Sirocco helps broker $500m deal and is confident of further sales, but now the challenge lies in Aviastar's ability to produce the aircraft (670 words)

Published: 9/14/2001

After the signing of an intergovernmental agreement between the Russian and Chinese governments, allowing the operation of the Tu-204-120 in China without additional certification, the Chinese civil aviation authority, the CAAC, has confirmed the letter of intent signed in August for five Tu-204-120s, with firm orders on 8th September for delivery of the aircraft in 2002 and 2003. The deal, negotiated by Sirocco Aerospace International and export agency, Aviaexport, provides for the delivery of three aircraft to Chengdu-based China Southwest Airlines and two to Xinjiang's China Northwest Airlines, all in freighter configuration, along with a further ten options. The package is reported to be worth $500m, although Sirocco is reluctant to confirm the amount involved in the cash deal. The order's shift to the Rolls Royce powered aircraft, in preference to the Russian powered Tu-204-100, has been attributed to the marketing efforts of Sirocco and Rolls Royce, which together visited 12 Chinese airlines promoting the virtues of the -120 with RB211-535E4B engines, Honeywell navigation and avionics suite and an Ancra cargo handling system. Tom Smith, President of Sirocco Aerospace International, said that the aircraft would be similarly equipped to the version currently being certified by the JAA with a English language cockpit, representing what he describes as the “first real sale” in Sirocco's five year history. The previous three aircraft sales have been to Air Cairo, closely associated with Sirocco's owner Kato Aromatic. Smith is, however, optimistic that the Air Cairo aircraft currently on wet lease to Air Egypt, could be purchased by the carrier. He expects further announcements of contract developments before the end of the month and is in ongoing discussions with a number of carriers in Western Europe and the Middle East. To support its international sales, including China, Sirocco has already established a support base at Hatfield in the United Kingdom and is currently in discussions with EADS subsidiary, Sogerma, over global support after initial talks at the recent MAKS air show. Smith confirmed that a base would be established in China, both to support the aircraft ordered and future expected orders. In the near term, Smith believes that sales will be dominated by the freighter variant of the Tu-204-120, since its price of $36m makes it highly competitive with the Boeing 757 freighter in the Boeing 727 replacement market and the aircraft will have to establish residuals for lease sales. Smith says that, given the leasing constraints, Sirocco will compete on the basis of price, "as it is our strongest sales tool” - the new price of the Tu-204 is the equivalent of the residual value of a 15-year-old Boeing. In fact, reports have suggested that the Chinese have negotiated substantially better terms than the publicly cited price. Aircraft pricing has been the subject of considerable tension between Sirocco and Aviastar of late, but Smith says that the disagreements are largely resolved. Sirocco, for its part, seems to accept that the terms of the deal originally set in the dark days of 1996 will be changed. Even so, it considers that the new management at Aviastar has not paid due regard to the $170m the company has invested in the plant, nor to its current funding of JAA certification, due to be completed by the end of 2002. Sirocco says that the certification, while not instrumental in the sale to China, remains important to further international sales. The production of the aircraft will be the next challenge, given that they will be produced from scratch by the Aviastar facility. Smith reports that a team has been evaluating the strength of the supplier networks and believes that, while there are a few “holes”, they can be resolved within a year. A more cynical line would be to suggest that selling the aircraft may prove to be the easiest part of the process, given that the struggling plant and its suppliers have not produced a complete aircraft since the early 1990s.

Article ID: 2761