The Russians are Coming, Again

Commercial | Airframes

Following the fall of the Soviet Union, Russia’s helicopter industry entered two decades of suspended animation from which it is slowly beginning to emerge. The first signs are encouraging, as the industry is being consolidated and initial attention is being paid to the basics, such as maintenance services and customer support.

Even more encouragingly, the new Russian Helicopters Joint Stock Company, the holding company which has taken over the industry, is taking a gradual, step-by-step approach rather than the bombastic, traditional Russian habit of decreeing that everything has been magically fixed, and is now in top working order. The Potemkin Village approach to customer support is no longer viable, the Russians have learned. To engage old and prospective new customers, Russian industry in August 2009 organized the first-ever International Russian Helicopters Operators Conference. This was an innovation, as previous conferences only concerned the Mi-8/-17 family of helicopters.

Recognizing that AOG is not a good advertisement for its products, and that customers need fast support, Russian Helicopters, JSC—which we will shorten to RusHelo for convenience—has also set up maintenance joint ventures in Sudan to serve its customers in Africa; in Sharjah, UAE, to serve the Middle East; and is now setting up a third one in Uzbekistan, for former Commonwealth of Independent States (CIS), which groups the former Soviet republics. More are planned.

RusHelo estimates that about 600 Russian-made rotorcraft are currently operated in the Middle East and North Africa, with many more in sub-Saharan Africa and Latin America, where it scored something of a coup by selling Mi-35 gunships not only to Venezuela but to Brazil as well. The company aims to eventually take about 15 percent of the world’s helicopter market, with an initial focus of maintaining its market share in India, China, Africa, and, to a lesser extent, Southeast Asia. It will then have a base from which to launch its new products: first the Ka-226T unveiled in December, and subsequently the new Mi-38, and two models that have long been in the pipeline: Ka-62 and Ansat.

Before it can begin to expand in new markets and new models, RusHelo must optimize its financial management because of today’s recession-hit market. This obviously means that less cash will be available for investment, so there is no way of knowing, short of guessing, when the company might find enough cash to implement its strategy.

There is also a second, bigger question mark hanging over RusHelo’s long-term plans: what will be its unique selling point? In the past, Russian-made helicopters promised, and mostly delivered, simple, reliable and abuse-proof engineering at low cost. That is why they were so successful in the developing world, where both cash and aviation expertise are at a premium. The low price was made possible by investments made by the Soviet Union, and long amortized when it collapsed; recent upgrades (Mi-8 to Mi-17 to Mi-171, for example), while operationally significant, have not required much investment. This will not be the case with the new helicopters, and as it is now playing under (almost) free market rules, RusHelo will find it much more difficult to finance their development, and turn a profit, for many years yet. Reliability, however, is what will make or break Russian industry’s plans. Its previous attempts to break into the open helicopter market in the late 1980s and mid-1990s failed abysmally because no one in his right mind would buy a helicopter without being 150 percent sure of his source of product support, spares and maintenance. And Russia could not offer such a guarantee.

Can it do better now? The answer is, not really. Russian companies have shown an admirable determination to get the job done whenever hard cash is in play—witness the sterling work being done by Russian, Ukranian and other ex-Soviet helicopters wet-leased by NATO or coalition members in Afghanistan, Iraq and the world’s other trouble-spots.

But the hard fact is that there is no rule of law in Russia today. This means the helicopter industry is as liable to a sudden, unlawful takeover as was Lukoil or the Hermitage Fund or any other dozens of companies that have been stolen from their rightful owners while the police, the prosecution service and the courts looked away.

Anyone entering into a contract expects to be able to enforce it in court, if necessary. This is impossible in Russia, where corruption and cronyism reign virtually unchecked in the police and justice system. This will obviously limit the number of commercial customers willing to gamble on the cost-effectiveness of newly-developed Russian Helicopters, even before insurers and certification authorities become involved. Caveat emptor, indeed.

This is the real obstacle that RusHelo must resolve before it can even think of taking commercial market share from its Western competitors. But unhappily for the company, and for Russia’s distinguished helicopter industry, this is not something it can do on its own.