Ukraine’s aircraft manufacturers are finding their niches on world markets
Lately, Ukraine’s aircraft industry has provided good reasons to take a closer look at how its manufacturing plants are doing today. The Antonov concern’s enterprises were merged with UkrOboronProm, the state-owned defense giant, and the famed company officially folded; military and technical cooperation with Russia has been stopped; announcements of new projects with western companies have begun coming in; corruption scandals have hit the heavy cargo business; and demand for Ukraine’s military aircraft production to expand has been growing. All this has created fertile soil to give rise to speculation about the “liquidation of Ukraine’s aircraft manufacturing industry to satisfy western monopolists.”
In fact, recent events could, on the contrary, be a catalyst for a complete break with the past for the Ukrainian chunks of the soviet aircraft industry that have spent that last quarter-century looking for their place in the new market environment. The phantom of “mutually beneficial cooperation” with Russia, under cover of which Moscow actively developed projects to compete with Ukrainian ones and kept substituting imports, has finally and completely disappeared into the past. For Ukraine’s aircraft industry to survive, it must be capable of finding its own competitive niches and survive the struggle in an extremely toxic environment—an environment that has already forced a slew of once-mighty western manufacturers of aircraft equipment and parts from the market in the last few decades.
Despite the widespread impression that Ukraine’s aircraft industry is represented solely by the Antonov group, there are dozens of other companies who also build aircraft today: the Zaporizhzhia-based aircraft engine manufacturer Motor Sich, the Kharkiv-based aviation production enterprise called KAVB, Konotop’s Aviakon, Kyiv’s Aircraft Repair Plant #410, the Ivchenko-Progress Design Office, Khmelnytsk-based Novator, Odessa’s Aircraft Repair Plant, and Lutsk’s Motor, just to name the biggest. For many years now, the lion’s share of gross income in the aircraft industry in Ukraine comes from repairing and upgrading aviation technology, manufacturing parts and instruments, not from the sale of new aircraft.
The modern face of Antonov
Antonov itself consists of three main divisions: the design bureau, the mass production facility that used to be called Aviant, and Antonov Airlines. The Antonov R&D office is engaged primarily in designing, experimental research, certification, and supporting the mass production and use of aircraft. Its “mass production facility” in actual fact has been producing experimental models of new designs from the R&D team. In short, manufacturing aircraft is a secondary activity for Antonov. The company has specialized in designing and, eventually, getting profits from making aircraft for foreign buyers. In recent years, the Russian Federation was hardly the only country with which Antonov cooperated in the manufacture of aircraft.
More recently, it became clear that the Antonov Design Bureau’s main business was not even just designing aircraft but the air transport handled by Antonov Airlines. The airline’s fleet includes the largest cargo airplane in the world, the AN-225 Mriya, seven somewhat smaller AN-124 Russians, one AN-22 Antei, and several other craft. Indeed, cargo planes are Antonov’s calling card. This class of flying machines is where the company once achieved its greatest successes.
Its capacity to take on enormous loads in size and in weight distinguishes Antonov from others and provided it with a niche in the global transport system. The AN-124-100 Ruslan and the AN-225 Mriya have carried out hundreds of impressive transport operations, such as moving industrial equipment blocks that weighed up to 180 tonnes, or the huge sections of space launch vehicles that would not have fit inside any other airplane in the world. Through its airline, Antonov controls nearly a third of the world’s air freight business for transporting extra-large and extra-heavy cargo. Of course, this specialized area of transport represents only a very small part of the aviation market, especially if compared to the rest of air freight transport, not to mention passenger carriage. But it is highly profitable, with margins up to 240%.
The corruption scandal that erupted recently over a shortfall in tax contributions from this particular activity drew attention to the fact that, according to top management, freight transport was providing Antonov from 50% to 75% of its total income lately. Moreover, the transport itself is in cooperation with two intermediaries, German-registered Ruslan SALIS GmbH and UK-registered Ruslan International Limited, both of which are JVs with Russia’s Volga-Dniepr.
An illusion of cooperation
The notion of “mutually beneficial cooperation” with Russia in the aircraft industry has long been no more than an illusion. Aircraft ready-made in Ukraine have not been sold in the Russian Federation for some time now. For instance, Ukraine’s export of aircraft was worth US $72.22mn in 2011, but only US $800,0000 of that went to the RF. Aircraft produced by the Antonov Design Bureau and bought by Russian companies and government agencies were actually assembled at Russian plants under license using a relatively small share of Ukrainian-made parts and components.
What’s more, even in components, the RF market has virtually collapsed: in 2011, the export of aircraft parts and components to Russia was worth US $30.54mn of a total of US $54.94mn exported from Ukraine, rising in 2013 to US $32.94mn out of US $61.16mn, by 2015 it had plunged to US $3.4mn out of US $26mn. Meanwhile, Russia was busy developing competing aircraft of its own, such as the Sukhoi Superjet. From the point of view of promoting Ukrainian aircraft globally, cooperation with the RF netted Antonov nothing. The two countries are, in fact, competitors. Still, Russia’s positions on world markets are barely better than Ukraine’s: in some years, export volumes from the two manufacturing countries have been almost the same, and lately Russian exports have focused more on military aircraft.
After the start of Russia’s aggression, Ukraine stopped supplying the RF with most aircraft components, including weaponry, engines and avionics such as electronic communication, navigation, imaging and instrument control components. Instead, Ukrainian suppliers were forced to find alternate markets, which they did. For instance, last year, Ukraine’s main customer for aircraft components was India, which bought US $13.46mn worth.
Meanwhile, Ukraine was still buying considerable volumes of Russian parts for aircraft: in 2015 alone, of US $24.5mn in imports, US $13.2mn came from the RF, and only US $9.4mn from the US and EU together. However, compared to just a few years earlier, Russian imports are down by nearly a third compared to 2011, when US $18.7mn came from Russia, while NATO countries were shipping about the same amount as now: US $9.2mn.
The significantly more important sector all this time was and remains cooperation in the production of engines for planes and helicopters. Imports to the RF from Ukraine, as well as components from Russia are severalfold hither than bilateral trade in the rest of the industry. So, in 2013, of the US $1.06 billion’s worth of Ukrainian aircraft engines exported in 2013, US $648.0mn went to the RF. In 2015, despite the fact that deliveries of dual-purpose goods was stopped and even banned, Russia still managed to import US $398.4mn worth of dual purpose goods, or more than 59% of all Ukrainian exports of aviation engines at that time.
The global market today
Over the last 10 years, finished aircraft from Ukraine were delivered to world markets mainly through the sale of military assets. In the best case, these were upgraded prior to sale using contemporary Ukrainian-made components. The share of newly-produced aircraft in aviation exports amounted to only a few percentage points. Meanwhile Ukraine’s aircraft industry was represented on world markets by Ukrainian components for new planes being produced at the clients’ plants or for upgrading an old soviet fleet of airplanes and helicopters. In soviet times, thousands of such aircraft had been sold to Asia, Africa and Latin America, as well as countries in the soviet camp starting in the 1960s.
For a certain amount of time, a given market can provide some orders and volumes for the manufacture of components at Ukrainian enterprises. However, prospects depend on the capacity of domestic manufacturers to either reorient themselves to repair and modernize the fleets of aircraft made by other global manufacturers, or to seriously increase their output of at least finished craft of Ukrainian design in the world, regardless of where they are actually assembled. Otherwise, the domestic aircraft industry is doomed to a natural death, even in its current state, as the number of orders to upgrade inexorably falls to nothing and real demand for components for the craft of other makers fails to materialize.
The world aviation technology market continues to grow despite cutthroat competition that only grew worse after a series of mergers of European aircraft manufacturers with Airbus and acquisitions of American ones by Boeing. These two behemoths control the lion’s share of the world market for aviation products and have been engaged in a grueling dogfight, including open dumping—especially Airbus—, and hidden subsidies from both the EU and the US. Both corporations sell hundreds of aircraft every year worth tens of billions and spend billions of euros and dollars on research and capital investment.
Fortunately, Antonov’s designs for passenger carriage are not in the same league as the craft produced by these two “monsters,” so their focus is on niche budget regional airlines looking to carry no more than 90 passengers, not on the majors looking for intercontinental liners. The situation with Antonov’s transporters and military transporters is very different, where ANs are serious competitors to both world leaders in aircraft manufacturing and smaller national companies. These include Canada’s Bombardier, Brazil’s Embraer, Italy’s ATR—in which Airbus had a stake—, and Russia’s Sukhoi, which developed the Sukhoi Superjet 100 jointly with Boeing, a craft in the 75-95 passenger category. The manufacturing of aircraft is growing, including models from these corporations being produced under license in China and India.
All these foreign makers have significant advantages over Ukraine’s aircraft industry, starting with a solid domestic market, access to much cheaper capital, leasing programs, and, last but not least, government subsidies that are hidden to greater and lesser extents and are several times larger than what Ukraine can afford.
Under the circumstances, Ukrainian manufacturers were forced to resort to the only realistic strategy to sell their competitive advantage in the battle for market share: to agree to allow client countries to produce the planes themselves, because they have both the capital and the sizeable markets. As a result, Ukraine only gets paid for its intellectual property, for ancillary services from designers and specialists, and for the opportunity to supply parts and components for assembling these planes. Ukraine’s share of parts and components is, unfortunately, shrinking with every passing year. Still, thanks to this, Ukraine has been able to promote its own products on foreign markets without having any serious competitive advantage compared to suppliers from other countries.
Not long ago, Taqnia Aeronautics, a Saudi Arabian company, came to an agreement to produce a series of Antonovs with the latest upgrades: AN-132s, AN-148s and AN-178s. In 2014, UkrOboronProm finished upgrading a slew of AN-32RE military transporters for India. This order meant US $400mn over five years to modernize hundreds of aging planes. However, as in the case of the Saudis, the Indians insisted that more than half the work be done at their own plants.
Another strategy for Ukraine’s aircraft industry to survive under current circumstances is expanding cooperation with western companies, both through buying from them and through supplying them with a wide range of components. This should increase export opportunities for Ukraine and compensate for the break in economic ties with Russia.
For instance, in October 2015, Antonov ordered PW150A engines from the Canadian subsidiary of Pratt Whitney, one of the world leaders in manufacturing aircraft engines. These will be installed in the new AN-132D. Meanwhile, Warsaw’s Air Force Institute of Technology (ITWL) has been developing a lightweight multi-purpose jet called Grot-2, which will be equipped with a Ukrainian motor from Motor Sich. In addition, western media has been publishing rumors recently that the US is looking at the possibility of setting up a holding based on Motor Sich that will work with American companies on MIC projects, including the modernization of Ukrainian Armed Forces equipment.
Looking into the future
The trouble with trying to enter foreign markets with finished products, especially in developing countries, is that, in addition to the limited niche for Ukrainian manufacturers—mid-range passenger and transport planes, military transporters, and other specialized aircraft—, Ukraine is simply unprepared to promote its planes offering its own leasing programs and providing credits for export deliveries. In fact, Antonov is now planning to set up authorized service centers in Latin America, Asia and Africa, which should increase both the marketing appeal of and demand for Antonovs for the companies and governments of these countries.
Ukraine’s aircraft industry cannot develop completely apart from the problems facing the entire country. If these aren’t resolved, countries with deep pockets but little technology will buy only samples of finished products if the right to manufacture them on the country’s own territory is part of the deal and, at most, an agreement to use a larger or smaller proportion of Ukrainian-made parts and components, plus royalties to the designer. Developing countries that are unable to pay independently for planes need lines of credit and leasing programs, which Ukraine is not in a position to offer today.
The one thing that might improve this situation quickly would be increasing military orders from the government, including orders to upgrade, repair or design new aircraft for the Ministry of Defense, the State Police Service and the National Guard, and increasing procurements for healthcare and the Emergencies Ministry. Ukraine’s aircraft industry could find its place in the world by providing certain parts and components to EU and NATO countries, and, what’s more likely, to use better quality components from them to produce new aviation products for domestic use and, eventually, partly for export. Specifically, UkrOboronProm has been talking about the need to set up domestic production of fighter jets.
An alternative source of capital for passenger plane and transporter production could be sufficient domestic orders, under which exports would only constitute additional sales volumes.
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