Boeing and Airbus Land Aeroflot

Moscow has approved the Russian carrier's bid to replace 27 foreign-built jets, despite opposition from domestic manufacturers

Russia's national airline, Aeroflot, will acquire 27 new Boeing and Airbus aircraft to modernize its fleet over the next two years, a senior Aeroflot executive said July 19. The airline's decision to renew its fleet, approved by the board of directors on July 15, breaks almost a year of tough negotiations between Boeing, the Russian government -- which had been concerned about the impact of such a deal on Russia's floundering domestic industry -- and the European Aeronautic Defense & Space Co. (EADS), which owns 80% of Airbus, and the Russian carrier.

The deal could translate into several billions of dollars in new sales for Boeing and Airbus at a time when the aerospace industry is facing a worldwide slump in demand. That global downturn, however, has helped push the deal along for Aeroflot, which says the oversupply will cut its costs by as much as 30%. "There is a good situation on the market now," says Lev Koshlyakov, deputy general director of Aeroflot, which is 51% owned by the Russian government.


  Koshlyakov says he won't be able to disclose the size of the deal until the financial agreements have been finalized in the next few weeks. But he confirmed unofficial reports that the carrier would acquire 18 medium-haul Airbus A-320s and 9 long-haul Boeing 767s as being "along the right lines." He said the deal would involve both direct purchases and leasing agreements.

To further cut costs, Aeroflot will swap its old Boeing and Airbus aircraft for the new models. Shipments of the planes are expected to begin at the end of 2002 and will continue piecemeal over the next two years.

Aeroflot's revenues grew 10% last year, to $1.4 billion, even as the rest of the global airline industry was devastated by a downturn in passengers following the terrorist attacks of September 11. The Russian airline has been shored up by an increase in domestic consumer-spending power and by the fact that flights to the U.S. make up only a small share of its total routes. Profit figures are unavailable because the company has not yet released full financials for 2001.

The Russian government had been trying to stall the deal because of fears that further imports of foreign aircraft could prevent any revival of the nation's slumping aerospace industry. But both EADS and Boeing have been aggressively trying to convince Moscow that their relationship with Russia is not just about clinching sales but also about helping to develop Russian industry.


  As part of a $2.1 billion development deal, EADS signed off on an agreement in May with Russian aerospace group Kaskol to set up an engineering center in Moscow to harness Russian knowhow for the new superjumbo A380 and other design projects. Boeing employs 650 Russian engineers at its design center in Moscow and has pumped more than $1 billion into Russian industry.

Those investments now appear to have paid off. Earlier this year, the Russian government agreed to a compromise: It said it would allow Aeroflot to replace its current 27-strong fleet of foreign-made aircraft without imposing punitive customs duties if the carrier did not increase the number of planes in its foreign-built fleet.

With politics out of the way, Aeroflot could concentrate on the economics. And it hopes the deal will eventually smooth the way for more purchases over the next six to eight years. Says Koshlyakov: "We want to further modernize our fleet."

By Catherine Belton in Moscow

Edited by Beth Belton

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