Ilyushin Finance wait for government support (1480 words)

Published: 2/26/2001

According to Atlant-Soyuz, the preliminary leasing agreement for 10 cargo Il-96-400s and 4 Tu-204s, has been signed with the Ilyushin Finance Company. The deal has been consummated without the Il-96-400 being available or any money with which to fund it, although according to General Director Alex Rubtsov, he already had considerable interest from Russian and foreign investors. The total value of the purchase is likely to be approximately $450-$480m, given the purchase price of $32m per Il-96-400C and $20m per Tu-204C. The leases, given the lack of a resale market and therefore no residuals, will involve the complete payback over twelve years, although IFC expect the aircraft to breakeven within eight years. Despite this the challenge for IFC remains the raising of this size of funding in the current environment over the period envisaged at a sufficiently low cost to make the structure viable. Something Rubtsov is confident of being able to achieve with at least ten-year money on reasonable terms. For success therefore, structural change to address issues such as amortisation of leases is essential, to persuade the Russian banks of making relatively long-term commitments at attractive rates of interest. This, in part, is why IFC's Rubtsov, has led the campaign to make sure that a comprehensive restructuring of the tax law, relating to these types of lease combined with government guarantees. Is an integral part of the government's new programme for the industry - due to be announced in the next few days. With the publicity surrounding the announcement of the Atlant deal, and its sheer size by Russian standards, the veracity of the case being made by Rubtsov can only be strengthened. Certification The full consummation of the deal and its financing seem a fairly distant prospect, when considering the period of time required to certify the aircraft in its new configuration. The changes to the aircraft making the aircraft much less a cargo version of a Il-96-300, than as one source described, a Il-96T with PS-90s. The level of work for re-certification however, is the subject of some debate. Some industry sources believe that the changes are so radical that the process could take 5 years. IFC are significantly more optimistic arguing that the engine and avionics on the new aircraft are already certified either on the Il-96T or the Il-96-300. Requiring, according to Rubtsov, less than 25 certifying flights along with documentation and software changes leading IFC to believe certification could be achieved in 2½ years. The more optimistic timetable being achieved by using an existing Il-96-300 as a test bed, while the first Il-96-400 is produced by VASO. Financing Certification The issue of who will finance the certification process is of interest. Although Ilyushin undoubtedly has self-financed some of the design work on the new aircraft, it is unlikely to be in a very advanced state. The funding for the programme is unlikely to come from Ilyushin itself, and the $3m promised by Atlant may not be sufficient to get the aircraft flying within the 2½-year period laid out by IFC. According to IFC, the programme has been costed at $28m with funding sources from inside and outside of Russia already identified. The successful landing of that funding is likely however, to balance on the government's decisions in mid March relating to the provision of very high initial levels of guarantees (possibly 100%) by the Russian government on leasing structures. Aimed at persuading comfort for investors both domestic and foreign. The sources of Russian finance seem likely to be the state owned banks, who although already providing some funding already, but in the absence of guarantees have made the pricing unacceptable to most operators. The foreign institutions Rubtsov is reluctant to discuss, but says they do not include the “political “ institutions such as the EBRD and in the main require less guarantee reassurance than their Russian counterparts. Guarantees however, remain the lynchpin and if they are not forthcoming, the chances of even the persuasive Mr Rubtsov convincing financial institutions and investors to part with long-term money, at viable rates of interest, appear slim. Given the availability of the Il-96T with a FAR rating, the move to this particular programme by Ilyushin appears strange to some industry commentators - though the quoted price for new aircraft of $40m is probably the major driver. IFC however, feel that the relative differences in performance of the aircraft to the Il-96T are offset by price and will still make it a viable competitor in its core markets initially. IFC indicate that the Il-96-400 will have a lower payload (5 tonnes less) than the Il-96T (92 tonnes) powered by P&W engines, and a shorter range by 500 kms on full payload. Should the government support guarantees on the 15th of March and IFC be successful in getting finance for the Il-96-400 programme. The programme may have the potential to succeed where others have not. Its focus on a relatively low cost large cargo aircraft at an attractive price may appeal to what is an expanding market that is less sensitive to the origin of its aircraft and more focused on its ability to deliver reliably and in profit. With the added prize for Rubstov that the introduction of the aircraft in commercial service can only improve its long term prospects both in cargo and passenger service. IN the event of the happy conjunction of events outlined however, success may in itself become a problem The Atlant orders alone would exhaust the supplies of airframes quickly and the concept of restarting total production in a factory and components industry battered and depleted by almost a decade of neglect challenges many who think the industry may already be beyond the challenge. Rubtsov however, is characteristically relaxed about the prospect, suggesting that VASO the aircraft's producer will simply require to hire back lost staff. What is clear however, the large aircraft industry has little choice as it is not done, then the industry will not avoid extinction as a producer of aircraft. Il-96T For VASO the birth of its new child, is accompanied by the troubled path of another entering into service. The delivery of the first Il-96T is reported to be experiencing teething problems with a reluctant Aeroflot. The airline is reported to have required that the aircraft be delivered with its engine rated zero hours, with the effect of both delaying delivery and also increasing costs. It also requires spare engines on operational leases. There are also reports of it requiring the subsequent aircraft to be “brand new”, although it is unclear whether this precludes VASO from producing new Il-96Ts from the airframes currently awaiting completion in Vorezneh. Delays in delivery are particularly painful for IFC, given that the airframe was acquired for $5.5m, but apparently currently sits on the balance sheet with a value of $20m - offering considerable potential liquidity to IFC. Atlant-Soyuz Atlant says its choice of the Il-96-400 over the Il-96T was largely driven by the latter aircraft's high costs. Deciding against the new Il-76TFs, as the aircraft is now produced outside Russia - in Uzbekistan. The latter reasoning appears curious, given that the purchase price of an Il-76TF would probably be substantially lower than the cost of the new Il-96-400, and also would be available significantly sooner. Whether it would be able to avail itself of a Russian government-backed leasing scheme is another matter. For IFC however, the Il-96-40 offers Atlant a modern aircraft capable of handling palletized cargo with substantially greater capacity giving it sufficient advantage over the Il-76TF to justify the premium. Aviastar were reluctant to confirm whether the Tu-204s would be combis or the Tu-204-100Cs with PS-90s, or RB211-powered Tu-204-120Cs. The former seems the most likely candidate and was confirmed by IFC. Despite recent reports of unreliability, Atlant believes that the PS-90s will be improved before taking delivery of the aircraft, but it still believes the PS-90A to be a reasonably good engine and the problems that are currently effecting this series of engines should be resolved by the PS-90A2 according to Rubtsov. Someindustry sources still believe that Perm have along way to go on the engine even in its new variant. The Il-96-400s will be used BY Atlant in peak season, flying long-haul routes and will be replaced by the Tu-204 (with its lower capacity) in the off-season. The airline said that Vladimir Prokopenko, General Director of Atlant-Soyuz, believes the correct fleet mix, as a result of this method of operation, is 1 Tu-204 per 4 IL-96-400s - given the on-/off-season requirements of the carrier. The new aircraft, when delivered, will join the Il-96-300 converted to cargo use two years ago and The airline's current operating fleet of 16 Il-76, 2 Il-86, 1 Tu-154M, 216 IL-76, 2 IL-86, 1 Tu-154M, 1 Il-96-300 (cargo version), 2 An-12.

Article ID: 2380