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Our strategy is to increase our presence in the markets of Asia

Ilyushin Finance Company, the biggest aircraft leasing company in Russia, has plans for Asian markets, and China specifically. We interviewed Aleksandr Roubtsov, general director of the company, who is enthusiastic about its future.

Please tell us about results of the MAKS'2009 air show.

We are satisfied with the MAKS'2009 since we won many new orders and commitments from the airline customers, and signed some more letters of intents (LoIs) which, hopefully will soon turn into firm orders. In September we start deliveries of the new generation regional jetliner, the Antonov An-148. This will be a worthy addition to the continuing deliveries of the Tupolev Tu-204 narrow body mainline airliners: in the time being we continue deliveries of the Tu-204-100 version and is prepare shifting onto more advanced Tu-204SM version. Our customers continue taking from us the Ilyushin Il-96 wide body quads, the -300 and -400T versions. All of those aircraft types are president in the new pack of agreements signed during MAKS'2009.
The primary contract we won at the show is the firm order from Atlant-Soyuz, the airline of the Moscow City government. It calls for 15 Tu-204SM narrow bodies and 30 An-148 regional jets. Importantly, our new client is a large airline heavily supported by the administration of a huge urban area. Atlant-Soyuz operates out of the fast-developing Vnukovo airport, which was recently rebuilt using Moscow city funding. For us it is very important that all the airplanes Atlant-Soyuz signed for, are customized. They are tailored to the specific requirements of this particular customer.
For the first time in Russian practice, these airplanes will come equipped with Internet connections, as well as modern communications systems, including GSM-phoning, and the new in-flight entertainment system. In addition, the An-148 series aircraft will, for the first time, come equipped with the synthetic vision system that would use a head-up display (HUD) and thermal imagers. This will allow landings in adverse weather conditions using poorly equipped airstrips as observed in some provincial airports. We offer all of these options to our customers, and Atlant-Soyuz is the first who chose all of those innovations.
Speaking of other agreements, I would draw your attention to the contract with Aviastar-Tu airline (ATu). According to it, we shall deliver two Tu-204 mainline airliners in cargo version later this year. ATu is a prominent airline that has long been operating Tu-204 series aircraft on cargo routes.
By the time of MAKS'2009 opening, we had handed over three Il-96-400T large freighters to Polet ("Flight"). This airline is the first user of this new aircraft type that evolved from the baseline Il-96-300. Let me stress that this fall these aircraft will commence regular cargo services into China. They will fly inside Russia linking the European part of the country with cities in Siberia, and, from there, continue into Chinese territory. Then back into Russia, via Moscow into Western Europe. Thus, Polet will soon interconnect China, Russia and Western Europe with its regular services. We believe that this new cargo transportation project will be very beneficial for our Chinese partners. Polet will support regular flights to largest Chinese airports, - Beijing, Hong Kong, and others, - using the unique capabilities and the performance of the Il-96-400T quad. The Chinese cargo traders will benefit a great deal from it. They now can forward their cargoes to Moscow and further
on to Western Europe by the shortest air route, using world's most modern and capable freighter aircraft.

Of other deals signed at MAKS, I shall mention a bunch of preliminary agreements with airlines that set major parameters of our future deals. One of those is with Vladivostok Avia, our long standing customer. It calls for delivery of six An-148 jetliners. Another such agreement, also on the An-148, was signed with Saratov Airlines, for five aircraft.
Separately, agreements were made with Latin American customers. They call for deliveries of Russian airplanes to Equador, Brazil and Peru. Specifically, Cielos of Peru is looking for Il-96-400Ts.
The grand total of aircraft for which we signed at MAKS'2009 comes to 90. Immediately after the show drew to a close, we added two more aircraft. On Monday, 24 August, two Tu-204s were signed for with Syrian Air. That brings the number of aircraft sold in the second half of August up to 92.

Wire services reported that an airline based in Brazil is interested in the Il-96-300. Is this so?

Clean Air, a start-up airline from Brazil, has expressed interest in used aircraft owned by Ilyushin Finance. The Brazilians are in the process of establishing their new airline. They are talking about five Tu-204s - three passenger and two freighters - and a pair of Il-96-300s. We have got two Ilyushin quads, - those were previously operated by KrasAir. Today they are undergoing maintenance and repair at the manufacturing plant in Voronezh. Earlier, Venezuela signed for these two particular airplanes. Unfortunately, because of the world-wide economic crisis, the materialization of that deal has slowed down. So, we had no choice but to put these aircraft back on the market again.

There were also reports about North Korea's interest in a Tu-204-100. North Koreans were recently seen on a tour of Voronezh plant. Are you involved in talks with the North Koreans?

Yes, we are engaged in the negotiations. A preliminary agreement was signed a month ago. There is no firm order as of yet, though. A new round of negotiations is scheduled for September. As per their visit to Voronezh+ I may guess that they might probably be interested in the An-148.

Considering geography of your sales, one might notice that we have been gradually nearing China, - but not yet entering. Ilyushin Finance has delivered six Tu-204-300s to Vladivostok Avia, and three Il-96-400Ts to Polet, - those two airlines fly into China. Besides, you are talking to North Koreans, who already operate a Tu-204-300. When are you going to cross into China?


This region is of much interest to us. The best propaganda in favor of our products is the real operations of the recent Russian aircraft on commercial cargo and passenger services. And this is what happens. As you said, Vladivostok Avia, based in Vladivostok, a large Russian city near North Korea and Japan, flies regular passenger services into China on their Tu-204-300 jetliners. Polet airline is about to open regular cargo services into China using their brand-new Il-96-400T freighters. Importantly, Air Koryo of People's Democratic Republic of Korea operates Tu-204-300 into China.
I think that this is the best sort of agitation for the new Russian aircraft, and for our services. These services I just mentioned show to the Chinese, both passengers and airline personnel, how airlines of their neighboring countries work using Russian equipment. In that situation, an interest is naturally sparks up, sometimes out of mere curiosity, in the economics and various features of the new airplanes made in Russia.
That is why it is so important to us to see successful start of Il-96-400T regular services into China. To see Chinese cargoes actually getting onboard of these new Russian airplanes, to be carried far away from their country of origin.
As far as regional jets are concerned, the An-148s that are ordered by Vladivostok Avia, have sufficient range to reach quite a few of Chinese airports. I am sure the airline will operate this type into China. And other airlines will. Certain airlines based in Siberia are negotiating with us on An-148s. Recently, Ilyushin Finance signed a provisional agreement with a prominent Russian airline, which asked us not to disclose its name until they award us a firm order. This airline operates out of Siberia, just from the geographic center of the Russian Federation. This airline intends to fly its new aircraft both on domestic and international routes, including those to Chinese airports.

Do you have plans for India?

Some time ago we looked into this, trying to indentify markets for the Il-96 freighters. I think the type will draw some interest from the side of the Indian airlines after it commences flights on long haul international routes. We hope to find customers in India.

Broader speaking, what is your strategy of penetration into Asia?

We will participate in various shows and expositions that are held in the Asian countries, especially China. In particular, Ilyushin Finance exhibits at the exposition in Hong Kong in order to held talks with the interested parties there. We invite many of the local airlines to visit our stand and have talk to us. I hope these talks will bring about some commercial outcome.

Do you consider attracting Asian financial resources for your aircraft financing programs?

We have been looking into this issue, trying to place our papers in the equity markets of China. In particular, we consider the stock exchange of Hong Kong. I do not exclude possibility that the leadership of our company represented by the members of the control board will make decision to enter the Hong Kong exchange with a rider that respective offers are made by large Chinese banks, investment funds and other financial institutions. As per our myself and my colleagues in the management, we do have interest in attracting Asian capital into our aircraft financing programs. And we are most interested in the financial markers of China.

It seems that Chinese banks would demonstrate more interest in your company in the case you find industrial partners in China.

Chinese aircraft manufacturers have been introducing new products. Some of their new designs are of interest to us. Especially airplanes for regional routes. The Chinese manufacturers produce the Modern Arc 60 (MA-60) turboprop passenger aircraft. It is difficult to mark it as the best product in the given class. Still, the MA-60 has been operational for some time, it carries out passenger services satisfactorily. Its performance is good enough. Therefore, Ilyushin Finance is interested to talk to our Chinese colleagues on possible collaboration in marketing efforts pertaining to this airplane. It is important to notice that the MA-60 does not compete with the products of Russia's United Aircraft Company (UAC).
As a matter of fact, UAC does not have turboprops in its product range. Admittedly, Ilyushin has developed the Il-114, but this aircraft is being produced at Tashkent plant situated in the Republic of Uzbekistan. Besides, there is the Antonov An-140 in production at Aviacor plant in Samara. Neither Aviacor, nor the Tashkent plant is a member in the United Aircraft Corporation.
Bearing in mind the all said, I do not exclude the possibility that we find some mutual interest with the Chinese manufacturers. We may help them in marketing efforts.

The Chinese central government in Beijing provides funds for special programs on development of remote territories, notably provinces in the north-east part of the country. Much money is pumped into construction of railways and airports. Airplanes similar to the An-148 are not produced by the local manufacturers. Yet, this type, with its high-positioned engines and strong undercarriage, can operate from poorly prepared airstrips such as those in the remove provinces of China. Do you think so?

Well, the An-148 is a very competitive design. Certainly, the Antonov designers were in luck when they were developing this airplane. The An-148 can find a niche in the Chinese market. We believe this airplane will sell in China and operate with Chinese airlines.
Promotion of this airplane is one of the goals we set before ourselves during the exposition in Hong Kong. I think our participation in this event will help us spark interest in this machine with Chinese carriers. The An-148 is a very advanced design and, therefore, very competitive.
Some people might think the ARJ21, which has similar seating capacity, could be a competitor. But it is not that way at all. The An-148 won type certification in 2007 and has been mastered in series production at the plants in Voronezh (Russia) and Kiev (Ukraine). At the same time, the ARJ21 is on its way to certification. It is not clear today, when it would actually achieve it. Meanwhile, our Ukrainian friends are already operating An-148 made in the Ukraine on regular passenger route linking Kiev and Kharkov. The first Russian-made An-148-100B is ready for delivery to GTK Rossiya, the first airline customer in Russia for airframes assembled in Voronezh. The delivery is to take place in September.
Admittedly, the backlog of orders for Voronezh-made An-148s is rising. Now, we can offer new customers delivery slots only in 2013 (all slots in 2009-2012 have been allocated, yet some orders are "soft", and need to be firmed up). Cancellations are highly unlikely. In plain words, all new airplanes to be assembled in Voronezh are already booked by our existing airline customers.

And is what about the Tu-204? Is it also popular with the airline customers?

When we speak of the Tu-204, we speak about backlog of between two years and two years and a half. This is somewhat less than that for the An-148.

Leaders of the United Aircraft Corporation have recently expressed their opinion that the Tu-204SM program shall be developed faster, even though this might require premature closure of the Tu-204-100 (current mainstream model) production run at Aviastar-SP plant in Ulianovsk.

I am supportive of this idea. In my opinion, the Tu-204SM development shall go at full speed achievable. But close attention shall be paid to the depth of additional (complimentary) certification - so that Tupolev developers make the Tu-204SM available for the airlines as early as possible. The developers of this aircraft must be very careful in determining what innovations they introduce and what they take from the current production Tu-204-100. Besides, the manufacturing plant in Ulianovsk needs to have a clear understanding when they terminate production of Tu-204-100 so as to shift completely to the Tu-204SM. I think that the year of 2011 is good target for first delivery of Tu-204SM to airline customers. To me, this timeframe seems achievable. Let me remind you that Ilyushin Finance holds firm orders for Tu-204SM aircraft placed by two airlines. Iran Airtour and Atlant-Soyuz expect deliveries to commence in 2011. Meantime, we have enough orders to support production of
Tu-204-100 passenger jets and Tu-204C freighters throughout the rest of 2009 and the whole of 2010. We have enough interest from the side of airline customers in aircraft of these models.

Why you are so interested in the exchange of Hong Kong? There are some other prominent exchange sites in the world.

Well, the exchange of Hong Kong is quite active these days, as well as the whole of the Chinese market. We are primarily interested in raising capital in the Chinese markets because they suffered less from the world-wide crisis. This makes them attractive. Besides, the size of the Chinese financial market permits raising really large financial resources.

How are you going to raise capital in the Chinese market? Are you going to issue debt papers or sell company's shares, including those to be produced by means of additional emission?

The question you asked is something that we are thinking on right now. The answer, if found, may require some serious changes in our corporate strategy. It is a matter of strategic importance to us. At this time I have no certain answer, as we continue looking for a proper solution. I think that as soon as we get first replies from our intended Chinese partners, notably those based in Hong Kong, we will come closer to making a decision on that matter.

At one time, Ilyushin Finance negotiated on deliveries of Il-96 airplanes with a Chinese airline. Did you manage to make it into a deal?

We held negotiations with a Chinese customer and even signed a memo of understanding (MoU). But it has not yet developed into a firm order. The airline that was going to take Il-96 aircraft from us was meant to be a start-up, developed from scratch. But this airline is still being established. Until it is up and running, we can not move further than MoU. Besides, the most important for us right now is to commence commercial operations of the Il-96-400T, to give this new type a good try in real everyday life of a general cargo airline. Polet is the airline that chose to be first operator of the Il-96-400T. We must try the new aircraft type in real service with the Russian airline. And only then offer it to customers outside Russia.

You mentioned the name of Polet several times. The airline has accepted three Il-96-400Ts by the time of MAKS'2009. Is Polet going to firm up the option for three more such airplanes?

The airline has approached us on the matter of firming up their soft order for three more aircraft. We are already discussing terms on fourth airframe which is in a high degree of readiness at Voronezh aircraft plant.

The UAC and Ilyushin Finance have asked the Russian government for additional measures of state support. What have you asked for?

The government has given some positive reply to what we asked for, but the issue is not yet completely settled. The government has agreed to increase subsidies by 50% to airlines that operate newly airlines made in Russia under financial lease agreements with leasing companies. This is something that the government has done already in reply to the plea of UAC and Ilyushin Finance. Now, we await another measure, the extending of the duration of subsidies from five to ten years. We have been urging the government to make such a move since it is very important to our business. One more thing we asked for is some changes in the Law of leasing. They changes are aimed at better protection of investors' interests and those of creditors. If accepted, the respective amendments to the Law will enable leasing companies take aback their aircraft from airlines that do not pay rentals timely and do not care much about technical condition of leased aircraft.

The government of Cuba became first customer outside Russia for the Il-96-300 and Tu-204-100/C airliners. One of the reasons the Cubans took these airplanes from Ilyushin Finance was that the Russian government and largest Russian banks offered an attractive financial package for this deal. Now, in the time of the world-wide economic crisis, can Russia offer attractive terms to foreign buyers of Russian aircraft?

I think that the Russian government should consider one more time the terms on support of the high-tech export. Today, our export agencies offer us terms that are not always suitable. The resulting costs of hired capital available to us as a Russian company is rather high. Sometimes our foreign competitors can borrow money in their home markets at much lower rates. It is advisable that the Russian government would consider higher pay-backs to leasing companies that hire money from Russian commercial banks (as you know, the respective practice of "slashing" banking interest rates is in use in Russian and other countries).

Do you see a situation in which a prominent Chinese airline awards Ilyushin Finance a large order for newly made Russian airplanes?

This is something we strive for.

It seems that the Chinese banks would be more willing to lend money to Ilyushin Finance if you manage to win an order from a Chinese airline. Would you agree?

I think Chinese airlines will award us orders for new Russian aircraft at some point in future. Today, we are focusing on Russian inner market. Logic requires this. Historically, we started working on export of new Russian jetliners with Cuba and neighboring countries in Latin America. The government of Cuba became our first foreign customer. Ilyushin Finance is much interested in strengthening its positions in the markets of that region, since we are already present there with our products. Our next target was the Middle East. We signed contract with Iran Airtour on five Tu-204SMs. More recently, we won Syrian Air commitment for two Tu-204C freighters. Our third step on expanding the sales geography will be than in the directions of Asia and Africa.

Also, it seems that the Russian products can generate sales in China only when their manufacturers streamline production of new competitive designs.


Certainly! The Chinese tend to buy in large quantities at a time, and they prefer well-tried, reliable products that are popular in the markets of other countries. We understand this and other peculiarities of the Chinese market. Therefore, we will enter it only when we can offer suitable products. We have been preparing ourselves to this.

As of this time, Ilyushin Finance offers a number of aircraft models to its airline customers. You offer the An-148 in the class of regional airplanes, the Tu-204 and its freighter version, and the further development of this narrow body jetliner in the form of Tu-204SM. And, on the top of the range, there is the Il-96-300 passenger quad and its derivative, the Il-96-400T freighter with extended fuselage. Which will sell better in China?

I think that of the aircraft models that are already certified and mastered in series production, the Il-96-400T has the most chances in China. He hope that, as soon as Polet starts regular cargo services into China using this type, the Chinese airlines will also get interested in it. The Tu-204SM comes next, but this machine is still in development. Airbus has set up a local assembly line for A320 series aircraft, which are similar in size (yet a bit smaller) to the Tu-204. However, we believe there is a niche for the Tu-204SM, too. And, of course, there is a niche for the An-148 regional jet.
Speaking of a more distant future, I shall mention the MS-21, a next-generation narrow body airliner. The MS-21 shall become the key product of the Russian aviation industry. It shall enter service in 2015-2016 timeframe. The MS-21 is meant to be produced in large numbers. It is important to us to make MS-21 popular with airlines, get them interested well before this aircraft enters mass production. In that sense the sales of Tu-204 create a beach head for the MS-21. When selling Tu-204s, we build up our client base and customer support system. These seem necessary to support sales of the MS-21.
Among other perspective projects I would mention a "trunk liner", a conceptual wide body airliner that is optimized for short and medium routes, up to 4-5 thousand kilometers. It is fairly possible that China and Russia would join forces in development and production of such a "trunk liner". To me, this project seems very interesting to be developed as a joint effort.

Russian-made jetliners are already in Chinese service. One Tu-204-120C was delivered last year. Earlier, China procured a number of Tu-154M and Yak-42D tri-jets, some of which are still in service. The armed forces operate Il-76 air lifters and Il-78 tankers. Obviously, China has amassed some experience of using Russian aircraft and built up support system for them. How are you going to explore this?

We try to talk the Chinese into replacing ageing Tu-154Ms and Yak-42Ds by newer Russian designs. We attempted this before, and we attempt this today. But our desire is not enough. It is mandatory that the operators of these airplanes get interested in finding a replacement. We are going to activate negotiations with these operators later on. First, we want to establish a connection with Chinese investors. Let me repeat that our strategy calls for a larger presence in the Asian markets, which we aim to achieve using all means. Hong Kong is likely to be our main base, using which we will penetrate into Asia further and further.