Soviet Breakup? Coup? That's Minor Turbulence

For British Airways PLC, doing business in the former Soviet Union has had all the drama, complexity, emotional extremes, and sheer length of a Russian novel. It was October, 1990, when BA Chairman Lord King and Boris Y. Panyukov, the Soviet Civil Aviation Minister and chairman of Aeroflot, revealed plans for the launch of a new international airline, dubbed Air Russia, by 1992. But 15 months later, the Civil Aviation Ministry no longer exists, Panyukov has dropped from the picture, and projected costs of $700 million have shot up to $850 million. Now the partners say Air Russia won't get off the ground before 1994.

Bad news? Not back in the former Soviet Union. "From my point of view, the situation is positive," says Nikolai N. Pechnikov, chief of Aeroflot's joint venture division. "This project has survived all of the problems we have been going through." Aeroflot pilots are already in Britain, training under the aegis of British Air. And BA has agreed to renovate Moscow's ramshackle Domodedevo Airport. But a major piece of the puzzle remains: money. BA and Aeroflot say they hope to have initial financing in place by March. "BA is breaking new ground," says one European banker. "This is the kind of big, high-profile deal we'd like to do."

Still, getting the loans is exceedingly difficult, both partners are forced to admit. Banks have become increasingly nervous about lending money to ventures in the former Soviet Union since the collapse late last year of Vnesheconombank, the Soviet foreign trade bank that provided all guarantees for project financing. But the fact that the venture has survived at all is testament to how badly both BA and Aeroflot officials want Air Russia to fly. For Russia, which has taken ever the joint deal, the new airline will be the crown jewel in the fledgling privatization plans of Aeroflot, which controls airports, cargo operations, and hotels, in addition to a fleet of 2,000 planes. For BA, the venture would expand its international service, giving it a substantial lead over other carriers, such as American, Air France, and Japan Air Lines, which have become noticeably more cautious about the region.

Given the trials and tribulations of British Air, it's easy to see why. As early as 1987, BA saw opportunities to expand its presence in the Soviet market. At first, BA was to provide Aeroflot with an array of support services. Little came of it. BA then joined a British consortium hoping to overhaul Sheremetyevo International Airport but lost out to Lufthansa. In 1990, BA helped Aeroflot explore other opportunities, from a new reservations system to plans for a shuttle service from Moscow to Leningrad and Kiev, modeled on BA's own in Britain.

SOMETHING RADICAL. Eventually, it became clear that Aeroflot's inefficiencies--an outmoded fleet, abominable customer service, no cost controls--required something revolutionary. BA proposed a new airline. The only problem was, other carriers were approaching Aeroflot with a similar idea. John Borkowski, BA's strategy chief and top negotiator, needed something radical to set BA apart. Although BA had minimal experience in airport renovation, Borkowski proposed that it construct a new 125,000-square-foot terminal at Domodedevo and modernize the rest of the decaying airport. BA officials were reluctant. But the terminal would provide jobs and hard currency and head off doubts by Aeroflot that the deal was stacked in BA's favor. Says Borkowski: "I didn't see how we could make the project work without it."

Once BA agreed, it seemed every bureaucrat from Moscow to Minsk wanted a piece of the action. At one point, BA had to gently rebuff an influential Russian official who wanted to use Air Russia to promote the sale of Russian airplanes to the West. His idea was to use Russian planes fitted out with Western engines, yet he had no idea when the planes could be delivered.

And the venture was continually buffeted by ill winds from Soviet political storms. A crackdown in the Baltics last January put the deal into deep freeze for months. By spring it was back on track, and it formally was registered on July 26. But three weeks later came the coup. "Frankly, we said goodbye to each other," recalls Pechnikov. The coup collapsed, and talks picked up without skipping a beat.

Borkowski and his team also had to get used to the idea that the Russians knew little about their own airline. "We would ask questions about the number of hours planes spent on each route," recalls Borkowski, "and they would look at us blankly." The Russians were not without a sense of humor, however. When a BA team member asked about the value of the Aeroflot fleet, an Aeroflot official threw up his hands and said: "How about 2,000 Marlboros?"

FEAR OF COMMITMENT. The banks thinking about financing the venture are unlikely to find that answer very funny. Without Vnesheconombank to guarantee loans, BA is trying to spread the risk. The partners have hired financial adviser Spectrum Capital Ltd. and have approached the World Bank and the European Bank for Reconstruction & Development for financing. To make the deal more palatable, Air Russia will keep ownership of the planes offshore, where creditors will have an easier time getting at them in the event of default. Yuri A. Lebedev, chairman of the Russian Republic Innovation Fund, a part owner of Air Russia, says the idea is to build a "soft financial structure." Partners, from jet-engine maker Rolls-Royce PLC to BA to Boeing, which will supply seven 767s, will share the risk.

As the deal stands, BA will take 31%, with 69% distributed among Aeroflot, Domodedovo Airport, and the Russian Republic Innovation Fund. Daily flights from Moscow to London should begin in January, 1994, adding such cities as Tokyo, Paris, and Seoul during the year. Service to New York, Milan, and Osaka will follow. A financial plan calls for Air Russia to break even in 1997. Such projections seem pie in the sky, given the uncertainty in the region. Then again, it's that kind of optimism that has taken Air Russia this far.

      AIR FRANCE Plans to set up new catering, freight handling centers in St. 
      Petersburg for Aeroflot
      AER LINGUS Carries passengers from Ireland's Shannon Airport to New York as 
      part of joint Belarus Airlines' new Minsk-Shannon-Moscow service
      AMERICAN AIRLINES  Sister company AMR Information Services, with IBM, doing $5 
      million feasibility study for reservations automationproject for Aeroflot; 
      consulting with Lithuania Airlines
      FINNAIR Forming airline with Aeroflot to operate from St. Petersburg
      LUFTHANSA Heads consortium to refurbish Moscow's Sheremetyevo Airport, build 
      new terminals and a hotel, for $470 million
      NORTHWEST AIRLINES Testing satellite-based navigation system for use over 
      DATA: BW