CLIPPED WINGS

MOSCOW —  Since Russia’s flagship carrier Aeroflot committed the ultimate act of independence in September by ordering 10 new Boeing 737s, nationalists and aviation workers have been wailing at an endless wake for the country’s aerospace industry.

But those whose pride and paychecks are less affected by the decision say the move--branded here as treasonous--could actually prove to be the best thing that ever happened to Russian aviation.

Confronted by competition for the first time in their lives, the builders of Tupolevs, Ilyushins and Antonovs are getting the message that not even their oldest customers will buy second-rate products.

“You cannot provide safe and efficient air travel on patriotism alone,” declares Aeroflot Director General Yevgeny I. Shaposhnikov, bluntly challenging the domestic plane builders and the estimated 1.8 million aerospace workers in Russia.

But nationalist feelings have sharply intensified in this post-Cold War era of shrinking industrial output and federation-wide financing woes. Across the vastness of Russia, engineers and technologists from the once-vaunted Soviet military-industrial complex are becoming redundant because the country cannot afford to invest in research and development in the free-market age.

To the struggling and unemployed, decisions such as Aeroflot’s order for Boeings are stinging reminders of Russia’s lost superpower status and the rough road ahead for industries such as aircraft manufacturing.

The Boeing sale, the first of at least 30 new aircraft that Aeroflot plans to buy over the next five years, stunned the struggling Tupolev enterprise in the Volga city of Kazan, where the state-owned carrier’s preference for its as-yet-uncertified TU-214 had virtually been taken for granted.

It has also set in motion a massive government-led effort to streamline Russia’s aerospace industry before it collapses on the eve of what is expected to be a boom in commercial aircraft orders.

Passenger air travel in the former Soviet Union is projected to more than triple by 2015, according to forecasts by Boeing Commercial Airplane Group.

The huge growth in traffic will create strong demand for new aircraft, compounding an already pressing need to replace the aging and outmoded fleets currently in service in Russia--planes that guzzle fuel, violate Western noise and emissions standards and accommodate passengers as if they were so much cargo.

Russian airlines alone will have to buy 1,600 new planes costing upward of $75 billion during the next two decades. In addition, countries such as China are experiencing a boom in air travel and have traditionally bought Russian aircraft.

But the do-or-die demand for reform could not come at a worse time for Russia, which remains mired in a wrenching economic transition that has all but eliminated funding for state-owned manufacturers and threatened millions with the loss of their jobs.

“They’re being asked to adapt to a whole new and much more difficult set of market demands at the same time that their resources and their ability to finance and invest have been overwhelmingly, I would even say ruthlessly, curtailed,” says Wolfgang Demisch, an aerospace industry analyst with New York’s BT Securities.

Demisch likened the restructuring pressures on the nearly bankrupt builders to a postoperative patient being forced to run a marathon. But he also warned that the Russian industry will be trampled by foreign competitors unless it learns to deliver planes to a more demanding market.

Tupolev’s government managers loudly protested Aeroflot’s Boeing purchase, saying they needed that $350-million order to resume production on four TU-214s that have been languishing on the assembly line for lack of money.

Aeroflot compromised with the strapped manufacturer by promising to buy the new jet once it is certified and up to international standards--a pledge that built a fire under some in the industry but left others disgruntled or in denial.

Aerospace workers turned out en masse last week for a one-day strike against government economic policies, including delayed paychecks and the new trend by state-owned airlines to buy their planes abroad. Only four of 80 airplanes ordered by Russian carriers so far this year are being made in Russia.

New international airlines such as Transaero and AJT are building their fleets around Western products and their clientele around promises of Western-style safety and comfort.

But it was the decision by Aeroflot, Russia’s flagship international carrier, to buy planes from Seattle that drove the point home.

The preference for imported aircraft “threatens to completely ruin Russian aircraft manufacturing,” warns the chairman of the Aircraft Manufacturing Industry Workers union, Anatoly Breusov. “The hundreds of millions of dollars spent on leasing or buying foreign-made craft is creating jobs abroad and cutting them in Russia.”

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Tupolev executives grudgingly concede that they cannot expect commercial airlines to buy a less competitive product just because it’s made in Russia, but they complain that they are hostages to a federation-wide cash-flow crisis.

“Our fate depends entirely on the general economic situation in Russia over the next two to three years,” says Oleg Y. Alasheyev, deputy general director of the Tupolev Aviation Corp. “We need to find a middle ground between the full state funding we relied on until a few years ago and the complete financial autonomy suddenly expected of us under the new system.”

By all outside appearances, the cavernous Tupolev works in Moscow could already have gone out of business. There is neither a sign nor a street number on the grubby building that stands anonymously behind a gas station and a billboard hawking car alarms. The dimly lit marketing and sales complex is virtually empty, and the few employees wear coats and gloves inside because the building is unheated.

The lack of cash to invest in new designs, engineering and construction is shackling production, and the absence of any workable financing or leasing system is stifling sales.

“We need to work out some kind of leasing program, because too few of our airline customers have money to invest” in buying planes, says Yuri A. Rostovtsev of the Aviaexport trading firm that markets Tupolevs. “We shouldn’t have planes standing idle in Ulyanovsk.”

Tupolev has hundreds of thousands of employees--nobody is sure how many--scattered among five major construction enterprises. It currently has 10 finished TU-204s with no buyers, a legacy of the Soviet-era practice of producing planes with government subsidies whether there were buyers or not.

Buying newer Russian-made planes to replace the 600 aging TU-134s now plying this vast federation’s airspace should make more economic sense than shopping abroad, Aeroflot’s Shaposhnikov concedes. Domestic aircraft cost a fraction of what competing Western makes go for, and they are familiar to Russian air and ground crews.

Aeroflot turned to Boeing not by choice but by necessity, Shaposhnikov says, “because Russian manufacturers have yet to offer a decent replacement option.”

Russian aerospace engineers are regarded by their Western colleagues as highly skilled, and they are accustomed to considerably lower wages. That has encouraged the development of joint ventures, which analysts say is the most promising path to recovery.

The massive aviation works in the southern city of Voronezh that produces Ilyushin aircraft is developing a new long-range wide-body jet, the IL-96M, that fits Russian-made fuselages with Pratt & Whitney engines and Rockwell Collins avionics. Aeroflot has already placed orders for 20 of the aircraft.

“Our approach has been all along that we are not just interested in bringing our engines here and selling them. We would rather produce something locally,” says Mark Pitts, the Moscow-based vice president for marketing with United Technologies, the parent company of Pratt & Whitney.

Because of the “nationalist fallout” from the Boeing sale, the atmosphere is quite favorable for cooperative ventures such as the IL-96M project, Pitts says, noting that the engine maker is also studying the prospects for joining forces with Perm Motor Works, which produces the troubled PS-90 aircraft engine.

The PS-90 has been the workhorse of the Russian air fleet, but it is unpopular with the airlines because of its voracious consumption of fuel and problems with spare parts and noise. It is so noisy that the German government has asked Aeroflot to cease night flights over its territory, and IL-62 long-range aircraft have been removed from U.S.-bound routes.

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“The wake-up call has been heard, and everyone realizes that they need to invest some money into the aviation industry,” Pitts says. “There’s some very good, solid engineering coming out of most of these companies that should be put to use.”

Boeing has joined with Tupolev to create the Technology Research Center just outside Moscow. Among its nearly 30 projects are safety studies and interior design tests, and a supersonic research laboratory aboard the resurrected TU-144, the plane that had been Russia’s hope for an SST-equivalent until one crashed at an air show several years ago. But the U.S. giant is not yet doing any joint manufacturing with Russians.

Tupolev is pinning its hopes on partnerships with Western industry leaders and is already fitting its TU-204 with Rolls-Royce engines. An Egyptian plane-leasing company, Kato Group, has ordered 30 of the aircraft, and Alasheyev says he expects Russian carriers to buy them as replacements for the roughly 1,000 TU-154s in service as they become obsolete.

“I think Aeroflot’s decision to buy Boeings will eventually be regarded as a mistake. I don’t believe it will be effective or profitable to use foreign-made planes at Sheremetyevo and other Russian airports,” Alasheyev says.

“We conclude this from the experience of other customers who bought Western aircraft because of political emotions at the time the Soviet empire collapsed. Now they realize that they need a whole new infrastructure to service them, and this cannot be developed overnight.”

Balkan Airlines of Bulgaria is already returning to its original Russian supplier, he says, and only a financing hitch is holding up completion of a deal to buy 16 Tupolevs for $120 million.

Indeed, financing is another big obstacle to Russian manufacturers’ improving their market standing. The cash-strapped enterprises cannot afford to build before receiving payment, and banks won’t lend without government guarantee of the purchase.

The Pratt & Whitney joint venture is backed by the U.S. Export-Import Bank, but analysts say the Russian government will have to reform its banking and credit system if it wants to see a reversal of aviation fortunes.

The clock is already running in that test of commitment to saving Russian aerospace. And the industry is pervaded by a fear that there may be too little time to develop competitive aircraft before the airlines need to replace their fleets.

Most Russian plants remain hugely overstaffed--the country’s aerospace work force is estimated at more than double the 800,000 workers who make up the U.S. industry. To compete, those enterprises will have to learn to do more with less, and quickly.

“Ultimately, they are going to have to exercise some triage, but it’s going to be very difficult for them. They will have to change their ways in a very dramatic fashion,” says aerospace analyst Paul H. Nisbet of JSA Research in Newport, R.I. “I don’t see the adaptiveness among Russians that I see in China to developments of that nature.”

Indeed, much of the recent reaction to tough new international air travel standards has been knee-jerk denunciation of perceived Western plots.

The newspaper Pravda, a Communist Party mouthpiece, claimed in an Oct. 23 article that Russia’s aviation industry is being systematically destroyed as a condition for membership in the Group of 7 industrialized nations.

Such claims, along with protests such as last week’s strike, nurture the resentment of those who have suffered as a result of Russia’s transition to a market economy.

“I’m not needed by anyone anymore. Our airlines want to buy Boeings now,” says 57-year-old Yevgeny V. Alyoshin, an embittered unemployed aviation design engineer who blames the West for his nation’s myriad troubles. “You need our oil and our diamonds, and now you want everything else. You in the West are gleeful that we are suffering.”

To salvage what it can of its once-vaunted aeronautics work, the Russian leadership in September ordered the Defense Ministry’s civil aviation committee to bring together designers, builders, marketers and buyers in a hurry-up effort to restructure.

Shaposhnikov, a major force in the rescue effort by virtue of his airline’s top-customer status, says steps are finally underway toward producing Russian products he would be interested in buying.

“But,” he adds, “there’s still a long way to perfection.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Aviation Boom

With air traffic in the former Soviet Union projected to triple by 2015, Russian airlines are expected to order some 1,600 new planes worth $75 billion. And the threat that they will come from the West has triggered alarm throughout Russia’s beleaguered aerospace industry. Recent and projected revenue passenger miles in the former Soviet states, in billions:

Source: Boeing Co.