Global Economics

Russia's New Airliner Readies for Takeoff


Moscow's hoping Sukhoi's Superjet 100, aimed at the competitive niche market for regional jets, will revive a dormant civil aviation sector

It's an event of huge significance for Russia. On Sept. 26, hundreds of guests were flown to the remote Far Eastern city of Komsomolsk-on-Amur to witness the ceremonial unveiling of the Sukhoi Superjet 100, the first Russian commercial aircraft designed since the end of the Soviet Union. The new plane, a midrange passenger liner, symbolizes Russia's bid to revive its aviation industry by making a comeback in the highly competitive international market for civil aviation.

In a sign of the project's importance, First Deputy Prime Minister Sergei Ivanov was on hand to introduce the long-awaited aircraft to the guests assembled outside of a hangar at the KnAAPO aircraft factory, where the plane will be built. "I urgently recommend all potential customers to take a close look at this novelty," Ivanov told them, shortly before the hangar doors lifted to reveal the shiny new Superjet. Even the chief executive of Boeing Commercial Airplanes (BA), Scott Carson, had recorded a message for the ceremony, which was broadcast on a giant screen. "Aviation is Russia's future," he said. "I congratulate you."

Targeting International Buyers

The fanfare represents the high hopes riding on the new aircraft. The Russians are hoping to sell at least 800 of them, including 600 to international buyers—with 60% of the total to be sold in North America and Europe. Unofficially, officials at United Aircraft, a recently created umbrella company that includes Sukhoi, have suggested that sales could reach as many as 1,800 units. With a price tag of $28 million, the targeted 800 aircraft would bring in over $20 billion, money that is badly needed to rebuild Russia's struggling aviation industry.

The country remains a major player in military aviation, thanks largely to Sukhoi's sophisticated Su-30 fighter, which has found ready customers (BusinessWeek, 4/10/07) in China, India, and even Venezuela. But during recent years Russia has produced just five or six passenger liners each year—outdated Tupolevs and Ilyushins that even Russian airlines (BusinessWeek, 5/1/07) are increasingly loath to fly.

The Superjet, Sukhoi's first foray into civil aircraft, is aimed at the niche market for smaller aircraft, so-called regional jets, that is estimated to be worth around $8 billion each year. The plane will come equipped with either 75 seats or 95 seats, with a range of either 3,279 km or 4,630 km (2,037 miles or 2,877 miles), depending on specification.

Competitive Advantages

The Superjet will face direct competition from two existing makers of regional jets, Brazil's Embraer (ERJ) and Canada's Bombardier (BBDA.TO), which until now have dominated the market. (The smallest jets from Boeing and Airbus seat more than 100 passengers.) But Sukhoi believes it has a number of trump cards that will enable it to take on these established competitors. Thanks to lower-cost, locally sourced materials, the Superjet is around 20% cheaper to build than the competitors' craft. The Russians also believe that new, fuel-efficient engines, developed with the help of French engine-maker Snecma (SAF.PA), will lead to operating costs that are 10% to 15% lower than rival offerings.

More generally, foreign involvement in the project has been crucial in ensuring that it meets the exacting technological standards demanded by international airlines. In June Alenia Aeronautica, a unit of Italian aerospace concern Finmeccanica (SIFI.MI), acquired a 25% stake in the project for $250 million. Under the contract, the Italians will supply parts for the aircraft and will own a majority stake in the unit that will be responsible for marketing. Boeing also has been a consultant, providing advice on areas such as project management and customer support.

True, not everyone is convinced of the Superjet's potential for success. Regional jets became all the rage in the 1990s, when the rise of budget airlines led to a surge in demand for smaller and cheaper aircraft used for shorter flights. But the regional jet market has more recently taken a downturn. Rising fuel costs have changed the economics of the airline industry, increasing the preference for larger aircraft covering longer distances. Skeptics note that the market share of regional aircraft plummeted from 17% in 2004 to 13% in 2006, according to statistics compiled by Boeing.

Encouraging Signs for Sales

Another problem is that Russia isn't alone in wanting to enter the market. The Chinese also are hard at work on their first commercial jet, the ARJ-21, which will have between 70 and 110 seats. It's due to begin full-scale production in 2009. Japan's Mitsubishi recently announced that it also wants in on the market, unveiling the model of its 72- to 92-seater MJ (Mitsubishi Jet) in June.

None of that is deterring the Russians, who already have orders for 73 Superjets on the books and plan to begin production next year. Although most of those orders have come from Russian airlines, including 45 from flag carrier Aeroflot (AFLT.RTS), Sukhoi also has attracted its first international buyers (BusinessWeek, 8/22/07). In June Italy's ItAli airline put in an order for 10 Superjets, with options for ten more. A number of other Western airlines also are reported to be eyeing the aircraft, with Hungary's Malev and Scandinavian Airlines System (SAS.ST) rumored to be finalizing orders. "There are already foreign buyers, even though they haven't seen the aircraft yet," says Evgeny Shago, aviation analyst at Trust Investment Bank in Moscow. "It's a very good sign."

With reporting from Anna Smolchenko


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