27 October 2016

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Where does Ukraine’s plane fly

Ukraine is looking for a place for its aviation industry. Technological and economic challenges have to be met amid complete rupture of relations with Russia, which until recently served as Ukraine’s main market and partner. Will it manage to find new forms of cooperation, new ties, and recognition of new customers?

Ukraine looking for a place for its aircraft industry
Ukraine looking for a place for its aircraft industry

National military-industrial complex, which includes the aircraft construction sector, is now in need of modernization and rationalization of production. President of Ukraine Petro Poroshenko at a recent meeting at the General Staff said that the country, which has been defending itself for more than two years in a war with Russia, the aggressor so nostalgic for the Soviet past, cannot keep asking for military help from the West forever. With such huge defense industry capacities, the government finally has to deal with its clumsiness and awkwardness and start producing weapons, which would allow fulfilling key defensive tasks under tight deadlines. The Head of State has set a goal of optimizing the work of Ukraine’s defense industry.

State-owned Concern Ukroboronprom as the main manager of Ukraine’s defense assets seems ready to meet the challenge set by the president. The company’s management has proposed to achieve the goal through creating industrial clusters – combinations of companies divided by types of production.

The first such association was established in early June: the Ukrainian Aircraft Building company gathered under its "umbrella" all the key factories and design bureaus. The core enterprise of the cluster is a Ukrainian aircraft building giant Antonov. State enterprise Novator, Kharkiv-based machine-building plant FED, Kharkiv’s Aggregate Design Bureau, and Mayak plant were also included in the association. This list is not finalized, though. Not only state-owned companies but also private aircraft manufacturers of any form of ownership can become members of the cluster. In theory, the cluster can have up to fifteen industrial and engineering facilities with the total number of employees exceeding 10,000.

"The new cluster will make the Ukrainian aviation industry a united and powerful mechanism with clear coordination of development, providing an opportunity to integrate into the world market through the introduction of international standards of production and management," said Ukroboronprom CEO Roman Romanov.

According to him, this will accelerate the process of import substitution and give a new impetus to scientific and technological development of the country as a whole.

An important thing is that the aviation industry should be an example to the rest of the enterprises and organizations of the country's key military-industrial sector. If the air-cluster, “takes off,” then similar production units will be established in shipbuilding, armored vehicles production, radio engineering, and electronics.

Organizers’ dreams

The presentation of a new cluster to the rest of the aviation world will take place during an international airshow in Farnborough, England, July 11-17. A quite representative Ukrainian delegation is heading there aiming not only to show Ukraine in a new light but also to achieve concrete results in sales.

Back in May, president of Antonov Oleksandr Kotsyuba in an interview with UNIAN noted that as soon as the organizers of the airshow announced the participation and demo flights of the Ukrainian cargo plane An-718, a new wave of interest in our aircraft rose across the world.

"Participation in exhibitions of such level is another important element in our marketing plan and sales concept. We are expecting to sigh off a number of concrete deals at Farnborough. We are very optimistic," said  Kotsyuba.

 As soon as the organizers of the airshow announced the participation and demo flights of the Ukrainian cargo plane An-718, a new wave of interest in our aircraft rose across the world /
As soon as the organizers of the airshow announced the participation and demo flights of the Ukrainian cargo plane An-718, a new wave of interest in our aircraft rose across the world /

Moreover, the Ukrainians are flying to the UK with a small production "stepping stone." Ahead of the Farnborough airshow, Antonov signed a contract with the Azerbaijani State Aviation Concern Azal for the supply to Azerbaijan of ten An-178’s for their further use by the Azerbaijani Silk Way Airlines - one of the largest air carriers in the Caucasus and the Caspian region. As expected, the first two An-178’s will fly to Baku as early as 2018 – an advance payment for their construction has already been received by the Ukrainian side. In the future, the Azerbaijani partners do not rule out setting up own assembly of An-178. They just need to be sure they have enough resources to implement the plan.

Kyiv also has great expectations regarding another project announced a couple of months ago, namely –participation in the tender for the supply of 200 medium-haul passenger aircraft to India. It’s directly the Indian Government which carries out the procurement for Hindustan Aeronautics Ltd state-owned corporation. The fact that the other participants of this tender are the Russian Sukhoi, Brazilian Embraer, and European Airbus characterize the scale of a potential deal. Ukraine is ready to present to Delhi the aircraft of an An-148/158 family. And it's not just about the actual delivery of the aircraft but also about the possible joint production and setting up post-sales servicing. The very prospect of our participation in these bids is a good asset and advertising aimed at the new customers.

In all fairness, it should be mentioned that all preconditions for success were made possible not due to the efforts of the newly-created air cluster as a structure, but of the Antonov company and the leaders of Ukroboronprom Concern. Moreover, the achievements were mostly due to personal contacts. The aviation world has no clue at the moment, what the new Ukrainian aviation association is like and how it will work.

Risks of merger

The Ukrainian experts have no clue, either. At the moment, they are very restrained in their assessments and prefer talking about the future of this air cluster in informal conversations, off the record. Their cautiousness can easily be explained – against the backdrop of the global rise of interest in the Ukrainian aviation industry any "careless statement" may undermine positions – not so stable yet – of the national aircraft manufacturers.

The national military-industrial complex, including the aircraft industry segment, needs modernization
The national military-industrial complex, including the aircraft industry segment, needs modernization

At the same time, we cannot but see and point at the "weakest links " in the announced plans to establish a Ukrainian aviation cluster. Moreover, Ukraine has already had experience of creating a unified aviation concern based on Antonov back in the late 2000’s.

Then the idea failed for rather obvious reasons: because of a shortage of orders, losses of the majority of production facilities, the lack of any strategy for the industry’s development, and a longtime undue dependence on Russia, which was often dictated by political considerations rather than economic benefits. In fact, Antonov which at the time mostly survived due to its transportation company, Antonov Airlines, rather than own production, became the breadwinner for all Ukrainian enterprises - in Kyiv, Kharkiv, and other cities. They were also idle, seeing no orders, piling up debts on taxes and wages.

The united aviation concern suffered to live through all hardships and was liquidated in January 2016. And now, several months later, the aircraft manufacturers were gathered "under one roof" once again, with promises that the new cluster will inherit the best corporate practices of Boeing and the Airbus – the experience based not so much on the overall merger but on a clear delineation of the production, management and marketing functions.

Experts have not yet gotten the idea of Ukroboronprom. Director of the Research Center for Army, Conversion and Disarmament Valentyn Badrak believes that the authorities should objectively evaluate their capabilities. "There is a large number of the announced projects and ventures that will never be implemented; they will rather draw a lot of resources," Badrak wrote on Facebook.

The other experts interviewed by UNIAN were talking about similar things. In particular, in their comments, they emphasized several problematic issues that threaten the realization of the project on creation of aviation cluster.

Firstly, it is clear for many that private and joint-stock aircraft manufacturers and factories, not controlled by the state directly (among them there are engine manufacturers Ivchenko Progress and Motor Sich) are unlikely to want to "fly on the same flight” with the state-owned enterprises. Fresh are the memories of previous years, when not only the production facilities were combined but also the losses, which had to be covered by all participants. By the way, being controlled by Ukroboronprom, the key operator of the established aviation cluster, is hardly the dearest wish for those who are used to solve their production and marketing problems on their own, without regard to the state. In other words, it will be very difficult to attract into a new cluster the relatively powerful players. Therefore, Antonov, which has only started to show some strength, will once again have to pull up the "weak" and "unprofitable." But will the national aviation giant have enough strength for everyone?

The second negative point is an attempt to combine the construction of aircraft and production of its components. The experts have stressed that vertical integration is possible in the aircraft manufacturing, but only in a more segmented shape. Clusters are good separately for assembling aircraft, for the engine construction, and for avionics. This is how the world’s major players work. Figuratively speaking: design bureaus are not tied with rigid internal corporate relations or obligations, say, before the engine manufacturers. They are driven purely by the market mechanisms of demand for the product and the offer of this product.

It is clear that on the one hand, it is very comfortable to have suppliers from Ukraine. For example, just the other day, Antonov, Ivchenko-Progress with the participation of Motor Sich signed a protocol on joint activities on the modernization of D-18 series 3 engines for An-124-100 Ruslan aircraft, which are operated by Antonov Airlines. The improved engines will provide noise reduction on the ground, the decreased release of harmful substances into the atmosphere, and a longer lifespan. But on the other hand, modernization of engines is the only project, and it relates to the planes which have been flying for a long time. And what should be done with the new projects where the customers set their own conditions, which the Ukrainian suppliers fail to fulfill – both in terms of material and in terms of post-sales service? Conflict of interest is already incorporated in the fact that sooner or later, Antonov, which is now reviving production, will have to choose between the Ukrainian parts and devices of foreign manufacture. And the choice in most cases will be made in favor of imported parts.

Ukraine wants to combine the aircraft construction and production of their components / Photo from UNIAN
Ukraine wants to combine the aircraft construction and production of their components / Photo from UNIAN

Here is just one example: At a Business Forum in Toronto (Canada) late June, Ukroboronprom solemnly presented the prospects of Ukrainian-Canadian cooperation in defense sphere. Deputy General Director of Ukroboronprom Artur Kheruvimov emphasized that aviation was the main direction of joint work with the Canadians. "Partnership between Ukraine and Canada in aircraft manufacturing has moved to an active phase, and has a significant potential for growth," said the official. Confirming his statement, Antonov announced the purchase of equipment for the An-148/158 worth more than $1 billion from the Canadian company CMC Electronics Inc. This is a long-term contract for the supply of components. And certainly, it will not be the only one.

Antonov does not have similar orders yet for the Ukrainian enterprises, and neither does it plan to. Whether the company will manage to balance the geography of its purchases in the future for everyone to be happy (the Ukrainian producers – to have enough orders and the foreign customers – to be satisfied) remains an open question.

And finally, the main problem lays not in Ukroboronprom or the Ministry of Economic Development and Trade of Ukraine, responsible for the efficient use of the country’s production capacity. The problem is that we lack a worked-out strategy of development of the national aviation industry. The only program of the aviation industry developed by the Economy Ministry dates back to pre-revolutionary 2013. However, there is neither economic, nor political sense to adopt this obsolete strategy now.

We need a new vision – taking into consideration all the challenges and program objectives, as well as real opportunities available. It is obvious that in forming such a vision, it is important not to get carried away by theory and develop a quality transformation roadmap. After all, it is the only key that can finally open the doors of the world market for the Ukrainian aircraft.

Olesia Safronova (UNIAN)

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