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. Last Updated: 07/27/2016

U.S. Pledges $1 Billion Loan to Aeroflot

The U.S. government's agreement to loan Aeroflot $1 billion to start building a new fleet of airliners will give Russia's moribund aircraft industry and substantial boost, local aviation officials said Wednesday.


The loan accord was announced late Tuesday by the U.S. Export-Import Fank. It will finance the sale of jet engines made by United Technologies' Pratt & Whitney and electronics from Rockwell International for 20 new Ilyushin IL-96 wide-body airliners.


The planes will be built at the aviation plant in Voronezh, Central Russia.


Some of the final details were worked out by U.S. Vice President Al Gore and Russian Prime Minister Viktor Chernomyrdin during a two-day Washington meeting of the U.S.-Russian Commission on Technological and Economic Cooperation.


Anatoly Brylov, deputy head of the information department of Aeroflot-Russian International Airlines, said Wednesday that the loan will help Aeroflot re-equip its fleet with state-of-the-art aircraft and improve service.


"We are sure that the best-in-the world Ilyushin fuselage in combination with the best Pratt & Whitney engines will make an excellent plane," he said. "Besides, the loan means jobs at dozens of Russian ailing aviation plants."


"This is important not only for Aeroflot and our company but for the whole Russian aviation industry," said Igor Katyrev, deputy general director of foreign relations for the Ilyushin design bureau. "The loan allows us to continue our work and very soon raise the level of Russian aviation."


An early stumbling block to the deal was strenuous opposition by Boeing, the world's top maker of commercial jetliners and the biggest U.S. exporter.


Boeing agreed to lift its opposition if the future deal would be regarded as "a unique exception." Boeing also was rewarded by Russia's agreement that it will remove the threat of tariffs on Western planes sold there.


Local aviation officials declined to discuss any details of such guarantees.


But Peter Smith, an aviation expert and chief executive of the Garry Kasparov Consultancy, said he didn't view them as a threat because Russian airlines likely would prefer less expensive Russian-made aircraft.


"The deal for Russia is excellent," he said. "It is absolutely vital for re-establishing the production cycle." In competitive terms, he said, "the only difference is that Western planes are easily financible. Russian are not. But if Russia will create the proper financial conditions, there won't be any problems."


The once vaunted Soviet aircraft industry, which at its height employed 3 million people, has hit the skids hard in the Russia's post-communist economy. Small carriers in former Soviet republics often lack the cash to buy new planes, and carriers in Eastern Europe have turned to Western-made aircraft.


Demand is expected to pick up as the economy recovers, however.


The Ex-Im Bank said its loan would be guaranteed by the Russian government. The aircraft themselves could be repossessed in event of a default.


The Ex-Im Bank financing will be repaid over a 12-year period beginning six months after delivery of the aircraft.


It said Ilyushin will sell the aircraft to a special-purpose corporation that will lease them to Aeroflot-Russian International Airlines. Aeroflot will lease 10 IL-96M jets, the passenger version of the aircraft, and 10 IL-96T models, the cargo version.


An estimated 70 percent of about 2,000 planes in the Russian civil fleet need to be replaced. Carriers should annually purchase from 100 to 300 aircraft to renew the fleet, according to Russian aviation officials.


Other estimates put the potential Russian market at as many as 1,000 planes -- as much as $70 billion worth -- by the year 2015.