Week of February 3, 1997

By Vovick Karnozov Russian Government Supports The Tu-204 Program The most important event in the life of the Russian aviation industry in January was granting the long-awaited governmental approval for the deal between Tupolev, Aviastar and Egypt's Kato Aromatic on the Rolls-Royce-powered Tu-204 middle-range airliner. Prime-Minister Victor Chernomyrdin signed the appropriate decree on 6 January, after fears over viability of the project had been allayed. According to the decree, the Russian Government grants state support to the production of the Tu-204 at the Aviastar factory in Ulianovsk, ordering Vnesheconombank to provide financial guarantees for the US $30 million that is being transferred to Aviastar by Kato Aromatic as the first official payment for the initial batch of 30 aircraft. In turn, the Ministry of Finance has been ordered to sign agreements on appropriate guarantees and counter-guarantees with Aviastar and Kato Aromatic. Thorough Assessment Before Kato Aromatic appeared on the scene, the Tupolev design bureau was developing the Rolls-Royce powered version of the Tu-204, known as the Tu-204-120, on its own money. "We did not have enough resources to provide steady financing for the project, and that is why development of the aircraft took so much time," says Oleg Alasheev, deputy general designer at Tupolev for civil programs. He describes Dr. Ibrahim Kamel, the head of Kato Aromatic, as a businessman with a rich experience of work in Russia. "He has been working with Russian aviation enterprises for several years now. Before the deal with Tupolev, he bough helicopters and Ilyushin airliners for foreign operators. Sometime ago we sold him several Tu-154s, and today he finances our most promising civil project, the Rolls-Royce-powered Tu-204." At first, Kamel wanted to make sure that the plane had strong market potential. He contracted a number of experts who thoroughly studied the aircraft and its documentation. Alasheev says that almost immediately the experts found that a cargo version would not be very profitable and eliminated it from further consideration. The basic version for 212 passengers in all-economy layout was not assessed as an ideal, either. The experts demanded partitions in the passenger cabin and the addition of a fourth toilet. A Russian-made food equipment set was found unsuitable and Tupolev had to replace it with a foreign one. Contract The assessment studies took half-a-year, ending with a positive mark for Tupolev and its product. Finally, the contract was signed on 25 March 1996, with Kato acting simultaneously as a buyer, investor and financial backer for the Tu-204-120. Oleg Alasheev states that the front page of the contract contains a mentioning of 200 aircraft to be delivered by 2010. "This figure is like a goal for the future," he explains, "the firm order being 30 airframes." The Aviastar factory claims it has capacity to build six airframes a month and, if the project develops well, this rate can be achieved in the year 2000. According to the contract, one of Kato's responsibilities is providing Rolls-Royce RB.211-535E4B engines. "It was a hard task," Alasheev continues, "because Rolls-Royce already had a tough schedule of engine deliveries. It took Kamel half a year to talk them into providing a sufficient number of engines for Aviastar in an appropriate time." Finally, the British manufacturer agreed to revive its reserve production line in order to almost double the output of the engine. According to Alasheev, Kamel has already paid Rolls-Royce for the first 30 engines. By the way, two engines for a Tu-204 cost US $12 million; in addition, US $1 million will be spent on associated systems. The lack of cash at Aviastar means that the factory is unable to finance construction of airframes without financial injections from the outside. Because of this, Kamel agreed to pay the whole cost of the construction up front. This requires a great investment into production, which Kamel himself could not afford. For this purpose, however, he has put together a group of banks, including Egypt's Bank of Cairo. Alasheev comments, "the Russian party did not participate in finding suitable banks, it was Kamel's problem. No Russian banks were included in the group." Complications By its very nature, the project is pretty complicated, demanding serious commitments from all the parties, and Kato Aromatic in particular. "Kamel is a risk-taker. When we were signing the contract, Tupolev did not have a commercial product. Even now we do not have it." Although the Tu-204 development prototype with Rolls-Royce engines, serialled RA64006, entered trials back in 1992, the Tu-204-120 has not obtained its certificate of type yet. "Although we have covered the major part of the certification program using the prototype, we will be able to finish it only after completion of aircraft number 27 being the first series-built airframe," Alasheev says. The RA64027 features a new engine pylon, new arrangement of wiring and some other innovations in hardware. The avionics suite has been changed as well. Although the core is still based on Russian instruments, now it incorporates some Western parts including a Honeywell inertial navigation system. Rockwell Collins' TCAS can be added on request. At the moment Aviastar is working on four airframes for Kato Aromatic. The RA64027 airframe is ahead of the others in terms of readiness. The first set of engines was delivered from the UK with a little delay; in September it was fitted to RA64027 together with associated systems. However, readiness of the aircraft lags behind the initial plan as a result of almost 10-month delay in the issue of appropriate state guarantees to Kato Aromatic. Alasheev says the factory completed work on the airframes themselves a long ago, but for several months they stood "bare," deprived of on-board systems and equipment. Aviastar had no cash to buy the essential parts from sub-contractors, whereas Kamel hesitated to transfer large sums of money without state guarantees. However, he continued to fund the program. According to the Izvestiya newspaper, only in December Kamel transferred to various Tu-204 part-manufacturers 12 billion Russian Rubles in order to speed up production of the aircraft at Ulianovsk. "Kamel has already spent at least US $100 million on the project," Oleg Alasheev states. He says that in general the Egyptian partner has managed to fulfill his financial obligations, "The contract contains a financial timetable. The first portion of money was to be given in two months' time upon signing the contract. We got it in late May, with the second portion coming in August and the third in November." The money was spent mostly on keeping Tupolev alive and carrying out the certification process. Now, after the state guarantees have been issued, all the parties are multiplying their efforts on the project. "As soon as the decree was announced, Kamel started to transfer money to the plant in Ulianovsk and our design bureau," Alasheev says. The RA64027 is expected to be rolled out on 15 February, to start flying almost immediately. If everything goes well, Tupolev will complete the Tu-204-120 certification in April. Operating Lease The situation in the Russian market is that majority of operators can afford a new airliner only under operating lease agreements. To make the Tu-204 available for Russian aviators, Kamel decided to set up an aircraft-leasing structure. For this purpose he founded Sirocco, a branch of Kato Aromatic. In December Sirocco made the first official presentation of the Tu-204-120 for Russian air companies. It lasted for three days and attracted 20 operators, including Aeroflot - Russian International Airlines, KrasAir, Khabarovsk, Vnukovo, Pulkovo and Transaero. They were briefed on performance of the aircraft and offered leasing terms. According to Lev Lanovsky, chief designer for the Tu-204, the list-price for a Roll-Royce powered version is US $32-36 million (depending on the cabin configuration), whereas a Tu-204 with PS-90 engines costs US $25 million. Sirocco offers a passenger Tu-204-120 at US $300,000 a month. According to Alasheev, this figure is 1.5 times lower than that for the Boeing 757, which is in the Tu-204 class with similar turnaround capabilities and operational expenses. However, even this rather moderate sum is not easy to pay for the majority of Russian operators. To overcome the problem, Kamel persuaded Citibank and other financial structures to participate in the project. They agreed to fund operators via Sirocco, providing credits on rather favorable terms. The operators are supposed to pay the lessor a hourly rate from those credits. Alasheev comments, "In our project the operator could renew credits every month. And it is not necessary to take a big credit - it can be, say, US $2 million for half-a-year, just to initiate the process, and then the profit generated by the leased aircraft would keep the business going. Rough calculations show the optimal time to take credit is one year." Details on financial terms on the operational lease and associated credits have not been disclosed to the press yet. According to Alasheev, Sirocco is ready to be flexible in talks with each operator, and that the terms will vary depending on number of aircraft ordered, interior, on-board equipment so on. Russian Clients The central idea of the whole project is to lease Russian-made airliners to Russian aviators. Tupolev has a good reputation around the world for its Tu-154 and Tu-134 workhorses featuring high reliability and maintainability. Those airliners are responsible for 60-70% of all passenger traffic inside the CIS. However, fuel burn and turnaround capabilities do not match those of the Boeing 737, which has become the main rival for Tupolevs on the CIS market. But the worst is the old age of Tu-134s; in just the next two years several hundred such airplanes should be withdrawn from service. The Tu-204 is marketed as the best replacement, and now the plane is available in a number of versions under lease agreements. The whole of Russian operators may be divided into two groups. The first group is more or less financially secure companies like Aeroflot - Russian International Airlines and Transaero, with the others being poor clients. Aeroflot and Transaero have enough resources to afford Tu-204s without help from Sirocco. Both operators have unambiguously favoured Rolls-Royce to Perm Motors. The RB.211, at US $6-6.5 million, costs twice as much as the PS-90A (US $3 million), but features much better in-flight/downtime numbers. Although the latest version of the Russian engine is claimed to have reached the Rolls-Royce' safety figures, the operators' attitude to it remains cold. Needs of Aeroflot are understood to be ten aircraft, with the same figure for Transaero. The former operator looks to replace its outdated Tu-154s, while the latter has to find new aircraft to supersede several Boeing 737s, whose operating lease ends this year. Both Eugeny Shaposhnikov and Aleksandr Pleshakov, heads of the two companies, attended the Sirocco's presentation in December. At one time operators from Krasnoyarsk and Khabarovsk approached Tupolev with an idea to get some Tu-204-120s "not via Kamel." They offered Incombank, one of the biggest independent Russian banks, instead of foreign investors in order to prevent the leak of money out of Russia. "Several Russian financial structures, including Incombank and Promstroibank, expressed interest in the project, but nothing has come out of it so far," Alasheev grumbles. Contingency Plans Kato does not work only with CIS operators; the company has contingency plans on employing its Tupolevs outside the CIS. Alasheev says that if the number of firm orders from foreign operators is big enough, Tupolev could make a special "English cockpit" for them. This would entail translating various manuals on the aircraft into English, which may be quite a problem. Among international companies interested in the Rolls-Royce-powered Tu-204 is Aviastar Asia, which wants 58 airframes for leasing to operators in Southeast Asia. The most promising country in the region is China, which flies tens of Tu-154Ms and Yak-42Ds. It is known that Kamel has successfully contacted several Middle-East air companies, including ones from Egypt and Kuwait. They are ready to accept Tu-204s should their Russian colleagues turn down Kamel's offer. "Kamel tries to reach agreement with foreign operators all by himself, he just informed us about arrangements he made," says Alasheev. He continues, "But it is understandable - he wants to have an alternative outlet for his aircraft. The contract between Kato, Tupolev and Aviastar contains the words '200 aircraft.' I believe Kamel studied the market before applying his signature." Ask Vovick AeroWorldNet Home Page | Contact AeroWorldNet