The Federal Antitrust Agency (FAA) has questioned the aviation-reformation plans adopted at a State Council session late February which envisages merging government and private plane-manufacturing plants in the country into a unified super holding, noting the realization of such project will highly undermine competition in the local aviation industry.

The agency’s negative stance on the issue runs counter to that of the Kremlin, which oversees the activities of the State Council — a consultative organ, which comprises the president as chairman and 89 regional leaders as members — and, meets regularly to deliberate on issues of vital importance to the nation. It was at one of such sessions in February that the “questionable final decision” was taken to rejuvenate the flagging aviation industry through consolidation of whatever is left of the Soviet-era’s once vibrant aviation might. “This is a final decision,” President Vladimir Putin told the council members at Zhukovsky, a scientific city outside the capital, on February 23, and ordered his legal team and related ministries to draft a decree setting the legal ground for setting up the company. “It’s only muscling up such a strong, powerful fist,” Putin said, while adopting the proposal to merge major plane manufacturing plants into a single entity, “that will enable us to achieve these stated goals.” “The concentration of all resources on realization of really prospective projects will help us achieve tangible results now, and not sometime in the distant future.”

But commenting later on the issue, FAA director Igor Artemyev noted that his agency would never come to terms with such arrangements, because his main tasks are to safeguard antitrust regulations that ensure free competition among all market participants in all sector of the economy. “The new company, which is expected to control just 10 percent on the world market, will not be a monopolist on the global arena, unlike on the home turf, where it will be an absolute monopolist, because it will control 100 percent of the local industry,” he said.

A group of experts headed by Industry and Energy Minister Viktor Khristenko worked out the concept, which envisages setting up a Unified National Aviation Building Company, through merging assets of all aviation construction plants in the country, irrespective of current ownership structures. Major local plane manufacturers such as leading manufacturers of defense-related craft MiG, Sukhoi, Irkut Corp. and civil aviation makers such as Tupolyov, producer of TUs and Ilyushin, which makes the IL jets, scientific institutions, design bureaus and air-leasing companies, have already agreed to relinquish their entities in favor of the new legal entity, which will be executed in three stages.

The first stage is restructuring of major aviation-construction companies and hammering out terms on which the merging of assets will take place. This stage envisages setting up a joint state and private consortium by mid-2005, which will draft up an aviation policy for the whole industry. At the second stage, the assets of all participating companies will be merged to form one company. The structure of the resulting company will be mixed — state and private — with the state holding a majority stake, at least, more than a 50 percent stake. The third stage will see the company going fully public. Its capitalization will be boosted and all measures taken to make it attractive to private investors, the strategists said. The company will be set up on Dec. 31, 2006, and is expected to become the most dominating leader on the Russian aviation-production market by 2015, when it is also expected to control over 10 percent of the global aviation-products market. Optimistic scenarios see the new super aviation giant at par with U.S. Boeing and EU Airbus, the current leaders in the global aviation-construction industry, which is currently valued at $1.7 trillion, they added.

To achieve these goals, Khristenko said government promises to offer more significant aid to the new structure that was the case in the past. For instance, the government plans to pump 15 billion rubles into the project in 2005, which will be about five times the sum it disbursed to the whole industry in 2004, while annual budgetary financing will be in the region of 60 billion rubles (or about $2 billion) and government’s order expected to reach 138 planes by 2008.

The novelty of the concept — which envisages a total eradication of competition in the country and concentration of all major aviation-construction plants’ assets and technological know-how in a single entity — is also its weakest point, because the eradication of competition places the yet-to-be launched project on a head-on-collision path with the antitrust regulations, which envisage a broad presence of different companies and free competition among them. These aberrations, according to Artemyev, will make the new company a defendant in a series of legal battles, because words such as “competition and economic freedom” are enshrined in the Russian Constitution. “Therefore, I do out rule out going all the way to the Constitutional Court, if necessary, to overturn the decision, “because if any business structure is founded unconstitutionally, then, there is always the Constitutional Court to determine the legality and constitutionality of such formations.”

Irkut Corp. acting president Valery Bezverkhikh, who has been appointed to head the workgroup tasked with preparing the preliminary documents for setting up the new holding, shook off FAA’s apprehensions. “It’s completely senseless to talk about monopoly in the context of Russia’s internal aviation-construction market, which at the moment, simply does not exist, at least in the traditional sense of the term. “Most revenues earned by Russian airplane-building enterprises today come from exports, while on the international markets they compete with such super giants such as Boeing and Airbus.”

However, not all regional leaders, share the optimistic views emanating from key Kremlin officials and top aviation industry executives. Some of the dissenting voices say the creation of such a super giant will give rise to a monopolist which will become inefficient in the future, partly because of no real competition on the internal market, while others even see the proposal as a drawback on the technological advancements made by aviation firms in their regions. “The setting up and concentrating all resources in one entity will mean some companies that are successfully run at the moment and profitable in their operations will have to destroyed in order to create a totally new company, whose future is not entirely clear,” noted Mitimer Shamiev, president of Tatarstan. Alexei Fyodorov — president of MiG, and former president Irkut Corp, which was built by merging different companies several years ago — proposes taking a more cautious step in the realization of the project, “because it is not easy to set up a new national aviation-construction company.” “This is because it is necessary to consolidate all production assets, scientific and technical capabilities, take into consideration a lot of regional and corporate interests, review a myriad of contrasting views as well as choose the correct projects that can be competitive on the market.