Russian Fleet Revolution Offers Respite for Ailing Western Values

Potentially Innovative Disposal Offer Could Slash MD80 Surplus At A Stroke The reported offer of up to 200 used Western aircraft to beleaguered Russian airlines would do much to boost service levels in the country while also slashing the surplus of such aircraft as the MD80 and Fokker 100, and allowing their...

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Potentially Innovative Disposal Offer Could Slash MD80 Surplus At A Stroke

The reported offer of up to 200 used Western aircraft to beleaguered Russian airlines would do much to boost service levels in the country while also slashing the surplus of such aircraft as the MD80 and Fokker 100, and allowing their values a measure of breathing space.

Reportedly brokered by the German transport ministry, the offer seeks to supply Russian airlines with up to 200 MD80 and Fokker 100 aircraft. The proposal follows the recent acquisition of 12 B757s by a Russian carrier. The aircraft would be supplied by SAS, GE Capital Aviation Services (GECAS) and Germania to a variety of Russian airlines as a stopgap measure. Lessors and owners of such equipment have been forced to find radical ways of disposing of still viable aircraft that have limited demand as passenger aircraft and a non-existent role as freighters.

The use of Western equipment would be on the basis of temporary leases, perhaps as short as 24 months. The aircraft would provide temporary capacity until new Russian aircraft are developed from the drawing board. For the last 20 years, Russian aircraft design has been exemplary but has always lacked sufficient funding to move it to the production stage. Specifically, domestic airlines need the new Russian regional jet but the service entry date remains extremely fluid, forcing alternative measures to be considered. The interim Western capacity would allow Russian operators to start using much more versatile and reliable equipment, and would be aided by the weak U.S. dollar and/or a barter arrangement. The increased profitability of Russian airlines could translate into more money for domestic programs. Airlines in Commonwealth of Independent States (CIS) have already benefited from the use of Western equipment much to the chagrin of Russian manufacturers.

While considerable obstacles remain, not the least of which is trying to persuade myriad operators that two aging Western types will meet all their needs, the potential benefit to both the used aircraft market and Russian operators is evident. Nearly 100 MD80s are now in storage along with more than 60 Fokker 100s. Existing operators are shedding more MD80s, thereby making the aircraft continue to outstrip demand. Balancing the supply and demand equation would do much to boost general market confidence, at least until the aircraft are returned to the lessors, and would aid values and lease rentals for the aircraft. GECAS, in particular, which has had a longstanding interest in the Russian market, would find considerable benefit in generating at least some revenue from currently unwanted assets. Should the deal not progress, finding alternative ways of increasing demand for this large number of aircraft would prove difficult at the very least, and lead to further weakness in the values of MD80s.

Acquisition of Western equipment by Russian operators has long been difficult due to onerous duties imposed on the import of older aircraft. The deal has already hit problems as Russian authorities consider the impact on domestic manufacturing. While the MD80s are reported to be less than desirable due to their 14-year age, such aircraft only compare with similar vintage Russian aircraft bolted together during the last years of the Soviet era. To make the deal work, it will require an exemption from import duties. To allay concerns over the effect on domestic manufacturing, a percentage of lease rentals could be diverted to domestic manufacturing. A strong Russian aerospace capability may not sit well with the U.S. government or Boeing. However, once savoring the delights of Western equipment, Russian operators may not wish to return to domestic equipment, which could create a political dilemma.

To advance Russian manufacturing and counter the concerns of domestic operators, Russian authorities are planning to integrate design and manufacturing. The move to integrate Ilyushin, Mig, Sukhoi and Tupolev into a single government-owned company would do much to overcome the fragmentary and diluting effect of maintaining so many facilities. Whether the plan is a reaction to the proposed offer of 200 Western aircraft is not known, but such a decision has been necessary for a number of years. The Russian government still needs to address the means by which mostly privately held aerospace companies are to be essentially nationalized.