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. Last Updated: 07/27/2016

Sibir Jets Look for New Lease on Life

National No. 2 airline Sibir and global accounting giant Ernst & Young say they will begin wooing foreign investors this week in an effort to get the first Western-style aircraft leasing program in Russia off the ground.

Both companies are keeping the list of targeted investors quiet, but not the details of the project — they plan to raise $40 million by the end of the year to refit up to 20 Sibir Tupolev-154Ms and lease them to domestic carriers, including Sibir itself. The plan is to have the planes ready for next year's summer season.

"If this project is realized it will be a phenomenon and will mark the advancement of aviation leasing in Russia," said Alexei Komarov, editor of the Moscow-based magazine Air Transport Observer. "It will also mean that foreigners have confidence in the Russian market and Russian companies."

The U.K. firm Phoenix Project Management Ltd., Sibir's financial adviser and originator of the project, along with Tacis, the European Union's technical assistance program to the former Soviet Union and Eastern Europe, has already prepared a feasibility study. "The project is the first opportunity for international [long-term] investors to invest in the first Western style non-governmental aircraft leasing company in Russia," Ernst & Young said in a statement.

Sibir would own no more than 50 percent of the yet-to-be named company in exchange for putting up the 20 Tu-154Ms — the workhorse of the industry — while foreign investors would own the rest. "What we are trying to do is get involved in raising some debts, acquiring aircraft and leasing them back into the market to try and support the regional airlines and develop a leasing philosophy in Russia," Ernst & Young managing director for corporate finance Mark Jarvis said in a recent interview. "[This project] will give the aviation industry another 10 years to come up with new planes and not let regional airlines fail," he said.

"We are listening to the investors, seeing what they want and what they don't want and re-writing the concept. We believe it will be the first true international type of leasing structure," Jarvis said, adding that the names of potential investors would be announced at the Moscow Aerospace Show next month.

Industry observers said the move couldn't have come at a better time: Only four new passenger planes were delivered domestically last year and only 22 in the last decade. And with passenger traffic growing at about 12 percent a year and hundreds of existing craft scheduled for decommissioning, a supply crisis is looming.

"After an overhaul the aircraft should be in excellent condition for seven years. This will allow the Russian airlines to begin to grow just as the market is developing — so the project is coming at the right time," said Moscow-based aviation analyst Paul Duffy.

"I would hope it would give Russian industry a respite to provide airlines with new aircraft. But the industry needs strong leadership and finance to do it," Duffy said.

"In three to five years there will be a shortage of craft on the Russian market and the new company can lease to any domestic airline," said Sibir spokesman Mikhail Koshman.

One potential sticking point with investors is the safety of the plane — a Vladivostokavia Tu-154M crashed in Irkutsk earlier this month killing all 145 people on board. But the crash was blamed on pilot error and analysts said the plane was still one of the safest in the industry.

"All serious professionals on the market understand that catastrophes happen anywhere and any time," said Air Transport Observer's Komarov.

"We believe that Tu-154M will be the backbone of the domestic aviation for the next decade," Phoenix Project Management CEO Peter Smith said in an interview last week.

"The qualities of the Tu-154M are often disguised in general prejudice against Russian aircraft. In fact it's younger, more economical and has a longer range than any Soviet-built aircraft … in our calculations by 2003, 42 percent of all domestic passengers will fly Tu-154Ms," Smith said.

Duffy said the Tu-154M is the best aircraft for the Russian market for the foreseeable future.

The Tu-154M, an upgraded version of Tu-154, can carry 180 passengers and has a range of 5,200 kilometers. It was launched into mass production in 1984 — the same year Boeing stopped producing its 727, a comparable craft. Tupolev produced more than 300 Tu-154Ms before it discontinued the model in 1996. Of those, 183 are currently operating in Russia and about 100 abroad, according to the State Civil Aviation Service.

The average Tu-154M in the project is less than 10 years old and would cost about $1.5 million to repair, Smith said. "Tu-154M is an excellent aircraft with good long-term prospects but requires significant investment way beyond the cash resources of most airlines," he said.

Flagship carrier Aeroflot spent around $15 million over the last year to upgrade its fleet of 24 Tu-154Ms and has said that it plans to rely heavily on the craft. But while an airline the size of Aeroflot can afford it, most carriers can't and would jump at the chance to lease safe, refitted craft at an affordable rate.

Smith declined to comment on how much the refurbished planes would cost, saying only that "the lease rental would be entirely compatible with the revenues of Russia's top 20 airlines and would not require" raising ticket prices. "The price is dramatically lower than any Western aircraft," he added.

Earlier this year Sibir and Aeroflot announced they would form a leasing company for new aircraft, but they have to compete against other leasing companies in a tender for state guarantees. The deadline for that tender is Aug. 13 and the winner will be announced in the fall.