Why The Russian Skies Look So Friendly

Russia's once-proud aerospace industry is struggling desperately, like the rest of the economy, to fend off chaos. And Western companies are rushing in to help, with business ventures from equipment leasing to building aircraft engines.

Despite the uncertainties, Western executives are lured by the chance to tap advanced Russian technology just when aerospace spending has shrunk drastically. They also want to win footholds in a potentially huge, though now anarchic, civilian airline market. "We have to enter now, even though for years it will mean risk before economic returns," says Heinz Pfingstgraef, marketing director for Germany's MTU Motoren. His company, a unit of Deutsche Aerospace, is close to signing a deal with Pratt & Whitney, a subsidiary of United Technologies, and Russia's Perm Motors to upgrade jet engines for the Ilyushin IL-96-300 airbus.

BREAKUP. Western carriers are also busy striking deals. British Airways, Air France, and United Airlines have invested in some of the 200-odd aviation companies that have sprouted in Russia alone from the breakup of Aeroflot, once the world's largest airline. It has dwindled to a fleet of 120 aircraft flying only international routes under the name Aeroflot-Russian International Airways.

The brightest prospects, though, are joint ventures with former Soviet aerospace companies. At a Moscow air show in early September, scores of Western vendors wooed Russian partners. One successful suitor was Pratt & Whitney Canada Inc. It inked a deal to build up to 100 small gas-turbine engines for airplanes and helicopters with St. Petersburg-based Klimov Corp. Pratt, with a 51% stake, will provide working capital, training, and management. Klimov will supply engine design and facilities. Says Gilles Ouimet, Pratt & Whitney Canada's executive vice-president: "There will be a long-term payoff in the large Russian market."

HIGH TECH, LOW COST. Other Westerners are also seizing opportunities. On Sept. 6, Boeing Co. launched an aerodynamics research center in Moscow employing 25 Russian scientists and engineers. And General Electric Co., which has sold 10 engines worth $150 million to Russian International Airlines, is in talks with Moscow-based Kamov to install GE engines in its helicopters for export.

Doing business with the former enemy makes sense for Western companies because of Russia's cheap labor, lower production costs, and advanced aero-space technology. Some ventures are starting to pay off. In June, Dutch leasing company Partnairs ordered 10 Ilyushin jets with Pratt & Whitney engines in a deal valued at $700 million.

Nor is Western involvement confined to planes and engines. American Airlines Inc. is setting up a reservations system for Aeroflot, while Lufthansa is building new Aeroflot terminals at Moscow's Sheremetyevo Airport.

Air Ukraine, lacking hard currency to buy expensive airliners, has leased several Boeing 737s. And on Sept. 11, AZAL Cargo, a joint venture between Kansas City-based Buffalo Airways Inc. and Azerbaijan's state airline, planned to start flying 707 charters between Houston and oil-rich Baku.

Among the new carriers, Moscow's Transaero has taken off fast, with revenues expected to reach $25 million this year. With four aircraft, including two Boeing 737s from Irish Airlease, it's awaiting approval to land at six U.S. destinations. Meanwhile, United Airlines is training pilots, Air France is teaching flight attendants to serve with a smile, and the Israelis are helping with security. Transaero is even offering business- class seats and a frequent-flier program.

Such accomplishments contrast with the chaos in much of Russian civil aviation: In August, two airliners crashed, one because too many passengers were crammed on board. Yet Transaero Senior Vice-President Gregory Gurtovoy, 30, is sure a major Russian carrier will rise from Aeroflot's rubble. "Now is the process of disintegration," he says. "The process of integration should come again." But even with help from the West, it could be a long wait.

Before it's here, it's on the Bloomberg Terminal.