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The Russian government has demonstrated true consistency in the issue of reducing import duty rate on business jets. In August 2007 the taxes were brought from the original 20% down to 10% - a resolution- accompanied by a promise to lift the duty altogether after a trial period of nine months. Discussed and debated somewhat exhaustively throughout the year- the question was raised again by the ...

AvBuyer   |   1st October 2008
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Thumbs Down Or A Big Hurrah?

A study of how consistency can pay poor service to the cause.

The Russian government has demonstrated true consistency in the issue of reducing import duty rate on business jets. In August 2007 the taxes were brought from the original 20% down to 10% - a resolution- accompanied by a promise to lift the duty altogether after a trial period of nine months.

Discussed and debated somewhat exhaustively throughout the year- the question was raised again by the international business community at the St. Petersburg Economic Forum in June - after which the long-anticipated lifting was announced. Although the reduction does not cover Russian import VAT (still charged at the traditional 18% rate on the aircraft customs value) the resulting effective rate of customs payments of just 18% is a major achievement compared with the approximately 41.6% chargeable before the first reduction.

However- it might just be a little too early to pop the champagne corks. Consistency can pay poor service to the cause- as further mechanical action without re-consideration of the documents it is applied to can lead to tripping over the same obstacle. Let’s consider this further…

It is often mentioned in the media that the zero duty rate is applicable for “certain models” of business jets- or a “class” of aircraft. Were it so- it would imply some kind of a conscious intent or even a stakeholders’ lobby. More accurately- though- the reduction applies to aircraft with empty weight ranging from 15 to 20 tons (ca. 33-000-44-000lbs)- which does not correspond directly or indirectly to any specific category of aircraft. Moreover- whereas putting an upper limit to the size of the aircraft can be explained as protecting the interests of the domestic aerospace industry- limiting the minimum size seems absurd: none of the Russian OEMs currently produce or design jet aircraft of such weight.

The solution to the charade is actually quite simple and lies in the way the Russian Customs Commodity Classifier is organized. The position in question- called 'Passenger aircraft with an empty weight of under 20 tons and with 19 or less passenger seats' is a sub-part of a more general position- 'Civil aircraft with an empty weight of over 15 tons'- which also incorporates regional aircraft- narrow- and wide-body airliners.

No one could spot a trace of lobby by looking at the short list of aircraft in serial production and in operation today (which by lucky chance qualified for the reduction)- including the Challenger 800/850- Gulfstream G350- G450 and Falcon 7X. Comparing that to the top-six models on the Russian market (by numbers of aircraft operated in the interests of Russian owners) causes more surprise: Gulfstream G550 (21.7 tons)- Legacy 600 (13.5 tons)- Challenger 604 (12 tons)- different modifications of Falcon 900 and 2000 (around 11 tons) and Hawker 800XP (around 7 tons empty weight). That’s a near miss for the first two.

As said above- the situation is not news. It was criticized by Russian business aviation market players a year ago. However- whereas the first decrease was cheered with enthusiasm (the community saw it as a sign of the government's acknowledgement of the industry's needs)- the second time around it brings nothing but disappointment and discouragement. Operators- OEM representatives in Moscow and market analysts hesitate to forecast how the reduction of import duty can change the market scene. They do agree that further consolidated industry efforts are required to correct the government’s consistency during the nine months of the trial period.

Adam Aircraft: Reloaded
It may sound a classic paradox- but there is an aircraft category- where facilitating import is in the interest of the Russian industry. Russian entities are directly involved in the production of two VLJ models: the Adam A700 and Eclipse 500. There had been a lot of speculation around a Russian investment group buying out the insolvent Adam Aircraft Industries- until the new owners revealed the details of the deal in a press-conference dedicated to the approval of the sale by the US Foreign Investment Committee (CFIUS)- which secured the new owners’ rights over the American aerospace manufacturer. That marked an unprecedented event in the history of either country.

AAI Acquisition was the company created specifically for the purpose of purchasing Adam Aircraft’s assets- is a 50/50 venture between two Russian investment groups: Kaskol and Industrial Investors.

This is not the pair’s first experience with crisis management- or with GA aircraft manufacturing. Their joint project- an air-taxi operator called Dexter- also provides insight into the operational side of the aerospace business. Being one of the main shareholders in Nizhniy Novgorod’s Sokol- Kaskol invested into certification and production launch of the M101-T- a six-seater single-engine turboprop- which was initially used by Dexter. However- with the increase of the state budget- Sokol’s involvement in the YaK-130 military trainer program took up most of the site’s capacity- reducing serial production of M101-Ts to five to seven aircraft per year. Dexter switched to Pilatus PC-12s- but within a year started searching for options in the VLJ segment. The road brought Dexter’s management to Adam Aircraft. Evgeniy Andrachnikov- head of Dexter- told journalists at a press-conference “operating turboprops since 2005 enabled us to create the market for air-taxi services- and we felt ready for VLJs. We know exactly what type of aircraft we need- and the A700 fits that description perfectly.”

However- Dexter will not be able to have A700s in its fleet before 2013-2014- as certification and the current backlog of 322 aircraft will keep the manufacturer busy for several years- particularly with the planned production capacity not exceeding 100 aircraft per year. In the short-term Dexter’s management has opted for Cessna Citation Mustangs- 20 of which were purchased at this year’s EBACE. The A700 and Dexter projects- although closely intertwined- are not directly associated with each other according to Kaskol’s Chairman of the Board- Sergey Nedoroslev. “The Adam Aircraft acquisition is not related to Dexter-” he explained. “Although we plan to use the A700 for air-taxi use in Russia- we do not view Dexter as the only buyer- nor the A700 as its only fleet source.” With four existing customers from the US- Europe- India and China- whose commitment is being re-negotiated at the moment- Nedoroslev sees the main market for the composite $2.5-2.9m VLJ to be in this region- as well as the CIS countries and the Middle East. The break-even is expected at 300 aircraft- with the current backlog amounting to $800m.

According to Chapter 7 of the US bankruptcy legislation AAIA became the owner of all production equipment- intellectual assets- patents- certificates- aircraft and aircraft components of the Adam Aircraft- but did not inherit its financial obligations to third parties- which caused the company’s insolvency. The new owners have announced a commitment to invest US$150m into completing FAA certification of the A700 and starting serial production- which they expect will happen before 2010.

They are also planning to re-brand the aircraft and the company. “I’d like to emphasize- that this is not a merely financial investment or a portfolio participation- we are actually involved in managing the company”- Nedoroslev said. One of the first responsible decisions the new owners made was concentrating all of the company’s resources on the A700- which means the certified A500 twin-engine turboprop program is on hold indefinitely.

Russia and the Eclipse 500…
In the meantime- a competing VLJ project with Russian involvement is steadily evolving. While Eclipse Aviation is going through restructuring- the project of creating an Eclipse 500 production site in Ulyanovsk (see World Aircraft Sales Magazine- April 2008- p149) is moving towards realization.

“We are at the stage of the project’s financial approval”- ETIRC’s Managing Director for CIS countries- Nikolay Nikiforov told World Aircraft Sales Magazine. Plans for MRO facilities are underway- and an MOU is signed with the local Ulyanovsk Flight Training College for providing Eclipse 500 type rating. Nikiforov also revealed the company’s estimates of the Russia/CIS market capacity for VLJs. According to him- the figure stands at 1-100-1-300 in the next five years.

Elizaveta Kazachkova is the staff writer for Moscow-based Air Transport Observer- Russia's expert airline business publication- where she oversees the Business Aviation section. She can be contacted at kazachkova@ato.ru

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