Russia Country Market
Insights and Opportunities
Overview: The Russian aviation industry remains an important strategic industry and a promising market for foreign suppliers of aircraft equipment. In 2009, state financing of the industry increased twentyfold as compared with 2004. The Russian government, through a special federal program and various types of assistance instruments, plays an active role in supporting the industry in an effort to reach its goal of supplying 5% of the world’s aircraft by 2015 and 10% by 2025. United Aircraft Corporation (UAC), a state-controlled corporation established in 2006, spearheads the development of the national aviation industry.
In 2009, the Russian government allocated 19.45 billion rubles ($644 million) to the development of the industry under a federal program. In addition to traditional types of support, such as direct contributions to UAC’s authorized capital and interest rate subsidies on modernization loans, the government also extended new subsidies for loans to support innovation and investment projects. This all signals an increased interest by Russian OEMs and tier suppliers to consider new procurement, which in turn opens broad prospects for U.S. suppliers of aircraft systems, components, machine tools and materials.
Since the Russian aviation industry consists of several intertwined industries (airframe, helicopter, engine building) and submarkets (OEMs, tier suppliers, distributors), opportunities for U.S. suppliers are not limited simply to a certain type of product, but cut across a variety of products along the production chain. These opportunities range from advanced machine tools and aviation materials to software, small and large components and spare parts, and complete on-board systems. Given the complex and multi-layered nature of this market, the total market size is difficult to estimate. However, estimated figures are available for future domestic aircraft needs and domestic aircraft production; this data reflects the dynamic Russian market and potential growth opportunities for U.S. suppliers.
Increasingly, less efficient Russian aircraft are being phased out from key air transport segments and are being replaced with western fleets. Western aircraft now handle approximately 69% of cargo turnover (within Russian and outside of Russia) and 74% of passenger turnover (within Russian and outside of Russia); out of the 74% passenger turnover, 62% of the domestic passenger market is handled by western aircraft. Boeing’s 767-300 and Airbus’ 320 handle 19% of passenger turnover versus the Tu-154M, the most popular domestic model which carried 9.5% of passenger traffic in 2009 (down from 24% in previous years).
Several Russian airlines have announced plans to procure a total of approximately 440 passenger aircraft between 2009 and 2015. It is expected that 35% of these aircraft will be Russian made, such as the An-148, SSJ-100, and Tu-204SM, assuming they will remain competitive with their western analogues.
Major western aircraft giants, Boeing and Airbus, have positive expectations about the domestic market demand in Russia. According to information published by Boeing, the 2009-2028 Russian and CIS market for civil aircraft will amount to 1,050 aircraft or $90 billion. Airbus’ published estimates are 1,030 aircraft or $90 billion for 2008-28. Out of the $90 billion, it is believed that $21.6 billion will be allocated to regional aircraft, $52.2 billion to narrow body, $14.4 billion to wide body, and $1.8 billion to super large aircraft. It is expected that the two major global aircraft manufacturers will capture approximately 50% of this market share.
It is expected that UAC will not consider direct competition with Boeing and Airbus on long haul aircraft to meet national and international market needs. However, it will compete in the regional and short/medium range niche by launching new projects such as the SSJ-100 (Superjet-100), MS-21, and Tu-204SM (modernized Tu-204) as alternatives to the Boeing 737 and the Airbus 320.
The Russian government strategy for 2008-25 is to produce approximately: a) 2,600 civil aircraft (60% for export) with average annual production of 152 aircraft, with levels to increase in later years to an average of 260-290; b) 2,300 military aircraft (major share for export) with average annual production of 110-130 aircraft; and c) 900-950 cargo aircraft (55% for export) with average annual production of 40-60 aircraft. The realization of these figures will depend on UAC’s ability to restructure and to consolidate the industry quickly and efficiently. As of January 2010, adjusted production figures indicate that between 2010 and 2012 UAC plans to produce 111 regional aircraft (72 SSJ-100 and 39 An-148), 48 short/medium range aircraft (38 Tu-204 and 10 Tu-214), and 6 long haul aircraft (IL-96) for a total of 165 aircraft (annual average of 55 aircraft). This is considerably fewer than were planned in 2008.
Russian helicopter production levels appear significant - the industry produced 120 helicopters in 2007, 169 helicopters in 2008, and 141 helicopters in 2009. The industry is export oriented with major markets in the CIS countries, Latin America, China, Pacific Rim and Africa. Part of the demand is driven by orders for military helicopters from the Russian Ministry of Defense to meet the Russian army’s internal needs.
Opportunities Avionics and Aircraft Systems: The two major Russian aircraft projects – the Sukhoi Superjet-100 and MS-21 – are examples of continued interest by Russian airframe manufacturers in complete on-board systems from western suppliers. The following types of western systems were used to support these two projects: hydraulics, cabin interior, integrated air management and fly-by-wire flight control, wheels and braking systems, landing gear systems, auxiliary power systems, etc. Suppliers for these designs have already been determined by Russian airframe manufacturers but additional projects are underway. Some opportunities may be available in the aftermarket segment, as Russian manufacturers of aircraft and helicopters as well as some airlines strive to upgrade and modernize their existing fleets using western systems. In the helicopter segment, it is reported that some foreign customers require that Russian helicopters be equipped with certain western systems (avionics, for example).
Smaller Aircraft Components: Smaller items such as amplifiers, control units, accessories, miscellaneous components, and subsystems may be in demand both by Russian OEMs and tier suppliers. In addition, Russian distributors are another target market for such items. Working with distributors may facilitate entry not only into the aviation industry, but also into associated industries, such as electronics, defense, telecommunications, and others.
Machine Tools: The market for machine tools in the aviation industry is growing due to increasing state funding and the need for modernization of production facilities by airframe manufacturers and tier suppliers. In July 2009, MAG Industrial Automation Systems, the world’s largest U.S.-based machine tool company, supplied a titanium profiler machining system to Russian titanium producer VSMPO-Avisma, as part of a 34-machine order to provide critical manufacturing capacity to the newly established Landing Gear Manufacturing Center for Excellence in Verkhnyaya Salda, Russia. The Center, part of the Ural Boeing Manufacturing joint venture between VSMPO-Avisma and Boeing, will produce landing gear components for the Boeing 787, 777, Airbus A380 and A350WXB, and the Sukhoi Superjet 100.
Materials: UAC is pursuing development of Russian technologies in polymeric and composite materials. In 2009, UAC’s Board of Directors approved the company’s participation in a new venture called Aerocomposite. The organization will create the technological base for development and production of composite parts that may find their application in the next generation of passenger and cargo aircraft. Special attention will be paid to composite wings for promising aircraft projects, such as MS-21 and the new version of SSJ-100. Given the increased interest in the use of composite materials, there is a critical need for specialized engineering solutions that address the complexities involved in the product development process.
Software: The Russian aviation industry continues to primarily utilize western software solutions. Siemens PLM Software solutions have been successfully used in many UAC projects and key programs, such as the SSJ-100, to enhance collaboration and optimize workflow. VISTAGY Inc., a leading provider of industry-specific engineering software and services partnered in May 2009 with Innovation Technologies and Solutions (ITS), one of the foremost technology sales and support organizations in the dynamic Russian aerospace market. The partnership will enable ITS to provide the most advanced software for engineering composite aircraft.
The current trend in the Russian aviation industry is to decrease its reliance on imports of complete western air systems and, instead, to emphasize the development of capabilities to manufacture similar products locally. For example, a tender for MS-21 avionics resulted in a cooperative agreement between Rockwell Collins and Russian company Avionica to develop a special avionics system for this aircraft. Further down the value chain, market opportunities are expected to arise for western manufacturers of high-tech machine tools and smaller aircraft components, as the Russian industry continues to build its capacity to produce locally. In the interim, however, western avionics, navigation systems and other large integrated components will continue to be in demand by Russian manufacturers of aircraft and helicopters to meet their current needs, especially in the modernization and the aftermarket segments.
Most Russian OEMs, tier suppliers, and distributors that are active in the aviation industry also manufacture and supply products for other associated industries, such as military and defense, automotive, electronics, and energy. U.S. suppliers may benefit from these synergies.
The links between the defense and aviation sectors are especially strong. Modernization of the Russian military is becoming an important national priority and the state order for arms is expected to grow in the near future. Between 2007 and 2015, the Russian government plans to allocate 4.9 trillion rubles ($162 billion) to support modernization of the army. The same enterprises that are active in the aviation industry (OEMs and tier suppliers) will receive additional state funding and support under the 2007-17 federal arms program, which will allow them to reinforce their ability to modernize and procure new machine tools and other equipment.