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MARCH 15, 2004
A Russian Planemaker's Daring Maneuvers Irkut is aiming high with an IPO and ambitions in overseas markets The Irkutsk Aircraft Factory may not seem like an obvious pioneer of Russia's transition to market capitalism. Founded by Stalin in 1932, the Siberian plant went on to churn out the MiG-23 and Su-27 fighter-bombers that formed the nucleus of the Soviet Union's Cold War air armada. Now, Irkutsk is about to stake an altogether different claim to fame: In late March, the factory will issue Russia's largest-ever initial public offering -- and the first by a Russian defense company. The IPO is likely to prove a highflier -- and, the company hopes, will help propel it into civilian-aircraft production. Irkut Corp., which was founded when the plant was privatized in 1992, aims to raise $100 million by floating 20% of its shares on Russia's two main stock exchanges. The company, which is 85% privately owned, will thus give investors a chance to own shares in one of Russia's most successful defense manufacturers. Last year, Irkut had estimated revenues of $522 million and pretax earnings of $94 million -- about twice sales and earnings in 2000. An even bigger selling point is Irkut's $4.35 billion order book, which includes significant overseas deals. "Foreign investors are more confident if a company has a high volume of exports," explains Elena Sakhnova, an aviation analyst at United Financial Group, a Moscow investment bank. What's behind Irkut's rapid takeoff? Senior Vice-President Sergei Tsivilev credits the Sukhoi Su-30 fighter jet. With state-of-the-art computers and all-weather radar, it is considered one of the most maneuverable fighters. At around $40 million, the Su-30 is at least 25% cheaper than comparable U.S. fighters like the F-18. Attracted by its price tag and capabilities, India ordered 50 Su-30s in the late 1990s and signed a $3 billion contract to build it under license. Malaysia spent $900 million on 18 Su-30s last year. Irkut's dependence on the Su-30 runs a risk, though. The plane will be obsolete in little more than a decade and funding a replacement won't be easy. That's why Irkut plans to diversify into civilian aviation, where development costs are lower and there are more opportunities for cooperation with the West. Its hopes hang on a new aviation wonder: the Beriev Be-200, a $25 million amphibious jet. NICHE PRODUCT. Amphibious planes were all the rage in the '30s and '40s, but there has been little demand for them since. Now, though, they are back in fashion -- particularly as fighters of forest fires. While traditional fire-fighting aircraft go back to base to reload their water supply, the Be-200 can land on water and scoop up 12 tons of it within 14 seconds. "It's a niche airplane that will have a significant global impact," says Dean Breest, chief executive of Liberty Group International Inc., a Georgia-based company that will market the Be-200 in the U.S. Breest adds that growing airport congestion in the U.S. could even make the Be-200 attractive to domestic passenger airlines. Irkut already has one potential U.S. buyer. Hawkins & Powers Aviation Inc., a fire-fighting company in Greybull, Wyo., signed a letter of intent in February to buy eight Be-200s. Irkut also expects tenders from French and Italian emergency-services agencies. A feasibility study Irkut conducted last year with European Aeronautic Defense & Space Co. and engine maker Rolls-Royce PLC, both of which are collaborating on the project, concluded that Irkut can expect to sell 320 Be-200s over the next 20 years. Irkut wants civilian aircraft to make up 45% of sales by 2010, compared with less than 10% today. But it will still depend heavily on military orders. It is now negotiating to be included in a new state-owned holding company that is likely to seek a majority stake in all of Russia's defense plants. How that plan pans out -- and how much money Moscow will devote to Irkut's development -- is not yet decided. Still, whether waging the Cold War or fighting fires, this company is a survivor. Even Stalin might be proud.  By Jason Bush in Moscow
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