These are frustrating times for Polet Air Cargo. Though its AN-124s are increasingly relied upon by all kinds of major customers – including Airbus, the UN and the US Air Mobility Command – its future fl eet plans are in turmoil. That is because in April the Russian government decided to focus for the moment on production of IL- 76 freighters, rather than re-startingproduction of the AN-124.
One reason for the decision might have been a desire to save an order for 34 IL-76 transports ordered in a $1.5 billion deal with China in 2005, which has been threatened by production delays. But evidence of demand from other carriers for the new re-engined chapter three noise compliant IL-76 must also have been a key factor in the decision. As well as Volga-Dnepr, which has ordered three, and at times talked of buying as many as 20, Silk Way of Azerbaijan surprised the market recently by ordering two re-engined IL-76s, and other orders are said to be in the pipeline.
By contrast, despite fi rm commitments and enthusiastic support from both Polet and Volga-Dnepr, the AN-124 is still short of the 40 or so orders that Polet founder and general director, Anatoly Karpov, admits would probably be needed to make a restart of production viable. “It is up to the manufacturer to decide if they have enough orders,” he says. “We have announced to the world that we are interested to purchase the AN-124-100 and we have signed a fi nance agreement with Vneshtorgbank for this matter. Now, the question is whether other companies will do the same.”
In the meantime, the delay to the resumption of production leaves a hole in Polet’s fleet plans. The carrier had fi ve AN-124s on order and fi nance for fi ve more, and was hoping construction of the first of them would start later in the year. Instead, it is now left scratching its head and wondering how to build its outsized cargo business without the new aircraft.
For Polet the problem is at least somewhat less acute than for its competitors. Milenko Strika, marketing and advertising manager for the car-carrier, says its existing six AN-124s have at least ten years life in them, as against as little as fi ve for some in its competitor’s fl eet. Nevertheless, he admits that in a couple of years’ time there could be a capacity crunch of sorts. The solution for Polet is to try and extend the life of its existing assets and also to look at alternative sources of aircraft.
The carrier does own a further two ex-military AN-124s which it is having converted to commercial use, but this project has been going on for some time, and it is still not clear when theaircraft will be delivered.
Strika says the fi rst may join the fl eet later this year, with the second following sometime in 2008 but, as so often with the Russian aerospace industry, this seems to be more of a hope than a fi rm commitment: Polet has certainly expressed similar optimism in previousyears.
The uncertainty seems to be centred on what changes will be needed to the aircraft to bring them up European Union standards. The airline is hoping that it will just be a matter of minor changes such as new oxygen masks and other safety measures, but there seems to be something of a questionmark over whether more major modifi cations might be needed. Even when the two freighters are delivered, they will not add to Polet’s capacity immediately, because they will be need to cover for maintenance on other aircraft in the fl eet. But once all the aircraft are fully operational, they will bring Polet up close to Volga-Dnepr’s ten aircraft fl eet, strengthening its position in themarket.
Volga-Dnepr has said that up to 20 other ex-military AN-124s, currently grounded, could be converted for commercial use, converting their cockpits to two man AN-124-150 standards, but Karpov seemed to pour cold water on this idea recently, when he told a journalist the modifications would cost $40m, which would not be worth it, given the relatively short operational life the ageing aircraft would then have. He now adds a qualifi cation, however, that this opinion was based on third party information, not direct conversations with Aviastar.”The factor has notyet named its price, so we are not sure how much conversionwould cost in reality,” he says.”And even if the amount looks toohigh for now, after some time, it mightnot do. Who knows what the futuremay bring?”
In the meantime, Polet is also going with the fl ow and planning to order three new re-engined IL-76s. Strika says the contract has not yet been signed, but expects it to happen soon. Karpov admits this is a change of direction for Polet. “We were not considering the IL-76 before, because we were anticipating the production of the new AN-124, but since the recent announcement about re-starting AN-124 production was not promising, we are now serious about the IL-76,” he says. “We know the potential of the IL-76 after modernisation, and for our niche market, it is thesecond most suitable aircraft.”
The idea is that the IL-76s could take over some of the work from the AN-124s, allowing Polet to use them less and extend their life. Already, Karpov says, the carrier is thinking more carefully about how it uses the AN-124s, trying to preserve them for when theirunique capabilities are needed.
This means using them more for outsize and other specialist loads and less for general cargo, with Strika claiming the latter is now down to 40 percent of Polet’s business. This is not to say that Polet will not pitch for general cargo at all – it is often the only way to fi ll a backhaul leg after an outsize charter – just that it will think more carefully about which tenders itbids for.
On the other hand, Strika also admits that if the aircraft are idle, pure general cargo loads will still be considered, and insists that revenue will not suffer as a result of conserving the AN-124s for specialist loads, leaving it somewhat uncertain how this policy will pan out in practice. Other measures that are being deployed to extend the life of the AN-124s include trying to maximise the effi ciency of routes to reduce fl ying hours and positioning fl ights as much as possible. Karpov says the carrier is also working with the Aviastar factory on other ways to extend the life of the aircraft. “How well that might turn out, it is hard to say,” he says. “However, as your readers know, the AN-124 is a unique aircraft and an important asset for air cargo transportation, so I hope together wewill fi nd some other solution.”
One way to boost the specialist use of the AN-124s is through more long term contracts. All the AN-124 operators are seeking such relationships, so as to be less reliant on ad-hoc charters and have a more predictable stream of business. In Polet’s case, it has long specialised in UN work and in aerospace traffi c, and both streams of business continue to fl ourish. Maxim Kloushin, sales manager for Polet, says these segments account for 15-20 percent of revenue each, and are growing at about fi ve percent a year. Both have received something of a boost in recent months. On the aerospace side, Polet signed a major partnership deal with Airbus in May, which cemented an already close relationship between the two companies that has seen Polet move A321 fuselages, A380 engines and satellites for Airbus’ EADS parent. Kloushin says that the two companies are now looking at even deeper cooperation, including closer participation by Polet in Airbus’logistics network.
On the humanitarian front, meanwhile, Polet got an incidental boost earlier this year when Volga-Dnepr were removed from the UN approved supplier list for alleged improper payments to a UN procurement officer. Alexey Ozerov, vice president of Polet and director of its New York offi ce, which was set up in 2002 specifi cally to be close to UN headquarters, admits that Polet has gained some business as a result, though it was in any case already involved in supplying UN missions to Somalia, the Democratic Republic ofCongo, and Darfur in the Sudan.
“Polet has the reputation of being a very ethical company,” he says. “I can’t comment on the allegations against Volga-Dnepr, but I can say that we never involve ourselves in this type of deal, and we have assured the UN that our already high standards will be even higher from now on.” On the aerospace side in the US, Polet has been moving satellites to be launched by Russian satellite launcher Energia, as well as fl ying equipment for the international space station from Moscow to the Vanderburgh launch site in California, among other projects, Ozerov says the AN-124 also continues to have occasional demand for moving Rolls- Royce engines for 777 operators such as American Airlines in AOG situations. “The reliability of Rolls-Royce engines is high, so it is only a few fl ights a year, but when speed is essential, the AN-124 has the advantage that it can take the engines fully assembled, whereas to fi t them into a 747 freighter you need to remove some of the components,” he says.
A new and perhaps surprising relationship that has developed in the past year in the US is with the Air Mobility Command of the US Air Force. Polet started working for the Air Mobility Command early in 2006, and Ozerov says demand has expanded to the extent that he would dearly like to have more lift available for this work. Missions include fl ying outsize equipment to support US forces, not just in the Middle East, but also worldwide, with one recent fl ight, for example, being tothe US Air Force base in Hawaii.
The carrier has also fl own some missions for the Canadian military, and Ozerov says roughly two thirds of its North American revenue now comes from military and humanitarian work, with oil equipment being an important part of the other third. Here fl ights are to the Middle East and Asia, but also to West African countries and the Russian Federation, for example in support of Canadian companies working for Russian energy company Gazpromin Siberia.
In all, he says Polet’s US business has increased three-fold since the offi ce opened. “Business is going extremely well, and we did not expect fi ve years ago that there would be such a huge demand for the AN-124 in this market,” he says. Polet is also seeing rapid growth in Asia, with business here up 15 percent in the past year, according to Strika. However, the carrier still has no plans as yet to open a sales offi ce in the region, serving it instead out ofits European office.
The reason, he says, is that business has not yet reached a critical mass there, though if current trends continue that could change in the next year or two. Traffic out of Asia is often general cargo used to fi ll the backhaul sections of outsized fl ights from Europe and the US, though Strika says outsize business originating in Asia isalso growing.
One key boost for the carrier earlier this year was getting an operating certifi cate for China, which will enable it to bid for all types of cargo in that market, as opposed to having to apply on a case by case basis for the right to move ad hoc business. Strika predicts a “serious increase in activity” out of China in the coming year as a result, and says Asia should become one of the major origins of air cargo for Poletwithin a year or two.
Back in Europe, Polet has for the last year been up against Ruslan International, the sales and marketing joint venture set up by its two rivals, Volga-Dnepr and Antonov Airlines, in July 2006. Strika insists that if anything this has boosted business, with some forwarders deliberately giving business to Polet in order to keep competition in the market. Karpov says Polet was not asked to join the joint venture and would not have been interested if it had been asked. “Our company isself-reliant,” he says.
“There were many questions at the beginning about what the market would bring us after they united, but I can say freely, our reputation is growing, as well as our work. In my view, the Ruslan joint venture can only exist with an alternative company in the market. If there were no competitors for them their existing would be meaningless.” Polet is taking steps to improve its customer service in Europe, however, and to this end has plans to relocate its sales and commercial staff from their current location in Cyprus to a German offi ce – probably in Munich – by the end of the year.
The idea, says Strika, is that Polet sales staff will be closer to their key customers, the large forwarders and German equipment manufacturers. Karpov himself is also taking a more day to day role in the running of the sales operation. In the US, Ozerov is also taking steps to improve the customer interface. “Clients are becoming more demanding, now that they know the aircraft, and expect a higher standard of service,” he says. “For example, they want English speaking crews on with a cooperative, a problem solving attitude, and like to see a clean aircraft.” As a result, Polet has been teaching the crews English and now 70 percent of them speak fl uent English. “Last year we were rated the most English-speaking Russian airline,” Ozerov claims.
One other long cherished dream of Anatoly Karpov has been to use his AN-124s as a platform from which to put satellites into space. The idea is that the aircraft would fl y high, and then launch rockets from its rear doors, providing a low cost way to put objects into orbit.
This project has been supposedly near fruition for some time – as long as two years ago the launch of services was supposed to be imminent, but Karpov insists it is still making good progress and has overcome its remaining obstacles in the past year. He is now expecting a government committee to visit Indonesia, who could be a launch customer for the concept. “Right now we are in the middle of a discussion with the Russian space agency, RosAviakosmos, to provide them our services and knowledge,” he says. “The Air Launch programme is growing and developing very well, and the results will soon show.”