Last week, German tourist conglomerate Thomas Cook AG, controlled by the Lufthansa Group and retailer Karstadt Quelle, officially announced the sale of twelve Boeing 757-200s to Russia. The airplanes were bought by Tsentr Kapitala, a Russian investment company closely related to Morskoi Aktsionerny Bank (The Marine Joint-Stock Bank). The companies did not disclose the details of the deal.

Only two airlines are currently flying Western aircraft in Russia: Aeroflot and Transaero. These companies are exempt from customs duties and fees thanks to a 1994 government act. The arrangement had some restrictions, though. Aeroflot was allowed to have only 27 planes imported under preferential terms in its fleet, and the privileges for Transaero were initially only for five years. But in December 1999, Vladimir Putin, who at the time was Russia’s Prime Minister, extended the concessions to Transaero for another five years provided that the airline would purchase aircraft of Russian origin along with imported planes.
All other airlines wanting to bring a Western airplane in Russia were required at one time to pay 20% of its assessed value in duties and 20% of the airplane’s value and the import duty in VAT. And no one wanted to fork over the money. Yet demand for Russian aircraft didn’t pick up noticeably either, which was no wonder. The Russian aircraft industry is not capable of producing new planes on a commercial scale, and no duties whatsoever will help it do so. The statistics prove it: in 2001, Russian aircraft factories manufactured a total of 8 new long-range passenger aircraft; in 2002, they made 5 and in 2003, 6.
Thus, after lengthy discussions between airline executives and the government, state officials met the aviators halfway. Under a revised edition of the Customs Code of Russia effective January 1, 2004, it is much easier to import Western aircraft and the VAT has been reduced from 20% to 18%. As an Expert correspondent was told by the State Customs Committee, when importing foreign aircraft in Russia, an importer is now able to take advantage of Article 212 of the Customs Code allowing duties and taxes to be paid in equal installments over 34 months. Apparently, Tsentr Kapitala’s leaders intend to exercise this very right when importing their Boeing-757-200s in Russia. The investment company will pay over $45 million in duties and taxes over almost three years.
As Expert , VIM-Avia Airlines will fly the Boeings in Russia under a leasing agreement. The company’s general director Viktor Ivanovich Merkulov (whose initials are in the company’s name), refused to give official comment, saying he would disclose all the details later. Nevertheless, by calling the company’s flight service, an Expert correspondent learned that personnel recruitment for the Boeing-757-200s was already in full swing. “Did you work for Transaero? Come and interview. Flights will start in March,” a stern female voice assured the journalist who had introduced himself as a pilot. At present, VIM-Avia mostly makes charter flights to Southeast Asia using obsolete Il-62Ms. When the company receives the new aircraft, it will be able to expand its flights significantly. Merkulov stated at a press conference in Moscow a few months ago that VIM-Avia was negotiating flights to Thailand, the Dominican Republic, Cuba, the Seychelles, and the Maldives.

Tsentr Kapitala’s deal with Thomas Cook had an explosive effect on Russian aviation circles. Over the past few days, leaders at all major Russian airlines except Pulkovo have declared their intention to import Western aircraft. The most sensational statement came from Valeri Mikhailov, general director of a small airline, Kaliningradavia. In an interview to a local news agency, Kaskad, Mr. Mikhailov announced that his company was going to lease as many as 19 Boeing-737-300s from the early nineties, as it is registered in the free economic zone and is formally exempt customs fees on imported means of transport. “The first lot of 4 planes will arrive in Kaliningrad this summer, and the remaining 15 by the end of next year,” Mikhailov said. After this statement, the Kaliningrad airport administration cut off all telephones at Kaliningradavia’s offices for non-payment and threatened to cut its hot and cold water if the company fails to pay its debts. The State Customs Committee of Russia, in turn, has officially informed Kaliningradavia that if the Western aircraft the airline intends to bring in Russia will be used on free economic zone territory, the company will be required to pay duties.
But while the affair with Kalingradavia resembles a childish intrigue, other airlines’ plans appear more realistic. Thus, for example, Aeroflot General Director Valeri Okulov told us that his company was considering the purchase of Western short-range planes to replace obsolete Tu-134s coming to the end of their service life. Alexei Isaikin, General Director of Volga-Dnepr, the world’s largest shipper of oversized and overweight goods, told Expert that the company intends to lease two freight Boeing-747s from Alitalia as soon as this spring in order to make flights from China to Luxemburg along the Trans-Siberian air route.
Boris Abramovich, General Director of Krasnoyarsk Airlines, also announced his desire to lease two Boeing-767s. He hopes the airline will escape customs fees by setting up a joint venture with a foreign partner, who would contribute the planes to the joint venture’s authorized capital. Igor Shvetsov, Deputy General Director of Siberia Airlines, was the only one who refused to tell us how he would bring Western aircraft in Russia. “By all means we’ll do it this year or the higher-ups will have my head,” Shvetsov assured us. Andrei Martirosov, General Director of the UTair, the world’s largest helicopter operator, has gone furthest on the import issue. Martirosov informed us that one of these days, his company would announce who won a contract to supply UTair with 5 foreign short and medium-range airplanes.

Do Russian aircraft builders have a chance?

Almost all airlines are already facing a dearth of up-to-date aircraft. According to the Ministry of Transport, the number of passengers increased by three million last year from 26.5 to 29.5 million people. By 2010, according to the most conservative forecasts, this figure will grow to 50 million people a year. The plane shortage will become increasingly acute with time. According Okulov’s estimates based on long-term development plans, Aeroflot will need to increase its fleet from 78 to 140-150 airplanes. Siberia has a slightly smaller shortage in supplies. Shvetsov says that his company currently needs 10 more aircraft but by next year, this figure will increase considerably.  According to Deputy Minister of Transport Alexander Neradko, Russian airlines will need a total of 200 new long-range and medium- to short-range aircraft.
Under present circumstances, this demand must be met by imports. Chapter 4 of the ICAO’s Aircraft Operating Rules will come into effect April 1, 2006. However, Russian passenger planes, including Tu-204s, Tu-214s, and Il-96s, do not meet the ICAO’s projected noise and emission requirements. It is makes no economic sense to purchase Russian aircraft only for domestic operations. According to Sergei Frank, Minister of Transport, one flight hour of a leased Boeing-737 costs just $50 more than that of a Russian Tu-214. Boeing also provides post-sale maintenance throughout a plane’s life, while a Russian plane gets no manufacturer service once it leaves the factory.
Tu-204s, Tu-214s, and Il-96s could be equipped with Western engines and avionics, after which the Russian airplanes would be allowed to fly to Europe and the US without restriction. However, no single project of this kind has ever been implemented, neither by Aviastar with Rolls Royce, nor by Perm Motors with Pratt & Whitney. The money for these projects has been wasted. Without radical restructuring the domestic aircraft industry is doomed to extinction.

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