Two of Russia’s most iconic aircraft manufacturers, Sukhoi and MiG, are going to be merged into one company under the authority of United Aircraft Corporation (UAC). The full extent of the reorganization of the companies will be decided in January 2022. The news was made public on December 3rd. It made a few headlines, but it is not clear yet what impact it will really have.
UAC was created by presidential decree in 2006 to consolidate the management of Russia’s numerous aerospace manufacturers and rationalize and ultimately save Russian civil and military aviation industry. UAC then incorporated several of the most important Russian design bureaus and production units such as Beriev, Ilyushin, Irkut, Mikoyan, MiG, Sukhoi, Tupolev, and Yakovlev as its subsidiaries. Since 2018, UAC has been part of Rostec, a state conglomerate that also owns United Engine Corporation (UEC), Russian Helicopters, Kalashnikov and controls Rosoboronexport, the state-controlled arms export monopoly.
The idea behind UAC takeover by Rostec was to combine the aircraft production chain in one entity and foster cooperation between manufacturers and subcontractors to create an international player in the aviation industry. Even in the days of the USSR, such a level of concentration had not existed.
Streamlining has proved difficult
However, the streamlining of the activities under the umbrella of Rostec has been slow and difficult. Multiple layers of management were hurdling UAC finances and productivity. In 2020, the Russian government had to bail out UAC with a $3.6 billion plan to provide some relief for the struggling state-owned defense conglomerate.
The state aid came with conditions, and in March 2021, Rostec CEO, Sergey Chemezov replaced Anatoly Serdyukov to head UAC board meeting and announced that he was about to launch a set of reforms. He revealed that Sukhoi and MIG were to merge into a single corporate aircraft building center at Khodynka Field, near Moscow, that would also manage Tupolev, Ilyushin and Irkut.
This ambitious plan aims at centralizing the management of separate entities belonging to the corporation to eliminate duplicate administrative and managerial functions, reduce production costs and overheads, create corporate competence and service centers, expand cooperation between production sites and deal with import replacement that followed western sanctions.
Contrary to what had been announced in March 2021, design bureaus are not included in the reform. According to the general director of UAC, Yuri Slyusar, the reform could save up to 130 billion rubles ($1.7 billion) and reduce managerial staff to about 500 people (out of 5 000).
Restructuring and Paying down debt
Since Rostec took over, it has been restructuring and repaying UAC debts and increasing its capitalization. Last November, Sergey Chemezov declared that it could become profitable following the financial recovery procedure in 2024.
In addition to clearing the books, Rostec undertook to rationalize management and administrative staff. In the case of Sukhoi and MiG, as soon as in February 2020, the general director of MiG, Ilya Tarasenko, was also appointed general director of Sukhoi. However, in October 2020 he resigned from both positions, and Sukhoi was subordinated directly to the general director of UAC, Yuri Slyusar.
It is worth noting that since 2020, Sukhoi has also been downgraded to a division of Irkut (since 2020, Irkut includes a ‘regional aircraft’ branch, which is developing and conducting serial production for the SSJ100 regional jet) and had to optimize overlapping management functions.
It resulted in the increase of the company’s revenue in 2020 by more than 50% compared to 2019, while the external debt was reduced by 15%.
It is not sure that the merger of Sukhoi and MiG can bring as much as the takeover by Rostec which controls most local producers such as Russia helicopters, United Engine Corporation and approximatively 750 manufacturers that could help for the localization of the production.
It also controls Rosoboronexport whose aviation sales since it was created in 2000 are worth $85 billion. Finally, in case of crisis Rostec can intervene directly to boost orders as it did during the pandemic, when it literally forced its airline operation, RedWings, into acquiring 60 Superjet 100 and 16 MC-21 before 2024.
The reasons behind the merger of Sukhoi and MiG are identical to those that motivated the creation of UAC in 2006: it is supposed to save the two national aerospace champions and bring financial stability.
UAC financial results are declining
Commercial results of UAC are in decline: in 2020, it supplied 67 combat and training jets, compared to 92 combat-jets in 2015, and only 20 civilian aircraft and airlifters. Military jets and unmanned aerial vehicle benefit from their visibility in military operations in Syria. In addition, UAC is betting on a light tactical aircraft developed by Sukhoi: the checkmate SU-75 which made its first foreign public appearance at the Dubai Airshow last month. The Checkmate is supposed to offer an attractive price with a unit cost of $30 million, roughly a third of current western front-line fighters, for supposedly similar performances, as well as some sort of stealth. This is also roughly half the cost of a new F-16.
Potential customers are being sought in the Middle East, Asia Pacific, and Latin America. Unfortunately, civilian aircrafts production and sales are lagging behind.
Seeking, but not finding, the commercial market
In an effort to optimize production and sales, UAC merged its subsidiaries responsible for developing and producing civil aircraft in 2019. Under the new arrangement Sukhoi Civil Aircraft Company (SCAC), the UAC-Integration Center and New Civil Technologies became one division merged with the Irkut Corporation. It illustrates how bad UAC is willing to develop its commercial aircraft, especially after the disappointing commercial results of Sukhoi first civilian aircraft, the Superjet 100.
Even though, Sukhoi partnered with western companies such as Boeing, Honeywell, Safran, Leonardo (Alenia) or Thales to bolster future international sales, its market remains mostly domestic.
At the moment, UAC export prospects lie in the MC-21, developed by Irkut, a narrow body airliner derived from the Yak-242. Irkut hopes to sell 980 of those by 2035 but faces harsh competition from the Airbus 320 and Boeing 737 families. Up to know it has received 175 orders, including 50 from the Aeroflot Group. Of the remaining, all but the ten ordered by Azerbaijan Airlines have also been sold to Russian airlines or domestic aircraft leasing companies.
In the less enticing but still moving twin aisle segment, Irkut has also supervised the CR 929 program for a widebody long-haul passenger aircraft developed with its Chinese counterpart COMAC where Russia is bringing its technological know-how such as a composite wing components and fly-by-fly wire from the MC-21 and can benefit from China’s production capability. It will be interesting to see if a unified UAC will mean more international cooperation with China.
Last but not least, UAC proposes an updated Sukhoi SuperJet, the SSJ- New Program but 97% of its components are imported from the US or the EU. As a result, UAC management has decided to reinforce indigenous production to avoid the disruption of the production due to the sanctions, which do not seem bound to disappear anytime soon.
Another example of Russian import-substitution strategy would be the Il-114-300 program. UAC believes that there is a market for a modernized version of the Ilyushin Il-114, designated the -300, to provide a domestically built alternative to foreign types such as the ATR 72 and De Havilland Canada Dash 8-400 so it simply resurrected a three-decade-old aircraft design! To help UAC, the Russian government has been introducing various measures to help local companies develop substitutes components and equipment for imported items.
What do UAC’s reforms tell us?
UAC reforms along with its portfolio and prospects for exports tell us three things.
First, because of sanctions, Russia cooperation’s with Western countries is unlikely to restart in the near future, contrary to those with China or India.
Secondly, Russia’s priority to relocalize its production indicates that a unified UAC is meant to answer a geopolitical situation that has significant industrial consequences. One important challenge ahead for UAC will be internal. Layoffs have already made the headlines since 2018 and UAC reforms meet important resistance from the employees of aviation corporations who refuses to move from Moscow to the far-East Komsomolsk-on-Amur or Siberian Irkutsk and consider that this announcement is yet another incremental change in processes to improve efficiency!
And, finally, the dual nature of UAC might prove to be its best asset: as the commercial markets are crumbling, defense export demand is still high, and any additional order from the VKS (Russian Air Force) is appreciated…
Those revenues can always be invested in R&D or used to modernize the production processes. Certainly, a must for UAC as a whole, today.