Runway in sight

Russia’s United Aircraft Corporation (UAC) is completing a large-scale effort to consolidate the national aviation industry. At the end of October the corporation received the remaining government-owned stakes in several aerospace assets it already controls. The stakes have been exchanged for the UAC shares from the additional issue worth 16 billion rubles ($538 million). As an added bonus for the onlookers, the move has given industry observers an opportunity to have a decent guess at the real market value of Russia’s aerospace industry.
In late October UAC reported that it received the share packages of the national lessors Finance Leasing Company (FLC) and Ilyushin Finance Co., the Sukhoi holding company and the Voronezh-based VASO aviation plant. All these companies are already controlled by UAC after the first phase of consolidation that took place in 2007. More important is that during the additional share issue the corporation gained total control over two more critical aerospace assets — MiG military jet maker and Kazan’s KAPO aviation plant. These two companies appear to be totally incomparable in terms of their market price.

Fair price
Independent auditor Ernts & Young was contracted before the share issue to audit both MiG Corp. and KAPO. The bottom line on MiG was that the enterprise’s market value equaled just 1.05 rubles ($0.035) due to its colossal debts amounting to 44 billion rubles. In the eyes of the auditor, the hefty indebtedness far outweighed MiG’s current order book worth $4 billion, along with 15 billion rubles in funding extended by the Russian government in April. UAC press secretary Konstantin Lantratov explained for the Russia & CIS Observer that, based on the auditor’s findings, 100% of the MiG shares have been exchanged for a single UAC share.
KAPO’s market value turned out to be much higher in the eyes of Ernst & Young, which believes the company costs 6.7 billion rubles. Lantratov comments that, despite KAPO’s insufficient workloads in the past few years, which have primarily consisted in building several Tupolev Tu-214 jetliners a year and upgrading the Russian air force’s strategic bombers, the enterprise has virtually no outstanding debts at the moment. This, in his words, explains the favorable audit report.
The audit conducted by Ernst & Young indirectly sheds some light of the market price of other assets whose state-controlled shares are to be handed over to the UAC. Now that we know how much a single share is worth, it is easy to work out that the market value of Sukhoi, for instance, stands at 51 billion rubles and that for Ilyushin Finance is 18 billion. The figure appears to be 1.7 billion for FLC and 1.2 billion rubles for VASO. Thus, the overall cost of the state-owned assets that were transferred to the UAC approaches 11 billion rubles.
Lantratov explained that the additional shares were also used for buying out — or, to be more exact, exchanging for UAC stock – the remaining privately owned interests in those enterprises which have already come under the corporation’s control. These enterprises include the Ilyushin company, the Sukhoi and Yakovlev design bureaus, Irkut Corporation, Beriev, Tagavia, Tupolev, the Aviastar-SP and Sokol aviation plants, and also the business division of the UAC - Transport Aircraft corporation. Ernst & Young valued Irkut at 23.6 billion rubles; Ilyushin, at 13 billion; Tupolev, at 3.5 billion; the Nizhniy Novgorod-based Sokol plant, at 2.5 billion; and Yakovlev, at 1.4 billion rubles.
Interestingly, the results of the independent audit do not differ much from the figures quoted by the Russia’s Federal Property Management Agency in late 2006, when the UAC was just beginning to consolidate the industry. The market price of the corporation’s two largest assets — the Sukhoi holding company and Irkut Corporation — has remained virtually unchanged from two years ago, when they were valued at 52 and 25 billion rubles, respectively. The market value of Ilyushin Finance, on the other hand, has grown significantly from the original 11 billion rubles. As for FLC, its value has shrunken more than fourfold from the original 8 billion rubles, apparently owing to the lessor’s current financial problems.

Defining the future
The UAC’s transaction signals the last major stage in the consolidation of Russia’s aviation industry. The corporation president Alexey Fedorov has recently named two more assets proposed for inclusion in the corporation’s structure — the Myasishchev design bureau and Gromov Flight Research Institute. For this plan to become a reality, though, both enterprises must first be turned into joint-stock companies — and that will take some time.
Now the UAC plans to complete the industrial reorganization stage and move on to the development of major projects. The corporation is not planning to revise its strategic development plans even despite the economic recession. According to Fedorov, "the effect of the crisis on our long-term plans is insignificant".
According to the earlier approved plans the industrial assets of the corporation will be reorganized into several business units. The first unit, UAC – Transport Aircraft, was set up in 2008 on the basis of Ilyushin design bureau. The new division’s programs includes localization of Il-76 assembly in Russia, development of light Il-112 transport and joint Russo-Indian MTA aircraft. The other task is restoration of An-124 heavy lifter production.
Now three more units are to be founded, explained UAC press secretary. KAPO will be included UAC-Special Aircraft division together with Tupolev, Beriev and Tagavia. In future the new unit is expected to be expanded with Myasishchev design bureau. UAC—Special Aircraft will focus at modernization of Russia’s Air Force strategic bombers designed by Tupolev as well as on manufacture of special mission aircraft, like Beriev amphibian planes.
Following this strategy KAPO will cease the assembly of Tu-214 narrow-body airliner in favor of the aircraft’s special modifications. Now such versions are ordered by the Kremlin’s Special Air Detachment that, for example, received two Tu-214SR radio relay aircraft in June. Four more aircraft are scheduled for delivery in 2010-2011.
KAPO’s hand-over to Special Aircraft unit also means the cancellation of Tu-334 regional jet that was to be assembled in Kazan. According to Lantratov, UAC has no orders for this aircraft from the airlines. The Russian market faces the strong competition in the regional segment with two projects – locally assembled An-148 and Sukhoi Superjet 100 aircraft entering the production phase. The only chance for Tu-334 is a potential order from the President’s Air Detachment that renews its regional fleet at the moment. UAC press secretary mentioned that the negotiations are under way, but to adapt the aircraft to carry the government top officials and to launch the production the corporation asks for $270 million. "Anyway, if such order is placed, Tu-334 will be considered a special mission aircraft", concludes Konstantin Lantratov.
The production of passenger airliners will be localized at UAC – Commercial Aircraft division. It will be headed by Irkut Corporation and will also include two assembly facilities – Ulyanovsk-based Aviastar-SP and Voronezh VASO. Aviastar-SP will continue to produce Tu-204 family narrowbody airliners and later Tu-204SM modernized variant while VASO will assemble An-148 regional jets and Il-96 widebody planes. At the first stage Irkut will keep its military programs, but later it plans to move to the assembly of Russia’s future MS-21 medium range airliner.
Another civil asset – Sukhoi Civil Aircraft, the manufacturer of Superjet 100 aircraft, will remain under Sukhoi that will head the UAC—Combat Aircraft Unit. The defense division will also include MiG and Nizhny Novgorod Sokol assembly plant.