Cooperation of AL-31 Engine Designers and Manufacturers: Current Situation and Prospect for Restructuring

Konstantin MAKIENKO

The international engine production industry is one of the most dynamic sectors of the world economy. Engines for civilian and mili­tary aircraft as well as gas pumping stations and power generators constitute the bulk of its out­put. Engines for helicopters, various rocketry and power installations for ships and vessels are also an important part of production. The an­nual turnover of international engine production (excluding the automotive sector) reaches $280 billion.

Brief Overview of Global Engine Produc­tion

Three major corporations - General Electric, Pratt & Whitney (USA) and Rolls-Royce (Britain) - are the leaders of the industry. France's Snecma is also developing quite dy­namically - its growth is promoted by the effec­tive support of the French government and the existence of the CFM-56 civilian aircraft engine, which has been extremely successful in terms of sales and technology.

One important concept should be kept in mind. The fact that the aforementioned companies are industry leaders, does not mean that only three or four countries have the technological and economic potential to manufacture state-of-the-art engines. There are currently about 15 coun­tries on the world market, and the technological potential of some (above all, China) is rapidly growing.

The noticeable acceleration of scientific and technological progress is one more important feature of the current state of engine produc­tion. In the 1970s, when the Soviet Union reached approximate technological parity with the West in this sphere, it took about 10 years to design and launch the production of a new engine. Now, thanks to the IT revolution and the more important but much less publicized revolution in machine-building and metal-proc­essing, the period has been reduced to 30-36 months. If a project takes longer, it loses mar­ket potential.

Finally, the formation of international indus­trial alliances is another aspect of the sector to­day. The trend is especially vivid in Europe (as usual on the basis of cooperation between France and Germany, though serious French-British and German-British projects have also emerged). Trans-Atlantic partnerships are also dynamic. For example, the aforementioned best­seller CFM-56 engine was jointly developed by Snecma and General Electric. The internation­alization of engine production is driven by the same motivations as in aircraft-, instrument- and rocket-production: minimizing risks through sharing financial investments and pooling engi­neering capacities and national markets of the countries involved.

Russian Engine Production

The combined annual turnover of Russian en­gine production stands at $1.5-2.0 billion, or less than 1% of global output. This has to do, above all, with the virtual demise of engine production for civilian aircraft and plummeting production of military engines. In addition, Russia currently does not produce helicopter en­gines, since the Motor-Sich factory in Zaporizhzhya, Ukraine, inherited the corre­sponding capacities from the Soviet Union. The annual turnover of the enterprise - $300 million - matches or exceeds the receipts of Russia's biggest engine manufacturers: the Ufa Engine Production Association (Russian acronym UMPO), Salyut Moscow Machine-Building Production Association (MMPP Salyut) and Saturn Scientific Production Association Joint Stock Company (Saturn NPO JSC). Until re­cently, Ukraine was also an exclusive manufac­turer of cruise missile engines.

Experts say that very few designers capable of making the first draft a new engine remain in Russia: Viktor Chepkin (Saturn), Mikhail Kuzmenko (head of Saturn civilian programs), Alexander Inozemtsev (OSC Aviadvigatel) and Alexander Sarkisov (Klimov Corporation).

Enterprises involved in the development and production of AL-31F engines - NPO Saturn, MMPP Salyut and UMPO - are more successful thanks to large-scale exports of Su-27/Su-30 fighters, which use these engines. We should note right away the most important feature of the present configuration of engine production facilities and companies involved in designing and manufacturing AL-31F engines: the gap brought between the designers and the manufac­turers about by the merger of Rybinsk Motors JSC and A. Lyulka-Saturn Design Bureau, which do not manufacture AL-31F.

Saturn NPO JSC

Saturn NPO JSC was established on July 5, 2001 through the merger of Rybinsk Motors JSC and A. Lyulka-Saturn, a leading Russian aircraft engine design bureau. The Rybinsk Mo­tors serial engine plant had merged with the Rybinsk Engine-Building Design Bureau in 1997 and acquired the production facilities of the Volga Engineering Plant - a major facility of the Atomic Energy Ministry - in 1999.

In December, 2002, Saturn NPO JSC revaluated its fixed assets, and its charter capital is now appraised at 4 billion rubles (about $125 mln). The management is probably the controlling shareholder, while the government retains a 37% stake. According to the Saturn NPO JSC web-site, the Board of Directors includes Deputy State Property Minister N.A. Gusev, Deputy Chief of Armaments of the Russian Armed Forces V.G. Mikheev and Deputy General Di­rector of the Russian Aerospace Agency S.Yu. Rynkevich.

Most of the company's income comes from re­pairs and production of D-30KP engines (for Il-76T/TD/MD, Il-78, A-50 and A-40 aircraft), D-30KU (for Il-62M) and D-30KU-154 (for Tu-154M). According to General Director Yuri Lastochkin, Saturn annually repairs 400-500 en­gines (up from 200-300 in Soviet times) and builds 30-50 new ones (down from 600-700 in Soviet times). Within the next couple of years production of new engines will be increased, since 200-250 D-30KP engines will be manufac­tured to fill China's order for several dozen Il-76MD cargo aircraft. Considering that the aver­age engine price is $1.3-1.6 million and the price of repairs is $0.25-0.3 million, the annual cash flow of Saturn NPO JSC in this segment of operations is about $200 million.

In the civilian engine sector, Saturn launched a joint project with France's Snecma group to de­velop the SM146 engine family for medium-range aircraft. The project is designated primar­ily for the Russian regional jet aircraft, jointly developed by AKhC Sukhoi, Ilyushin AC and Boeing Corp. In this project, unlike in most of its international programs, Russia is a full part­ner - with equal risk sharing and equal invest­ments. The engine is derived from a French gas generator. Saturn is developing its cold air in­take duct.

The sales and repairs of D-30KP/KU engines provide Saturn with the necessary resources for several other projects in two other operations areas: the production of energy-converting ma­chinery (gas pumping, heat and power genera­tion) and military aircraft engines.

In one particularly successful project in the de­fense sector, Saturn established the production of cruise missile engines. Lastochkin mentioned this line of production in an interview with the Vedomosti newspaper without indicating the specific missile type, but most likely these are the X-55, X-555 and X-101 strategic cruise mis­siles. Earlier only Ukraine's Motor-Sich made them. Given the tremendous strategic impor­tance of developing Russia's independent de­fense industry potential for deterrence, this pro­ject appears exceptionally important for na­tional security. Judging by the information on Saturn's website, the company also manufac­tures 36MT engines for air-to-surface tactical missiles. Since the production of strategic mis­siles is one of the most classified subjects, it is impossible to say whether there is a government order for them, not to mention to try to evalu­ate its size. As for tactical missile engines, theo­retically the order for them should have grown over the past few years with the beginning of export deliveries of "four plus" generation Su-30MKK and Su-30MKI multirole fighters.

The production of engines for the new genera­tion of Ka-60/62 helicopters is another direc­tion of Saturn's operations in the defense indus­try. In the absence of helicopter sales it is likely to be limited to test samples. However, as in the case of cruise missile engines, what matters most is the fact that for the first time since the collapse of the Soviet Union Russia has a do­mestic source of helicopter engines. Presently all such engines (above all for the heavily exported Mi-8/17) are manufactured in Ukraine, at Mo­tor-Sich. One more potentially promising pro­ject is the development of an advanced AL-55 engine for Yak-130 and MiG-AT trainers on the basis of certain AL-31F technologies.

And finally, R&D on upgrading AL-31F engines within the framework of the AL-41F remains a basic direction of Saturn's military sector. This direction seems to have the financial support of the Russian Air Force, which seeks to maintain the scientific and technical potential for creat­ing engines of a new generation. Clearly, the Air Force regards Saturn, which has about one third of its personnel in designing units (over 4,000 trained designers), as the natural, and possibly the only, developer of new generation engines.

Overall, Saturn's defense sector generates up to 15% of total revenues, and the company man­agement has set the objective of raising the share to 35-40%. Saturn's total sales stood at $170 million in 2001 and probably rose to $220-$230 million in 2002.

MMPP Salyut

Over the past few years, MMPP Salyut has led Russian aircraft engine production in terms of sales. Its turnover exceeded $270 million (with profits of $58 million) in 2001, rose to $300-320 million in 2002, and is estimated to climb to $400 million in 2003. Sales of AL-31F engines constitute 70% of total sales. The company spe­cializes on deliveries to China, thus splitting the market with UMPO, which covers deliveries to India. Salyut General Director Yuri Yeliseev predicts that the absolute volume of AL-31F/FN sales will rise over the next five years. Since existing delivery contracts will be com­pleted by that time, the growth will probably stem from the licensed production of AL-31F engines and deliveries for F-10 light fighters.

While Saturn wants to raise the share of mili­tary output to 35-40%, Salyut plans to reduce the share of AL-31Fs to 50%. The reduction should be achieved through the launching of the production of D-436 engines for Tu-334 and Be 200 aircraft, D-27 engines for An-70 and AI-222 engines for the Yak-130 trainer. Salyut is also making its own attempts to upgrade the AL-31F. Nezavisimoye Voyennoye Obozreniye Weekly has reported that an engine with a thrust of 13 tons (up from 12.5 tons in standard models) made 20 flights in 2002, and that the thrust is to be boosted to 13.3 tons in 2003. Ac­cording to Yuri Yeliseev, the existing gas gen­erator could produce a thrust of 15 tons in the AL-31F, but this would require fundamental changes to the aircraft frame. The company management also advocates the replacement of regular MiG-23 and MiG-27 engines with AL-31 engines to increase thrust and reduce weight and fuel consumption.

Thanks to high export revenues, Salyut is able to invest heavily in the renewal of fixed assets. In 2002 alone, it purchased $40 million worth of new equipment.

The company has set up its own design bureau, which concentrates on upgrading the AL-31F. It also cooperates closely with the Central Insti­tute of Aviation Motors and the Ukrainian Pro­gress Design Bureau. It is interesting to note that the overall strategies of the two competi­tors - Saturn and Salyut - in regard to Ukrain­ian engine-makers are direct opposites. While Saturn is consistently trying to launch the pro­duction of cruise missile, helicopter, ship and gas turbine engines as well as engines for train­ers in Russia as an alternative to Ukrainian production, Salyut is cooperating with Progress and Motor-Sich. Thus, the D-436, D-27 and AI-222 engines Salyut is considering producing as a supplement to the AL-31Fs have been developed at Progress and will be manufactured in close cooperation with Motor-Sich.

The other radical difference in the philosophies of the two leading companies is that Yuri Las­tochkin is an evident advocate of the liberal economic approach and right-wing conservative political ideology, while Yuri Yeliseev has re­peatedly proposed the introduction of an em­bargo on the incorporation of defense industry facilities - an approach that is far from liberal.

As it advances its design capabilities, Salyut is also diversifying its production sites. As part of this strategy, it has purchased the Topaz plant in Chisinau (Moldova) and plans to acquire the Pribor plant in Bendery (Transdniestria).  It al­ready owns production facilities in Gavrilov-Yam, Naro-Fominsk, Seim and Faustov in Rus­sia.

The cost of manpower in Moscow is becoming a serious and apparently insurmountable strategic problem for Salyut. Average wages at the plant are over 12,000 rubles a month (about $400), but according to unofficial information the en­terprise is still having trouble with high person­nel turnover.

JSC UMPO

The least amount of information is available about UMPO. Unlike Lastochkin and Yel­iseyev, UMPO top managers have not given de­tailed interviews to national publications and the company does not have a web-site. In Soviet times, UMPO was one of the country's biggest engine production facilities. Back in 1994, it had a total of 28,000 employees. In addition to aircraft engines, it used to make automobile and harvester engines. At present, it concentrates on the production of AL-31FP engines for Su-30MKI fighters. Unofficial reports say that UMPO had great difficulties launching produc­tion and delayed the delivery of the first batch of fighters to India several times in 2002, as it was unable to guarantee the necessary quality and reliability.

There is no reliable information about its capital structure. The State Property Ministry of the Republic of Bashkortostan owns 35.3% of the shares.  According to unofficial information, Scientific Production Corporation «Irkut» (formerly IAIA) owns another 3% of the shares.

Conclusions

As in other high-tech sectors, the absence of a clear government institutional policy has re­sulted in bitter competition between potential poles of integration in the engine production in­dustry. Saturn and Salyut can both claim the role of the leader. Cooperation on AL-31Fs is accompanied by a split in the once united scien­tific industrial system; this process is especially acute in the Sukhoi group, where the AKhC Sukhoi and Irkut Corporation compete. It is in­teresting that Salyut, like Irkut, is trying to build its own version of a design bureau.

Each of the competitors has its strengths and weaknesses. Saturn has a powerful scientific and design potential, fortunate location of the main production site, an adequate form of ownership, a capital structure that stabilizes the company leadership, and qualified and aggressive man­agement.

Salyut's biggest trump cards are a turnover that is impressive by Russian standards and a stable portfolio of orders, which allows it to actively renew fixed assets. Its basic drawback is loca­tion - a major industrial facility should not be located in Moscow. It is also unlikely that a state unitarian enterprise can become the center of industrial integration.

As for the situation overall, the present configu­ration of economic entities is highly irrational. Three companies are simultaneously renewing fixed assets and competing on the limited mar­ket of skilled labor, but are too small for effec­tive competition on the world market. Mean­while, the combined turnover of Saturn, UMPO and Salyut could reach $900 million, bringing it closer to the $1.5 billion mark considered ade­quate for a Russian engineering company to pur­sue a distinct industrial and innovation policy and attract Western investors.

Thus, a government policy of stimulating merg­ers and acquisitions in the engine production sector appears necessary. In our opinion, the first stage would require the merger of Saturn and Salyut, and therefore the incorporation of the latter. After the merger, the government could increase its share in the equity of the new company.