Outcast club of Iran, North Korea and Cuba – an unexpected niche for a new Russian aircraft?

In February 2015 one of the Russian aviation suppliers declared its commitment to increase the number of non-foreign avionics in Sukhoi Superjet 100 airplanes from 48% to 80% thus lowering its dependence on foreign suppliers. The decision was prompted by the latest geopolitical shifts and the consecutive need to secure national aircraft programs from the potential escalation of sanctions against Russia. However, while Cuba, Iran and North Korea have first-hand experience of how sanctions may severely impact local air connectivity, it seems that the sanctions may actually break a trail for a new Russian aircraft to the forbidden niche market.

The castaways

At the dawn of their activity, the flag carriers of Cuba, Iran and North Korea were operating rather fresh Douglas,Boeing, Ilyushin and similar aircraft types. But over the decades of commercial, economic and financial embargos, their fleet became extremely old. And though the word „old“ is not applicable for an aircraft if it is properly maintained, a limited or restricted access to both spare parts and service providers takes its toll on any technology. Other issues associated with a neglected aging fleet include fuel efficiency, seat capacity, comfort, number of crew required, etc.

In his interview to Reuters in June 2014, Farhad Parvaresh, the CEO of Iran Air stated that the carrier would need at least a hundred of airplanes immediately after the lift of aviation-related sanctions thus emphasising the urgent need for fleet renewal. However, so far the sanctions were eased only for the supply of certain spare parts for Iranian aircraft, the absolute majority of which have been in the air for over 20 years now.

Meanwhile, the procurement or long-term lease of a Western-built plane is still a no-go deal as every aircraft of a U.S. origin (including non-U.S. aircraft which have over 25% of U.S. content by value) is subject to the U.S. Export Administration Regulations and thus may not be sold or transferred under dry lease to a country under economic and trade sanctions.

When it comes to Cuba, Iran and North Korea, the bar is even higher – aircraft and engines with 10% and more U.S. content cannot be exported or re-exported to the aforementioned countries. This automatically disqualifies not only Boeing and General Electric, but also Airbus, Rolls-Royce and other aviation manufacturers with major suppliers in North America.

The challenge of exterritoriality

In addition to trade restrictions for the non-U.S. Original Equipment Manufacturers (OEM), the U.S. Export Administration Regulations also extend to the owners and operators of such aircraft. For instance, in late 2013 the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) included three non U.S. air carriers – Ukrainian-Mediterranean Airlines (UM Air), Bukovyna Airlines, and Kyrgyz Trans Avia (KTA) – to the list of Specially Designated Nationals (SDN) list for supporting Iran Air and Mahan Air with the acquisition of new aircraft. Acting as intermediaries in the deal, the Eurasian carriers are now banned from any business related with the United States.

Another exemplary case is the ex-Qantas (Australia) Boeing 747s one of which ended up in the Iran Air fleet. According to the U.S. officials, Qantas sold the jets to a leasing company in the UAE. Then three Boeing 747s were sold to Sam Air (UAE) which, in turn, traded them to a Gambia-based leasing company. The latter leased one Boeing 747 to an Iranian Aban Air (now the aircraft is operated by Iran Air). The transaction of the remaining two aircraft was stopped by the U.S. authorities as soon as they identified the embargo violation. Under similar circumstances the authorities ended up blacklisting Orion Air, a Spanish airline, which wet leased a BAe 146 to the Syrian carrier Pearl Airlines.

Right from manufacturing and up to scrapping – throughout its entire life cycle an aircraft is subject to numerous international and local regulations. The U.S. laws certainly play a pivotal role in the system, since the majority of manufacturers, leasing companies, financiers and insurance companies are bound with the U.S. economic and legal systems. As a result, these players cannot ignore the restrictions imposed by the U.S. authorities. Such extraterritorial appliance concerns the Russian SSJ100 and the Chinese C919, too.

Who if not the Russians

Both China and Russia are currently developing their narrow-body C919 and MC-21 projects. The Russian regional SSJ100 is already operated in the CIS, North America and Asia. However, none of these aircraft can be sold to the sanctioned countries due to a substantial amount of the U.S. content, including engines, avionics and control systems.

In the meantime, the recent initiatives of Russian suppliers indicate the intention to equip the locally produced MC-21s and SSJ100s with Russian-made avionics and maybe even engines. However, the development and certification of the equipment will require at least a couple of years. And even if the re-equipment process goes smoothly, the manufacturers may still be unable to reduce the volume of U.S. content below 10% since the project was initially developing as a joint Russian-Western aircraft.

However, the hopes for a silver lining nurtured by the sanctioned countries may not be as far-fetched as it may seem. An unexpected solution may come in the shape of a new Russian Tupolev Tu-204SM. As of today, Tu-204 remains one of the very few Russian civil aircraft still in the production. Its latest modification – Tu204SM – provides up to 215 seats while its technical specifications are similar to the ones of Airbus A320 or Boeing 737 NG.

Initially, the aircraft was powered by PS-90A2 engines – the product of a joint Aviadvigatel/Pratt & Whitney project. However, after the U.S. State Department blocked the sale of five Tu-204SM jets to Iran in 2010, Russia bought out Pratt & Whitney’s rights in the PS-90A project and certified a new model - PS-90A3. Following the buyout, the manufacturer has announced that the aircraft may be equipped with Russian-made components by up to 93%. If such aircraft’s “purity” is reached, it will open the door to a unique niche market closed to other aircraft manufacturers.

At the same time, recently we have witnessed certain positive signals in the U.S.-Cuban and U.S.-Iranian communication. However, even if the trade embargos are eventually lifted, the manufacturers will still find it difficult to do business with the countries they have had little or no contact with for so long. In the meantime, over the years Russian manufacturers have built strong ties with local operators.

Apart from historical cooperation in both civil and military segments, Russia continues to support Cuba, Iran and North Korea with its commercial aircraft. For instance, in 2010 Russian aircraft leasing company Ilyushin-Finance (IFC) leased a Tu-204 to Air Koryo, the DPRK’s flag carrier. The company has also financed the delivery of two regional Antonov An-148 to the North Korean carrier and five An-158 aircraft to Cubana. In addition, the Russian and Iranian officials are currently discussing the opportunities to launch the production of Tu-204SMs in Iran.

At the same time, though Antonov and Ilyushin planes also feature on the delivery list, the production of new Il-96s was cancelled back in 2009 due to the overwhelming competition with more efficient Airbus and Boeing wide-bodies. Meanwhile, the future of An-148/158 aircraft which is a joint Russian-Ukrainian project is uncertain due to apparent reasons.

China’s role in the deal

The CEO of Iran Air stated that if no long-term embargo-lifting agreement to be reached the carrier will turn to Russian and Chinese manufacturers. Considering the aforementioned, Russian-built aircraft seem to be the only viable option for the carrier at the moment.

However, should large orders to follow, both the carriers and the manufacturer will require extra financing to support the deliveries as well as the expansion of the production line itself. This is the moment where Chinese banks step in. Unlike Cubana‘s short-term wet-leased Airbus and Boeings (whereas the actual operational control of the aircraft remains with the lessee), the acquisition or long-term lease of new aircraft will require substantial funds. Considering the fact that an approximate price of a Tu-204SM is USD35 million and taking into account all the geopolitical, legal and financial circumstances, Chinese banks may be the only option for acquiring the necessary funds.

In other words, the sanctions against Russia have already pushed the country’s leaders to actively seek for new partners. With proper political will in both Moscow and Beijing, Russian aircraft manufacturing industry may unexpectedly find itself in a niche market of outcast countries which no one wants (or cannot) to deal with. But for Russians, the unique environment will allow to show (and maybe even prove) technological and commercial advantages of a new aircraft type while Boeing and Airbus won’t be able to do anything about the evolving new competing product.