Airplane Makers Told to Team Up

Airplane Makers Told to Team Up

The country`s hundreds of aviation companies will be consolidated into a half
dozen holding companies by 2004 in a bid to transform the stagnant industry into
a mean and lean competitor to U.S. and European rivals, the government
announced.

The plan, adopted by the government Friday, puts a new spin on a years-long
industry restructuring by proposing to clump civil and military aircraft makers
together.

By setting a three-year deadline, the government showed the urgency with which
it feels a revamp is needed. Its 2004 deadline is well ahead of the 2010
deadline that the Russian Aviation and Space Agency and the Industry, Science
and Technology Ministry suggested when proposing the revamp to the government on
Friday.

Deputy Prime Minister Ilya Klebanov told reporters after the government meeting
that Russia has to consolidate its hundreds of aviation companies into a handful
of aviation powerhouses that can compete with the likes of Boeing and Lockheed
Martin of the United States, and the maker of the Airbus, the European
Aeronautic Defense and Space Co.

``There`s only three of them in the world, and there are 316 in Russia,``
Klebanov said.

This number will be whittled down to six to seven holding companies, of which
one or two will make aircraft. Only three civil aviation plants will remain ЎЦ
factories in Voronezh, Ulyanovsk and Kazan that produce Ilyushin and Tupolev
planes. The civil aviation plants, in turn, are to be saddled with the country`s
two military giants, the producers of Sukhoi and MiG fighter jets and
helicopters.

Under the plan, one holding company will combine 10 enterprises including the
Tupolev aviation complex, MiG Russian Aircraft Corp., helicopter designer Kamov,
Aviastar in Ulyanovsk, Aviakor in Samara and Progress in Primorye. A second
holding will unite 15 companies including MiG rival Sukhoi, the Yakovlev design
bureau, the Ilyushin aviation complex, and the Mil, Rosvertol, Kazan and
Ulan-Ude helicopter plants. A third will bring together the country`s 33 engine
producers.

Klebanov said the government also wants to set up 10 to 13 more holdings to lump
together other aviation companies such as those dealing in weapons and avionics.

The deputy prime minister did not rule out an eventual merger between the makers
of the Su and MiG jets, a proposal that has been floated by the government in
the past and fiercely opposed by both military giants.

Klebanov said the defense industry would launch the production of a fifth
generation fighter by 2010. The government will discuss a draft for reforming
the entire military industrial complex next month, he said.

The government is well aware that it faces a struggle to sweep the aviation
companies into holdings, since it has lost controlling stakes in a number of the
enterprises after the privatizations of the early 1990s.

A federal audit last year found that the government maintained a controlling
stake in only seven companies, while it had completely lost control of 94.

The government said Friday that at least a third of the aviation companies is
state-owned, while another third is partly state-owned. The state has no stakes
in the rest.

The government is working to increase its ownership in the companies by writing
off their debts.

The Russian Aviation and Space Agency estimates that endeavor will cost the
government 222 billion rubles $7.7 billion, of which 14 percent will come from
the federal budget.

Some industry players welcomed the government`s bid to prop up their sagging
profits. The industry, which accounted for up to a quarter of global production
in Soviet times, only managed to roll out nine civil aircraft and 21 military
planes in 1999, according to the Audit Chamber. All 21 military planes were sold
abroad. By comparison, the Soviet Union built about 450 civil and 1,000 military
aircraft during its glory days, the chamber said.

The aviation industry produced 73.8 billion rubles worth of goods last year,
while profits reached 17.1 billion rubles, according to government figures.
Output grew 41.4 percent.

Orders from the state account for 10 percent to 15 percent of production
capacity these days.

``This is a timely, economically sound and well-founded decision in line with
the global practice of creating multiprofile companies,`` said Andrei Mazurov,
deputy general director of MiG.

``This will increase competitiveness and help lower expenditures for the
companies,`` he said by telephone Friday.

``The country cannot leave this stew the aviation industry as it is, and a
restructuring should have been done five years ago,`` agreed Konstantin
Makiyenko, deputy head of the Center of Analysis of Strategy and Technology.

However, Makiyenko expressed skepticism about the plan.

``I have not seen a single positive example of the government restructuring the
sector,`` he said.

``Unification should come from the enterprises themselves and not be imposed
from above.``

And that is exactly what has been happening in some aviation companies. As they
scramble to survive, some have been revamping operations, diversifying products
and seeking partnerships with other players.

Fighter producer MiG, for example, has completed a restructuring that brought
design, production, rollout and servicing under one roof. Sukhoi is carrying out
a similar revamp. Both companies have for several years been pushing civil
aviation programs with modest success.

Perm Motors, producer of the PS-90 engines that power Ilyushin and Tupolev
passenger jets, is building up a holding, and Lulka-Saturn, designer of engines
for Su-27 fighter jets, and producer Rybinsk Motors are aiming for a merger.

``It [the government`s plan] will work out if companies have joint projects,``
said Mikhail Dicheskul, deputy general director at Perm Motors.

Sukhoi spokesman Yury Chervakov said the government`s consolidation plan was a
must, but ``Sukhoi itself has to complete its restructuring first.``

``These holdings have to unite over a solid program,`` he said. ``Just throwing
them into one heap is not right.``

Veniamin Kasyannikov, spokesman for the Kamov helicopter producer, was less
enthusiastic about the plan.

``The industry has been tossed around for the past 10 years, and we are too
tired to react,`` Kasyannikov said.

By Lyuba Pronina Moscow Times

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