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OBORONPROM CEO Andrey Reus: Competition key to quality product

Izvestiya, 08.02.2011

The new-generation PD-14 engine for civilian aircraft, the first of a whole family; a future engine for military aircraft; a future high-speed helicopter and gas turbines for small power plants - these are just some of the projects launched over the past three years by Oboronprom, an umbrella corporation for the Russian helicopter and aircraft engine industries. These projects aim to deliver a range of high-quality Russian products that will compete on the world markets over the next 40 to 50 years. Izvestiya has talked about their progress, financing and, most importantly, overall strategy with Oboronprom Director-General Andrey Reus.

Q: Mr Reus, you are now running a very large company that unites two closely related but distinct industries: helicopter and aircraft engine making. Have you managed to achieve the goals the government had in mind when it created the Oboronprom holding company?

A: The challenge three and a half years ago was to complete the consolidation of the Russian helicopter industry and turn Vertolety Rossii (Russian Helicopters) into a world-class company. In engine-making, we needed to consolidate the existing independent suppliers, kick-start their growth and in some cases save them from bankruptcy. That was the problem I was working on back when I was a deputy industry and energy minister, before I got the chance to put my ideas into practice as the chief of Oboronprom.

Many of the leading companies in this industry were in dire financial straits not so long ago. The biggest problem was the so-called “toxic debts” which these companied had run up prior to their incorporation into Oboronprom so as so keep to the deliveries schedule. Thanks to government financial assistance we have largely cleared those debts. The Russian helicopter and aircraft engine making industry has received an injection of over 20bn roubles (650m dollars) via Oboronprom recapitalization.

Our asset management companies have conducted an in-depth audit of all the key problems faced by the industry; we have improved relations with our main customers and reached debt restructuring agreements with our lenders. The industry is back from the brink and can now focus on new projects as opposed to crisis management. Revenue growth figures have reached 20-30 per cent in the last few years. According to early estimates, in 2010 the group turned its first profit of 11bn roubles on revenues of 170bn.

We have now reached a new phase in our strategy. We are investing in helicopter and engine-making competencies that will keep us competitive over the coming years and enable Oboronprom to make a leap forward in terms of the technology and philosophy of our business. Our goals are defined by the map of Russian technological skills and competencies, and our company is set to become a major landmark on that map. Our ideology is to compete with the world’s best.

Q: What are the key projects that will enable you to beat the competition?

A: I think it is our duty to grab all the market share we can grab – within the limits of the law, of course. I would be a crime for us to waste any opportunity to do that. Unless we overcome our lack of confidence, our red tape and our internal squabbles, all these market segments will be grabbed by our competitors, who are better organized and more aggressive.

Russian Helicopters holding company has already become a serious player on the word markets. Russian-made helicopters are operated by more than 110 countries in every part of the world. We remain especially strong in the Middle East, Africa, Asia-Pacific, Latin America, the CIS countries and in Russia itself. Russian Helicopters is one of the largest makers of helicopters in the world. We must keep that momentum and convert it into further growth.

One of the key challenges we are facing is to modernize our most popular models in the medium and heavy helicopters segment in order to maintain and increase our share of the market. We also need to diversify our product range in the light helicopters segment. I am talking about new models such as the Ka-226T, Mi-34S1 and Ansat.

Rosoboronexport (Russia’s authorized arms exports intermediary) is now bidding for an Indian contract for 197 helicopters with our Ka-226T model. This helicopter, which is fitted with the Arrius 2G1 engines made by France’s Turbomeca, is a good example of international cooperation delivering excellent results. The helicopter has passed all the tests in India with flying colors and is reckoned to be one of the main contenders.

In 2010 we launched a program of deep upgrades for the Mi-8/17 family of helicopters, designated provisionally as Mi-171M. Russian Helicopters is determined not to let go of the markets we have already won, and Mi-171M is set to become a worthy new member of the hugely popular Mi-8/17 family.

Late last year the second prototype of the new multirole Mi-38 helicopter successfully completed flight tests. The plan is to offer this helicopter with two engine options: one supplied by Pratt & Whitney Canada, the other by our own ODK (United Engine Corporation).

The situation in our engine-making division is more difficult. We are still clearing the aftermath of the financial, industrial and HR policies that weighed down the sector over the past 20 years. Whereas all our helicopter manufacturers have now become profitable, some of the engine makers, including the company in Samara, are still reeling from their recent near-death experiences. Nevertheless, the goal for ODK is to become one of the world's top five makers of aircraft engines by 2020. To that end we are launching some truly breakthrough projects, such as the PD-14. The new engine is a product of cooperation between almost all the Russian engine designers and manufacturers brought under the ODK umbrella. Perhaps even more importantly, for the Russian engine industry this is the first new independent project of its kind in 20 years. We are also launching mass production of new products such as the SaM146, the first Russian–made aircraft engine to have obtained EASA (European Aviation Security Agency) certification.

Q: Are you confident that entering joint ventures with your direct competitors in foreign markets is not going to undermine your plans? Take, for example, your venture with AgustaWestland to make AW-139 helicopters in Russia.

A: That decision was dictated by the need for our product range to span every segment of the market. Our own helicopter industry has traditionally specialized in medium and heavy helicopters; lighter models were not a priority. We are determined to correct that imbalance. The current product range offered by Russian Helicopters does not have a mass-produced civilian model of the AW139 class. And besides, I believe it would be pointless to compete with our Italian partners in the luxury segment, in which they reign supreme.

That is exactly why we have set up the HeliVert joint venture between Russian Helicopters and AgustaWestland, which is a subsidiary of Italy's Finmeccanica Group. The venture, which is based in Tomilino, just outside Moscow, will assemble at least fifteen AW139 helicopters every year. Apart from sales in Russia and the CIS, they will be marketed by AgustaWestland's international distribution network.

Partnership with AgustaWestland, Turbomeca, Snecma, Pratt & Whitney, General Electric, Avio and other leading industry players increases the presence of Russian Helicopters and ODK in the foreign markets. It is also a chance for us to adopt internationally recognized business practices. In our product development we are led not only by contracts from Russia's own government (the defense and emergencies ministries) and majority state-owned giants (United Aircraft Corporation, Gazprom, Rosneft, etc) but also by what the international markets want, and we are seeking new partners in every corner of the globe.

Q: When can we expect to see the engine for the Russian fifth-generation fighter? And why are you developing the PD-14 engine for the future MS-21 airliner? Haven’t the Americans won that contract?

A: The delay with the engine for the fifth-generation fighter, the so-called second phase engine, happened largely because there were two contenders for that government contract, ODK and the Salyut plant in Moscow. That problem has now been resolved. Technically Salyut has not yet become part of ODK, but they are already working very closely with us. We have no internal competition for that project. Furthermore, the two companies are already working together on this project under ODK's lead.

As for the PD-14, the project is extremely important to ODK and the entire Russian aircraft engine industry as it enables us to retain and develop the requisite engineering expertise. I would like to emphasize that the plan from the very beginning has been for two engine options to be available for MS-21. One of these options will be developed by ODK, and the contract for the other one has been awarded to Pratt & Whitney.

In late 2010 we began testing the core engine for the PD-14 in Perm. It had taken us only 18 months to get to that stage, which is a clear achievement for our industry. The government is fully committed to that project and is providing all the necessary financing. Unless we develop that technology we are not going to be able to compete in this segment. We will start on a slow path to degradation. That is why having two engine options for the MS-21 is the best solution for us. Competition is key to hard work and quality products.

Q: India is about the declare the winner of a large contract for attack helicopters. Our main competitors, the Americans, who are offering the Apache, have made an unprecedented move and offered New Delhi the transfer of technology for that helicopter. How much does that undermine the chances of our own Mi-28NE? How can we counter that move?

A: That move was quite predictable. Mi-28N is a very capable attack helicopter used by Russia’s own armed forces. It has very good chances. But we also have the Ka-52 Alligator, which is also used by our own armed forces; in addition to being an attack helicopter, it is a versatile machine that can be put to various specialist uses. That is our competitive advantage. In addition, we are also prepared to share technology with our strategic partners – and India is clearly one of them.

Q: Speaking about India, when can we expect the opening of you service center in that country?

A: The market for civilian aircraft is very demanding to post-sale service and maintenance. We have a clear understanding that our business plan should include providing support for our products throughout their whole lifecycle. That is not an easy thing to do, but that is what the market wants. As soon as Russian Helicopters opens a new service center, sales in the region it covers immediately pick up.

In early February, ahead of the Aero India 2011 airshow, we opened a service center in India. More than 200 Russian helicopters are now in operation in that country; sales are picking up in the civilian segment. For example, we have obtained Indian certification for the multirole Ka-23A11VS helicopter, which completed the EASA certification procedure a year ago. As soon as that happened, we immediately sold two units in India.

Our country is setting up service centers all over the globe. In 2011 we plan to open basic service centers in Africa, Latin America and China, and also to expand some of the existing centers, such as the one in Vietnam.

Q: One of the most interesting recent trends in the helicopter industry is high-speed helicopters. When can we expect such a model to appear in your product range?

A: I am confident that we need to extend our product range and develop our technological expertise. Almost every large helicopter manufacturer in the world has a high-speed model in the pipeline. We have to keep up with these trends, because the business environment is very competitive. We are now studying the future high-speed helicopter concepts developed by the Mil and Kamov design bureaus. Both of them are leveraging their traditional strengths in these concepts. The project is coordinated by the Russian Helicopters Council of Experts, which aims to pursue a unified R&D policy. Such a system gives us the necessary level of expertise when making decisions on product development, including the future high-speed helicopter, and ensures a healthy degree of internal intellectual competition, which is always a good thing.

We are using the same approach to the new Unmanned Aerial Vehicle (UAV) project, which Oboronprom is developing in cooperation with Israel’s IAI. The domestic and international market for UAVs has very bright prospects. We are now working to launch assembly of UAVs at the Urals Civilian Aircraft Plant, which is owned by Oboronprom.

Q: Are there any such projects in engine making?

A: Apart from the PD-14, which we have already discussed, I would like to mention the project to launch production of helicopter engines here in Russia. That includes the popular existing models such as the VK-2500 as well as new products. The ODK companies that are now working on this project include Klimov, UMPO, and MMP Chernyshev. We are planning to start manufacturing helicopter engines here in Russia in late 2012 - but we will also continue our productive cooperation with the Ukrainian engine makers. Some of our new products are nearing mass production as well.

Another thing I would like to mention is our energy business. We supply power plants for gas transit pipelines; in my view, this is a crucial piece of national infrastructure, and it must therefore use Russian-made equipment. We are also developing small power plants that provide both electricity and central heating. Such projects will be implemented in Bashkortostan, Yaroslavl and Sverdlovsk Regions and other parts of Russia. We are now spinning this business off into a separate division within ODK.

Q: There has been a lot of talk of an IPO by Russian Helicopters...

A: Yes, there has been a lot of speculation, but I do not wish to comment on that. I just want to say that we are studying various options for financing our new projects. The time frame for attracting foreign financing and the choice of the specific options will depend on a whole range of internal and external factors, including the state of the stock markets.