russia’s mro sector set for growth
September 12, 2019
Despite ongoing problems and general economic uncertainty, Russia’s MRO industry for business jets is steadily developing. Eugene Gerden talks with some leading local MRO providers and industry analysts to learn more
The financial crisis in Russia, caused in part by the sanctions implemented following Russia’s annexation of Crimea and ongoing meddling in Western elections, has led to a steep decline in the entire Russian Business Aviation market – including MRO sector. In fact, according to the latest data, provided by some leading Russian analytical agencies in the field of Business Aviation, between 2015 and 2016, the market saw an aggregate decline of nearly 40% compared to pre-crisis figures.
However, beginning in the second half of 2016, the situation has started to show signs of improvement which, in turn, has resulted in a growth in demand for MRO services. Although the current level of development in the Russian MRO industry for Business Aviation is lower than its commercial aviation counterpart, this is due to the fact that the number of business jets owned by Russians is still significantly smaller than the commercial fleet. (The Russian Business Aviation fleet is estimated at about 500 aircraft, of which only 10% are registered within the domestic jurisdiction.)
Currently, there are only a few MRO service providers in Russia, and range of their services is rather limited. Although Russian MRO companies service nearly 80% of local business jets, this work tends to be limited to simple technical operations. In fact, according to some statistics, domestic MRO providers are practically non-existent when it comes to technically sophisticated MRO work, including upgrades and complex repairs.
“As a result, a significant number of Russian business jet owners have preferred to get their MRO work done overseas, particularly in the EU and US,” says Timofey Kravtsov, deputy general director of Russian business jet operator Tulpar Aero Group.
That being said, the implementation of economic sanctions has had a positive benefit for local MROs. Thanks to the resulting weak ruble, their services have become much more competitive compared to services provided by Western companies. Furthermore, the imposition of a ban on the import of certain technologies to Russia, including those used by domestic MROs, also provided an impetus for the development of the local MRO operators.
Big Opportunities and Big Challenges
According to most figures, the Russian MRO market for business jets is estimated at about US $650 million. But this lack of technical expertise results in an estimated annual loss of profits for Russian MRO companies in the tune of US $350 million or higher.
However, this skill gap also represents huge potential for a further near-term growth. “This environment means big opportunities for local MRO providers and is ripe for the launch of new companies,” says Kravtsov.
However, leveraging these opportunities does come with a number of challenges. For instance, the diversity of the Russian Business Aviation fleet means MRO providers must invest heavily in the training of personnel and the introduction of new technologies. Furthermore, the flight time of the average Russian business jet typically does not exceed 30 hours per year. This means the amount of MRO work is limited, making the launching of a new business risky.
There’s also the issue of a lack of infrastructure, including hangar areas, at the majority of Russian airports. And the low level of interest in integrated pay-by-hour support programs means MRO providers are more vulnerable to fluctuations in demand in the local market. Last but not least, there’s the complete lack of support from the Russian state, which poses a significant challenge to getting the investment needed to launch a new MRO business.
As a result of these many challenges, Russia’s MRO sector continues to struggle. “The sector is seeing a serious slowdown in growth, which is primarily caused by objective external factors and the lack of understanding of the industry’s problems at the state level,” says Andrey Akopov, general director of Vostok Technical Service Jets, LLC, one of Russia’s largest MRO service providers.
“The MRO sector for Business Aviation in Russia is still in the initial stage of development, and there are no conditions for any serious growth to happen in the near future,” adds Oleg Ivanov, corporate affairs director of A-Group Aero, a FBO operator and ground handler at Moscow Sheremetyevo and St. Petersburg’s Pulkovo airports.
To illustrate the current situation, Ivanov points to the A-Group’s experience in expansion. The Group recently considered organizing a full-fledged MRO center within its FBO at Vnukovo-3 airport. “However, after careful examination, we decided to postpone the launch of the project for an indefinite period of time,” says Ivanov. “This was mainly due to the lack of prospects and the need for huge investments to just get it off the ground.”
Signs of Growth
Unfortunately, there isn’t much local MROs can do to remedy the situation. After all, they are fully dependent on the country’s domestic fleet. That is why most analysts we talked to believe the demand for MRO services depend on the development of Business Aviation in Russia in general and, in particular, the expansion of the domestic fleet. As the fleet expands, new MRO centers will need to be established, and not just in the current hubs, but across the vast country.
Hints of this trend are already starting to be seen. For example, work on a new MRO center at Kazan International Airport has begun. Currently, Kazan Airport has the status of one of the largest in Russia and already operates its own Business Aviation terminal. The new MRO center will be located within a new air-service zone, to be called Aeropark, which will include several hangars for various aircraft types, an apron with taxiways and parking places, a flight test station, the production and auxiliary areas for repair shops and storage areas for materials and components.
The new air service zone is expected to be one of the largest in Russia in terms of the volume of conducted works and the range of provided services for business jets. As planned, Tulpar Technik will be the zone’s first resident, as the company plans to establish its own MRO center there. However, it is very likely that Tulpar won’t be alone for long, as the airport is currently in talks with other leading domestic and foreign MRO providers.
The first phase of the Kazan project is expected to be commissioned in the first half of 2020. The building of the new air service zone will be carried in cooperation with such foreign partners as Leipzig/Halle Airport.
Despite ongoing challenges, overall, the industry in Russia remains optimistic. “The current level of development of the MRO segment in Russia remains at a generally good level, as can be seen by the recent launch of some modern MRO centers around the country,” says Anna Serezhkina, executive director of the Russian United Business Aviation Association (RUBAA), “However, this is just the beginning of a long path, and local MRO providers most always think about how they can further improve their services.”
According to Serezhkina, the further development of Russia’s MRO segment will depend on the future dynamics in the Russian economy, the overall investment climate in the country, and the general situation of the Russian Business Aviation sector.