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Ukraine, the price of survival: from civilian aircraft to attack drones

Fri 4th Mar 2016

The Ukrainian aviation conglomerate Antonov was more than an industry; it was a legend. The symbol of an era, Antonov has been Ukraine’s industrial national champion for 70 years, so the recent news that it now may be closed has been distressing for many. Most Ukrainians lament: “Antonov is Ukraine’s calling card. The aircraft conglomerate built the most powerful transport planes that beat all the world records. Losing it would be like cutting off an arm”. Yet the news that Antonov, could possibly be “saved” for the time being but will now be producing combat attack drones, has also caused distress. At a recent press-conference (26.01.2016) the Ukrainian National Security and Defence Council’s (NSDC) Secretary Oleksandr Turchynov announced that the drones “will be tested in the complex combat conditions of the conflict zone in eastern Ukraine”. This troubling announcement poses the question: if Antonov was “saved”, then at what price?

The Ukrainian government stated that Antonov was closed as an independent enterprise and transferred to the Ukrainian Defence Industry Trust due to a lack of money. Yet, as will be discussed later, at least 200 million USD annual income has disappeared from the company’s coffers. The cumulative income of leasing out Antonov planes (in the period 2006-2015) to the SALIS-NATO programme has now reached 2billion USD. In 2015 Antonov airplanes were also leased by Boeing for an undisclosed sum. But rather than seeking the missing money, the Ukrainian state prosecution is busy harassing the party-political opposition and banning the Ukrainian Communist Party. Sadly, as what is now left of the Ukrainian aircraft industry is militarized, more people will be dying, so that others will get richer.

Closed or not closed? A prelude to a profitable (for some) chaos

Recently, media broadcasted the news about the closure of Antonov, the emblematic Ukrainian State Aircraft Manufacturing Trust (SAMT) (January, 2016). SAMT was created in 2008. It consisted of the Antonov state aircraft enterprise (Kyiv), the Kharkiv State Aircraft Manufacturing Enterprise, and the Civil Aviation Factory 410 (Kyiv). The “closure announcement” was followed by an equally swift rebuttal by the Ukrainian government. Curiously, the Ukrainian government announced that SAMT will be both liquidated and not liquidated. The government stated that SAMT will be liquidated as an independent State Trust (“technical liquidation”), but it will become part of another Trust: Ukroboronprom; the latter abbreviation stands for the “Ukrainian Defence Industry”. The Ukrainian Ministry of Economic Development and Trade (henceforth ‘the Ministry’) enigmatically announced that the closure of SAMT has take place “due to the lack of participants” and that Antonov has already been part of Ukroboronprom since the summer of 2015.“On the surface, it is only reorganization, but it rather looks like liquidation”, concludes a Russian analyst. Western analysts agree: “The Antonov Aviation Company is no more ... and Boeing and Lockheed breathe a sigh of relief”.

A business card of a national champion
But first of all – a bit of history: Antonov, the national champion of the Ukrainian industry and leading manufacturer of aircraft in Ukraine was founded almost 70 years ago, during Soviet times. The poster-child of Soviet industry developed more than 100 models of aircraft, including the largest transport aircraft in the world - AN-124 (Ruslan) and AN-225 (Mriya, which translates as “Dream”). The range of Antonov products includes passenger aircraft (AN-38, AN-74, AN-140 and AN-148) and transportation aircraft (AN-3, AN-70, AN-124-100 ‘Ruslan’ and the newly developed AN-178).The birds were the pride of the entire Soviet Union, Ukraine, and of course, the designers themselves.

Only one AN-225 “Mriya-Dream” was ever built. This super-heavy and truly unique machine was initially designed to transport the Soviet space shuttle “Buran” and fragments of the Soviet rocket carrier ‘Energy’. Even Antonov's smaller An-124 Ruslan is a much bigger bird than anything Boeing or Lockheed Martin produce, admit Western analysts, and as such, would have been a formidable competitor for global buyers seeking large-capacity airplanes. As recently as March 2015, Boeing used ‘mammoth Antonov-124 jets to keep assembly lines supplied during and after the labour dispute that slowed cargo movements at Puget Sound ports’.

The twilight of an industry
The last available analytical report of the top 100 Ukrainian companies (henceforth referred to as ‘the Report’), published by the Ministry, sheds some light on the momentous announcements of recent days [1].

In spite of Antonov’s glorious past, in 2013 the legendary Antonov factories produced only seven aircrafts: five AN-158 for the company “Cubana De Aviacion” and two AN-148 for the company “Air Koryo”. In 2014 the situation became even worse, as the enterprise produced only two aircrafts (although 5 were planned). The lack of liquidity and problems with suppliers complicated the financial state of the company, as joint projects with Russia have mostly been suspended.

Nonetheless in 2014, as the company completed the testing of its new transport aircraft AN-178, it optimistically estimated the total volume of demand for this new aircraft at 200 machines by year 2032. In May 2015 the Cabinet of Ministers transferred Antonov to the state military Trust Ukroboronprom.

In July 2015, the company announced that the modernization of the production facilities will enable it to produce 25 aircraft per year.

However, even the best products need markets. After losing the vast Russian market Antonov, in the words of the Ministry, ‘has begun conversion to Western markets’. The conversion reportedly consists of work on the development of a modern multipurpose transport aircraft AN-132. Yet Ukraine has now lost access to certain airplane components, produced in Russia. The Ministry plans to substitute the Russian components with equipment from Western aviation companies, such as: Pratt & Whitney, Canada, General Electric, Honeywell, Liebherr and Hamilton Sundstrand. The Report makes no mentioning of the price of Western equipment, and the impact that this price may have on the final aircraft price (and consequently the competitiveness) of the new aircraft. Another question to consider is how profitable it would to buy foreign-made components, when the hryvna (the Ukrainian national currency) is constantly being devalued.

Where did 2 billion USD go missing?

Aviation industry is a world of giants - in 2013 Boeing manufactured 200 aircraft, Embraer - 80, and the Russian Aviation Corporation – 111. The Ministry admits that ‘reforms are needed’ to ensure the availability of 100 million USD working capital (2015 estimate). The Report advises that to provide this capital, Antonov needs to receive orders for at least 6-7 aircrafts per year, with a down payment of 50% of the order. Yet already in 2014, the New York Times reported that “Antonov is now living off the 200 million USD in revenue earned annually by a subsidiary that leases giant AN-124 transport planes to NATO and other customers”. There is a strange discrepancy indeed between the report of the foreign newspaper (200 million USD in annual revenue) and the Ukrainian Ministry’s plea for 100 million USD annual working capital! The Ministry is silent about the lease of the planes, and only foreign sources mention that the lease takes place via subsidiary companies.

Whatever may be the reasons for this silence, the 200 million USD annual revenue does not feature in the Report. Meanwhile the Ministry suggests several solutions to its monetary shortage. First of all, the much-needed investment could be provided by the Ukrainian state, by means of increasing the share capital or by provision of long-term loans on favourable terms. Yet, since the Ukrainian state is already the 100% shareholder, the first suggestion looks dubious at best.

Secondly, the state could consider selling a minority stake to a foreign strategic investor ‘with the necessary reputation’, that will help advance the company on the “highly competitive world markets”. Yet the world is not full of benevolent investors, especially since taking over Antonov would not result in the acquisition of a market niche. Western countries prefer their own producers, supporting them via tax subsidies, and receiving political support for defence contracts’ procurement. Apparently, the Ukrainian Ministry has yet to realize that Western governments want to provide jobs in the first place to their own producers, rather than help their Ukrainian competitor, who is now in a difficult situation.

Lastly, the report suggests that Antonov could be saved by receiving purchasing orders from domestic customers - both civilian and military, “given the challenges currently facing Ukraine in the field of defence”. Now that Antonov has been transferred to Ukroboronprom, the last option - purchasing orders from domestic customers – is seemingly the only viable option. It remains to be seen how long the state, which is rapidly and sadly descending into a spiral of International Monetary Fund loans, would be able to keep the pride of Ukrainian industry and aviation afloat.

The Ministry of Economic Development and Trade concludes its report by stating that Antonov must optimize costs by eliminating the non-core assets and aircraft, in order to focus on promising models, including the An-158 and, potentially, An-178 and An-70. The Ukrainian Ministry also recommends that the company “should optimize its management structure of risk-based corporate governance that has emerged in 2014”. Such measures also involve laying off of skilled personnel, but the Ministry is once again strangely silent about this particular impact. Only in one of the Report’s tables is there a record about the human side of “corporate reforms”: during the one year period from 2014 to 2015, the number of personnel decreased from 12,698 to 12,123. The most notable omission of the Report is its stubborn silence about at least 200 million USD annual revenue, received from the aircraft’s leases. The Center for Transport Strategies reports (2014) that NATO has extended the lease of Ruslan Aircraft under the SALIS program until 2017. The lease has been taking place since 2006, with 200 million USD annual rent. The cumulative income (2006-2015) has now reached 2 billion USD. As mentioned earlier in this article, in 2015 the Boeing factories also leased Ruslan aircraft. One question remains then for the Ukrainians to ask of their government: where is the money?

Attack drones
Rather than seeking accountability for the money supposedly received (but missing) for the leasing of the airplanes, Turchinov, the NSDC secretary has just announced that Antonov will be producing attack drones. Combat Drones, or Unmanned Aerial Vehicles (UAV) are capable of carrying a combat load and destroying land, air or above / underwater targets. Turchynov stated: “We have very serious demand for combat drones in the Armed Forces, and I will not be divulging a secret by saying that we have held a meeting with Ukroboronprom and we are starting production at Antonov”.

The drones will be developed in collaboration with Poland. Already in September 2015, Antonov had reached a cooperation agreement with WB Electronics (Poland). WB Electronics is part of the WB Group, the largest private holding company in Poland, specializing in defence technologies. The group produces various electronic components for military needs, computer systems, as well as drones. WB Electronics will help the Ukrainian enterprise develop tactical UAVs for the Ukrainian Armed Forces. The relevant memorandum was signed during the “Weapons and Security” exhibition in September, 2015, according to a news release of the Centre for Transport Strategies.

This international collaboration possibly gave confidence to the NSDC secretary, who claimed: “Until now, unfortunately, we have been limited in our ability to obtain combat aircrafts [from abroad]. And more over the unreasonable restriction of our country with regards to the scientific and technical cooperation continues, especially with regards to combat aircraft. But we will break this barrier, and our way is: to rely on our own production, on our own potential”.

A recent news brief of the Ukrainian Centre for Transport Strategies informs the public that Turchynov has just delivered a consignment of modern unmanned aircraft complexes to the Armed Forces. The complex consists of a ground control station and three drones. The news brief finishes with the announcement that: “The Ministry of Defence will test the complex in combat conditions in the conflict zone in eastern Ukraine”.

An elegy for an industry
In late 2015, the Chinese civil aviation chief Li Jiaxiang emphasized: “A great nation must have its own large commercial aircraft”. Antonov, the proud creation of the Soviet people became the prized post-Soviet heritage of the Ukrainians. “Closure” and “liquidation” – this is not the fate deserved by an industry which was developed with so much dedicated work, talent and effort. A comparison can be made with the efforts made by China, the second largest economy in the world, which has been trying hard to produce its own passenger airplane. The country has dreamed of building its own civil aircraft since the 1970s. Yet even such a powerful state has faced difficulties: a commercial aircraft prototype has been in development since 2002; it was supposed to have entered service in 2007; a milestone was expected in 2015, now it is once again delayed to 2017. Apparently, nobody in the Ukrainian government is willing to learn from the Chinese example – how difficult it would be to re-develop an aircraft industry, if they lose Antonov.

The Ukrainian government is letting go of a global brand and established aircraft producer, allegedly for lack of profits even though millions of US dollars are disappearing without a trace. Furthermore, projections for the aviation industry’s market predict growth of more than $4 trillion in sales over the next 20 years. The Chinese aircraft-in-progress, which cannot even fly yet, has been hailed as “an important step in China's economy moving beyond low-cost manufacturing”.

If this is so, with the closure of Antonov, Ukraine has just taken a huge step backwards.

[1] The Ukrainian Ministry of Economic Development and Trade, 06.2015, Analytical review of the top 100 largest state enterprises in Ukraine, Kiev, Ukraine.

Photo credit:
Photo 1: Wikimedia Commons, Author: U.S. Air Force/Tech. Sgt. Jason Tudor, Source: https://commons.wikimedia.org/wiki/File:An-225_front_day_V1.jpg
Photo 2: Wikimedia Commons, Author: Marek Slusarczyk, CC BY 3.0, Source: https://commons.wikimedia.org/w/index.php?curid=34128551

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