners.

The Russian federal and regional authorities are interested in welcoming international hi-tech aerospace companies, and provide every assistance to investors. One of the measures to stimulate foreign investment was the creation of a special economic port zone (SEpz) at Ulyanovsk vostochny airport.

Ulyanovsk being a renowned aerospace center, the city and region have everything that is needed for setting up and operating the SEpz, including the infrastructure, qualified personnel, and established international business links.

The Ulyanovsk vostochny SEpz is intended as a gateway to Russia for international aerospace companies, helping to keep investor risks to a minimum and improve the cost effectiveness of international projects. The SEpz will initially take up an area of 120 ha, to be further expanded to 640 ha. The SEpz concept envisages three major types of activities: manufacture of aircraft and associated components; aviation MRO services; storage, logistics, and wholesale operations.

What makes the SEpz attractive to investors? The Russian government through the Ministry of Economic Development and the Ulyanovsk Region administration will use its own resources to build the infrastructure required for successful operation of aircraft enterprises: roads, including airfield taxiways;

electricity and water supply, gas distribution networks, etc.

SEpz residents will enjoy considerable tax reliefs: almost all of the taxes are nulled and Region Government may return to a company a part of income tax paid by its workers. The land is provided at minimum prices. In addition, the SEpz being a free customs zone, commodities to be imported into it from abroad do not have to be declared, nor are they subject to fiscal duties or vAT. This provides a unique advantage for many types of business, especially those involving deliveries of aircraft parts and materials.

Additional incentives for investors are the complete transparency, total absence of corruption, and universal administrative support offered to SEpz residents. Each individual project to be implemented within the zone will be supervised by the governor of Ulyanovsk Region and by the relevant department of the Ministry of Economic Development. The aerospace competencies and expertise accumulated in Ulyanovsk, the availability of qualified personnel, and the close proximity of several aerospace educational institutions are also among the factors important to investors when making decisions on where to implement their projects.

These lucrative investment incentives, coupled with the efforts of the SEpz managing company Special Economic zones JSC to spread the word about the new zone, are already bearing fruit. The SEpz is expected to start operation in late 2013 but the Ministry of Economic Development has already registered three businesses as SEpz residents. At the MAKS 2011 International Aviation and Space Salon, Minister of Economic Development Elvira nabiullina awarded residence certificates to volga-Dnepr Technics Ulyanovsk, fL Technics Ulyanovsk, and vityaz Avia.

The former two companies will contribute to setting up a so-called MRO supermarket in the SEpz — a network of

MARKET SUPPLEMENT engineering centers offering a wide range of aviation equipment by different manufacturers and providing universal MRO support. volga-Dnepr Technics Ulyanovsk will set up an MRO center in the SEpz, with two servicing hangars for up to four widebody aircraft, primarily for the Antonov An-124 Ruslan and Boeing 747 fleet operated by volga-Dnepr Group. further down the road volgaDnepr Technics Ulyanovsk is planning to launch an operation for Boeing 747 passenger-to-cargo conversions. fL Technics Ulyanovsk is a subsidiary of the Lithuanian company fL Technics which is already well established on the Russian MRO market. Its SEpz project envisages building three 80-by-60-meter hangars to service foreign-built narrowbody types, primarily Boeing 737s and 757s, the Airbus A320 family, ATR42/72 and SAAB 340/2000 turboprops.

The US company AAR Corporation expects to implement a similar project in the SEpz, jointly with a Russian private investor. AAR is one of the two leading players on the US MRO market and one of the top five major global MRO providers. The project has already gained approval from the SEpz supervisory board.

Another planned element of the SEpz MRO supermarket is an MRO center for Diamond DA42 light aircraft, to be set up by the Austrian OEM Diamond Aircraft jointly with Ulyanovsk Higher School of Civil Aviation, the largest Russian customer for this type.

There is already an aircraft painting specialist operating at Ulyanovsk vostochny airport. The Spektr Avia painting facility will contribute to aircraft maintenance services at SEpz. The MRO supermarket project is therefore shaping up nicely.

As for the aircraft manufacture aspect, general aviation manufacturers are showing high interest in the SEpz. vityaz Avia, for one, is planning to build an assembly line there for Bombardier DHC-6 Twin Otter Series 400 turboprops seating up to 19 passengers. nizhny novgorod-based company prom Avia is planning to set up an assembly shop in the SEpz for its Accord

six-seater aircraft. for this purpose the manufacturer has set up the Aerotekhnologia subsidiary, which is currently preparing to apply for SEpz resident status. prom Avia already operates a production facility in nizhny novgorod, but is required there to pay customs duty on imported engines, propellers, and avionics; if sold for export, these extra costs will make the aircraft prohibitively expensive. By contrast, manufacturers operating from within a special economic zone do not have to pay customs duty.

GA aircraft will not be the only products manufactured in the Ulyanovsk SEpz. Aviapribor Holding, a subsidiary of the Russian Technologies state corporation, will build a production and servicing center there to manufacture, maintain and repair hi-tech avionics instruments for foreign and domestic aircraft.

The Ulyanovsk branch of Special Economic zones JSC works with all the major manufacturers across the aerospace industry, from fixed- and rotarywing aircraft to aero engines to compos-

Aircraft Corporation is setting up the Aerocomposit production facility in Ulyanovsk that will manufacture the composite wing for the MS-21 airliner.

Aerocomposit’s suppliers – Russian and international leaders in the production of composite parts and raw materials – may also set up facilities in the SEpz. Eventually, an entire “composites valley” may emerge in Ulyanovsk and in the SEpz in particular, with shared laboratory and production equipment.

In terms of logistics the plan is to create an aviation cargo hub in the SEpz in order to encourage major freight operators, logistics providers, express mail and package delivery companies to set up their terminals and sorting centers in the Ulyanovsk zone. This work is already in progress.

The Ulyanovsk branch of Special Economic zones JSC invites aerospace companies to cooperation. The Ulyanovsk vostochny SEpz is welcoming investors, and they are already on their way. vacant land plots are still available.

ite materials and their components, in order to attract investments and technologies to the SEpz. Special attention is paid to working with composites specialists, since composite materials are playing an increasingly important role in aerospace manufacturing. Several composites manufacturers already operate in Ulyanovsk, including the Aviastar-Sp plant and the Ulyanovsk branch of the vIAM research institute of aviation materials. United

www.russez.ru JSC “Special Economic Zones”, branch in Ulyanovsk 29, 40 let Pobedy Street, 432059, Ulyanovsk, Russia ☎ +7(8422)20-70-81, +7(8422)50-24-68  ulyanovsk@oao-oez.ru LOCATION AT FARNBOROUGH INTERNATIONAL AIRSHOW – Hall 2, booth C28 – Ulyanovsk Region.

AIR TRANSPORT

More passengers, more empty seats Air traffic figures are growing in Russia but the carriers’ capacity seems to be growing even faster

Alexei Sinitsky ussian airlines carried over 64 million passengers in 2011, flying a total of 166.7 billion passenger kilometers. This indicates an annual growth of 12.6% and 13.4% respectively, or half the growth rate registered in 2010.

Official comments stressed that the 2011 passenger numbers had exceeded those recorded in 1992, the year when Russian civil aviation entered a period of radical reforms. It should be noted though that the market was on the decline in 1992; a comparable figure for a growing market was last reported back in 1976. In other words, rather than clambering out of a 20-year recession the industry last year rolled back a full 35 years in terms of passenger numbers.

R

In addition, the very structure of air traffic has radically changed, as witnessed by the average sector length which is calculated by dividing the total number of passenger kilometres flown by the total number of passengers carried. The average sector length grew substantially in the 1990s as a result of actively developing international route networks; it still continues to grow, indicating that the greatest growth on the market is to be found in the sector of the more profitable international air services.

Continuing concentration The Russian air transport sector is witnessing a continuing concentration of services in the hands of the top five airlines, which together accounted for 62.4% of passenger kilometres flown

Sergey Sergeev

In terms of passengers carried on international routes NordWind moved up to fifth on the list of Russia’s largest carriers

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and 57.9% of all passengers carried on the domestic and international routes (see p.24). This is 4.2 and 4.8 percentage points higher, respectively, than the 2010 results. The average growth rate for the top five carriers were also higher than the industry average: passenger kilometres grew by 21.6%, and passengers carried by 22.6%, compared to the 13.35% and 12.59% growth across the industry.

Aeroflot and Transaero preserved their first and second positions on the list of the largest Russian carriers.

Transaero demonstrated a better growth rate, particularly on international routes. UTair Aviation led the top five airlines in terms of growth, beating S7 Airlines to the third place by a narrow margin. However, continuing consolidation of assets and the establishment of air carrier groups are mak-

MARKET SUPPLEMENT

Russian Researchers Expect a Leap in Short-haul Efficiency Russian researchers continue to push forward a proposed medium-haul, widebody aircraft design which has been under development since 2010 in the framework of an expanding joint program involving a number of Russian and international research and consultancy organizations, including the Central Aerohydrodynamics Institute, the International Air Transport Association, the MATs Inter-Sector Analytical Cente), Infomost Consulting, and SH&E/ACf. Widely known as frigate Ecojet, the project was launched in the form of a self-funded initiative by the private diversified aviation group Rosaviaconsortium, whose activities include the development of civil aircraft in Russia. Over the last 15 years the Rosaviaconsortium team of aircraft engineers has been behind several development programs, including the cargo version of the Tupolev Tu-204 jetliner (several Tu-204C examples have been successfully operated by TnT in Europe) and also the Tu-204-300, a shrink version of the same baseline. frigate Ecojet is based on a fundamentally new, innovative aerodynamic and structural design. Work on the aircraft is being undertaken in conjunction with the Russian center for aviation science at the Central Aerohydrodynamics Institute. It stands to become a major platform for advanced design technology and innovation in the Russian aviation industry. The main objective of the program is the development of the frigate Ecojet next-generation widebody short- and medium-haul aircraft that would be competitive on the international civil aviation market through the application of conceptually new aerodynamic and structural design.

A study of the overall trends in aircraft development and the most advanced Western aircraft design reveals that the conventional aircraft body design has reached the maximum level of aerodynamic refinement, and that future perfection of design stands to benefit most from exploiting the application of new aerodynamic schemes. The completely new design approach of the IS-1 aircraft represents an engineering breakthrough potentially satisfying the needs of next-generation aerodynamics and serving as a prototype for future development in this area.

The result of the conceptual design phase demonstrated the feasibility of a new widebody aircraft for short- and medium-haul routes with low technical risks. The aircraft demonstrates a high level of safety and comfort, as well as a high degree of competitiveness.

Concurrent with the aircraft development process using an integral aerodynamic scheme, engineers have obtained a wealth of experience and taken out more than 50 patents. frigate Ecojet is expected to enter series production in 2019-2020. Its operational performance is expected to exceed that of the most advanced civil aircraft of 2010 by 15-20%. The main characteristic of the twin-engine aircraft is an elliptical fuselage which would accommodate 300350 passengers in a three-class, tripleaisle configuration. Contemporary studies of the global air transport market have revealed a segment with a flight range of 3,000 to 4,000 km in which the operation of widebody aircraft is very effective. Over 56% of all global flights of widebody longhaul aircraft is actually for less than 3,000

km. In some regions of the world this percentage is much higher.

Analysis of the Russian air transportation system provides firm data substantiating a flight range bracket between 500 and 3,500 km as the core for a potential target market segment. Consequently, a key market requirement for the range vs. maximum payload criterion could be set at 3,500 km. Another key market requirement is a single-class capacity of 295 to 300 seats. Currently the frigate Ecojet project team is considering various engines by leading international suppliers, including the pD-18R and pS-90A20 turbofans as well as the latest Rolls-Royce and pratt & Whitney designs. The selected engine is to achieve an increased fuel efficiency of 10-16% and save 10 -15% on the life cycle cost as compared with the existing pS-90А2, pW2000, and RB211-535E4 models.

Analysis of airline route networks has demonstrated that the Ecojet’s 302-seat version operating at ranges of up to 3,500 km will exceed the fuel efficiency parameters of all same-class aircraft currently in operation on these routes by 25%. During flights with 352 passengers to a range of 2,500 km, the fuel efficiency gain would reach 30%.

Currently the frigate Ecojet team is gathering an impressive consortium of international consultants including Ernst &Young, ICf SH&E and Infomost Consulting, as well as Russia’s MATs to study scenarios of future development of the project - either as a stand-alone effort or a part of certain national, e.g. UAC’s potential wide body program, or international venture.

AIR TRANSPORT

ing precise analysis of performance reports difficult: the business groups no longer coincide with the carriers for which performance data are available.

For example, the combined 2011 results for S7 Airlines and its subsidiary Globus are higher than those for UTair Group, which also includes the UTair Express regional feeder airline.

Aeroflot, Transaero, and Rossiya kept their first, second, and fifth positions respectively in terms of passenger kilometres flown on international routes. NordWind Airlines and OrenAir swapped their third and fourth positions; in terms of passengers carried NordWind moved up from eighth position to fifth on the list. The business models of both these carriers are largely dependent on their cooperation with the Turkish tour operator Pegas Touristik. Now that OrenAir is in the process of being acquired by Aeroflot Group, it appears that Pegas Touristik is redistributing passengers in favour of NordWind in a bid to protect its own business interests.

A number of serious changes took place on the Russian domestic market last year. Transaero came fourth in terms of passengers carried, and progressed from fourth place to second in passenger kilometres flown. The airline is obviously intensifying its domestic operations between European Russia and the Far East; its primary competition on these routes is Aeroflot. S7 Airlines kept its third position in pas-

sengers carried domestically but dropped from second to fourth place in terms of passenger kilometres flown. Its subsidiary Globus climbed from eighth place to sixth in passenger kilometres, and from 11th place to seventh in passengers carried; this indicates a redistribution of passenger traffic within the S7 Group network.

One of the most significant events last year was the folding of Russia’s only two low-fares airlines. Acquisition of Sky Express by Kuban Airlines was completed in November 2011, and Avianova ceased operations in October.

Prior to their exit from the market both carriers demonstrated relatively good performance results. Avianova last year moved from sixth place to eighth in terms of passengers carried (the airline’s fleet never exceeded six Airbus A320s), whereas Sky Express, which reported an acute fleet shortage last summer, moved from ninth to 15th place in passengers carried, and from 12th place to 19th in passenger kilometers flown. Both airlines’ problems were internal rather than external. The lowfares market niche in Russia is expected to remain vacant for some time.

Overall, the number of Russian air carriers continues to shrink. Individual representatives of the country’s aviation authorities are being quite frank about this being the officially endorsed policy aimed at reducing the number of operators. They usually defend this position by citing flight safety and care for

NUMBER OF AIRLINES IN RUSSIA

300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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the passengers. International practice certainly does not indicate that flight safety is influenced in any way by the size of the airline. If anything, cutting the numbers of smaller carriers is detrimental to the accessibility of air transport in those regions where the demand for air services is particularly high. All talk about there being too many airlines is also beside the point. There were 976 commercial airlines operating in Europe last year.

Russia is setting a negative record of witnessing no new carriers on a growing market. Asked directly why this is the case, head of the Federal Air Transport Agency Alexander Neradko said: “Commercial transportation, in particular passenger transportation, is the highest league of the air transport sector and therefore very difficult to enter.” At the same time, in his words, “the doors are open” to new entrants: an airline wishing to obtain a certificate may do so by demonstrating the seriousness of its intentions, an own fleet of aircraft, a working airworthiness maintenance system, specialist training programs, and compliance with all the necessary requirements. In any case the emergence of new civil aviation projects in the current situations is fraught with great difficulties.

Empty seats Air traffic statistics provide no clue as to the financial condition of Russian airlines; there are no detailed official data. In this situation one good indicator would be the seat load factor of the Russian carriers, which dropped significantly last year.

This trend was especially evident on domestic routes. In fact, domestic seat load figures have been decreasing for the past five years. The overall seat load factor across the industry, on the contrary, had been growing almost continuously since 2000 (except for 2004), and has only recently dropped by 1 percentage point.

The fact that the seat load factor on international routes exceeds the overall index across the industry is explained by the great volumes of tourist traffic,

AIR TRANSPORT

Sergey Sergeev

Despite the overall seat load growth, Russian airlines started carrying fewer passengers in 2011

which brings the seat load factor of individual carriers to nearly 100%. The general conclusion however is that last year, despite the overall seat load growth, airlines started carrying fewer passengers. This worsened their financial condition (and we are not taking other factors into account, such as the growing fuel prices).

If we are to compare the numbers of passengers carried by Russian airlines to their seat load factors we will see that the country’s largest carriers are increasing their market share by reducing revenue loads. Aeroflot is the only airline whose passenger load factor grew last year, probably because the carrier was actively operating to tourist destinations; this resulted in so-called charter wars, in which Aeroflot’s primary rival was Transaero.

Even S7 Airlines saw its seat load factor decrease in 2011 despite its strategy of restrained growth: the airline’s growth in passengers carried amounted to only 6% last year, against the fasterthan-market growth reported by other carriers (25.6% for Aeroflot, 27.2% for Transaero, and 31.3% for UTair). On the other hand, the S7 Airlines results could have been partially influenced by the redistribution of passengers from the Globus subsidiary, whose load factor increased by 0.7 percentage points 20

last year. Some of the second-tier airlines, according to Russia & CIS Observer sources, ensured a passenger load factor growth by cancelling and combining flights. Such tactics affected the fleet utilization figures of these carriers and, consequently, their financial performance.

Russian airlines continued to actively renew their fleets last year. As of late 2011, the country’s combined mainline and regional fleet stood at 561 foreignmade and 511 Russian-made airframes.

The share of air services provided with the use of foreign-made models amounted to 89% (compared to 18% in 2000), and is set to grow further.

Ironically, fleet renewals may result in surplus carrying capacities, although in the situation of a growing market such a conclusion may appear absurd.

There are two points to be made however. First, the Russian air traffic is very seasonal in nature, with shortages of throughout capacities in the summer months traditionally replaced by overcapacity in winter (which may reach 20%, according to some estimates).

Second, obsolete airliners often get replaced with new models of similar seating capacity; foreign-made aircraft used under leasing agreements require — indeed, are capable of supporting — fairly intensive operation.

RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

Conclusions by the market segments Aeroflot and Transaero are actively competing on the long-haul widebody market, and it is highly unlikely that any other Russian airline will be willing and able to join the fray there any time soon. The possible outcome of this standoff is unclear; both carriers have access to a variety of resources.

Rather than backing either rival, we should hope for this market segment to further expand through liberalization of the legislation governing international air services.

On the domestic market, UTair is expected to further strengthen its positions. The carrier has the advantage of operating a fleet of ATR turboprops; smaller regional airlines, which will soon have to retire their obsolete Antonov An-24 aircraft of comparable seating capacity, will hardly be able to replace them with foreign-made equivalents.

In the mainline narrowbody segment, the primary market for the 20 largest Russian airlines, various scenarios are possible. We may well expect further mergers and acquisitions, which would not necessarily be dictated by market conditions. As for the low-fares segment in Russia, it is once again vacant.

AIR TRANSPORT

Russian MRO providers gain strength Maxim Pyadushkin n the past few years the Russian MRO market has been on the rise, reflecting the general growth of the air transport market that continues since the start of the century.

The growing air traffic triggered massive fleet renewals by Russian carriers, with foreign types accounting for 89% of the domestic passenger turnover in 2011.

The shift to Western-built airframes necessitates the establishment of a completely new MRO system. At present most of the foreign-made airliners operated in Russia are serviced abroad, but the local MRO sector is also developing. Changes in the sector started with the largest Russian airlines opening maintenance departments for servicing their fleets, but now some of these facilities are evolving into independent MRO providers.

The country has now only a few service centers certified to provide heavy maintenance on foreign-made airliners.

These are in fact Aeroflot’s Aviation Technical Center, Vostok Technical Service and Engineering Holding.

Engineering Holding is likely to advance further than others on its way to

I

become an independent MRO provider. It unites several facilities owned by S7 Group, namely S7 Engineering, Sibir Technics and ATB Domodedovo, and also has maintenance centers in Moscow, Novosibirsk and Mineralnye Vody. In 2011 the holding’s revenues reached about 2.4 billion rubles (around $80 million).

According to Engineering Holding representatives, S7 Engineering was the company’s the largest division in 2011, with revenue of 1.35 billion rubles. Last year S7 Engineering’s workload exceeded 747,000 hours; it performed 448 A-checks, 19 C-checks, and two Dchecks. At the end of last year S7 Engineering completed the first Dcheck on an Airbus A319; prior to that it had offered such maintenance forms only for the Boeing 737 Classic family.

Another Russian provider certified to provide heavy checks is Novosibirskbased Sibir Technics. It can perform periodic maintenance including D-checks for the A320 family and also for Boeing 737 Classic and NG airliners. In 2011 the company logged more than 443,000 work hours, with 158 A-checks, 27 Cchecks, four IL-checks, and five D-

Engineering Holding

The shift to Western-built airframes necessitates the establishment of a completely new MRO system in Russia

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checks. Its revenues amounted to 700 million rubles. ATB Domodedovo, which specializes on maintenance of Russian aircraft types, preformed 80 different forms and ranked third within Engineering Holding with 355,000 work hours and 340 million rubles in revenues.

Russia’s largest carrier Aeroflot traditionally prefers to perform line and periodical maintenance of its large fleet at its own facility in Sheremetyevo Airport. The airline’s MRO business also provides services to third parties. For example, in 2010 Aeroflot reported that it had provided maintenance services to 27 other carriers.

In February 2012 the Aeroflot board decided to spin off the airline’s MRO facilities into a joint venture to be created with the Russian Technologies state corporation. The JV business plan is expected to be approved by the Aeroflot board this summer. According to the board, this will allow the airline to cut fleet maintenance costs; the new JV will also be able to provide MRO services to carriers based in the CIS and Eastern Europe. According to sources in the Russian aviation industry, the planned JV could be joined by Lufthansa Technik, which has strong positions in the region.

Vostok Technical Service was recently created on the premises of the VARZ-400 MRO provider at Moscow’s Vnukovo airport. The company is certified by EASA to provide C-checks on Boeing 737 Classic and NG aircraft.

According to the head of the Vnukovo board, Vitaly Vantsev, this maintenance facility plans to develop cooperation with such large Russian carriers as UTair Aviation and Transaero. The former is based at Vnukovo while the latter has recently started to move part of its operations to Vnukovo from another Moscow airport, Domodedovo.

AIR TRANSPORT

Polina zvereva he Russian lessor Ilyushin Finance Co (IFC) is looking at opportunities to enter the regional turboprop segment.

Among its possible partners are Bombardier, ATR, and also manufacturers of smaller aircraft. The Saratov-based carrier Saravia has already announced its intention to lease three Bombardier Q400s from IFC; the type was issued a Russian certificate in early June 2012.

The demand for foreign-made regional aircraft is growing in Russia, but the technical requirements differ from region to region. According to an IFC-led study, there are 11 airlines offering regional services in European Russia, all the 36 airports of the region are equipped with concrete runways, and typical sector lengths vary between 200 and 800 km.

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In this situation the best option would be an ATR-72 or a Bombardier Q400.

The situation in Siberia and the Far East is totally different: this huge area is served by not more than 18 airlines; 43% of the local 119 airports have unpaved runways, and typical sector lengths lie between 400 and 3,000 km. The ATR-72 range may prove too short for this particular market; apart from the Q400, it would be best served by Antonov An-140 turboprops and An-148 jetliners. In other words, there is no universal, one-sizefits-all regional airframe. On the whole, IFC believes the Russian regional market will require about 200 airliners through to the year 2030.

Russian carriers started importing foreign-built turboprops almost six years ago. UTair Aviation became Russia’s first ATR operator with one ATR-42-500.

The airline currently operates 17 ATR

Roman Gusarov

Ilyushin Finance eyes regional leasing market

This Bombardier Q400 NextGen made a demo tour across Russia in May

72-500s, two ATR 72-200s, and 14 ATR42-500s (five of the latter serve with the carrier’s UTair Ukraine operation).

NordStar Airlines operates six ATR 42500s from Krasnoyarsk Territory, and signed a firm contract in late 2011 for the delivery of five ATR 42-600s with an option for a further two. Another Krasnoyarsk carrier, KrasAvia, opted for smaller 19-seat Let L-410 turboprops.

The first example was delivered in midJune 2012. Yamal Airlines received its first L-410 in late May this year.

RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

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AIR TRANSPORT

Top 20 Russian airlines, by passenger carried and passenger kilometers flown in 2011 Passenger kilometer Passenger carried Airline Ranking in Passenger km, Change to 2010, Ranking in 2011 Passengers, Change to 2010, 2011 (2010) million % (2010) thousand % International and domestic routes Aeroflot – Russian Airlines 1 (1) 42,020.9 +20.83 1 (1) 14,173.8 +25.59 Transaero 2 (2) 33,179.9 +26.19 2 (2) 8,453.4 +27.18 UTair 3 (4) 11,119.3 +39.30 3 (4) 5,802.3 +31.26 S7 Airlines 4 (3) 10,542.8 +2.57 4 (3) 5,128.3 +6.07 OrenAir 5 (5) 7,500.3 +4.77 7 (6) 2,507.2 +4.41 Nordwind 6 (7) 7,281.1 +43.26 8 (14) 1,721.6 +44.21 Rossiya Airlines 7 (6) 7,190.9 +15.19 5 (5) 3,537.5 +15.12 Ural Airlines 8 (8) 6,832.8 +41.14 6 (7) 2,513.4 +40.24 Vladivostok Air 9 (9) 4,534.8 -4.64 12 (13) 1,213.9 -3.79 VIM-Avia 10 (10) 3,961.2 -0.42 9 (11) 1,612.5 +21.48 globus 11 (13) 3,427.0 +26.26 10 (16) 1,472.1 +34.73 Yakutia Airlines 12 (12) 3,374.8 +11.42 14 (17) 1,019.0 +12.81 Nordavia 13 (16) 2,240.2 +13.58 11 (8) 1,468.3 +5.00 NordStar 14 (18) * * 19 (23) * * Red wings 15 (14) 2,162.5 -11.26 18 (18) 781.4 -10.80 IFly 16 (20) * * 25 (28) * * Sky Express 17 (17) 1,422.2 -14.32 15 (15) 942.4 -17.57 Avianova 18 (19) 1,406.9 -8.46 13 (12) 1,048.9 -19.46 kuban 19 (25) 1,369.7 +40.73 16 (19) 900.4 +35.10 Donavia 20 (15) 1,271.0 -47.55 17 (9) 864.1 -37.65 International routes Aeroflot – Russian Airlines 1 (1) 28,645.9 +21.21 1 (1) 8,679.1 +21.86 Transaero 2 (2) 25,911.4 +27.16 2 (2) 6,673.0 +25.87 Nordwind 3 (4) * * 5 (8) * * OrenAir 4 (3) 6,840.8 +2.12 3 (3) 2,109.1 +0.44 Rossiya Airlines 5 (5) 4,673.4 +16.95 4 (4) 1,790.7 +20.04 Ural Airlines 6 (9) 4,359.9 +61.06 7 (9) 1,501.0 +58.68 UTair 7 (11) 3,907.4 +172.50 8 (12) 1,440.7 +140.05 S7 Airlines 8 (8) 3,712.3 +24.96 6 (7) 1,580.1 +31.76 VIM-Avia 9 (6) 2,592.6 -32.24 9 (5) 953.7 -24.12 Red wings 10 (10) 2,071.6 -7.15 10 (10) 756.0 -7.74 IFly 11 (13) * * 11 (14) * * NordStar 12 (17) * * 15 (18) * * Tatarstan 13 (15) 923.8 +0.65 14 (15) 327.4 -5.44 kolavia 14 (16) 804.1 -10.02 17 (16) 292.8 -7.40 Sky Express 15 (22) 774.1 +70.81 16 (22) 308.5 +52.32 Vladivostok Air 16 (21) 689.1 +11.72 12 (17) 332.5 +5.38 Yakutia Airlines 17 (20) 655.6 +0.54 18 (21) 255.7 +18.78 Moskovia Airlines 18 (14) 650.7 -50.35 19 (13) 247.6 -47.24 Donavia 19 (12) 587.3 -56.64 13 (11) 328.7 -49.90 kuban 20 (25) 413.9 +112.96 20 (23) 239.4 +82.10 Domestic routes Aeroflot – Russian Airlines 1 (1) 13,375.0 +20.01 1 (1) 5,494.7 +31.96 Transaero 2 (4) 7,268.5 +22.84 4 (5) 1,780.3 +32.37 UTair 3 (3) 7,212.0 +10.14 2 (2) 4,361.6 +14.17 S7 Airlines 4 (2) 6,830.5 -6.54 3 (3) 3,548.3 -2.41 Vladivostok Air 5 (5) 3,845.7 -7.08 10 (8) 881.5 -6.85 globus 6 (9) 3,042.8 +49.27 7 (11) 1,304.2 +55.38 Yakutia Airlines 7 (6) 2,719.2 +14.41 11 (13) 763.3 +10.94 Rossiya Airlines 8 (7) 2,517.5 +12.06 5 (4) 1,746.7 +10.48 Ural Airlines 9 (8) 2,472.9 +15.88 9 (10) 1,012.4 +19.62 Nordavia 10 (10) 1,918.9 +9.45 6 (7) 1,332.1 +2.38 Avianova 11 (11) 1,382.9 -10.02 8 (6) 1,029.2 -20.98 VIM-Avia 12 (34) 1,368.7 +803.02 14 (41) 658.8 +834.30 NordStar 13 (15) * * 18 (21) * * kuban 14 (16) 955.8 +22.71 13 (15) 661.0 +23.55 UTair Express 15 (18) 867.4 +28.66 12 (14) 691.8 +27.06 Yamal 16 (19) 779.6 +22.72 17 (17) 470.8 +14.39 Donavia 17 (13) 683.7 -36.03 16 (12) 535.4 -26.65 OrenAir 18 (22) 659.5 +43.27 19 (19) 398.1 +32.16 Sky Express 19 (12) 648.0 -46.29 15 (9) 633.9 -32.62 gazpromavia 20 (17) 621.1 -11.83 20 (18) 344.5 -14.10 Note: * No official data available at the moment of the issue's release.

Source: Russian Transport Clearing House.

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RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

BUSINESS AVIATION

Bouncing back The Russian business aviation market is recovering and gearing up for a new, albeit less speedy, growth cycle.

Anna Nazarova ife has finally corroborated the optimism of experts about a permanent recovery of the Russian business aviation market. Although 2011 was a difficult year for the sector, its results demonstrated that the market had stabilized.

One of the two key indicators of business aviation market growth in Russia is historically the number of aircraft movements. Although no such statistics exist, the figure can be deduced with the help of expert estimates. Market players concur that the frequency of business flights in Russia began to grow last year, although at a slower pace than it had been growing prior to the economic crisis.

According to Leonid Shcherbakov, chief inspector of the Aerotrans, Russian provider of flight dispatch services, last year there were more than 140,000 business aircraft movements in Russia. The growth had begun in 2010, when the number of business aviation flights exceeded that performed in 2006 and 2009; the frequency of flights further grew in 2011, at a pace not seen since 2006.

Sergey Sergeev

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Evgeny Bakhtin, president of AvcomD Group which manages the business aviation centre at Moscow’s Domodedovo airport, cites less optimistic figures.

According to him, the market continued to revive slowly throughout 2011 at a 12% growth rate. Bakhtin explains the slow but sure growth rate by the overall moderate growth of the Russian economy, the increase in global energy prices, the growing welfare of the Russian population, and the resultant increase of paying demand for business aviation operations.

An even less optimistic view is held by the Russian business aviation magazine Top Flight, whose analysis is bases on the performance data for Russia’s largest business aviation airport Vnukovo 3.

According to the magazine, the Moscow region airports (which together account for over 70% of all business aviation movements in Russia) registered a 6% growth in business operations in 2011 to a total of 24,000 flights.

Last year’s results did nothing to overcome the lopsided development vector of the Russian business aviation market: 62% of all flights were international, and only 38% were performed domestically.

The 2011 results demonstrated that business aviation services have become an inseparable part of business activities in Russia, and that even the unstable economic situation of the recent years has not resulted in a significant decrease in customer numbers. This is indirectly indicated by the Top Flight statistics, according to which the number of passengers carried on business flights across Moscow region grew by 3% last year to 160,000 people. For comparison, in precrisis 2008 the figure stood at 152,000.

Fleet renewals The other key indicator of Russian business aviation development is the condition of operators’ fleets. Again, no exact statistics are available with regard to the number of Russian-owned business jets because about 95% of the entire fleet is registered abroad. Based on expert estimates, one can assume that the fleet of Russian-owned business aircraft consisted of 300-380 airframes last year. Up until the crisis of 2008 this figure was growing at a breakneck speed, but by September 2008 the growth had ground to a standstill. By early 2009, one in three business

95% of the Russian-owned business jets are registered abroad

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BUSINESS AVIATION

jets had been put up for sale. Yet there were almost no sales recorded, even though the pre-owned airframes were being offered at a 10-20% discount off their market price. Panic selling continued until 2010. Last year the secondary business jet market began demonstrating signs of recovery, with the prices and sales starting to grow gradually, but this process remains very slow. According to Bakhtin, there is a certain increase in Russian customers’ interest in purchasing business aircraft.

However, potential buyers of both new and pre-owned airframes are usually large corporations seeking to replace, rather than expand, their fleets by retiring obsolete aircraft. It is therefore too early to expect a further growth of Russia’s business jet fleet, despite the recovering pre-owned market. On the other hand, there are positive trends in evidence: more owners are having their newly purchased business aircraft registered in Russia. This process is being stimulated by the recent lifting of customs duty on such airframes.

Competition among operators The ratio of Russian and foreign business aviation operators on the domestic market remained largely the same throughout 2011. According to Aerotrans, the share of Russian operators stood at 51%. This fluctuating insignificant overbalance in market leadership has been observed

since 2012 however the situation has aggravated: Aerotrans reports that in the first three months of the year the share of business flights operated to or from Russia by foreign carriers reached 60%.

Ever since 2006, when the business aviation sectors first started evolving into a civilized market, national carriers have been operating flights within Russia and to CIS destinations. Most of these operated Soviet-era passenger airliners fitted with corporate interiors; the noise levels of these types did not meet international standards and prevented them from flying abroad. Just like today, there were very few carriers operating foreign-made business jets. International operators, for their part, serviced business aviation flights abroad, primarily to Europe.

Western carriers operating foreign-registered aircraft are not permitted to service domestic routes in Russia. These mutual restrictions led to a natural division of the market between the Russian and foreign operators. However, the rapidly ageing Soviet-made aircraft, first of all Tupolev Tu-134s and Yakovlev Yak-40s, as well as the Russian aviation authorities’ continuing campaign to promote flight safety (which often results in cancellation of operators’ licenses), and government-led crackdowns on foreign carriers attempting to offer illegal services inside Russia, have all resulted in a booming demand for domestic business aviation flights.

BUSINESS AVIATION FLIGHTS IN RUSSIA IN 2007-2011, BY OPERATORS Russian operators Foreign operators

Number of flights

70000 60000 50000 40000 30000 20000 10000 0

2007

2008

2009

2010

2011 2011

Note: The chart is based on the data on non-scheduled flights from/to Russia under the assumption that all of them are business flights.

Source: Aerotrans

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RUSSIA/CIS OBSERVER № 1 (34) JULY 2012

“Domestic demand for business aviation services is growing faster than the market,” says Bakhtin. “This is primarily due to a shortage of supply. The absence of sufficient numbers of modern business aircraft in Russia is further restricting the already very scarce offer of business aviation flights into the country. This is why it is too difficult and too expensive at the moment to find a modern business aircraft that would be operated within Russia.”

Several large market players are competing for the rapidly growing domestic business aviation segment in Russia.

First to arrive on this market was JetAlliance, which brought two Cessna Citations to following the purchase of the Aeroflot Plus charter provider.

In December 2011 Avcom Group rolled out its Jet Travel Club program, which offers members the use of business jets for private flights. The program terms are similar to those of rent-a-car arrangements; this business model is enjoying an increasing demand among Russian businesspeople and medium-level managers.

In June 2012 Austrian operator VistaJet announced its intention to create a joint venture with the Russian airtaxi operator Dexter. VistaJet will contribute for the Dexter fleet with two Bombardier Challenger 605s for operation inside Russia. Also in June 2012, RusJet — one of Russia’s largest operators of Western-built aircraft — joined the fray by launching operations with an Embraer Legacy 600. General director Mikhail Titov says the aircraft will be mostly used for domestic revenue flights.

2011 will be remembered as the first year of stability on the Russian business aircraft market following the economic crisis. The lifting of customs duty on foreign-made business aircraft certainly played a positive role here, as did the recent changes to the country’s aviation regulations which considerably simplified access of business aviation to Russian airspace and airports. Another favourable development was the partial opening of Russian airspace for notification-based GA operations. All these factors, coupled with the observed revival of the Russian economy, give hope for a further growth of the Russian business aviation market.

SPACE BUSINESS

Igor Afanasyev, Dmitry Vorontsov ast year was exceptionally difficult for the Russian space sector. Undisputed achievements were marred by a higher-than-normal number of embarrassing failures.

Formally, Russia preserved its global leadership in the number of space launches (32, or 38% of the overall number of launches worldwide), but simultaneously set a worrying record with five launch failures.

The 2011 successes included the orbiting of the Elektro-L geostationary meteorological satellite and the Radioastron (Spektr-R) radio telescope. Another major achievement was to complete the deployment of the Glonass constellation of navigation satellites to a global coverage capacity.

Last year also saw the start of the Russian-EU project Soyuz at Kourou with the first two launches of Russian rockets from the ESA-operated equatorial spaceport.

However these successes were eclipsed by a string of mishaps. The Geo-IK2 geodesy satellite and the Express-AM4 communications satellite were both placed into wrong orbit.

The Progress M-12M resupply ship was lost in a launch failure on August 24. On November 9, the Phobos-Grunt probe — Russia’s first interplanetary mission in decades — found itself stranded in low Earth orbit. All attempts to reactivate the craft were to no avail. The probe burned on re-entry in mid-January 2012. Finally, on December 23, 2011 a third-stage engine failure at launch resulted in the loss of the Meridian 5 military communications satellite. Furthermore, the dates for many other Russian

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space launches were missed throughout the year.

What makes these failures are all the more vexing is that government allocations for space exploration have increased tenfold over the past decade.

The program budget of Russia’s Roscosmos Federal Space Agency stood at about 95 billion rubles last year, or $2.8 billion at the current exchange rate. The disparity between the hefty funding and the absence of impressive achievements has led the government to doubt the effectiveness of the current space exploration strategy.

One immediate consequence was a reshuffle at Roscosmos, which saw agency head Anatoly Perminov replaced by Vladimir Popovkin. The government also identified a systemic crisis in the country’s space industry, tracing its roots to the late 1980s and early 1990s when the funding for space exploration first started to shrink. This, the reasoning goes, eventually eroded the production capacities and competencies of industrial enterprises, which in turn led to a drop in the quality of space-related products and compromised the responsibility of personnel.

The crisis at hand prompted the government to get down to strategic planning by revising (and, if required, amending) the current priorities and their relevance to the country’s actual needs. Popovkin in October 2011 proposed a number of measures to improve the quality of space industry products, and identified a new order of key priorities: applied problems, scientific research, manned space flight, and the development of new launch vehicles.

Since the allocation of funding at that moment did not correspond to the new priority list (up to 42% of the Roscosmos was being spent on manned

A.Ilyin

Reviewing Russia’s space strategy

In 2011 Russia preserved its global leadership in the number of space launches

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SPACE BUSINESS

I. Marinin

The new head of Roscosmos Vladimir Popovkin identified key priorities for Russia’s space industry

programs, leaving only 7% for research missions), Popovkin proposed to reassess the agency’s spending strategy.

First, the painful but unavoidable decision was made to suspend the program to develop the Rus-M launch vehicle, owing to the significant costs involved in it and the fact that the rocket’s performance overlapped with that of the new Angara system, which will soon enter flight tests.

Second, it was decided to build a launch pad for Soyuz-2 vehicles at Russia’s future Vostochny Cosmodrome so that the first launch from the new site could be performed as early as 2015.

Finally, and most importantly, Roscosmos developed a draft development strategy for the Russian space industry to 2030 and beyond. The draft was submitted to the government in March 2012. A formal medium- to long-term concept of Russian space efforts had long been due. Until recently the industry’s development was guided by targeted 10year programs and unspecific regulatory documents like the federal law on space activities and the framework of Russia’s policy in the area of space exploration to 2020 and beyond.

Of special interest are several key points made in the Strategy, the first such document ever that has been proposed for public discussion. In particular, Roscosmos suggests choosing prospective space programs based on their costeffectiveness. Independent access to space should become one of Russia’s priorities. Perhaps for the first time in 28

Russia’s history, the Strategy mentions private space exploration as being essential to the country’s strategic interests. At the same time, in the light of the high risks involved in private space activities, it is being proposed to promote publicprivate partnerships in this field.

The Strategy is somewhat vague on the objectives of space exploration. In pursuing its space program Russia is expected to “meet, on a global level, the growing socioeconomic, scientific, defense and security needs through the use of indigenous space assets”; to “secure independent access to space from its territory for the entire spectrum of space-related activities”; to “assume a leading position in the most significant areas of fundamental space research and Lunar exploration”; and to “ensure international-level performance characteristics of indigenous space assets”. These objectives do not appear equisignificant; besides, far from all of them can be measured quantitatively.

The Strategy proposes several stepwise development phases. The “restoration of capabilities” phase, through to 2015, envisages the completion of the current plans and programs across the space sector. In the “consolidation of capabilities” phase, through to 2020, Russia is expected to get re-instated in the club of the leading space powers as applied to all the key aspects of space activities.

During the “breakthrough” phase, through to 2030, Russia should begin implementing major projects in near space and outer space. In particular, by that

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time the country should have expanded its capabilities in terms of independent access to space by putting Vostochny Cosmodrome into operation, creating a super-heavy launch vehicle system and a fleet of space tugs. Also during this phase Russia is expected to perform “a demonstration manned Lunar orbital mission with subsequent landing of cosmonauts on the surface of the Moon and their return to Earth”, as well as to “continue with active unmanned research, including through international cooperation, of the Moon, Mars, Venus, the Jupiter system, Saturn, and asteroids”.

The next phase, “consolidating the breakthrough”, should include the implementation of major projects in near space and on the Moon, and also preparations for a manned mission to Mars. In particular, the Strategy proposes opening a re-visitable Lunar orbital station after the year 2030.

The Strategy confirms the main priorities of Russian space exploration as outlined by Popovkin in October 2011: “the development and operation of space equipment, technology and services in the interests of meeting the country’s socioeconomic, science, defense and security needs”; “creating crew, cargo and Earth-based assets in the interests of space exploration, including a reusable launch vehicle”; and also “laying the groundwork for an international manned mission to Mars and the development of a new-generation orbital station”.

It should be noted that such complex projects as manned missions to the Moon and Mars would require colossal expenses and extensive international cooperation. In fact, none of the leading space powers currently has any concrete plans for interplanetary manned missions. An emphasis on manned space exploration would run counter to the standing order of priorities for the Russian space industry, which brings applied problems and scientific research to the fore. Another point to be made here is that the proposal to develop a superheavy launch vehicle seems to be too specific to be included in the Strategy: it is as yet unclear whether Russia would require such a system.