November 2009 Letter

Dear Fellow Commie-Era Reminiscers,

Twenty years ago this month, Europe had one of its best days ever when the Berlin Wall was smashed down. This anniversary provides a great opportunity for societal introspection about what the Wall’s collapse meant. From my parochial perspective—I was an aviation industry analyst then, as I am now—the Wall’s destruction led to the end of the massive Soviet civil aviation industry. Like the end of the Wall and communism, the end of their industry was unexpectedly complete. And there’s an oft-forgotten lesson from its collapse: Closed economies produce terrible aircraft.

First, some history. Soviet civil aviation was a funhouse mirror reflection of the Western aero world. Operating within closed borders and with massive subsidies at all levels, this parallel universe created funny-looking analogues of many Western planes, from the Ilyushin Il-62 (VC-10) to Tupolev Tu-154 (Boeing 727) to Tu-144 (Concorde). Fun fact: the Soviet Union was the only sovereign nation other than the US to produce its own twin-aisle jets (Il-86 and -96). These quirky planes seemed like the aeronautical equivalents of animals from a Dr. Seuss book. For me, seeing an An-225 up close at Farnborough 1990 was like meeting a Star-Bellied Sneech.

Learning more about Soviet planes after 1989 was incredibly exciting. Yet as the Iron Curtain fell, we discovered what was behind this curtain: more iron. Not titanium alloys, carbonfiber, or aluminum-lithium. Just lots of old fashioned heavy iron, or at least enough excess aluminum and double-thick steel that might as well have been iron. Everything was heavier, louder, thirstier, and more maintenance-intensive than its Western equivalent. And after communism, the Soviet aero industry, like the rest of the Soviet economy, was exposed to the scrutiny and competitive heat of the outside world. As someone who inspected the Il-96 told me, “Wherever they could find a place to put a rivet, they put one.”

The Soviet aerospace industry was a vertically-constructed monstrosity operating behind walls of its own. Aircraft primes weren’t free to select the engines, avionics, or materials that they wanted. Customers weren’t free to buy the planes they wanted. Government ownership kept everyone in check, and it insulated companies from the discipline brought by equities or capital markets. After the Soviet empire fell, exposure to the outside world rendered this construct and the engineering experience and production equipment that went with it totally obsolete. Worse, the whole Soviet economy was built this way. Russia’s GDP didn’t recover to 1989 levels until 2006. While the situation was looking up a few years ago due purely to high resource prices, according to the IMF Russia’s economy is falling 7.5% this year. That’s worse than any other major economy in the world.

At first, there was hope that existing Soviet designs could be re-equipped with Western avionics and engines, on the An-38, Il-96M, Il-114, and Tu-204M. Yet in the competitive world of air transport, heavier airframes just failed to sell. Notably, GE stayed aloof; in 1993 Brian Rowe pointed out that he wasn’t running a charity business. Pratt, Rolls, and most every other Western company just gradually walked away. A few pitiful aircraft still survive as two-per-year new-build programs, but the only hope is Sukhoi’s SuperJet. It’s the first Russian plane to be designed from the start with international assistance. It’s arriving just as the regional market stalls out.

What’s striking about the post-Soviet civil aviation experience is the extent of the disaster. It wasn’t that there were a few uncompetitive planes or a few companies that needed restructuring. This was a complete industry write-off. No civil programs survived in more than token form. Soviet civil aviation was an evolutionary dead end. It died like a half-evolved fish-reptile, left behind by the tides, flopping around on the shore and gasping for air until it noisily croaked.

The death of the Soviet aero universe resonates today because China seems to be heading down a Soviet path. In China, a government-owned industry is creating jets primarily for the national market. While Western suppliers are welcome to bid components, intellectual property (IP) concerns guarantee that they will bid last-generation technology. An emphasis on locally-based joint ventures makes things worse—there will be pressure on the prime to select products created by these joint ventures. Unlike the Soviets, China hasn’t erected a wall around its aero industry; just unpleasant barriers that modern technology might not cross.

This is more than a theoretical concern. Take China’s ARJ21 regional jet. Please. For the past decade, this misbegotten clunker was presented as a harbinger of China’s coming aviation challenge. Today, it’s simple. Non-aero people take this plane seriously, seeing it as yet another example of the eclipse of Western manufacturing by a rising China. Aviation professionals think it’s a disaster. It’s heavy enough to be a typical Soviet jet, with 15% more weight per seat than Bombardier or Embraer’s equivalents. It uses imported equipment that was state of the art a decade or two ago. Some unlucky Chinese carriers might be forced to take a few, putting them at a competitive disadvantage against anyone with a good aircraft.

So far, the ARJ21 story has been one of polite deference. Nobody wants to deliver the bad news. On his visit to China this month, President Obama even promised to assist AVIC with US certification for the ARJ21. He endorsed a check that nobody in their right mind would ever cash. But China’s industry would be better off getting some tough love. To put it in Berlin Wall terms, Premier Wen, tear down this plane.

China needs to hear the truth about the ARJ21 because there’s still time to save the larger C919, avoiding a repeat of the ARJ21 fiasco. They should start by privatizing AVIC (a move that’s already on the agenda). This would be risky—there’s no guarantee a private firm would be able to raise the capital—but government-owned companies simply don’t meet commercial market needs. China has a vibrant private sector economy and a sluggish government sector. Its aviation industry needs to be part of the private sector.

Second, if you must build your own jet (rather than focusing on new technology), build for export markets. Re-inventing the DC-9 as the ARJ21 was bad enough. If the C919 is merely a 30-year late re-invention of the A320, it too will go nowhere.

Finally, and most of all, the C919’s designers need complete freedom to select the latest and best technology—engines, avionics, structures, materials, etc—from suppliers around the world. That means IP protection for Western suppliers (which would be easier if they were dealing with a privatized Chinese company). It means no preferential treatment for locally-based joint ventures. Most of all, it means an end to Chinese Government talk of creating national engine and other equipment champions. Telling Western suppliers that you want their latest and best while also creating national companies to compete with them guarantees obsolete content, and therefore another useless jet.

Twenty years after the Wall, as we survey the wreckage of the post-Soviet world, it’s important to note that Chinese scientific and engineering talent is among the best in the world (just like in the Soviet Union). China has a superb home market (just like the Soviet Union had). China has adequate capital (just like the Soviet Union’s aviation industry had). China wants to construct a broad array of jet families (just like the Soviet Union did). But without economic freedom, it means nothing. If China continues down this path, its aviation industry will be heading down the same Soviet dead end street.

We’ve updated the ARJ21 report this month, but our forecast remains grim. Other updates include the more successful MRJ, the CH-47, NH90, Lynx, Jaguar, KT-1/T-50, and the TBM700/850. A very happy holiday season to all.

Yours, ‘Til The Term “National Jet” Evokes Laughter,
Richard Aboulafia