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. Last Updated: 07/27/2016

Skill, Politics Shape Battle for Air Market

While the Zhukovsky Air Show this week featured a lot of nifty and weird Soviet jet fighters and hovercraft, the key exhibits were the Ilyushin 96M and the Tupolev 204 passenger jets, the two great white hopes of Russian civil aviation.

On one hand, Russia has huge pent-up demand for big passenger aircraft. Air traffic in the Commonwealth of Independent States is expected to grow by 4.8 percent a year for the rest of the decade, close to the world average of 5.1 percent. Moreover, the fleet of up to 1,000 large passenger jets now in service in the CIS is old, gas-guzzling and in desperate need of replacement.

Airbus Industrie estimates that the growth in traffic and replacement needs for existing old, smelly planes will create a demand for about 80 new craft a year.

For the moment, Russia's airlines are handicapped by financing constraints. They do not have the money to buy up front, and Western aircraft-leasing companies do not yet trust Russian laws or Russian airlines enough to take the financial risk. But given the demand, the financing problems will be solved.

Once this happens, Russian carriers will not want to buy inefficient domestic models.

The Tupolev 204 and the Ilyushin 96M are the quick-fix solution. They are hybrid planes mixing Russian fuselage technology, which is world class, with Western engines, communications and control equipment.

The presence of both jets on the runway at Zhukovsky is strong proof that these projects are getting somewhere. The Tu-204 has had some technical problems but I walked around and went inside the Il-96M and watched it maneuver a series of hair-raising turns and dives. It seemed fine. At any rate, the manufacturers, Russian and Western, think they have a good product.

The fight between Russian manufacturers and their Western competitors is on and it will be a matter not just of technology but of commercial skill and politics. The real issue will be the government's will to force its models on the domestic market, at least until they prove their worth and attract commercial financing.

Prime Minister Viktor Chernomyrdin has solidly backed two big aircraft factories on these two pet projects. Many would say an equally clever policy would be to rationalize production and merely make parts for Western planes or at the least only one Russian plane. As its main tool of economic policy, Russia has introduced a 30 percent import tariff on foreign planes to force domestic airlines to buy Russian. Partly as a result, only 38 big foreign planes are now flying on the CIS market.

Boeing and McDonnell-Douglas, who are now blocking U.S. Export-Import Bank financing for Aeroflot's purchase of the first 20 Il-96Ms, have responded aggressively. They appear to be trying to stop the development of any Russian competitor.

While the question of whether the U.S. government's own bank should get involved is delicate, this belligerent approach could backfire. Backed into a corner by Western manufacturers, Russia may decide either to have its own aircraft or none at all.

Airbus Industrie was towing a conciliatory line at Zhukovsky. First, it said, the Russian market will grow so fast there will be plenty of room for Western and Russian manufacturers. Second, it said tariffs, which must be high to be effective, are not the right policy tool. If Russia wants to protect its domestic industry, it should impose quotas on foreign planes.

Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.