Boeing, Airbus, Aeroflot and the Aerospace Industry

On May 31st, the U.S. airplane manufacturer Boeing upped the ante in its high—stakes competition with European rival Airbus to secure a $3 billion tendering contract for the construction of 22 passenger aircraft for the Russian airline Aeroflot. In a clear effort to gain favor with those Russian authorities who will determine the disposition of the contract, Sergei Kravchenko, head of Boeing's Russian operation, announced that his company intends to invest $27 billion over the next thirty years in Russia. These 'investments' would include the purchase of $18 billion in titanium, $5 billion in engineering, service, and intellectual products, and $4 billion in other related items and services.

Although Kravchenko stated that the Boeing announcement was 'not a reply' to an earlier pledge by Airbus to invest $25 billion in Russia, no informed observer can take this claim seriously. The Russians certainly do not. Aeroflot's subsequent declaration on June 6th that it may delay its final decision until late July 'to allow Airbus to formulate the dates of delivering its planes' before announcing the tender winner, was a de facto invitation for the Europeans to counter the Americans' counteroffer.    

Regardless of which manufacturer ultimately wins the contract to supply new planes to Aeroflot, the real victor in the increasingly expensive game of one—upmanship between Boeing and Airbus will be Russia. Having endured collapse and stagnation in the decade and a half since the fall of the Soviet Union, the country's moribund airline sector stands to gain immensely from the influx of Western investment, industrial machinery, and intellectual capital that must now accompany any deal with Aeroflot.

Russian president Vladimir Putin could not be happier. This is a formula that Russian state and military officials know well.

The current bidding war between Boeing and Airbus to win the right to sell airplanes to Aeroflot is the most recent chapter in the storied history of Russian civilian and military airpower. From the turn of the last century until the present day, Russia's aviation fortunes have been closely tied to the country's ability to secure western assistance. Blessed with an immense pool of talented engineers and technicians, but hampered by a backward industrial base, outmoded production techniques, and the lack of broad innovation typical under its authoritarian governments, Russia has long relied on infusions of foreign technology and capital to support its aviation programs. In some cases, espionage has proven vital to success. As often as not, however, Russia has simply purchased its way to the top.

The most infamous, though still widely unknown, example occurred during the 1930s. At that time, mired in the Great Depression, the world's leading aviation firms furiously competed to sell their planes in a rapidly shrinking global market. Facing the prospect of bankruptcy and with few customers available for their products, American corporations including Pratt & Whitney, Curtiss—Wright, and Boeing offered cut—rate deals on licensing agreements as well as technical training and the machine tools necessary to construct their aircraft to entice foreign companies to purchase planes. Eager to promote international commerce and to prevent the bankruptcy of firms critical to the nation's military industry, the U.S. government did nothing to intervene as cutting edge technology was virtually given away to foreign states.

The principal beneficiary of these practices was Josef Stalin's Soviet Union. While it would take some time for the USSR to realize the full advantages of this technological windfall, the largess of American companies and the acquiescence of Washington, DC officials during the thirties made possible the modernization of the Soviet air force. The immense supplies of raw materials, machine tools, and technical assistance that arrived via American Lend—Lease shipments during World War II further expanded Soviet production capabilities.

After the War, the decision of the newly elected British Labor government to sell what were at the time the world's most advanced turbojet engines to the USSR laid the foundations of the Soviet challenge to American aerial supremacy. The deal rapidly propelled the Red Air Force into the jet age. Soviet—produced versions of the British engines powered the MiG—15s that harassed American pilots in the skies over Korea between 1950 and 1953.

Of course, much has changed since then. The threat of Soviet Communist expansion has long since disappeared, having been replaced by the garden variety authoritarianism of the Putin presidency. Meanwhile, the Cold War conflict between Marxism—Leninism and capitalism has given way to a near universal faith in the power of free markets and the inevitability of globalization. In such a climate, it is all too easy to forget that nations have interests which may not fully coincide with the boardroom concerns of increasingly global corporations.

The promises being made by Boeing and Airbus to 'invest' tends of billions of dollars in Russia's long term development in order to secure a near term sale of $3 billion in airplanes sound eerily familiar to deals struck more than fifty years ago by American airplane companies, including Boeing, with the USSR. As then, the infusion of capital and transfer of technology that will necessarily accompany the final agreement with Aeroflot will do much to hasten Russia's reemergence as a major player in international aviation. No less significantly, it will also enhance the industrial and technological capacity of the Russian state and its military.

President Putin has already begun positioning Russia's moribund aviation industry for a comeback. Earlier this spring, he announced plans to consolidate leading Russian civilian and military airplane enterprises into a single Unified Aircraft—Building Corporation (or, UABC). The integration of the MiG corporation with the KAPO aircraft factory in Kazan (makers of Tupolev aircraft) will mark the first phase in the transition. Once completed, at least 75% ownership of the UABC will be under the control of the Russian state. Not coincidentally, Putin has also recently signaled that the Russian firm OSO VSMPO—Avisma, supplier of nearly one—third of the world's titanium (a critical component in the construction of advanced airframes and key military weapons systems), is a candidate for nationalization.

Members within the Bush administration would be well advised to pay close attention to the promises being made by Boeing executives to their potential Russian partners. Historically, commercial transactions have been the principle avenue through which the Russian state has built and maintained its industrial, technological, and military strength. Clearly, President Putin has learned well the lessons of the past. American officials should do likewise. If U.S. leaders are not alert to the prospects of a resurgent Russia, the long—term costs of any deal with Aeroflot will come not merely at the expense of Boeing, but also American national security. 

Scott W. Palmer is a historian specializing in the history of Russian aviation and technology transfer. His first book, Dictatorship of the Air: Aviation Culture and the Fate of Modern Russia will be published next month by Cambridge University Press.

On May 31st, the U.S. airplane manufacturer Boeing upped the ante in its high—stakes competition with European rival Airbus to secure a $3 billion tendering contract for the construction of 22 passenger aircraft for the Russian airline Aeroflot. In a clear effort to gain favor with those Russian authorities who will determine the disposition of the contract, Sergei Kravchenko, head of Boeing's Russian operation, announced that his company intends to invest $27 billion over the next thirty years in Russia. These 'investments' would include the purchase of $18 billion in titanium, $5 billion in engineering, service, and intellectual products, and $4 billion in other related items and services.

Although Kravchenko stated that the Boeing announcement was 'not a reply' to an earlier pledge by Airbus to invest $25 billion in Russia, no informed observer can take this claim seriously. The Russians certainly do not. Aeroflot's subsequent declaration on June 6th that it may delay its final decision until late July 'to allow Airbus to formulate the dates of delivering its planes' before announcing the tender winner, was a de facto invitation for the Europeans to counter the Americans' counteroffer.    

Regardless of which manufacturer ultimately wins the contract to supply new planes to Aeroflot, the real victor in the increasingly expensive game of one—upmanship between Boeing and Airbus will be Russia. Having endured collapse and stagnation in the decade and a half since the fall of the Soviet Union, the country's moribund airline sector stands to gain immensely from the influx of Western investment, industrial machinery, and intellectual capital that must now accompany any deal with Aeroflot.

Russian president Vladimir Putin could not be happier. This is a formula that Russian state and military officials know well.

The current bidding war between Boeing and Airbus to win the right to sell airplanes to Aeroflot is the most recent chapter in the storied history of Russian civilian and military airpower. From the turn of the last century until the present day, Russia's aviation fortunes have been closely tied to the country's ability to secure western assistance. Blessed with an immense pool of talented engineers and technicians, but hampered by a backward industrial base, outmoded production techniques, and the lack of broad innovation typical under its authoritarian governments, Russia has long relied on infusions of foreign technology and capital to support its aviation programs. In some cases, espionage has proven vital to success. As often as not, however, Russia has simply purchased its way to the top.

The most infamous, though still widely unknown, example occurred during the 1930s. At that time, mired in the Great Depression, the world's leading aviation firms furiously competed to sell their planes in a rapidly shrinking global market. Facing the prospect of bankruptcy and with few customers available for their products, American corporations including Pratt & Whitney, Curtiss—Wright, and Boeing offered cut—rate deals on licensing agreements as well as technical training and the machine tools necessary to construct their aircraft to entice foreign companies to purchase planes. Eager to promote international commerce and to prevent the bankruptcy of firms critical to the nation's military industry, the U.S. government did nothing to intervene as cutting edge technology was virtually given away to foreign states.

The principal beneficiary of these practices was Josef Stalin's Soviet Union. While it would take some time for the USSR to realize the full advantages of this technological windfall, the largess of American companies and the acquiescence of Washington, DC officials during the thirties made possible the modernization of the Soviet air force. The immense supplies of raw materials, machine tools, and technical assistance that arrived via American Lend—Lease shipments during World War II further expanded Soviet production capabilities.

After the War, the decision of the newly elected British Labor government to sell what were at the time the world's most advanced turbojet engines to the USSR laid the foundations of the Soviet challenge to American aerial supremacy. The deal rapidly propelled the Red Air Force into the jet age. Soviet—produced versions of the British engines powered the MiG—15s that harassed American pilots in the skies over Korea between 1950 and 1953.

Of course, much has changed since then. The threat of Soviet Communist expansion has long since disappeared, having been replaced by the garden variety authoritarianism of the Putin presidency. Meanwhile, the Cold War conflict between Marxism—Leninism and capitalism has given way to a near universal faith in the power of free markets and the inevitability of globalization. In such a climate, it is all too easy to forget that nations have interests which may not fully coincide with the boardroom concerns of increasingly global corporations.

The promises being made by Boeing and Airbus to 'invest' tends of billions of dollars in Russia's long term development in order to secure a near term sale of $3 billion in airplanes sound eerily familiar to deals struck more than fifty years ago by American airplane companies, including Boeing, with the USSR. As then, the infusion of capital and transfer of technology that will necessarily accompany the final agreement with Aeroflot will do much to hasten Russia's reemergence as a major player in international aviation. No less significantly, it will also enhance the industrial and technological capacity of the Russian state and its military.

President Putin has already begun positioning Russia's moribund aviation industry for a comeback. Earlier this spring, he announced plans to consolidate leading Russian civilian and military airplane enterprises into a single Unified Aircraft—Building Corporation (or, UABC). The integration of the MiG corporation with the KAPO aircraft factory in Kazan (makers of Tupolev aircraft) will mark the first phase in the transition. Once completed, at least 75% ownership of the UABC will be under the control of the Russian state. Not coincidentally, Putin has also recently signaled that the Russian firm OSO VSMPO—Avisma, supplier of nearly one—third of the world's titanium (a critical component in the construction of advanced airframes and key military weapons systems), is a candidate for nationalization.

Members within the Bush administration would be well advised to pay close attention to the promises being made by Boeing executives to their potential Russian partners. Historically, commercial transactions have been the principle avenue through which the Russian state has built and maintained its industrial, technological, and military strength. Clearly, President Putin has learned well the lessons of the past. American officials should do likewise. If U.S. leaders are not alert to the prospects of a resurgent Russia, the long—term costs of any deal with Aeroflot will come not merely at the expense of Boeing, but also American national security. 

Scott W. Palmer is a historian specializing in the history of Russian aviation and technology transfer. His first book, Dictatorship of the Air: Aviation Culture and the Fate of Modern Russia will be published next month by Cambridge University Press.