partial compensation out of the federal budget funds of lease payments and interests on credits obtained by airlines from Russian credit institutions with the purpose of purchasing new aerotechnics;
granting of sovereign guarantees to support the export of aircraft manufactured in Russia and provision of security for interior borrowings aimed to implement the project of designing the Russian regional aircraft of new generation.
Besides, the new institution, United Aircraft Corporation OJSC (hereinafter – UAC) (in some information recourses referred to as United Aircraft Building Corporation) is being established in the brunch. It will comprise the two biggest plants: Russian Aircraft Corporation (RAC) “MiG” and Kazan Aviation Production Association named after S.P. Gorbunov (hereinafter – KAPA). The integration is to be completed up to April 1st, 2007. The Corporation will unite the presently segmental potentials of design and production and start creating a new, cutting-edge product for Russia to compete with Boeing and Airbus on equal footing. The similar processes are taking place in the sphere of aircraft engine-building. Russia has gradually been integrated into the worldwide system of high-technologies including aircraft building.
In order to develop aircraft leasing sales schemes, a draft federal law №206888-4 was developed at the end of 2005 - at the beginning of 2006 on the basic principles of governmental control over aircraft lease. Considering specific features of the aviation equipment (high cost and significant operational risk), it governs particulars of the aircraft lease and establishes measures to ensure state support of commercial activities in this area, as well as to enable aircraft lease participants to protect their lawful interests. Should this draft be adopted, aircraft lease is expected to expand. However, the State Duma of the Russian Federation has rejected the above-mentioned draft.
The Cape Town Convention adopted on November 16, 2001 is a document to promote aircraft lease development at the international level (“The Convention on International Interests on Mobile Equipment” and “Aircraft Equipment Protocol to the Convention on International Interests on Mobile Equipment”).
The Convention was adopted in order to simplify financing system of expensive mobile equipment, including trains, air and space objects. The main objective of this Convention is to considerably lower the risks accompanying aircraft purchase. Certain legal and finance tools under the Convention are aimed to achieve this objective: the seller, the lessor, and the party that invests into aviation equipment purchase, are provided with different remedies in case the debtor would fail to execute his contract obligations, including an option to de-register and return the aircraft; lessor’s authorities are regulated at the international level, the order of provisional legal defence (prior to a judicial decision) is unified, an international title registration system for the aircrafts is introduced (with a possibility to get information from the register round the clock via Internet). Thus, security and, subsequently, attractiveness of investment for the parties that invest in aircraft purchase, is ensured by offering credits under lower interest rates and for longer periods.
Moreover, it should be noted that currently there is a global trend of engine leasing expansion. Engine is a convenient object for pledge. It is high-priced and preserves its value for a long time. The Cape Town Convention treats engines as separate objects and it creates favourable conditions to finance their production and purchase.
On the one hand ratification of the Cape Town Convention is extremely beneficial for Russia. It’s a ready-to-use legislative base that allows raising funds, influencing the international rule-making, lifting restrictions for insurance compensation, speeding up the integration into the international market. Dozens of Russian helicopters are leased by foreign countries and UN, but only the Convention enables protecting the property rights of the Russian owners. This issue is vital for “Rosaviakosmos” as well, because our rockets and satellites in prospects are to be launched from foreign sites.
Besides, ratification of the Cape Town Convention by ICAO facilitates marking down the interest rates on credit and reducing costs in the sphere of aeronautical engineering and aircraft acquisition. On the other hand the Cape Town Convention constitutes the basis for the global aviation Register which enables a creditor to provide precedence of his rights for an aircraft in regard to the other creditors having registered and non-registered property rights, what is positive in itself, however, to achieve this purpose the legislative framework in Russia should be changed so that the processes of registration of title for aircraft, financing and certification could be brought into compliance with the international legal standards. There is a possibility that the door to Europe can be closed in front of many Russian aircraft as soon as the Cape Town Convention is ratified and the consolidated Register of aircraft ownership and financial interests is established. Up to the time the Convention has been signed by 20 countries including Great Britain, Germany, Italy, China, USA, Turkey, Switzerland and Republic of South Africa. Neither Russia, nor any of the CIS countries have signed the Convention. The Cape Town Convention and Protocol for Avionic Equipment present a considerable achievement in the sphere of international aviation law. The international guarantee in itself and the possibility to get it registered in the international Register appear to be the unique remedies to protect the interests of creditors and lessors dealing with aircraft, A/C engines and helicopters. The international status of the Convention and Protocol is aimed to reduce creditors’ risks and, consequentially, cost of credits. It will expand the possibility to obtain funding for aircraft by the companies located in developing countries the legal system of which does not ensure the protectability of creditors’ rights. We cannot but hope that eventually Russia and other CIS countries will evaluate the prospects and advantages and join the Cape Town Convention in the nearest future. Thus, we can come to the conclusion that from the point of view of legal groundwork in the sphere of aircraft lease the situation has not been drastically changed within 2006. The expected draft “State Regulation Law in the Sphere of Aviation Lease” has not been approved. The Cape Town Convention fit to improve the situation, including the legal aspects in the sphere of lease, has not been ratified by Russia. In spite of considerable governmental efforts to encourage the development of aviation by means of financial investments there is no point to expect high rates of economic growth in the sphere of Russian aviation without drastic changes of juridical base including the legal grounds of aviation lease.
3. Technical Conditions of Air Traffic Market in 2006
The fleet is the main problem and the further development of air traffic in Russia is not possible without its solving. In 2006 there were 1,448 passenger aircrafts in Russia. 747 of them are long-distance planes and 701 are regional ones. The Tu-154, Tu-134, An-24, and Yak-40 families remain the biggest according to quantity, they account for 75% of the passenger aircrafts. The average age of the long-distance planes is 17 years (only the average age of the fleet of TU-154M and Il-96 is less than 15 years), the age of the regional fleet approaches 30 years. In the long-distance fleet the planes of 10 to 20 years of operation life dominate and the average age of the regional fleet is 20 to 30 years.
The graph illustrates structure of passenger aircraft fleet in 2006.
Russian air companies carry out more than 60% of all transportations with the planes which were developed in the 60s-70s. The aircrafts which do not meet modern international standards of noise level serve about 50% of the carrying capacities of the long-distance passenger fleet of Russia. There is a growing trend of older-generation aircrafts retirement. For Tu-154B, IL-18, Tu-134, An-24, Yak-40 the operational life is 70% and more exhausted. For all types of regional aircrafts (Tu-134, Yak-40 and An-24) there shall be a massive retirement since most of this fleet is of critical age. IL-86, Tu-154М, IL-62М, Yak-42 can still remain in operation for a long time considering the individual programmes of life prolongation.
According to the retirement necessity of aircrafts upon their design life expiration and a number of factors of no relation to the design life, there is an obvious tendency that, by 2015, carrying capacities of different sectors of the operating fleet would decrease by 40-70%
We should take into account that nowadays the practice of life prolongation is widely spread. Thus, the actual technical condition of the fleet, as well as the trends of aircraft retirement can significantly differ from the forecasts. The equipment is retired at an extremely low pace. Unserviceable aircrafts often stay idle for several years without mandatory maintenance, and assemblies of such aircrafts that still have valid life are used to equip other aircraft.
While the average level of retirement for the latest five years has equalled to 115 aircraft per year, it has been practically no replenishment. Since the beginning of the nineties the domestic aviation industry has produced only 36 aircraft of the 1st-3rd class. In particular, in the reporting year the domestic aviation industry manufactured 9 long-distant planes and the customers received only 7 of them.
The lack of the required quantity of aircraft to be supplied to the airlines causes the necessity to operate foreign aircraft most of which are acquired from the second-hand market. Thus, in the sphere of foreign technique there has appeared an evident tendency to acquire extremely worn-out, used aircraft acutely requiring high-quality maintenance but at the same time having high fuel efficiency.
In 2006 the number of such aircraft in the long-distant and regional fleet equalled to 166 planes. The traffic volume carried out by such aircraft reached 29% of the total passenger turnover. At the same time the passenger volume made by new domestic aircraft totalled to 8%.
The experts of our Company utilized the government-furnished information for the year 2006 to analyze the fleet structure of all Tu-154 modifications. The research was based upon the information on all the aircraft listed in the State Register, including the ones which were not in fact operated in 2006 but the service life of which was not yet served out, as well as the liners with the restorable airworthiness.
For the analysis of life cycle status we used the data on validity of aircraft airworthiness certificates, dates of manufacture and dates of re-registration. We also considered the decisions on conditions and procedures of airworthiness continuation (airworthiness period is 30 calendar years) and on life cycle prolongation for the aircrafts over 30 according to their technical condition.
It must be noted that the airlines are actively involved in used aircraft purchase when credits on the aircrafts are given. There is a growing practice for the airlines to take possession of the aircrafts they leased before.
4. Forecasted Capacity of the Aircraft Market Forecasting approach to the transportation market development is based upon the ratio between the pace of GDP and traffic volume growth. Global statistics evidences that 1% growth of the gross domestic product in emerging economies usually leads to 1.6% growth of the passenger traffic volume.
Growth of GDP, %
Growth of air traffic, %
As follows from the table, the year-average GDP growth in the Russian Federation is 6.05%; the transportation volume increases by 9.86%. Thus, in Russia 1% growth of the gross domestic product leads to 1.63% increase of the passenger traffic volume, hence, the annual average pace of passenger traffic growth is higher than it was predicted.
The passenger air traffic performance for the period has increased by 5.66%. According to the expert evaluation, if the national economy keeps progressing, by 2013-2015 the passenger air traffic performance will have reached the level of the most successful 1990 to make 150-200 bln passenger-kilometers. The market analysis demonstrates that the demand caused by the existing air traffic performance exceeds the existing carrying capacities, and this spread will only be increasing in the course of time (see the graph “Carrying capacities of the existing aircraft fleet and air traffic performance”).
The growing demand of Russian air companies for aircraft is determined by, firstly, the underproduction of domestic equipment and, secondly, aging and charging-off of the aircraft operated at the time.
The dynamics of aircraft disposal (retirement) is forecasted on the basis of maintenance status, overhaul-period renewal and the existing tendencies of the equipment writing-off. It should be taken into consideration that airlines holding different positions in the market implement different strategies to manage life cycles (maintenance status) of their fleet. Namely, the major airlines have the prevailing practice to write the outdated planes off as it is economic inexpedient to further operate them. Taking into consideration the forecasted expiry dates for service life and calendar time designed for the aircraft as well as the failure of aircraft to meet the international aviation standards, we can expect that approx. 70% of civil aircraft will have been written off by the year 2010.