Western parts inventory grows with free economic zone, partners, cultural understanding
Russian aviation lacks the scale and speedy growth of Chinese aviation, but its fleet of about 500 Western aircraft is formidable. Unlike China, Russia is just a 2-3 hr. flying time from major aircraft manufacturers, shops and part inventories in Western Europe, so the need for in-country part stocks has not been as intense as in China or other Asian markets.
But one facet of Russian aviation argues for local stocks. Almost every Western aircraft rotates though one city, Moscow, daily. Inventories held in the capital city can very efficiently serve the entire market.
The government is sensitive to the need for local stocks to support the country's aviation. It has established a zone in Russia for imported parts free of customs and value added taxes (VAT) until the parts are actually sold to airlines. And the Russian Federation has joined the World Trade Organization, which should eventually, if not immediately, ensure some important safeguards for foreign suppliers.
Non-Russian companies have started to build significant stocks of aircraft parts in Russia. These stocks are still supplemented by shipments from Western hubs in the Netherlands, England and Germany. But the direction is clear.
If Russian aviation continues to grow at a healthy pace and the government plays by Western rules in regulating and taxing parts, Moscow could have major stocks of line-replaceable units fairly soon. This will happen faster and more efficiently if companies can connect with the right partners in Russian aviation.
In penetrating this market, it helps to be close, both physically and in experience, in dealing with Russians. “The Russian market keeps growing and we are planning to grow along with it,” summarizes Paulius Kavaliauskas, head of business development for components and materials at FL Technics. His company is part of a group listed on the stock exchange in Warsaw, Poland, a neighbor of Russia and well acquainted with Russian ways.
FL Technics opened a subsidiary, FL Technics Line, two years ago in Moscow and placed no-go and critical components in Moscow Vnukovo International Airport to deal with aircraft-on-the-ground (AOG) situations. “With our own base in Russia, we also offer logistic services and help operators with customs clearance, significantly shortening delivery times,” Kavaliauskas says. FL plans to expand geographically within Russia and add additional stocks.
No-go, critical and some dangerous components are placed at Vnukovo and support, and -family aircraft. FL's main stocks are still in Vilnius, Lithuania, another close neighbor with very good connections to Russia. Kavaliauskas says FL can deliver parts from Vilnius the same day they are ordered or early the next morning. Customs clearance can be completed less than 24 hr. after a purchase order is received.
But London is still the best location for some parts, including flight controls for 737NGs and some other popular items. FL also keeps a parts inventory for 737NGs and 737 Classics in Warsaw. “Sometimes we may even use our Kuala Lumpur or Chicago stock,” Kavaliauskas notes.
FL wants to expand the range of parts it stocks in Russia for the most popular models and also to add parts from partners with which FL has distribution agreements. These partners include Seal Dynamics, Heico and Kellstrom. It is looking at placing certain flight controls, engines and auxiliary power units inside Russia to support airlines in AOG situations even faster.
Russia's free economic zone for aviation at Ulyanovsk-Vostochny airport is about 570 mi. east of Moscow. Chiefly a cargo airport, the facility is home to Volga-Dnepr Airlines and Aviastar, which makes Antonov and Tupolev jets.
Ulyanovsk-Vostochny could become the logical place to stock parts used for heavy checks, where facility space is cheaper than Moscow, MRO facilities exist and tax treatment is favorable.
These reasons contribute to FL Techics' plan to build a 16,000-sq.-meter (172,222-sq.-ft.) maintenance base and warehouse at this airport. This will significantly lower investment in stocks, which will cost about the same as anywhere else in Europe.
Bringing parts into Russia now means immediately paying an import VAT of 18% and sometimes, customs duties. “Operating from a free economic zone allows stocking parts without freezing this additional cash,” Kavaliauskas says. “Duties and taxes have to be paid only when the part is sold to the customer.”
The FL executive sees other companies taking the same direction his has in Russia. But he cautions, “This market is highly attractive yet very complex and it takes a lot of time and energy to understand it, let alone start operations.” He predicts companies that have been working on serving Russia may soon enter the market, but entirely new entrants will probably take a few years to penetrate it.
A J Walter Aviation has been supporting Russia for nearly 20 years from the U.K., but it also now has more than $30 million of rotable and expendable components at Moscow Domodedovo International Airport with a secondary location at Krasnoyarsk, Siberia. It is considering placing inventory at Vnukovo and is willing to look at other locations, says Roger Wolstenholme, director of group sales.
He says A J Walter logs about $100 million in annual sales in Russia and in other members of the Commonwealth of Independent States (CIS).
The company's components in Russia initially are intended for the S7 Group's A320s, but it plans to expand into 737 Classic and NextGen, and perhaps otheraircraft, too.
Wolstenholme wants to build on this position by developing customized solutions based on AJW's expanding product lines, including power by the hour, consumables, engines and component repair management by AJW Technique. He is especially hopeful about opportunities for this division of AJW.
AJW has considered Russia's new duty-free zone but sees only limited benefits, compared with an efficient logistics chain out of the U.K. Russian customs still pose problems that local stocks might partly solve.
Customs clearance remains an ongoing issue, even though AJW has considerable experience in minimizing delays, ensuring that documentation is correct and that items are efficiently tracked. “AJW also has the ability to provide customs-clearance services via our local agent,” Wolstenholme notes.
He expects other companies will join in the buildup of part stocks in Russia.
For instance, Engineering Holding, one of the largest MROs in Russia and the parent company of S7 Engineering, is stocking up to $5 million of inventory on a consigned basis from AeroTurbine, a subsidiary of International Lease Finance Corp. Stockpiling used, serviceable material onsite at Engineering Holding's facility at Domodedovo should expedite inventory delivery to customers within one day after ordering. The initial inventory for 737 and A320-family aircraft, which became available on May 31, consists of wheels, brakes, avionics, fuel pumps and actuators.
In addition, AAR Corp. signed a letter of intent in June to open a parts center in Ulyanovsk in mid-2014 and a maintenance facility there in 2015. AAR currently keeps inventories for Russia in Amsterdam, London and Hanover, Germany, and can also tap warehouses in the U.S., Middle East and Asia.
Carl Glover, sales vice president in AAR's supply chain group, says Amsterdam has provided good connections to Russia and CIS nations. That is where AAR now stocks its high-moving rotables for exchanges and consumables for immediate shipment, including AOGs, to the region. Glover notes that AAR has Russian-speaking staff who understand local logistics and documentation.
Glover attributes part growth in Russia both to more Western jets flying there and to the aging of the first Western jets in Russian aviation, as these now require more maintenance and spares. He emphasizes both single-aisle and regional aircraft fleets. He also notes that, thanks to online tools, airlines have better visibility into which firms have what parts.
Glover says AAR will put inventory closer to points of use in Russia as its Russian maintenance venture matures. These on-site inventories will be high-moving rotables and consumables. Glover says AAR will consider partnerships in light of specific business cases and whether partnerships serve customers.
Oliver Wyman Partner Chris Spafford observes that Western part stocks in Russia are growing, not only because of more Boeing, Airbus and Bombardier aircraft, but because Russia's ownrequire many Western components. And Russia is unusual in that virtually all of its Western aircraft operate through Moscow.
Spafford says this attractive market had been difficult to penetrate because ownership of aircraft had been so concentrated, with about 70% of jets flying for five airlines. Geopolitical and bureaucratic factors also posed hurdles. “Some of that has begun to shift.”
Aircraft are more numerous now, and geopolitical issues have lessened, except perhaps between the U.S. and Russia. Russia joined the World Trade Organization in mid-2012, but WTO rules have not yet been incorporated into Russian laws, regulations and practice. “It is still very challenging to do business in Russia,” Spafford cautions. “It has become easier, but it's not like Western Europe.”
Even the new free zone at Ulyanovsk-Vostochny has not been applied consistently, Spafford notes. “You must have a local partner to navigate it.” In fact, the Russian aviation market is a lot like China, except for size. Spafford points out that those 500 Western jets are not much more than one Chinese fleet,.