Avialeasing” Company Annual Report of Closed Joint-Stock Company (zao)



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At present the Russian airlines are in want of such domestic aircraft the operating costs and continuing airworthiness expenses for which would be lower than the ones for the existing aircraft. The modern domestic aircraft is to meet the Russian and international safety standards, ICAO and Eurocontrol requirements; it is to be equipped with high-efficiency engines having good service life. It is vital to design such aircraft models that would considerably increase the fleet operating efficiency for the airlines.

Besides, there is a pressing task for the Russian airlines to upgrade the fleet and maintenance systems in the course operation; it’s also urgent to provide flight simulators for the crews to get trained.

In order to deliver on the target of providing the Russian airlines with the home-produced aircraft in November 2006 they established the United Aircraft Corporation OJSC (hereinafter – UAC) which, in intention of the RF Ministry of Industry and Energy, is to become the fifth largest aircraft building corporation in the world. For today the UAC equity capital has been formed already. It has incorporated the assets of such leading aircraft enterprises as “Sukhoi” Aviation Holding Company, “Ilyushin” International Aircraft Building Company and “Tupolev” Public Stock Company. The government share in the holding exceeds 90%. By the end of 2007 UAC is to have incorporated almost twenty companies in order to gain control over the five leading aircraft plants and five design bureaus. The Corporation will be divided into three divisions: civil, transport and military aviation. The UAC development strategy will be submitted to the Board’s approval in February – March 2007. Some details of the preliminary plan are known as yet.

According to UAC estimates the Russian airlines will need 1100-1800 new civil liners of all dimensions by the year 2015. The State Research Institute of Civil Aviation supposes that within the nine years to come (also by 2015) the demand will slow down to 648 new planes. The serial aircraft production is currently feasible at seven plants, which, should they be supported by the government, will be able to manufacture 1112 new liners of all dimensions by 2015 if they ramp production up to 150-160 planes per year starting from 2010.

Aircraft Category

Aircraft Category by Seating Capacity

Aircraft Type

UAC Production Program for 2007-2015

Passenger

Long-distance:










- high (315-435 seats)

IL-96-400

28




- medium (120-200 seats)

Tu-204

140




Regional:










- high (70-95 seats) (turbofan double-flow engine; jet double0flow engine)

Sukhoi Superjet-100

An-140

An-148

440

177

170




- low (30 seats)

(turbofan double-flow engine; jet double0flow engine)

An-38

155

Cargo




An-124

2

Total







1112

We used the data from available official sources and calculated the carrying capacities deficit for 2015 and 2025 with consideration of the forecasted retirement of the Russian fleet and supplies of new Russian-made aircrafts by UAC. According to the forecasted growth of passenger turnover, by 2015 the expected deficit of carrying capacities can reach 12.92% and by 2025 – 59.54%. Thus, in spite of the optimistic forecast made by UAC, for today the Russian aircraft industry fails to completely satisfy the demand of domestic airlines while the air traffic performance is growing.





2006

2015

2025

Passenger turnover, bln. passenger-km

92.09

145.92

211.17

Remaining aircrafts upon retirement (write-off)

1275

649

73

Aircraft renewal program

9

1110

1110

Total number of aircraft

1284

1759

1183

Carrying capacities deficit, %




12.92

59.54

The global aircraft manufacturers, Airbus and Boeing, have made their own forecasts as for the development of the market of air traffic performance and airlines demand for aircraft.

According to Boeing’s estimates within the period till 2025 the development of global economy and international trade as well as intensification of competition in the market will cause the growth of traffic performance. The average annual growth of passenger traffic volume will make 4.9% and the one of cargo service – 6.1%. The volume of new civil aircraft market for the 20 coming years will total to US$ 2.6 trillions. The airlines will consume approximately 27210 new passenger and cargo aircraft. The global civil aircraft fleet will be doubled (17330 planes in 2005 to 35970 planes by 2025), mainly their will be narrow-bodied (for 100-240 seats) and wide-bodied (for 200-400 seats), long- and medium-distant aircraft. By the year 2025 there will be relatively few (approx. 3450) aircraft of lower seating capacity and flying range (i.e. regional ones) bought by air companies in the world. For reference: by the time 16540 narrow-bodied and 6230 wide-bodied aircraft will have come on the market; besides, 990 aircraft of extended capacity (Boeing 747 type and higher capacity) will have been supplied to the market. Taking into account the aircraft which will keep in service by 2025 the global civil aircraft fleet will comprise 36000 liners.

Boeing does not provide an independent analysis of the Russian aviation market; however, one can collate the estimates of the company with the forecast given by domestic experts. While Boeing evaluates the global demand for regional aircraft at the rate of 13% (for long-distant wide-bodied – 61%, narrow-bodied A/C – 23%), the UAC intends to focus on producing the very aircraft: the planned output of regional aircraft for the period of 2007-2025 will come up to 84.86% of the total make.

According to the results of evaluation made by Airbus within the calculation period (by 2025) the global volume of passenger traffic flow will be growing by 4.8% per year and of cargo traffic flow – by 6% per year. To meet the demand of growing passenger traffic the supply of 21860 new aircraft accommodating over 100 seats will be required. Thus, by the year 2025 the passenger aircraft fleet will increase to comprise 27307 planes. Within the period under review the airlines will have replaced 12071 aircraft with the new machines.

As distinguished from evaluation made by Boeing, Airbus separately analyzes the Russian market of passenger service. They report that along with the Brazilian, Indian and Chinese markets the Russian one is developing most rapidly and by the year 2050 it will take the lead. According to Airbus expert opinion in 2006-2010 the passenger flow in the CIS countries will increase by 7.4%, the total number of new aircraft to be supplied to the CIS airlines during the period of 206-2015 is about 200 planes, during the period of 2016-2025 – 348 planes that makes 3 % out of the global supply of new aircraft.

Despite the fact that Airbus considers the CIS countries an integral region, the report emphasises that the Russian Federation currently has dominating position as per economic indicators and traffic volume of all kinds. The demand for new aircraft in Russia in 2006-2025 is expected to be 811 planes for the total sum of US$ 69.6 bln.

In general, the forecast made by Airbus experts as well as the one given by Boeing specialists is based upon the assumption that within the period of 2006-2025 the narrow-bodied aircraft market will be developing most intensively and the supply of such type aircraft will reach 68% of the total supply. Here lies the fundamental difference in the evaluations made by foreign and domestic manufacturers as the latter place their stakes on production of regional aircraft.
5. Appraisal of the Domestic Airlines Demands
A forecast of the Russian air service market development is of primary importance to set up technical policy for the civil aviation. According to TKP for 2006 total passenger turnover of all Russian airlines has grown by 9.5% to 93.9 bln passenger-kilometres, passenger volume – by 8.3% to 38.01 mln people. As per foreign experts1 estimation, by 2015 CIS traffic volume will amount to 6.8%, by 2010 traffic will rise by 7.4%. These estimations coincide with the ones made by Russian experts that believe that annual passenger traffic flow will make 7% in the near 20 years.

By 2010 Russian airlines will need new modern and economic A/C. A/C fleet modernization is a business priority of the 3 Russian leading airlines. As per Aeroflot-RA fleet development plan adopted in the beginning of 2006 the airline intends to put out of commission all Soviet –built A/C such as Tu-134 (11 A/C), Tu-154 (25 A/C) and IL-86 (6 A/C). The Airbus A-320 family will represent a core of the airline mid-range fleet (currently it numbers 18 A/C). The airline demand in long-haul A/C is 30 units. The decision made on Tu-143 A/C withdrawal shouldn’t weaken the position of the airline on the regional market: due to Sukhoi SuperJet 2000 delivery delay the airline top management will lease western aircraft as a temporary solution.

S7 Airlines, the second major airline and leader in the domestic traffic market, has also refused from Russian A/C operation having sold 2 Tu-204 A/C. In 2006 as a business priority the airline decided to develop its domestic traffic by enlarging its long-haul fleet. In April 2006 S7 airlines secured 10 Airbus A-319 lease agreement with GECAS during the year 6 A/C have been delivered to the airline. Besides S7 airlines received 2 Boeing 737-400, 2 Boeing 737-500, 4 Airbus A-310. Hence the airline western-built A/C fleet is the second largest in Russia and CIS after Aeroflot-RA (27 A/C). With 61 long-haul A/C fleet S7 Airlines top management plans to increase the number of 100-seat Boeing 737-500 to 24 A/C during the next 5 years - to increase the number of Airbus A-310 replacing them with New Generation aircraft in 2012.

Transaero holding the 3rd place is geared to long-haul A/C fleet development. In 2006 5 A/C were delivered to the airline: 2 Boeing 737-500, 1 Boeing 737-400, 2 Boeing 747-200. The total amount totalled to 21 A/C. Today the airline is the major customer for Tu-214, in 2005 an agreement on 10 Tu-214 A/C finance leasing was signed. In view of further development of domestic and international traffic in 2007 Transaero plans to lease 5 more Boeing 737-500. The airline has also secured an order on 8 long-haul Airbus A-330-200 with a delivery term in 2009.

Airline activity performance in 2004-2006

Items according to types of transportation

2004 г.

2005 г.

2006 г.

+/- 2006 г. к 2005 г. (%)

Passenger turnover, bln passenger-km

82,99

85,78

93,91

+ 9,48

International, bln passenger-km

43,72

45,79

50,91

+ 11,18

Domestic, bln passenger-km

39,27

39,99

43,00

7,53

Passenger traffic, mln people

33,79

35,10

38,01

8,29

International, mln people

14,90

15,88

17,26

+ 8,69

Domestic, mln people

18,89

19,21

20,75

+ 8,02

Passenger seats occupancy rate, %

70,7

71,9

72,4

+ 0,70

International, %

72,4

73,9

75,1

+ 1,62

Domestic, %

68,9

69,7

69,4

- 0,43

On the whole as per United Aircraft Corporation (UAC) by 2015 Russian domestic market demand in civil aircraft will be the following: passenger aircraft – 600-900 units, freight A/C – 100 units. In 2006 the RF Aviation Industry produced 9 long-haul A/C including 1 Tu-154M assuming that the market demand is 30 A/C of such type. In 2007-2015 UAC plans to build 1110 passenger aircraft.

However according to UAC forecasts the volume of new Russian-built A/C won’t cover an A/C deficit. Operating western-built A/C remains the only solution to the current situation for Russian airlines. So far a high VAT and import duties had hindered western A/C comings-in (only Aeroflot, Transaero and KD-Avia had customs privileges) yet in the reporting year the issue of customs duty reduction has been nearly decided.

The RF government has prepared draft regulations on reduction of customs duties by 8% for aircraft with 50 seat configuration and by 10% for aircraft with 115-160 seat configuration. Only aircraft leased to airlines for a 3-year period will enjoy such concessions that will be valid till the 1 of January 2011. At present import duties compose 20%.

The said government decision won’t change dramatically the current situation since the 3 year concession term is not enough to reequip considerably the fleet with western A/C. As a rule, leasing companies let on lease new A/C at least for 5 years and wide body long-haul A/C – for 10-15 years. Typically 20-year-old A/C with high operation costs and small demand are leased to airlines or a small operator for a short–term lease. Nevertheless indicated tariffs can serve as a guide and used A/C acquisition rise is anticipated when the final decision on duty rebate will be taken.

Thus, taking into account high prices of the new generation aircrafts, no decrease of import duties charged upon foreign-made aircrafts, and the low rate of aircraft production, we can conclude that, given the current state of the aviation market, it will be relevant for the airlines to be offered and to operate at perspective domestic routes mid-distance Tu-154М aircrafts. In 2006 there were 254 planes of this type registered in the state register, though such quantity is not enough to serve this passenger air traffic segment. Moreover, in the next years Tu-154М, one of the few domestic long-distance planes suitable for flights to West European countries and the Mediterranean region, will be employed for international passenger flights as well, and regional routes will be primarily served by different modifications of Tu-154 and by Tu-134, despite the fact that their calendar life nearly expired.

Upon the practice of “UTair Aviation”, a regular partner of our Company, one can make sure that dynamically developing airlines are interested in intensive operation of Tu-154 and Tu-134 after overhaul, having components of complete between-shop-visits life cycles; having all maintenance done according to the officially provided service bulletins; and given for lease in complete airworthiness.

Utair Aviation is among five leading Russian airlines. Over 10 years the management of “UTair Aviation” turned a small provincial company that annually served 400 thousand passengers into one of the leaders of national civil aviation. There are established routes, special passenger services (catering, ticket sales, maintenance), the fleet is being renewed, corporate shares are freely traded at stock exchanges thus attracting supplementary finance recourses, there is an established public credit history. The company intends to carry 2.5 mln passengers in 2006.

A public credit history was formed. Special services appeared. OOO Utair-Technik, company’s subsidiary, received EASA certificate that allowed to provide western A/C maintenance services registered in the countries where EASA Part-145 is applied. ZapSibCatering, company’s affiliate provides passenger services, A/C external and internal cleaning, in-flight catering, a ticket sales system set up by Utair Aviation serves dozens of airlines. Moreover in December 2006 OOO Utair-Express (LLC) registration procedure was completed and received a certification on performing AN-24 commercial flights. At the same time OOO Utair-Leasing applied for 100% share purchase of OAO Roschino Airport (Tyumen), an international airport with federal status.

Operating results of UTair Aviation in 2006:

- Passenger turnover reached 3 655.8 mln passenger-km, 23.1% growth;

- Passenger flow amounted to 2 417 060 people, 28.1% growth;

- Cargo carried came up to 9 411 tons, 15.4% growth, mail – 1 410.6 tons, 38.7% growth;

- Flight time amounted to 109 401 hours, 15.3% growth.

The figures reveal the fact that the Utair Aviation management strategy brings its positive results- economic and production indices keep growing. Company’s top management believes that domestic freight and passenger market is larger than a foreign one. Despite of a temporary red ink of domestic traffic this market has a great potential and profits for air companies. Hence a long-haul, short-haul and regional traffic orientation is Utair Aviation business strategy.

Utair Aviation seeks to use domestic A/C, particularly Tu-154 resources to its maximum. Comparatively low A/C fuel efficiency is compensated by low cost of ownership: relatively low cost of acquisition, operational costs, safety control, flight training. In the end of 2006 Utair Aviation fleet numbers 120 A/C. In the reporting year 2 short-haul turboprops ATR 42-320 were commissioned, they started regular flights in June 2006. In 2007 Utair plans to acquire some more ATR 42-320 and medium-range A/C. Utair fleet technical status meets international standards. The practice of “UTair Aviation” proves that a proper operation of the fleet and business organization in general ensures effective employment of Russian-made aircrafts and positive results of it

UTair Aviation” and “Avialeasing” have a five-year history of cooperation within the project of upgrading of domestic mid-distance aircrafts. UTair Aviation business diversification ensured company’s financial stability and business-related risks. In 2006 UTair Aviation demonstrated an impressive passenger traffic growth of 28.1% and held forth position in the rating of leading Russian airlines in terms of total passenger traffic volume, having moved a line up in the rating of leading domestic airlines.



6. Mission and Declaration of the Company
The Company’s mission is to meet the growing demand of the domestic airlines by offering safe passenger aircrafts that fully meet airworthiness requirements and ensure:
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