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Is Russian Civil Aircraft Manufacturing Industry Too Slow to Compete in the Global Market?

Mon, 30/08/2010 - 09:16

In 2010, out of 38 civil aircrafts that are currently in production/assembly by various Russian airframe integrators within and outside of UAC, only 14 aicrafts (TU-204/214, SSJ-100 and AN-148) are expected to be delivered to airlines and customers by the end of this year.

According to Gravitas Research latest market research findings, Russian civil aviation industry has almost 38 aircraft that are currently assembled/produced by various integrators within UAC. These 38 civil aircrafts were scheduled to be completed/transferred to Russian and foreign airlines by the end of 2010. However, only 14 aircrafts are expected to join fleets of airlines by the end of 2010 despite their strong demand for passenger and cargo aircrafts due to booming air transportation market in Russia.

Starting from 2001, Russian civil air transportation market demonstrates strong market growth, reaching 8.0 per cent of CAGR growth of passenger transportation turnover and 4.2 per cent of CAGR growth of cargo transportation turnover. Both passenger and cargo transportation peaked in 2007 reaching 18 and 17 per cent respectively as a result of high international prices for oil and gas spurring all sectors of Russian economy, steadily growing disposable income of Russians, expansion of consumer financing by the of the Russian banking sector, increasing competition among Russian airlines and others. Volumes of passenger transportation turnover and cargo transportation turnover from 2001 to 2009, CAGR growth rate, market trends as well as their growth rates are illustrated in the Graph 1.

Graph 1. Passenger and Cargo Transportation Turnover, Growth Rates and Trends (Russia), 2001-2009

Passenger and Cargo Transportation Turnover, Growth Rates and Trends (Russia), 2001-2009Passenger and Cargo Transportation Turnover, Growth Rates and Trends (Russia), 2001-2009

Russian airlines were actively expanding their fleets with Russian and foreign-build aircrafts following growing demand for air transportation both by local population and Russian business community. During the period of 2003 to 2009, more than 500 of new and used foreign and Russian aircrafts were added to existing fleets of Russian airlines with market value exceeding of €25 billion EURO. Large but aging fleet of old Tu-154, Tu-134 and others determined the need in the new civil aircrafts. Import (new and leased) and procurement of local civil machines is dominated by narrow-body aircrafts that reached almost 80 per cent (in units) of all aircrafts procured in 2009. Graph 2 highlights historical procurement volume of foreign and Russian aircrafts by the Russian civil aviation market during 2003-2009.

Graph 2. Historical Market Size of Russian and Foreign Civil Aviation Procurement and Split by Body Types (Russia), 2003 - 2009

Historical Market Size of Russian and Foreign Civil Aviation Procurement and Split by Body Types (Russia), 2003 - 2009

Among the key market drivers that allowed Russian civil aircraft building to revive production of the aircrafts is old and aging aircraft fleet in Russia. Shown on the graph 1, more than 80 per cent of Russian aircrafts that are in operation by Russian airlines are almost 30 years old or older.

Graph 3. Distribution of Russian Civil Aircraft Fleet by Age Groups in 2010. Pareto Curve and Percentage Split (Russia), 2010

Distribution of Russian Civil Aircraft Fleet by Age Groups in 2010. Pareto Curve and Percentage Split (Russia), 2010

According to Gravitas Research estimates, before 2006, every year Russian aircraft fleet was loosing from 30 to 35 aircrafts due to end of their life-cycle. However, the peak of aircraft scrapping was reached at the end of 2008 and beginning 2009, when more than 200 units of TU-154, TU-134 and Yak-42 aircrafts were scrapped.

Such significant drop in the Russian aircraft fleet combined with steadily growing air transportation that reached almost 85 per cent of the air transportation level registered in 1991 (150.4 bn passenger-km), favourable investment climate and support of Russian Government provided Russian aircraft builders with strong market growth opportunities. Moreover, Russian airlines were forced to acquire or lease new and used aircrafts as strict international regulations raised barriers for utilization of old, Soviet-build TU, AN, YAK and IL passenger and cargo aircrafts abroad. These market factors boosted order portfolios for new aircrafts of Russian manufacturers.

Among other important market drivers that facilitate growth of the Russian aircraft building industry are the high international prices for oil and gas as Russian Government is able to secure sufficient financial resources to support national industries including Russian civil aviation builders. During 2002 to 2006, overall investments of the Russian Government into modernization of the aircraft building industry in Russia reached €0.6 billion EURO. However, the largest support to the industry was made by the Russian Government during 2008-2009 when Global financial crisis affected Russian economy.


2008 Economic Recession in Russia and Russian Civil Aviation Industry

Efforts of Russian civil aircraft builders in revival of full-scope production of aircrafts were stalled by the Global economic and financial crisis. Deeply affecting all real sectors of Russian economy, such as machine-building, chemicals, textile, automotive, transportation and others including aircraft manufacturing, Russian economic recession is taking its toll on the pace of the industry development while exposing deeply rooted structural inefficiencies and problems of the Russian aircraft building industry.

Russian economic recession negatively affected air transportation market causing 8 per cent drop in passenger air transportation turnover to 112.5 bn passenger-km and 3 per cent drop in cargo air transportation turnover to 3.6 bn tonnes-km in 2009. As a result, average load coefficient for passenger air transportation dropped to 73.4 per cent with a share of idle aircrafts reaching 41 per cent. As per Russian cargo air transportation market share of idle aircrafts has reached 51 per cent in 2009. Gravitas Research estimates that globally, passenger air transportation turnover has decreased only 3.5 per cent with average load coefficient higher than in Russia and reaching 77 per cent. At the same time, drop in the cargo air transportation turnover globally was reaching 10 per cent (compared to 3 per cent in Russia) along with average load coefficient not exceeding 49 per cent.

In such market conditions attention of local Russian airlines shifted toward acquisition or lease of used foreign aircrafts while canceling orders for new aircrafts, focus on modernization of existing aging fleets and shift toward market survival strategies. Thus slightly more than 115 aircrafts were acquired and leased by Russian airlines in 2009, mainly used one.

Graph 4. Impact of Economic Recession on Financial Stability of Russian Air Transportation Market and Renewal of Aircraft Fleets (Russia), 2010

Impact of Economic Recession on Financial Stability of Russian Air Transportation Market and Renewal of Aircraft Fleets (Russia), 2010

On the other hand, despite stiffening of financial resources of Russian airlines and general economic recession in Russia, local aircraft builders were able to finish and supply to customers 12 civil aircrafts in 2009. This is compared to only 9 units supplied in 2008.

Nevertheless, shrinking or delayed market demand for new aircrafts and economic recession just highlighted inefficiencies of local aircraft building industry. The role of the Russian Government in protection of the Russian aviation industry is worth noting as only in 2009, Russian Government spent more than €2.46 billion EURO to support UAC and aircraft-building plants in Russia. Despite considerable support by the Russian Government, UAC and aircraft-builders development are impeded by number of market and non-market factors, among them are the following:

  • Internal lobby of new aircraft projects within UAC that involves unequal distribution of financial resources among aircraft-builders
  • Old and aging manufacturing facilities and assembly methods with average wear rate exceeding 70 per cent. Only ZAO “Sukhoi Civil Aircrafts” and Komsomolk-na-Amure production facilities invested in reconstruction of assembly line for the SSJ-100 project
  • Presence of large vertically integrated organizational structures
  • Lack of investments in R&D during 1991-2003
  • Oversized number of employees among others contribute to continuously growing gap between foreign and Russian aircraft builders
  • Inadequate and outdated aftersale support and customer service

Considering mentioned above factors and other data collected during preparation of the market report “Strategic Opportunity Analysis of the Russian Civil Aviation Supplier Market”, Gravitas Research preliminary estimates demonstrate that despite large number of aircrafts being currently in production/assembly lines of Russian aircraft builders, only 14 civil aircrafts will be delivered to customers this year. Graph 5 demonstrates details of planned production schedule and expected deliveries of Russian civil aircrafts in 2010.

Graph 5. Russian Civil Aircrafts Production Schedule vs. Expected Deliveries of Aircrafts to Customers (Russia), 2010

Russian Civil Aircrafts Production Schedule vs. Expected Deliveries of Aircrafts to Customers (Russia), 2010

About Gravitas Research:
Gravitas Research is a specialized market research and consulting company, headquartered in London, UK. We publish premium market research reports, business analytics and industry analysis of the Russian, CEE and CIS industries and markets

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