Full merger to follow

Published: 5/11/2000

At a recent press conference, engine designer and producer, Aviadvigatel and Perm Motor Plant (PMP) announced that they are on their way to a full merger and now share the same senior management, with Valentin Stepankov Chairman of the boards of both companies and Yury Reshetnikov General Director of the two companies. Currently about half of Perm's business comes from the aviation area although little in the way of new production. In fact during 1999 the company did not produce any new engines for the aviation industry. A substantial portion of the company's business however, is derived from the use of aero engines in power units for the oil and gas industry of which their dominant customer is gas company Gazprom. The latter is however, considered by PMP to be a difficult customer paying 60% its debts to the producer in energy supplies, offset against the plant's consumption.The balance of monies are provided in the form of promissory notes denominated in roubles with maturities of between 12 and 24 months. To keep the real value of the notes givne inflation and exchange risk, it appears that Perm probably trades the notes at very deep discounts for cash, somwtimes asmuch as 80%. It appears that no cash changes hands in the Gazprom transactions. Gazprom will however, continue to be a major customer for the plant given the huge size of its requirement for 400 turbines between now and 2006. The first of these a GTU-2.5 will be brought online in the autumn at a power station at Ufa in Bashkiriya, joining an installed base of 63 turbine-powered power stations. During 1999 Perm provided engine overhaul services overhaul of engines although the plant saw an increase in volume of 30% improving the company's financial position although not moving it back into profit. The company has firm orders for three PS-90s in 2000 from the state airline Rossiya . The two companies recently presented their newest product the PS-90A2 at the Engine-2000 exhibition in Moscow and according to Aviadvigatel's Chief Designer Alexander Inozemzev, are working closely with Pratt and Whitney and a number of western components producer including Allied Signal, SKF, AEG and Powell Electronics. The company has made a number of sales of the engine recently including its first foreign sale albeit at once removed, through its sale to Ulyanovsk based Aviastar Tu, which will operate the PS-90A powered aircraft for UK cargo carrier AirRep. Sales however, remain tough and the company has had to adopt a number of strategies to persuade airline's to adopt the PS-90, the latest being “fly by the hour” offering complete MRO support according to Michael Dicheskul, head of Perm's sales department. The company is looking to develop products for other market segments and Inozemzev mentioned that they were reviewing the potential of aircraft in the Tu-334 100 seat segment, rather candidly saying that they saw little prospect for larger products in current market conditions in the foreseeable future. Inozemzev said that the Tu-334's existing power plant produced currently in the Ukraine, the Ivchenko Progress D-436T1, was over twenty years old and did not offer the level of fuel efficiency required to make the aircraft competitive in present market conditions. He therefore believed that a market existed for a Perm produced product offering greater reliability and economy. He did not mention the plan to offer the aircraft with the RR Deutschland BR710 and 715. Dismissing the recent press stories that foreign shareholders, principally P&W, were stealing the struggling producers technology. Vladimir Schmatovich, Chairman of Perm Motors Holdings and a director of major shareholder Interros, commented that P&W were restricted by Russian law to a 25% holding and had invested considerable amounts of money in the company's development, with $2.5m invested recently in a new workshop to produce components for both Perm and P&W. Schmatovish also added that the interest of Gazprom in the company was also overstated as the gas producer currently only holds 2.5% of the Perm Motors Plant and 10% of Aviadvigatel.

Article ID: 1754