Regional Jets and Turboprops: The new Russian and Chinese products December 2010

The December 2009 issue of Aviation Strategy examined the rapidly fragmenting regional jet (RJ) and turbo–prop markets. New entrants from Russia and China are set to shatter the duopoly that presently exists in each segment: Bombardier and Embraer in RJs and ATR and Bombardier in turbo–props.

Russian and Chinese ambitions go beyond the RJ market. Manufacturers from both countries are already learning lessons from their soon–to–be operational RJ programmes and applying them to far more ambitious narrowbody offerings. These aircraft are expected to arrive shortly after 2015, one year before Airbus is expected to release its A320NEO (New Engine Option) and perhaps a decade in advance of Boeing’s ground–up redesign of its ageing 737 family. Fairly substantial differences exist between the respective paths that the Russian and Chinese aerospace industries have taken to this point and where they hope to be in ten years.

Russia has a very strong pedigree in aircraft construction both in the commercial and especially the military fields, honed during the post World War II Soviet years. The captive ‘domestic’ market catered for both Russia and its captive markets in eastern Europe and all of what now constitutes the Commonwealth of Independent States (CIS) region. Demand for both civilian and military aircraft allowed for a fragmented aircraft production industry that included Mikoyan, Sukhoi, Ilyushin, Tupolev, Beriev, Irkut, Antonov and Yakovlev, amongst others. Following the unravelling of the Soviet Union, the domestic aerospace industry was in disarray. Much needed modernisation has only come about within the last five years. Political will and finances have followed a Vladimir Putinled effort to consolidate all of the aforementioned manufacturers (with the exception of Ukrainebased Antonov) into one entity — United Aircraft Corporation, or UAC. Stiff taxes on imported aircraft provide an economic incentive for Russian airlines to source their aircraft domestically and wait for the UAC entities to combine their disparate facilities and resources effectively.

The first stage in the consolidation of UAC was the development of the Sukhoi Superjet, also known as the SSJ, a 75–100 seat RJ. Part of the mantra for the SSJ was to develop an aircraft platform that would be certifiable in the ‘West’ and would involve a suitable number of ‘Western’ Tier 1 suppliers. This was done in the hope of allaying any preconceived notions that a wholly–Russian developed aircraft may have on customers. First delivery to launch customer Aeroflot is expected by the end of 2010 and with a fairly healthy order book, which may add Alitalia to its list in the coming weeks, the SSJ is on the path to becoming a success in the lead up to the all–important Irkut MS–21 narrowbody aimed at replacing the Tupolev 204/214 and competing head on against the Airbus A320 and Boeing 737 families.

China’s aerospace industry has been built largely on the back of industrial participation with Russian manufacturers, then in the 1990s with McDonnell Douglas and more recently with Embraer, Airbus and Bombardier. The prerequisite to establish these facilities has been through joint ventures with the fledgling community of domestic Chinese aerospace firms, who have used the know–how to establish their own domestic aircraft producers who in turn have been busy developing the AVIC ARJ–21 RJ (based largely on the Boeing 717/McDonnell Douglas MD–80) and the more ambitious COMAC C919 narrowbody due by the middle of the decade.

Sukhoi Superjet SSJ 75/100

Acceptance of these aircraft types within China is largely assured as the Chinese government controls the aircraft procurement process for all of China’s airlines via a state controlled centralised procurement agency — the Civil Aviation Administration of China (CAAC). This ensures that the domestic market will remain captive and protected from competition in a manner that is arguably more effective than the Russian import duties. Sukhoi is 99.7% owned by the United Aviation Corporation (UAC) but the Superjet programme has been structured in a unique manner to ensure participation from key Western aerospace firms.Sukhoi’s Civil Aircraft subsidiary owns 75% of Sukhoi Superjet (Alenia Aeronautica of Italy owns the other 25%). Superjet International is 51% owned by Alenia and 49% by Sukhoi Civil and is responsible for several key aspects such as marketing, sales, delivery centre and customisation for the Western markets, training and worldwide after–sales support and services. These have traditionally been the areas that have prevented Russian aircraft from gaining more traction outside of home markets.

The SSJ 100 is expected to have a 10–15% operational cost advantage over its closest competitors from Bombardier (CRJ 900/1000) and Embraer’s ERJ family of RJs plus an enticing pre–discount list price of US$28m. The SSJ has generated over 225 firm orders plus more than 80 options, mostly from Russian customers. Sukhoi hopes to sell approximately 700 of the aircraft in North America, Europe, Latin America, Russia and China. It is widely believed that Sukhoi will decide on whether to introduce a larger, stretched version of the SSJ 100 that could seat up to 110 passengers following the entry into service of the initial aircraft to Aeroflot later this year. This would catapult them firmly into the smaller half of the market that Bombardier is aiming at with the smaller version of their upcoming C–Series.

Russian political pressure

According to the Italian Civil Aviation Authority (ENAC), the four aircraft involved in the SSJ100 certification programme have logged around 840 flights and more than 2,070 flying hours, with Russian certification expected by the end of November. In September, the SSJ completed five validation flights led by EASA for noise programme certification aimed at a joint Russian- European certification process. Sales momentum for the Sukhoi picked up at this summer’s Farnborough air show where it won 82 firm orders from four different customers.Despite a seemingly successful Sukhoi SSJ programme to date, it is largely viewed as a stepping stone to more ambitious and larger aircraft offerings in the future. Vladimir Putin has invested a substantial amount of financial and political capital into the consolidation of the industry into UAC’s formation and continues to use his influence to promote the domestic industry. Putin sharply criticised Aeroflot’s chief executive Vitaly Savelyev prior to the 2010 Farnborough Air Show for not buying more Russian–made aircraft. Putin told Mr. Savelyev in a stage–managed meeting broadcast on Russian national television in September: “You want to dominate the domestic market, but you don’t want to buy Russian technology...that won’t do.” While Aeroflot is one of the largest customers for the SSJ100, having placed firm orders for thirty with options for a further fifteen, a greater degree of support for Russian aircraft is expected in order to provide a toe–hold for the various development programmes in their domestic market.

In response to Putin’s message, Aeroflot recently submitted a tentative time schedule for acquiring domestically built aircraft to the government. Acquisition plans up to 2020 include a pledge to purchase 40 Sukhoi SSJ100s, 11 Antonov AN–148s and 25 AN–140 52–seat turboprops before 2016. In addition, Aeroflot has pledged to order up to 50 Irkut MS–21 narrowbodies for delivery between 2016 and 2020. Aeroflot expects to integrate six other Russian state–owned airlines (Rossiya, Orenair, KavminVodyAvia, Vladivostok Avia, Saratov Airlines and SAT Airlines), with whom it expects to carry a combined 79.5 million passengers by 2025, up from 20 million this year. Market share in Russia is expected to increase from the current 36% (post–integration) to over 65% with group revenues quadrupling to $18 billion. The message from Putin was likely aimed at all of Russia’s airlines, not only Aeroflot.

Aeroflot recently retired the last of its large fleet of Soviet–era Tupolev 154Ms and currently operates just six Russian–built aircraft – all four–engined Ilyushin IL–96s widebodies which are used on long–haul domestic routes and international flights from Moscow to Bangkok, Hanoi, Delhi, Seoul and elsewhere. Savelyev has stated the IL–96s were "profitable".

Russian import duties

Aeroflot also inserted a caveat in its letter of ‘intent’ to Putin whereby it points out the importance of sticking to "the tight schedule" of aircraft delivery as “crucial.” The ability to fulfil even small orders has been a consistent problem for both Tupolev (with its late 1980s designed TU–204/214 narrowbody that was designed as a TU–154 replacement) and the Ilyushin IL–96 widebody, as the respective factories struggle to upgrade production methods to handle modern production and supply processes. After the break–up of the Soviet Union, the Russian government introduced import duties on Western aircraft in a bid to prevent the collapse of the domestic manufacturers. A ban on the importation of older, second–hand, non–Russian aircraft has kept the older Soviet–type aircraft in operation for longer than expected with the venerable tri–jet Tupolev TU–154 still a mainstay of many Russian airline’s fleets.

Irkut MS21

A significant 20% customs duty is imposed on the importation of aircraft. Russia has been flexible in applying this tax, offering limited customs duty exemptions to steer investment towards particular aircraft segments. For example, it is currently possible to import an aircraft duty–free if it has in excess of 300 seats or fewer than 50 seats. Some Russian carriers have benefited from relaxations where they have committed to investing in Russian–made aircraft, when Russian–made aircraft of a particular specification become available. Leasing aircraft doesn’t help, Russian airlines avoid taxes as there is a Russian withholding tax on lease payments made abroad of 10%. A higher 20% tax applies if the aircraft only operates on Russian domestic routes. Putin’s sternly worded message to Aeroflot earlier in the summer also mentioned the UAC Irkut MS–21 project as an example of upcoming Russianbuilt aircraft that should be the “primary focus of the modernisation of the (domestic) fleet.”

The Irkut/UAC MS–21 is aiming directly at the 150–210 seat narrowbody market currently dominated by Airbus and Boeing. It will make extensive use of composites in the fuselage and wing structures.

UAC is finalising the industrial infrastructure underpinning development and production of the MS–21, which is due for first flight in 2014. UAC has begun development of a new polymer composite structures manufacturing plant, which will develop the firm carbon–fibre wings for the MS- 21. The UAC enterprise complements the efforts of Aerocompozit, a joint venture of Sukhoi and Progrestech set up last year to build composite structures for both the MS–21 and future versions of the SSJ. Aerocompozit selected Ulyanovsk, an industrial centre on the River Volga, as its production home next to the site of the Aviastar–SP plant, which manufactures Tupolev TU–204 passenger and cargo aircraft and will soon produce Ilyushin Il–476 freighters. The MS–21 will be powered by the Pratt & Whitney PW1000G geared turbofan (GTF) that will also power Bombardier’s C–Series. In addition to a newly–developed offering by Russian engine manufacturer Aviadvigatel who are to develop a new turbofan (PS–14) that it claims will be 10–11% more fuel efficient than the CFM56/IAE V2500 engines that power Boeing and Airbus narrowbodies.

Western acceptance

Despite being over four years away from its maiden flight and service entry in 2016, the MS–21 has already garnered a significant number of commitments from lessors. Ilyushin Finance recently placed an order for 28 MS–21s, with options on 22 more. VEB–Lizing committed to 15 with options on a further 15. Interestingly, fledgling Malaysian lessor Crecom ordered 50 MS–21s. Crecom is seeking exclusive regional marketing rights for the MS–21, which would include the establishment of a regional support centre for the MS–21 family with the aim of boosting Malaysia’s own aerospace industry. Crecom’s chief executive, Mohamad Isa Abdullah, stated at the Farnborough air show that they are looking to expand this agreement into the seven member countries of ASEAN. Support is crucial to the Superjet’s development. Willis Lease Finance CEO Charles Willis stated that “success of this aircraft will rise or fall on support and [marketing firm Superjet International] is aware of that." Lack of a global logistic network to support Soviet–era aircraft effectively eliminated any slim chance to secure orders from countries other than those who face US and/or European sanctions, effectively forcing them to procure Russian technology, such as Air Koryo (North Korea), Cubana (Cuba) and airlines in Syria and Iran.

However, Sukhoi’s partnership with Alenia has allowed Sukhoi to tap into ATR’s global logistics and support network to support SSJ customers in every corner of the globe, a first for a Russian aircraft type and a prerequisite for any Western airlines considering operations with the SSJ.

US–based Willis Lease Finance could firm–up its agreement to purchase six SSJ100s (with an option for a further four aircraft) anytime soon, in what would represent the manufacturer’s first sales success in the North American market. However, while Willis is US–based, there is no indication that the aircraft will enter service with any North American airline. Regional carrier Pinnacle Airlines had reportedly shown interest in the Sukhoi but until an MoU/LoI is signed, Sukhoi will not undergo the lengthy and expensive US FAA certification process. Realistically, it was always going to be unlikely that any North American airline would order the Sukhoi until it had entered service. North America remains the most entrenched market for both Embraer and Bombardier, although the recent LoI from St. Louis based Trans–State Airlines for 50 Mitsubishi RJs (MRJ) plus 50 options indicates that there may be those willing to break up the cosy duopoly in the North American marketplace. Willis’ chief executive Charles Willis stated recently that the SSJ100 is not a "game–changing" aircraft, but states: "Certain benchmarks have to be met but, if they are, it will be a good aircraft." Industry sources have indicated that Sukhois have been keenly priced.

While Sukhoi has secured several orders from smaller, regional carriers outside of Russia/CIS, the market awaits a sales victory to a “blue chip” airline. There has been a substantial amount of speculation that Alitalia may be their first major ‘Western’ customer (regional airline ItAli Air has ordered 10 SSJs). Sukhoi’s Venice, Italy–based marketing and financing arm Superjet International made a proposal to Alitalia in early October in a bid to win the contest to replace Alitalia’s fleet of 16 RJs (10 Bombardier CRJ 900s and 6 Embraer E170s). Curiously, the oldest of these 16 RJs is just six years old. Alitalia has stated that it will decide in a matter of weeks between the Sukhoi SSJ100, Bombardier CRJ1000 and Embraer E190/195. Sukhoi’s offer of 20 aircraft and an undisclosed number of options is based on an operating lease package already agreed with an international leasing company. At the Farnborough air show in July, newly–formed Bermuda–based lessor Pearl Aircraft signed a tentative agreement to acquire 30 SSJ 100’s, with options on another 15, and described Alitalia as "maybe" a target client.

Embraer has not given up on the process and recently stated that they see “a strong opportunity to win orders from Alitalia” for the E–190, once the Italian carrier completes its assessment of the type against the Sukhoi and Bombardier CRJ1000. Commenting on the political pressure that Alitalia may face, Embraer executive vice–president for airline markets Paulo Cesar Silva stated that "Alitalia is under a lot of pressure to look maybe with different eyes due to the association of the Italians with Sukhoi, but it’s not a given that they will go for this solution."

UAC’s product portfolio

The Italian connection to Sukhoi via Alenia’s investment in the Sukhoi programme would suggest that a degree of domestic political ‘support’ will be behind the SSJ100. However, there are few aircraft procurement contests in the world that do not attract elements of political persuasion to varying degrees, with the post of US President being described by ex–Boeing management as ‘Boeing’s best sales person’. There are a raft of other aircraft development programmes in Russia and many more under serious consideration. Most of these are niche aircraft that will compete with a small number of Western manufacturers, or in the case of others such as the Antonov AN–124 cargo plane, will operate in a segment almost exclusively belonging to themselves. Below we highlight those that do actually compete with Western aircraft or whose development is otherwise noteworthy.

Antonov AN-124: The super–heavy freighter that was first unveiled in 1986 has received a new lease of life as the outsize freight market continually increases in size. The last AN–124 was delivered in 2004 and Russian freight specialist Volga–Dnepr Airways has been lobbying to see a resumption of production. In addition to commercial operators, the Russian military have shown interest in ordering extra AN–124s. Russian president Dmitri Medvedev last January stated the intent to order 20. The Russian defence ministry may not be the largest customer for new AN–124s, but a state order could be more secure than those from commercial operators. "In our business plan we anticipate that the commercial airlines might place orders that are comparable to those from the defence ministry, but most of the technical and economic risks connected with resumption of production we anticipate will be largely carried by the state customers" according to UAC President Alexey Fedorov. The only competitors to the AN- 124 are the Lockheed Galaxy C–5 and dedicated Boeing 747 Freighters that can be nose–loaded.

Ilyushin IL-476 : Assembly of the first prototype of the modernised, re–engined freighter is now under way, with flight tests due to start next year. The IL–476 is based on the IL–76, which was introduced in 1974. As the modifications are minor, UAC doesn’t envisage the flight test process to take long with deliveries expected in 2012.

Again, much depends on the planned Russian rearmament programme, with UAC expecting a large military order for this latest iteration of a cargo and troop transporter that is able to land and take off from unpaved landing strips such as those that exist throughout Russia’s northern and eastern regions. The IL–476’s new PS–90A–76 engines will comply with International Civil Aviation Organisation (ICAO) Chapter 4 noise regulations and allow the type once again to be operated by commercial carriers into noise–sensitive European Union airspace. There are 88 IL–76s still in operation throughout Russia, the Middle East and Africa.

Antonov AN-148: The 68–85 seat AN–148 has finally entered service with St. Petersburg–based carrier Rossiya following a lengthy gestation period that stretched back to the 1990s. The AN–148 resembles a British Aerospace/AVRO RJ but with two engines rather than four. The type has been made somewhat redundant by the SSJ, which also comes in a similarly–sized 75–seat version (SSJ75). Regardless, Antonov has already begun production of a larger stretched derivative, the 99–seat AN- 158. While it is difficult to see this aircraft gaining any traction in ‘Western’ markets, the operational performance of the first five AN–148’s into Rossiya’s fleet (the first aircraft was delivered in October 2009) has been notable.

Rossiya has stated that the incidence rate of technical failure in its entire fleet occurred once every 344 hours in the AN–148, every 5,355 hours in its Airbus fleet (mostly newer A319s and A320s) and every 2,824 hours in its Boeing 737–500 fleet. While acknowledging a number of technical deficiencies in the AN–148s, Rossiya says they do not compromise safety and the airline is working jointly with the lessor (Ilyushin Finance Co) and the manufacturer to resolve them. Rossiya is planning to firm–up an order for a further nine AN–148s despite its recent problems.

China

The order backlog for the AN–148 and its derivatives stands at over 110. The majority of these orders comes from Russian operators: Rossiya (six firm plus six options), Polyot (15), Moskovia (10), and Atlant–Soyuz (20) are the largest customers. Ukrainian carrier Aerosvit has ordered ten while internationally; Cubana (three plus three options) and Dagestan Airlines (15) have ordered the type while negotiations are reportedly under way with potential customers in Cuba, Venezuela, Bolivia and Syria. Production of the AN–148 is ramping up. While two aircraft were delivered in 2009, seven will follow in 2010, rising to 12 then eventually 24. China has taken a different tack to developing its aerospace industry to the Russians. China clearly doesn’t have the pedigree or experience that the Russians have built up over the Sovietera, but they have a larger market and have established a state controlled centralised aircraft procurement agency, the Civil Aviation Administration of China (CAAC) to order and distribute aircraft amongst the countries’ airlines.

ARJ-21

In addition to the obvious benefits to pricing that CAAC is able to maintain through ordering in bulk, it will also likely be used as a tool to encourage China’s airlines to order Chinese aircraft currently under development, notably the MD–80 inspired ARJ–21 but further down the road the C919 narrowbody that will be aimed at the heart of the largest segment of the industry – the A320/737 dominated narrowbody segment of 150–210 seat aircraft. China’s AVIC I Commercial Aircraft Company (ACAC) is the second new entrant after Sukhoi to announce their entry into the RJ market with their ARJ–21 model. The ARJ–21 RJ is being developed by Shanghai–based AVIC I, a consortium of six companies and aerospace research institutes carrying out the development and manufacture of the aircraft that was formed in 2002.

AVIC has stated that it has over 200 orders for the 80–100 seat ARJ–21. ACAC has also signed a deal with China National Aero–Technology Import and Export Corp to help market the planes overseas, although it is difficult to see this aircraft gaining much traction without a global parts and support network in place. Engine supplier GE has had its Commercial Aviation Services (GECAS) unit order five ARJ’s with 20 options and is the first foreign company to order the type.

From a design innovation standpoint, the ARJ does not break many new moulds, using what will essentially be ten–year old GE engines on an airframe with a striking resemblance to the outgoing Boeing 717 (itself a derivative of the MD80/DC9 aircraft dating back to the 1960s). This is no coincidence. The Chinese first gained the know–how to assemble aircraft as part of a deal with McDonnell Douglas in a 1992 Chinese order for 20 MD–80s and 20 MD–90s, which were assembled in Shanghai with kits shipped from the firm’s former plant in Long Beach, California. The so–called “Trunkliner” programme included the shipment of machine tools from the US.

COMAC C919

However, as plans were unveiled at the Asian Aerospace Expo in Hong Kong in September 2009 for an all new narrowbody aircraft called the C919 in the 130–200 seat segment, the ARJ–21 is best seen as a stepping–stone for Chinese aviation. The success or failure of it should be measured not solely on numbers of units sold but rather the lessons learned from the process that can be imparted onto by–products like the C919. More than 80% of the ARJ–21’s systems will be designed and manufactured outside of China. GECAS has also ordered the ARJ–21, presumably for lease to a domestic carrier as only one airline outside of China (Lao Air) has ordered the aircraft. The C919, like the ARJ–21, is somewhat of an exercise in demonstrating to the outside world (and to a certain extent to the domestic market) that China can build and support its own aircraft development programme. Local participation in the supply chain of the C919 will mean that almost 50% of the aircraft’s systems will be designed and manufactured domestically.

However, the list of foreign partners for the C919 shows very strong support from US–based aerospace companies. Honeywell is providing the landing gear systems, brake controls systems and tyres, Rockwell Collins the communication and navigation solutions and GE Aviation Systems will provide the avionics core processing system, display system and on board maintenance systems. Each US firm will be partnered by a Chinese counterpart through locally established joint ventures. The C919 is also expected to be the first aircraft to enter service powered by CFM’s LEAP–X engine, furthering GE’s participation in the C919.

Manufacturing work on the C919 fuselage sections started in August. Jiangxi Hongdu Aviation Industry is supplying the forward and aft fuselage sections. Jiangxi Hongdu is a subsidiary of AVIC and is also a supplier of fuselage components to the Airbus A320 assembly facility in China. Some major Tier 1 suppliers involved in the RfP for the C919 have indicated that the specifications of many of the key components such as landing gear systems and others were within a very small fraction of the current A320 family, heightening long–held concerns about the respect for intellectual property rights in the country.

The first orders for the C919 were received last month from Air China, China Southern, China Eastern, Hainan Airlines, Chinese lessor CDB Leasing Company (CLC) and GECAS for a combined 50 firm plus up to 50 options. COMAC hopes to produce 2,300 C919s following the first aircraft taking to the skies for flight testing in 2014, with initial deliveries expected in 2015- 2016 in a schedule that closely mirrors that of the Irkut MS–21.

Boeing predicts that worldwide demand for single–aisle aircraft (excluding RJs) will reach 21,160 between 2010 and 2029. That would indicate that COMAC would be aiming for an approximate market share of 15% of the global narrowbody market, which would seem to be ambitious. However, Boeing also forecasts that the Asia–Pacific region alone would account for some 6,700 narrowbodies of which China could reasonably expect to account for two–thirds, at which point the 2,300 estimate seems more plausible, especially in light of the fact that the CAAC can virtually force its domestic carriers to purchase the aircraft.