Boeing Frontiers
October 2003
Volume 02, Issue 06
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Trans-Siberian EXPRESS


Above: At the Moscow Air Show in August, Boeing Russia/CIS President Sergey Kravchenko (left) presented a Boeing 7E7 model to Russian President Vladimir Putin during the state leader's visit to Boeing's exhibit. Commercial Airplanes Vice President Craig Jones (third from left) and Senior Vice President Doug Groseclose (fourth from left) also attended.
Boeing Russia/CIS President Sergey Kravchenko's territory includes the country with the largest land area in the world. And he and the Moscow-based leadership team are making big plans for long-term growth in Russia and the Commonwealth of Independent States.

It's been 10 years since Boeing first opened its office in the Russian capital, and the company celebrated this milestone last month with a series of stakeholder events that included a visit by Chief People and Administration Officer Laurette Koellner and the debut of the Boeing Russia Web site. But rather than merely celebrating the past decade, Boeing Russia/CIS is looking ahead—and looking forward to more strategic partnerships with the region's aerospace industry, in which Boeing has invested more than $1.3 billion through cooperative programs.

Russia/CIS is key to Boeing's global strategy because the countries are poised for growth. The commercial airplane market there, Kravchenko said, is valued at about $12 billion during the next 10 years. And that doesn't include the potential worth of airplane services. This potential hasn't been lost on Boeing Capital Corp., which in August opened a new Moscow office.

Trans-Siberian EXPRESSLast year, according to the Russian State Statistics Committee, the country's gross domestic product grew 4.3 percent. Its cargo traffic is growing; the people in these countries are traveling a bit more.

But, "Do [airlines] have more dollars to pay for new airplanes? Definitely not," Kravchenko said. "That's why BCC is opening an office here."

But just as this presents opportunities for Boeing, challenges also exist. "We usually think in terms of our customers buying airplanes," Kravchenko said. "Russia in this regard is a little bit different. It is very difficult to penetrate because of tariffs."

Currently, foreign-produced aircraft purchased by Russian airlines are slapped with a 20 percent import tax as well as a 20 percent value-added tax. That makes it especially tough, if not nearly impossible, for most of these cash-strapped carriers to buy new airplanes. (However, the government has granted two airlines—Aeroflot and Transaero—"exemptions" from these tariffs.)

But Russia's hopes for World Trade Organization accession rest in part on its repeal of these taxes. All WTO members have a side agreement not to levy such taxes, and the U.S. government believes that if Russia gains membership, it too should honor this accord. Russian carriers are lobbying their government to lift these tariffs—and Boeing is optimistic that the country's airlines finally will be able to modernize their fleets with airplanes that meet global and European environmental and noise standards.

With eye on Russian market, Boeing Capital opens Moscow office

Mher PapyanIt's hard to buy or lease new—or even used—airplanes without cash, or access to it. That's why Boeing Capital Corp. is now open for business in Russia/CIS.

Boeing Capital has tapped Mher Papyan, former Legal and Development director for Armenian International Airways, to lead its efforts in this region. Introduced to the Russia/CIS aviation community at the Moscow Air Show in August, Papyan has extensive experience with aircraft leasing and financing transactions.

But Papyan faces no small task at Boeing Capital, as airlines here are flying aged and often economically inefficient fleets. Boeing estimates Russia will need about 300 new aircraft during the next 10 years, but no real infrastructure exists for aircraft financing and leasing.

"The airlines in this region have a lack of financial resources," Papyan said.

"All these airlines are using Soviet-manufactured aircraft. Now they are turning to Western aircraft, but they need their flight crews trained, their maintenance staffs trained," he said.

Craig Jones, Commercial Airplanes vice president, sales, for Russia/CIS, added that the countries' airlines are facing a deadline to update their fleets. He said that because of European noise regulations, many Russian-built airplanes will be banned there by 2006. "The airlines are a little panicked," he said, "because there's a near-term crisis coming up."

That's where Boeing Capital hopes to step in and work with Commercial Airplanes to provide solutions. Papyan and Jones expect a learning curve, as many Russia/CIS airlines have been government-supported and thus unfamiliar with the financing process, as well as with operation of Western planes.

But with Boeing's tailored support program —which will assist in the leasing of aircraft and provide total support services—the company will work with airlines to ensure a smooth flight ahead.

—Maureen Jenkins

"Russian admission to the WTO would be of both general and specific benefit to Boeing," said Tom Pickering, the senior vice president of International Relations who as U.S. ambassador to the Russian Federation in the mid-1990s helped shape the U.S.-Russia post-Cold War policy. The country's accession would mean it "would agree to codified rules and a level playing field across the board in trade."

Pickering said it's "too difficult now to guess when [accession] might happen, but Boeing and I believe the world's interests would be served by it happening as soon as possible."

And when it does, Boeing leaders believe the long-term company investment in Russia/CIS will pay off even further. That's one reason Boeing Capital Corp. set up shop there. It wants to partner with the region's airlines to help finance the modernization of their fleets. There have been recent successes. In the past few years, Uzbekistan Airways has taken delivery of 767-300ER (Extended Range) airplanes, while Russian carrier Transaero has added 737s and 767s to its fleet.

The region's civilian aircraft industry has shriveled since the Soviet Union's fall, but its airlines still need new airplanes in order to grow. So in a mutually beneficial relationship, Boeing continues to partner with the Russian/CIS aerospace industry as it rebuilds itself. That's where the company's "tailored support" concept comes in: Boeing will assist in the leasing of aircraft to airlines as part of a total support package.

"Maintenance, engineering, spares are basically included in the price," said Craig Jones, Commercial Airplanes vice president, sales, for Russia/CIS. "It's because it's a place where the infrastructure doesn't exist."

Despite these challenges, Kravchenko said, "Russia is one of the few places in the world where there is a lot of history and background in aerospace. There is an opportunity for us to look at Russia not just as a place to sell our products," but a country with cost-effective raw materials and engineering know-how.

That's why Boeing Commercial Airplanes is serving as a contract adviser to the Russian Regional Jet program, led by Sukhoi Civil Aircraft, on the development and marketing of an airplane designed to compete with those made by Bombardier and Embraer. Smaller than the 717, the RRJ won't compete with any jets Boeing builds.

"The first reason we got involved was historically we had not been in that market," Jones said. "From a growth standpoint, it's one of the fastest-growing segments of the industry."

Another ongoing way Boeing benefits from this region's aerospace skills is through the Boeing Design Center in Moscow, which Kravchenko estimates has completed 450 projects over the past five years. About 350 engineers here work with their American counterparts for round-the-clock design coverage, participating virtually in the modification of 777 and other Commercial Airplanes models. The Moscow teams have done space-related projects with Integrated Defense Systems employees in Houston. And ongoing joint work on both Sea Launch and the International Space Station keep the two sides linked.

"As a result of BCA's leadership in Russia," Pickering said, "we have a strong and ongoing model for globalization to use worldwide in many areas."

And while some U.S. employees fear that investment in foreign countries negatively affects them, Pickering and other company leaders stress the opposite.

"These all add up to a significant contribution to the bottom line, both in creating and adopting new technology on the one hand and secondly, in efficient and lower-cost activities on the other," Pickering said. "Adding to Boeing's efficiency through globalization helps us preserve and expand the 90-plus percent of Boeing jobs located in [the United States]."


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