UAC increases its capital to 390bn rub for re-equipment of aviation industry

Kazan Aircraft Production Association is going to join Rostec, which means Chemezov will control almost half of the defence industry of the Republic of Tatarstan

UAC increases its capital to 390bn rub for re-equipment of aviation industry

As Realnoe Vremya found out, the authorized capital of the United Aircraft Corporation (UAC) will increase by 70,5 billion shares, worth about 60,6 billion rubles. As a result, aircraft plants will have the opportunity to receive budget funds for the modernization of the production and the development of aviation programmes. UAC needs the money badly — the financial recovery of the aviation corporation will cost Rostec and the state 350 billion rubles. The history of decline and the accumulation of large debts of the Russian aviation industry dates back to the 1990s. According to experts, the problems can be solved only in the case of a serious state order for civil aviation equipment, so that it can compete with Airbus and Boeing, which produce 1,000 aircraft a year.

UAC will increase its authorized capital by 60,6 billion rubles

On the Interfax information disclosure server, a message was published about the resumption of placement of UAC PJSC's issue securities. Through private offering, "70 500 000 000 (seventy billion five hundred million) pieces, with a nominal value of 0,86 rubles (eighty six kopeks) each” of securities will be placed, that is, in the amount of 60,6 billion rubles.

The range of potential buyers is limited to two: the Russian Federation, represented by the Federal Agency for State Property Management, and the State Corporation for Promoting the Development, Production and Export of High-tech Industrial Products of Rostec. The end date of the placement is June 15, 2020.

“The main task to be solved in the course of this additional issue is to bring state funds under the state programmes of production modernization and the of aviation programmes to the enterprises part of the UAC," the United Aircraft Corporation told Realnoe Vremya.

There have been such additional issues earlier as well: UAC issues shares and transfers them to the state in exchange for money for modernization.

When the takeover takes place, the Kazan assets of Tupolev PJSC (part of UAC, which owns 90% of the company), in particular, Kazan Aircraft Production Association, will fall under the control of Rostec. Photo: Maksim Platonov

“Now UAC has more than 492 billion shares, and another 70,5 billion shares will be placed under the additional issue. That is, an additional 14% of the current volume of shares. UAC's entry into Rostec implies the transfer of UAC shares held by the Federal Agency for State Property Management (Rosimushchestvo) to Rostec's balance sheet. “No assessment of assets is required," the official representative of the UAC informed Realnoe Vremya. If you calculate, now the сorporation's market capitalization is 328,5 billion rubles (or more than $5 billion). After the additional issue, the cost of the UAC will increase approximately to 389,1 billion rubles.

The Kazan assets of Tupolev will also fall under the wing of Rostec

When the takeover takes place, the Kazan assets of Tupolev PJSC (part of UAC, which owns 90% of the company), in particular, Kazan Aircraft Production Association, will fall under the control of Rostec. As Tupolev PJSC told Realnoe Vremya, Kazan Aircraft Production Association, as well as other UAC enterprises, was included in the outline of corporate procedures carried out as part of the process of integrating UAC into Rostec Group.

In our article about the state order for defence enterprises of Tatarstan, we published that the volume of the state defence order for PJSC Tupolev had fallen twofold, amounting to 267,5 million rubles. And half of it was provided by Russia special aircraft division, belonging to the Administrative Directorate of the President of the Russian Federation. It provides flights for Vladimir Putin. The maintenance of the presidential planes of Putin alone cost 100 million rubles in the past year.

In recent years, modernization is underway at the sites of Kazan Aircraft Production Association — in 2016, the Tupolev tender for 1,8 billion rubles was won by Kazansky GiproNIIaviaprom. The latter also fell under the control of Rostec last year: 50% plus 1 share was purchased by Technodinamika holding, which is part of the Rostec aviation cluster headed by Anatoly Serdyukov. It is still unknown whether Technodinamika and GiproNIIaviaprom will be transferred to the UAC. It is unclear whether Serdyukov will remain the chief curator of the absorbed UAC.

Rostec also controls the yet unprofitable Kazan Helicopters plant through its Russian Helicopters holding. Photo: Maksim Platonov

Rostec in Tatarstan: Kazan Helicopters JSC, Radiopribor, Kazan Electrotechnical Plant, KAMAZ, Shvabe, Pozis, Elecon

Rostec also controls Kazan Helicopters plant through its Russian Helicopters holding, which lost 5,3 billion rubles in 2018 and 1,1 billion rubles in the first quarter of 2019. The problems are explained by that the volume of state orders for Kazna Helicopters collapsed almost twofold, from 4,4 to 2,4 billion rubles. And the bulk of this money supply was provided by one contract “OKR 'Completing the project of creating the MI-38 Cipher Mi-38/11 helicopter”, for which the state (the ministry of industry and trade of the Russian Federation) paid 1,7 billion rubles.

Besides, Rostec controls several other enterprises of the Republic of Tatarstan, in particular, Radiopribor JSC and Radiopribor Almetyevsk Plant JSC and Kazan Electrotechnical Plant. To buy additional stakes in these companies, Rostec sold 2,8% of its shares in KAMAZ PJSC to Tatarstan, 47,1% of which is also owned by Rostec state corporation.

The corporation also controls Shvabe state corporation, the latter owns the State Institute of Applied Optics Scientific Production Association in the Republic of Tatarstan. The state order of the State Institute of Applied Optics increased by 1,5 times in 2019, amounting to 1,4 billion rubles. The company has relied on export contracts for years. Last year, Shvabe supplied customers with more than 1,500 diffraction gratings, about 600 of which were exported. Seventeen contracts worth 1,4 billion rubles were signed with Ekran research institute, Ekran is part of the defense enterprise Concern Radio-Electronic Technologies JSC of Nikolay Kolesov, which, in turn, is also controlled by Rostec.

Rostec, through certain holdings, or directly, also owns Pozis JSC and Elekon Plant (through Kolesov's KREZ).

Last May, Sergey Chemezov and Tatarstan President Rustam Minnikhanov launched the construction of an assembly aircraft production facility and an experimental aviation airfield in Tatarstan. Photo: Rinat Nazmetdinov

Rostec will control almost half of the entire defence industry of Tatarstan

Rostec also have other interests in Tatarstan. Last May, Sergey Chemezov and Tatarstan President Rustam Minnikhanov launched the construction of an assembly aircraft production facility and an experimental aviation airfield in Tatarstan, which is supposed to be commissioned in 2020. It is expected to invest about 2,5 billion rubles a year to produce 100 modern multi-functional T-500 aircraft.

In total, out of 24 defense enterprises in Tatarstan, at least 11 will be controlled by Rostec in the future. These are the largest performers of the state order: in 2019, they received 23,2 billion rubles from the total state budget of 24,7 billion, And, as we have already noted, most of them suffer from “withdrawal”, becoming independent from the state defence order, the turnover of individual companies is falling quite significantly. This is due to the planned by Russian President Vladimir Putin conversion of the Russian defence industry to civilian production — which is obviously what Rostec is supposed to do now in the aviation industry.

The ministry of industry and trade of Tatarstan has not yet answered the question of Realnoe Vremya about the attitude of the republic's authorities to the merger of UAC with Rostec.

The UAC will be divided into divisions and possibly, merged with Russian Helicopters

Earlier, the head of Rostec, Sergey Chemezov, said that the entry of the United Aircraft Corporation (UAC) into Rostec would not be completed until 2020, since it was necessary to evaluate the UAC in order to carry out the procedures, which would take the entire 2019 year. Another 3 years will be spent on the financial rehabilitation of the corporation, after which Rostec will start searching for investors.

Subsequently, it became known that the takeover of UAC by Rostec was to be completed by the spring of 2020. Finally, in November, Chemezov stated the final deadline — the first half of 2020, saying that UAC can be divided into three or four divisions: “This is a civil, military, transport and, probably, the fourth will be strategic aviation. Maybe we can combine it with transport one, but this issue is under discussion. Certainly, we need to do a lot of work to reduce costs, and there will be some changes in the organizational structure, so that all the companies that had previously been included in the corporation would also be included in this cluster. Those engaged in the production of components, engines, and so on, all of them will be combined in one cluster.”

Rostec also hoped — following the example of Airbus and Boeing — for the merger of UAC with Russian Helicopters (already owned by Rostec), but this required the consent of Mubadala holding, which controls 12,5% of the shares of the helicopter holding (a company of the United Arab Emirates) — the Arab fund could demand compensation for the share price of 30 billion rubles. After the takeover and recovery of UAC, Rostec will start searching for investors, but only for the civil division, which can include foreign companies, but the controlling stake will remain with Rostec.

Rostec also still hoped — following the example of Airbus and Boeing — for the merger of UAC with Russian Helicopters (already owned by Rostec). Photo: Dmitry Schipanov

Financial recovery of the credited UAC will cost the state 350 billion rubles

Rostec will also need hundreds of billions of rubles for its own financial recovery. Since last year, the group has been in “difficult negotiations” with VTB and Sberbank to restructure debts formed from old loans issued in the 1990s, which have been estimated at 350 billion rubles. Chemezov spoke about the need of UAC's capitalization increase in the amount of more than 300 billion rubles for its “final financial recovery”. Sources in Rostec reported about a possible move by the state: the state corporation hoped for state subsidies for 350 billion rubles to pay off bad debts: "182 billion rubles of losses of previous years, 63 billion rubles of uncovered investments in R&D, 59 billion rubles of outstanding obligations of customers, and 46 billion rubles — UAC bonds issued to cover the deficit in 2011.”

We also talked about three rehabilitation scenarios considered by Rostec. First, cleansing of the company's balance sheets of non-core assets, optimizing plots and unutilised space, and bringing inventory in line with the production programme. The second scenario included a reduction in the number of final assembly plants and aggregate plants, as well as a significant share of staff (given that in 2018, up to 60% of UAC expenses, or 89,4 billion rubles, were paid for labour). Finally, the third scenario involves the creation of an airline with only SSJ 100 and MS-21 on the basis of the State Transport Leasing Company (STLC) which would serve regional transportation. To create a massive state support for demand for Russian aircraft, the state will be asked to subsidize interest rates on loans and leasing.

“Today, Airbus and Boeing produce 1,000 aircraft a year, and what about our civil aircraft builders?"

In addition, Rostec, as part of the integration of the UAC into the group's structures, counted and pointed to “low labour productivity in the UAC, which is 7-10 times lower than that of global competitors in the face of American Boeing and European Airbus”. What about the Tupolev space in Kazan?

“Increasing labour productivity is a common task of Russian industry. The integration of UAC into Rostec is aimed at solving it," the press service of Tupolev PJSC, which owns the Kazan assets represented by the Kazan Aircraft Production Association, explained to Realnoe Vremya. “In particular, the growth of labour productivity will be largely provided by the implementation of programmes for technical re-equipment and equipping UAC enterprises with high-performance domestic technological equipment.

Former director of the Institute of Aviation, Ground Transport and Energy of KAI, head of the Jet Engines and Power Plants Departments, vice-rector for educational activities Alexey Lopatin agrees with the solution proposed by Rostec and sees the root of the current problems in the 1990s, when instead of purchasing own aviation equipment, aviation companies serving the industry were reoriented to the foreign aviation industry, in particular, to Airbus and Boeing.

“As a result, although not quickly, but gradually, there was a decline in the aviation industry of the Russian Federation. Today, Airbus and Boeing produce 1,000 aircraft a year, and what about our civil aircraft builders? Superjet, for example, produces several dozen... But in the mass production of any goods, the cost falls: the more produced, the lower the cost of goods is. An airplane is the most complex technical device on Earth, and it creates the maximum surplus value. And when a huge company, designed to produce hundreds of planes, begins to produce two planes a year — and the company must be heated, employees get salaries, and so on — then all the capital costs, calculated for hundreds of planes a year, fall on two aircraft. And their cost grows, as well as the cost of the service," Lopatin explained to Realnoe Vremya.

“As soon as there is a serious state order for civil aviation equipment, the industry will begin to develop”

Hence the reason for the weakness of the Russian air service. The service costs money and it makes sense to put it where a large number of aircraft are built and operated — it involves long-term investments and pays off only in the case of mass production of aircraft. The expert sees the solution to the problem in the protectionist policy of the state, in particular, in increasing the state order, after which “children's diseases” will go away: when the technique is new and it is “put on the wing”, it can inevitably cause a lot of complaints, as, for example, happened with Superjet.

“But still, we have made aviation equipment and are doing it very well. The problem is in the order. As soon as there is a serious state order for civil aviation equipment, the industry will begin to develop. The problem is that more specialists are needed to fulfill large orders, and the reproduction cycle in universities is long, in defense specialties — 5-6 years. It will be impossible to get the necessary personnel immediately. Aviation industry is like metallurgy: you can't stop the blast furnace, it will fail! You can stop something, but when you start the entire industry, you will start to feel the loss of links in one chain...," says Lopatin. “It is painful to see when our aviation equipment is abandoned mainly because of poor service.

In Perm, the PD-14 engine is being made, and the plans are for a more powerful PD-35 engine. Photo:

“Kazan Aircraft Production Association had excellent samples, such as Tu-334!”

On the other hand, the necessary steps have already been taken: in Perm, the PD-14 engine is being made, and the plans are for a more powerful PD-35 engine. Both engines are being developed by UEC Corporation (United Engine Corporation — part of Rostec), in particular, UEC-Aviadvigatel JSC (the city of Perm) and UEC-Perm Motors JSC.

There is a movement concerning the MS-21 — it is Russia's promising medium-haul narrow-body passenger aircraft developed by Irkut Corporation in cooperation with its member Yakovlev Design Bureau.

The expert is sure that a country with such a length as Russia needs its own aircraft, but at the same time, he advises applying not the principles of “import substitution” but the principles of “export orientation”, focusing on the best Western analogues, “do not make it worse, but do it according to patterns that surpass Western models”. Aleksey Lopatin cited the example of the defence industry, where this is happening, why defense equipment today is not inferior to foreign analogues and is in high demand. Delays in the execution of large orders for the civil aircraft industry will be, however, they are not inevitable.

“Kazan Aircraft Production Association had excellent samples, such as Tu-334, for example! The machine, which was actually designed using the money of Tatarstan (Tu-334 was developed in the 1990s to replace the decommissioned Yak-42, Tu-134 and Tu-154B. For a number of reasons, serial production of the aircraft was not organized). Or Tu-204 (developed in the late 1980s and early 1990s at Tupolev Design Bureau to replace the Tu-154 passenger plane on airlines). But any technique becomes obsolete, it must be modernized, conceptually, physically. And it takes time.

By Sergey Afanasyev