A long-term forecast of market prices for civil and military transport aircraft

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  • ISSN 10757007, Studies on Russian Economic Development, 2010, Vol. 21, No. 4, pp. 380392. Pleiades Publishing, Ltd., 2010.Original Russian Text A.V. Galchenko, V.A. Tegin, 2010.

    380

    Forecast of the cost of civil and military transportaircraft and helicopters. Growth in any sector of production depends on the quality of the forecast of themarket demand for its products. It is the starting pointfor justification and calculation of the credit amountsand allocations to production. A reliable forecast ofthe demand for aviation equipment requires, first,determining the range of possible contract prices, and,second, analyzing (in physical terms) the possibilitiesof its budget financing, as well as constraints on itspurchase.

    1

    The present authors examined in [1] the issues ofdevelopment and practical application of the forecastof the catalogue price for new civil aircraft and militarytransport aviation (CA and MTA) according to thedata of 19602005 statistics. As a basis, the parametricdependence of the cost of a passenger (transport) production airplane on its weight, year of manufacture,and (to a far lesser degree) cruising speed of flight wasused:

    (1)

    where C is the catalogue value (with = 1989 for thecountries of the first group, with = 2004 for the countries of the second group) or the market value (with =1994 for countries of the first group, with = 2009 forthe countries of the second group) in million dollarsaccording to the current price of a fully equippedempty CA and MTA production airplane in its basedesign (airframe, engines, airborne equipment), T theyear of manufacture, is the reference markyear, m0is the weight of the empty airplane (tonnes), k = 0.115is the scaling factor, and V is the cruising speed of theairplane flight (kilometers per hour).

    1 The primary purpose of this study is to reveal trends in the rise ofprices for new aviation equipment, so it omits issues of the secondary market, as well as the problem of veracity of price information. Even specialized publications continue publishing dataon aviation equipment prices not tied to time. Such informationactually confuses its receiver.

    C 1.1T m0kV1/3

    ,=

    The analysis of the available array of catalogueprices for CA and MTA airplanes has revealed a rate ofprice growth fixed for all manufacturers of aviationequipment that is about 10% per year, according toformula (1). Also, it has turned out that the countriesmanufacturing aviation equipment are divided intotwo groups: for the first group, the 1989 markyear ofcalculation of the catalogue value of airplanes is taken(i.e., the United States, Canada, the countries ofWestern Europe); for the second, the markyear of2004 (Eastern Europe and China). It is because in thereference markyear the catalogue value of airplanes(in million dollars by the current rate) numericallyabout equals (neglecting the insignificant influenceof V) its weight (in tonnes), i.e, C m0.

    However, the catalogue value is but a thing initself or even an abstract notion, not identical to theanalogue of the market value. For this reason, the possibility was examined to apply dependence (1) corrected for the forecast of the market value and its contract prices for CA and MTA airplanes. The result waschecked against specialized sources of information[213] containing records on fully completed contracts on deliveries. Over 70 highly reliable records forthe period of the 1960s through 2008 for the countriesof the first group and over 50 records for the countriesof the second group have been analyzed. The analysishas allowed us to make the following conclusions.

    The contract prices of the delivered models depend ontheir weight and the year of manufacture in accordancewith formula (1). Specified is a 10% (or 8.7% by therecent data) growth of value per year (in current dollarprices) for the delivered aviation equipment.

    The conclusion (see [1]) about the lower averagelevel of contract prices for aviation equipment in thecountries of the second group (Russia, etc.), which bythe refined data is about 30% relative to the countriesof the first group (United States, etc.) with the samegrowth rate, was confirmed. In other words, the con

    A LongTerm Forecast of Market Pricesfor Civil and Military Transport Aircraft

    A. V. Galchenko and V. A. TeginReceived May 4, 2009; in final form December 4, 2009

    AbstractThe paper briefly examines the procedures to forecast the price of aircraft and helicopters andtheir results in calculating aircraft deliveries. It formulates a hypothesis about the existence of two world systems of price formation. Some features of price determination in the aircraft market are indicated.

    DOI: 10.1134/S1075700710040052

    INDUSTRIES AND INTERINDUSTRY COMPLEXES

  • STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 21 No. 4 2010

    A LONGTERM FORECAST OF MARKET PRICES 381

    Fig. 1. Factual array of prices for planes by year of manufacture:trend of contract prices of planes ():(1) countries of the first group (United States, etc.);(2) countries of the second group (Russia, etc.);contract price for planes:( ) countries of the first group; ( ) countries of the second group;catalogue price of planes shifted by five years:() first group countries; () second group countries.

    clusion is a backwardness of about 15 years in the levelof the domestic prices for similar aviation equipment.

    Contract prices were 1.41.5 times lower than thecatalogue ones, so that, to compare them, the initialformula has to be corrected by about five years, withthe reference start date shifted to a later one (for airplanes of the first group countries from 1989 to 1994and for the second group countries from 2004 to2009).

    Formula (1) was found to be applicable for forecastcalculations of market value of not only airplanes butalso helicopters. The reference calculation date of themarket value of helicopters was 1989 for the first groupcountries and 2004 for the second group countries.

    The validity of conclusions is illustrated by the factual data array on contract prices for CA and MTA airplanes for the second half of the 20th to beginning ofthe 21st century in Fig. 1. In connection with a directrelationship of the price C and mass m0 of the manufactured airplanes, it is reasonable, in order to use formula (1), to introduce a comparison of CA and MTAwith respect to the parameters of the contracts specific price (Y):

    Y = C/m0. (2)

    This array of data is obviously divided into twofields, with records on the countries of the first andsecond groups. In each of these parts, similar trends inchanges of the specific market prices by the yearly

    growth rate, i.e., 8.7% (validation of the first conclusion), are found. The trends about which price fluctuation takes place practically coincide, but are shiftedby 15 years relative to each other (validation of the second conclusion). For illustration, Fig. 1 shows also thetrends of the catalogue specific prices of aviationequipment through 2007, shifted to a later (fiveyears) date, similarly to the shift of the reference datein calculation of the market value (according to thethird conclusion).

    Figure 2 gives the clarified factual array of contractspecific prices YV, i.e., accounting for the removedeffect on the price of the value of the cruising speed Vof each model according to formula (1):

    YV = C/(0.115 m0V1/3). (3)

    It is obvious that, upon comparison of relationshipsin Figs. 1 and 2, the airplane trends do not differmuch, which is explained by weak influence of V on Y.In addition to the factual array and the trend of thespecific contract prices of airplanes, in Figure 2 a similar array and the trend of specific prices of CA andMTA helicopters is added.

    Figure 3 shows the same factual array (see Fig. 2)reduced to logarithmic form, which considerably simplifies the procedure of forecast processing of thetrends.

    Y4

    3

    2

    1

    0

    1960

    1965

    1970

    1975

    1980

    1985

    1990

    1995

    2000

    2005

    2010

    y = 1.087 (T1994)

    T

    (1)

    y = 1.087 (T2009)

    (2)

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    STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 21 No. 4 2010

    GALCHENKO, TEGIN

    The obtained trends are averaged indicators, relative to which contract prices fluctuate. In accordancewith theory, such a determination corresponds to the

    definition of market value. Therefore, the trends arean approximation to the parameter of the market valueof the aviation equipment.

    Fig. 2. Factual array of prices for aviation equipment by year of manufacture:price trends for aviation equipment refined by formula (3) ():(1) for helicopters of the first group countries (United States, etc.);(2) for planes of the first group countries (United States, etc.);(3) for helicopters of the second group countries (Russia, etc.);(4) for planes of the second group countries (Russia, etc.);contract price for helicopters:( ) countries of the first group; () countries of the second group;catalogue price for helicopters shifted by five years:()countries of the first group; ( ) countries of the second group (the remaining notation see in Fig. 1).

    Yv

    0.1

    0.01

    1960

    1965

    1970

    1975

    1980

    1985

    1990

    1995

    2000

    2005

    2010

    y = 1.087 (T1989)

    T

    y = 1.087 (T1994)

    10

    1

    y = 1.087 (T2004)

    y = 1.087 (T2009)

    Fig. 3. Factual array of contract prices, their trends, and catalogue prices for aviation equipment shifted by five years by year ofmanufacture in a system of coordinates with the YV axis reduced to logarithmic form (notation see in Figs. 1, 2).

    Yv

    4

    3

    2

    1

    0

    1960

    1965

    1970

    1975

    1980

    1985

    1990

    1995

    2000

    2005

    2010

    y = 1.087 (T1989)

    T

    (1)

    y = 1.087 (T1994)

    (2)

    8

    7

    6

    5

    y = 1.087 (T2004)

    (3)y = 1.087 (T2009)

    (4)

  • STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 21 No. 4 2010

    A LONGTERM FORECAST OF MARKET PRICES 383

    As a result of processing the trends with allowancefor the financial values of each contract, the obtainedmean square deviation of the contract prices from thecalculated market value of CF and MTA airplanes ofthe first group countries is below 10% (roughly1 year) and up to 20% (roughly up to 2 years) tothe value of helicopters.

    The factor of the existence of two segments in theworld air market and differences in prices for aircraftmodels. The factor underlying differences in the formation of prices for aircraft products between thecountries of the first and second groups is, accordingto [14, 15], the relationship of the per year rate of pricerise to per year increase in labor productivity and,accordingly, to the per unit labor remuneration inthese countries. Therefore, higher prices of aircraft arebased on the generally higher living standards and onlypartially on the direct improvement of quality. Thisconclusion erodes the generally accepted mutualrelationship between the notions expensive forhigh quality products and cheap for products ofsubstandard quality. It seems reasonable to replacethe notion of the higher price of product according toits better quality by the higher price of product dueto the constantly increasing costs of its manufactureand market promotion.

    However, with the existence of the two systems inprice formation for aviation industry products (thefirst and second group of countries), the primarycauses for the persistent 15 year lag of prices in the second group of countries, lasting over several decades,remain unclear. The explanation can be the existenceof two rather isolated sales markets with identical peryear price rise for their products.

    The aircraft market with prices of the second groupof countries now has good positions in the world, andthere are good prospects for expansion of its geography, because the exponential rise in prices for expensive aircraft of the countries of Western Europe, theUnited States, Canada, and Japan forces buyers tolook for other alternatives. However, whatever economic depressions or revivals, the next decade will seean utter quantitative (not financial) decrease in thepurchases of new aircraft by most of the countries ofthe world (see graphics 1, 2 in Table 2), because therate of their economic growth and per capita incomeof the population (who are ultimate payers for the purchases and operation of aircraft) is, as a rule, alwaysbehind the 9% per year rise in aircraft prices.

    Superficially, this creates for Russian aircraft manufacturers favorable export opportunities. However, ifinside the country the preference is given to importedairplanes, the domestic products will hardly find amass foreign purchaser. The described situation willnaturally not last for long, because by aircraft price,again, Russia lags behind all told by 15 years. It is pos

    sible to state for sure that, if a country cannot forfinancial reasons replenish its fleet of civil or militarytransport aviation with new models of Western aircraft, in 15 years it will be unable to replenish it evenwith Eastern aircraft.

    However, the real process of price formation foraircraft in particular countries is not always accordingto the abovedescribed scheme. Thus, Poland, Romania, and Czech Republic, i.e., countries of the secondgroup, are trying to come over to the first group. Butthe formation of prices for their aircraft has so far beendeveloping by the system existing in the countries ofthe second group. The price of the manufacturedRomanian clones of French helicopters is formed alsoby the system inherent in countries of the secondgroup.

    Another example is Indonesia, manufacturingCN235 airplanes by Spanish technology within theframework of the joint company Air Track. The formation of prices in this case is yet more characteristic ofcountries of the first group. This is due to its closecooperation with the Spanish KACA firm, which hasobtained because of it the possibility also to noticeablyreduce the prices for its products (C295).

    Comparison of price parameters, fixed and calculated by formula (1), of the new aircraft models is givenin Table 1. The calculation was performed for 2009output, provided that the investment and building ofeach particular specimen takes one to three years, or ifthe year 2009 is the average year in manufacture of theseries ordered by the customer.

    The calculation of the market cost of specimensallows verification of the contract conditions beingplanned for aircraft delivery. As an example, we consider the contract of the US government for the delivery of 167 V22 heliplanes in the 20082012 period fora total sum of $10.4 billion. The price of $62 millionplanned by the contract is roughly the estimated market cost of the model, i.e., $60 million (deviation fromtheory is 3%). The second example is the contract ofthe government of India for delivery of six C130J30airplanes in the 20102011 period at a total cost ofover $962 million. The price of $160 million per specimen planned by the contract is noticeably above itsestimated market cost of $140 million, which can beexplained by the features of the concluded agreement(deviation is 13%). The third example is the Europeanproject for a delivery of 192 advanced BTA A400 airplanes to the alliance of countries for a total of$29.5 billion. The planned contract cost of $154 million per specimen is hardly comparable to the estimated market cost of the airplanes built in the 20072015 period, i.e., a minimum of $284 billion (deviation not less than 87%). No comment is needed; theproject is not realizable within this framework.

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    STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 21 No. 4 2010

    GALCHENKO, TEGIN

    Table 1. Value characteristics of present civil airplanes and helicopters

    Airplane type

    Calculated value/actual contract

    price of 2009, $ million

    Weight, t Country exporter Cruising speed, km/hYear of start of operation

    A 1 2 3 4 5

    Airplanes*

    A380 ~1109 ~280 France ~850 2008

    Boeing 747 698 173 United States ~900 1971

    An124 198 172 Russia/Ukraine 780 1982

    Boeing 777 634 157 United States ~900 1996

    A330(340) 575(515)/233** 120(130) France ~850 1992

    C17 474/453 122 United States 800 1992

    Il96 139/70** 117 Russia 880 1993

    Il76 ~115/107 ~100 Russia 780 1974

    Boeing 767 324/326 82 United States 850 1982

    A310 306 77 France 860 1983

    An70 ~80 ~70 Ukraine 780 2012

    A400 ~240/236*** ~65 France 680 2013

    A350 ~257 ~65 France ~850 1992

    Boeing 787 ~236 ~60 United States 850 2009

    Tu204(214) 65.8(67.5)/44.5** (65) 58(59) Russia 830 1996

    A321 186 47 France ~850 1993

    Boeing 727 182 46 United States 870 1971

    A320(319) 166(156)/90** 42(40) France ~850 1988

    MC21 ~42 ~35 Russia 860 2012

    C130J 117/122 33 United States 650 1998

    Boeing 737 112 32 United States ~880 1967

    Tu334 ~32.7 ~28 Russia 810 2010

    Su100 ~2750/32.5*** ~23 Russia 780 2010

    An148 ~25 ~21 Ukraine 870 2010

    An72(74) 19.9/20.1 19 Ukraine 570(680) 1985

    F28 70 18 Netherlands 800 1968

    An32 15.5/6** 17 Ukraine 500 1982

    C27 48/46 16 Italy 440 1975

    V22 52/55.3 15 United States 560 1999

    Il114 14.9 15 Uzbekistan 500 1998

    MA60 14/14 15 China ~450 2008

    C295 ~39/40 ~12 Spain 460 1998

    F27 36 11 Netherlands 460 1965

    An140 ~12.4/12 ~12 Ukraine/Russia 570 2002

    EBM 145 to 41.5/~34 ~11 Brazil ~740 1996

    Cn235 to 26/24 8 Indonesia 460 1986

    Helicopters****

    Mi26 32.5/34.3 28 Russia 255 1981

  • STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 21 No. 4 2010

    A LONGTERM FORECAST OF MARKET PRICES 385

    Some retrospective features in the formation of contract prices for airplanes and helicopters of civil andmilitary transport aviation. Fluctuations of contractprices are of a random, stochastic nature. At the sametime, to a high degree, they are determined by a number of recurring factors revealed in the analysis of theabovementioned array of records on completed contracts.

    An often occurring, in settlements with the customer, yearly situational price deviation is compensated by the opposite deviation in the next year (years)in prolongation of the contract. These deviations canremain stable over a fairly long period of time. Anexample is the C295 of Spanish manufacture, nowrapidly growing in price, the contract prices of whichin 20042007 being about $20 million increased in20082009 almost to $50 million at a sufficientenough work load [16]. The obviously underestimated

    price (about $30 million) of a heavier and moreadvanced Italian C27 did not hold for long. Thus,already in the contract in delivery of three aircraft toLithuania in 20062007, their price increased to$39 million.

    A considerable influence on the price is likely to bemade by compensation for its deviation at the expenseof another customer. An illustration is examples ofcontracts (see [4, 5]) on deliveries of American BlackHawk S70A42 helicopters to Austria in 2002 (nineunits at $20.33 million each) and S70A255 helicopters to Israel in 20022003 (24 units at $8.83 millioneach) at an estimated cost of $12 million. The influence of political interests on prices is quite certain, forexample, the drop in price, at the expense of the budget, in deliveries of equipment from the United Statesto member countries of the programs fighting terror

    Table 1. (Contd.)

    Airplane type

    Calculated value/actual contract

    price of 2009, $ million

    Weight, t Country exporter Cruising speed, km/hYear of start of operation

    A 1 2 3 4 5

    CH47 43/55 11 United States 260 1962

    EH 101 39/50 9.4 Italy 280 1996

    Mi8(17) 8/8 7.2 Russia 250 1966

    Ka32 ~8.4/9.4 ~7.5 Russia 250 1982

    S92 28/25 7 United States 250 2002

    NH90 24.8 6.2 Germany 250 2007

    S70A 20.7/26 5 United States 290 1977

    AS.332(532) 20(18)/20.4(21.6) 5(4.5) France 260 1980(90)

    W3 4.2/4.1 3.9 Poland 220 1985

    S76 15 3.7 United States 260 1979

    IAR 330 L 4.2/4.9 3.6 Romania 260 1967

    AB 139 13.6/17 3.3 Italy 270 2003

    UH1N 10/9.5 3 United States 190 1979

    Ansat 2.4/2 2 Russia 240 2008

    ES145 6.9/8.9 1.8 France 230 2000

    AW100 6.5/8.7 1.7 Italy 240 1976

    Dhruv 7/7 1.6 India 2008

    ES635 6.0/6.3 1.5 France 240 1969

    ES135 5.8/9.5 1.5 France 230 1996

    Notes: * Weight of ordinary plane, minimum 8 t. ** Dumping prices (19982004 year of manufacture). *** Catalogue price of 2009. **** Weight of an empty helicopter, minimum 1.5 t.

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    STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 21 No. 4 2010

    GALCHENKO, TEGIN

    Table 2. The refined forecast of the MTA number of a number of countries (from the international press)

    Country

    Number of MTA planesAverage plane weight

    in 2007 (tonnes)

    2007 2022 (forecast I basic)

    deliveries 20082022

    (forecast I basic)

    2022 (forecast II optimistic for the countries of West

    ern Europe, United States, Canada

    deliveries 20082022

    (forecast II optimistic)

    A 1 2 3 4 5 6

    United States 1100 610 + 110 340 740 + 110 470 57

    China 201 370 280 370 280 33

    Russia 628 120 + 250 110 120 + 250 110 55

    Australia 48 45 + 4 30 50 + 4 36 31

    Great Britain 78 40 + 5 20 50 + 5 27 43

    India 237 210 + 15 30110 (150210) + 15 43110 28

    Canada 36 28 + 3 17 33 + 3 23 42

    France 117 (44120) + 7 2794 (63120) + 7 3694 26

    Italy 48 38 + 4 21 46 + 4 29 26

    Germany 96 2762 1550 3455 2150 31

    Indonesia 49 (2482) + 5 2078 (3582) + 5 3178 23

    Greece 36 31 + 5 12 35 + 5 17 36

    Saudi Arabia 50 (1845) + 13 1138 (2245) + 13 1538 36

    Spain 42 38 + 5 22 46 + 5 30 17

    Brazil 40 (2463) + 11 1655 (2963) + 11 2255 23

    Iran 84 80 + 8 56 80 + 8 56 21

    Algeria 17 (1647) + 5 1243 (2043) + 5 1743 27

    Nigeria 16 (1241) + 4 1241 (1641)+ 4 1641 27

    Republic of Korea 33 25 + 7*3 19 35 + 7 29 17

    Turkey 80 5295 1760 5895 2360 17

    Egypt 42 (1339) + 10 1036 (1739) + 10 1136 28

    Pakistan 31 (824) + 3 723 (1024) + 3 923 26

    Taiwan 26 19 5 21 7 33

    Ukraine 214 10 + 120 10 10 + 120 10 54

    United Arab Emirates 24 (1323) + 3 414 (1523) + 3 614 39

    Columbia 13 9 + 2 6 8 + 2 8 25

    Venezuela 17 20 + 3 17 20 + 3 17 29

    Chili 10 (614) + 1 311 (814) + 1 511 48

    Morocco 29 (1022) + 7 517 (1322) + 7 817 27

    Angola 18 19 + 2 14 19 + 2 14 32

    Poland 24 (1525) + 3 620 (2525) + 3 820 21

    Israel 23 39 39 49 49 40

    Japan 30 (517) + 5 517 (717) + 5 717 23

    Mexico 20 (818) + 4 414 (1018) + 4 614 29

    Thailand 21 (1122) + 4 415 (1322) + 4 615 26

    Belgium 17 (715) + 5 311 (815) + 5 411 32

    Belarus 29 5 + 15 5 5 + 15 5 65

    Ecuador 16 1321 311 1521 511 29

    Malaysia 26 (2043) + 3 932 (2243) + 3 1132 26

  • STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 21 No. 4 2010

    A LONGTERM FORECAST OF MARKET PRICES 387

    Table 2. (Contd.)

    Country

    Number of MTA planesAverage plane weight

    in 2007 (tonnes)

    2007 2022 (forecast I basic)

    deliveries 20082022

    (forecast I basic)

    2022 (forecast II optimistic for the countries of West

    ern Europe, United States, Canada

    deliveries 20082022

    (forecast II optimistic)

    A 1 2 3 4 5 6

    Czech Republic 11 (13) + 2 312 (512) + 2 112 26

    Portugal 9 (511) + 3 39 (511) + 3 319 26

    Peru 42 23 + 3 13 23 + 3 13 21

    Philippines 18 (716) + 3 312 (916) + 3 512 23

    Argentina 26 (37) + 2 26 (37) + 2 26 34

    Norway 6 (27) + 2 27 (37) + 2 37 33

    Republic of South Africa 26 (411) + 2 310 (511) + 2 410 20

    Sweden 13 (37) + 3 26 (37) + 3 26 29

    Jordan 10 (411) + 3 310 (510) + 3 410 19

    Libya 66 20 + 25 4 20 + 25 4 56

    Uzbekistan 47 10 7 10 7 27

    Yemen 18 12 + 1 5 12 + 1 5 33

    Democratic Peoples Republic of Korea

    18 4 + 4 4 4 + 4 4 37

    Denmark 6 6 2 6 2 21

    Syria 12 10 + 7 3 10 + 7 3 43

    Singapore 5 (14) + 2 14 (24) + 2 24 33

    Kuwait 4 (13) + 1 13 (13) + 1 13 33

    Tunisia 12 (913) 15 (1013) 25 30

    the Netherlands 3 3 + 1 1 3 + 1 1 28

    Serbia 12 38 27 38 27 14

    Romania 11 (69) 14 (69) 14 23

    Bolivia 12 (13) + 3 13 (13) + 3 13 23

    Kazakhstan 36 5 3 5 3 22

    Vietnam 16 5 5 5 5 14

    Ethiopia 15 2 + 2 2 2 + 2 2 30

    Cuba 11 4 + 5 2 4 + 5 2 30

    Myanmar 6 3 3 3 3 17

    Finland 3 13 13 13 13 11

    Bulgaria 9 (23) + 4 01 (23) + 4 01 17

    Switzerland 3 (01) + 2 01 (11) + 2 11 12

    Hungary 5 (01) 01 (01) 01 15

    Notes: 1. Counties are given in the rating sequence in accordance with the forecast value of their purchase of planes in 20082022.2. The weight of MTA planes over 8 t.3. The weight of planes by the basic and optimistic forecasts according to the average weight of planes in 2007.4. In the table, the data on planes with service life over 30 years are marked.5. In the table, for the number of planes, the following graphical notation is used:of mostly European designbold, underlined;of mostly Russian, Ukrainian (Soviet before 1992) designbold;of mostly US designbold italics, underlined.

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    GALCHENKO, TEGIN

    ism and the drug trade (to Columbia in 2001, to Thailand in 20022005).

    One should specially mention the rather frequentcases of considerable (several times as high) rise ofprices in deliveries to such rich countries as Saudi Arabia (for example, the deliveries of French CougarAS532U2 helicopters in 19982001). In rare cases,the considerable price deviations on small contractscan be explained exclusively by actions of firms ofdealers.

    The declared price on the agreed contract, as itturns out, has been lately not always the final specifiedvalue. In declaration of the price on the contracts inoperation, a tendency has appeared to hide a considerable part of it behind the consequent services,providing the beginning of operation of new specimens of CA and MTA. Thus, the declared contractvalue in purchase of four C17 aircraft ($780 million)in the Australian contract for deliveries in 20062008[2, 3] was underestimated by half, including, as wasproved, the so called total price of purchase(roughly $1.5 billion) booked presumably by otherchannels of budgetary financing [6]. In contrast tothis, the Canadian contract of 20072008 was fullydeclared, i.e., $1.6 billion for four similar machines[7]. Close to this sum is also the total value of the program of purchase of six C17 airplanes by British AirForce with deliveries in 20012008, which is today$2.4 billion [7]. In addition, in cases, for example, ofsuch contracts as for C17, one should take intoaccount that these machines were delivered withinlarge government programs, calculated for decades. Inaccordance with this, the foreign participants of theseprograms were to receive the products at a middleprice, which is close to the cost of an aircraft producedin the middle year of the program, i.e., in 2003.

    Such are advantages of timely forward financing.However, the same factors, in the view of O. Panteleev,the manager of AviaPort analytical services, have actednegatively and led to the failure of Ukrainian deliveriesof An140 aircraft to Iran: Iran was not prepared tofinance at a priority rate the deployment of the localassembling infrastructure and manufacture of machine sets of the An140 in Kharkiv, while the Kharkivaircraft factory has also turned out not to possess therequired resources for advanced financing of a largescale production of the constituent parts by itself ortheir purchase on the side [17].

    The cost of aircraft of the East European countriesand China over the last 50 years has been no more thanonethird of the analogues from Western Europecountries and from the United States. At the sametime, since the beginning of the 1990s, the products ofthe domestic aircraft industry have been found in a situation of keen competition with Western secondhandaircraft, as a result of which the price had to be fixed at

    a still lower mark. An important factor of considerableadditional underestimation was the possibility of usingin production of such airplanes like the Il76, Il96,An32, An124, and (to a lesser degree) An72/74 theconstituent parts and resources of the still Soviet production. This practice, along with the consequentsales crisis, was just that which has led to lower production and price decreases already for new liners, forexample, for the Tu204 and Tu334, and this processcontinues even now. It should be admitted that thepractice of price dumping allowed the Russian aviation industry to survive in the 1990s, especially incompetition with foreign secondhand airplanes; butat present it hinders innovative development of thesector. Such a price policy compels offering the marketthe airplanes of past years of manufacture, whichentails a number of problems in crediting such a longproduction cycle, physical and moral outdating of thedesign, and even the prejudice spread by the mediathat these airplanes are derelicts of the aviation market. This practice of price dumping, as will be shownbelow, has already taken deep roots in the activity ofthe Boeing and Airbus companies.

    By this time, the ties between the domestic structures of civil aviation and the aviation industry havebeen broken. The current lamentations of the managers of the Russian operator companies and their lobbyist deputies about the impossibility of the domesticaviation industry to supply immediately the requirednumber of uptodate (and by all means cheap) aircraft are very suspicious [18, 19]. Recall the typical situation for the sector 15 years back. From 1990 to 1996,the result of the developments of the Tupolev AircraftScience and Technology Complex (ASTC) was manufacture of 23 Tu204/214 aircraft, the most uptodateaircraft at that time. At the same time, over seven years,no more than nine specimens were sold to operators; tenfinished specimens and another eight specimens at thestage of assembly remained at the Ulyanovsk aircraft factory [20]. The operators preferred to buy secondhandforeign machines, which allowed them at that moment toeconomize and not spend on finishing the new rawdomestic designs, reduce operating costs, and provideprofits to the dealers. Today the situation is quite oppositeto that in the 1990s, but the result remains the same. Theoperators of aircraft, owing to their sector egoism, shortsightedness, and pursuit of immediate profit, are defiantly not interested in the development and manufactureof domestic aircrafts (first of all, long haul aircrafts).Today all failures will be ascribed to the global economiccrisis.

    The fact of dumping prices by using the inhibitedproduction process can be shown in a case from [13].At the beginning of 2009, a Tu204CE no. 64037 aircraft was shipped to a Cuban aviation company; themanufacture of this plane, according to its number,was started in the middle of the 1990s and continued

  • STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 21 No. 4 2010

    A LONGTERM FORECAST OF MARKET PRICES 389

    with intervals for more than 10 years. So its priceroughly corresponds to the price of the average year ofits production, which is five or seven years back; it isalmost half the current price calculated for a Tu204 ofthe 2009 year of manufacture. We should note thatsuch facts are becoming rare events in the domesticpractice, and the following deliveries in the same yearof 2009 were Tu204 aircrafts with production numbers 64050 and higher. This tendency is due to depletion of postSoviet reserves of nonfinished manufacture. In the practice of Western aviation, the oppositetendencies are observed. The crisis of overproductionleads to freezing the rate of manufacture, as a resultof which the full cycle of the construction of specimens is prolonged for years, which becomes obvious incomparing the planned and real dates of production ofthe aircraft of new brands.

    The current situation: dumping policy of boeing andairbus. As already mentioned, the Russian practice ofprice dumping has been borrowed and successfullyapplied in competition by the leading world manufacturing firms. These facts are so alarming that they needspecial consideration.

    By the analysis of the data of the past 50yearperiod, the catalogue prices have always been 2530%above the contract prices for the supplied aircraft.According to [13], the lower level of catalogue prices isdue to discounts; their size has always been a topsecret. However, by now there are signs of catalogueprices lately deviating from the established system.Figure 4 shows the catalogue and contract specificprices of the aviation giants Boeing and Airbus for

    2008. Pay attention that, in the 20th century, the aircraft catalogue prices of the Western Europe countries,United States, and Canada exceeded those determined by the trend of specific value, and in 2008 thecatalogue prices already became much below thetrend.

    In addition, by the middle of the decade, there wasa tendency to a considerable decrease also in the contract price for these aircraft in competition with aircraft of the countries of Eastern Europe and China. Inthis connection, let us consider a concrete fact of thedelivery of two new, by all published references,A319CJ cargopassenger aircraft to the Air Force ofthe Czech Republic in 2007 at $77 million [2] (theirprice was $58.569.5 million by the 2008 catalogue[13]). The price by the catalogue is far below the contract one, and both prices are much lower than the calculated one ($132 million) determined in accordancewith the basic forecast by formula (1) (Table 2). Thesecond case is also from Airbus and its A330 tankeraircraft, advertised for equipping the air forces ofmany countries, including the United States. In20082009, it was supplied to Canada at a catalogueprice of $214 million (the calculated price was $550million). At the same time, its less massive (by a factorof 1.5) American analogue KC767 is sold at $300 million (the catalogue price $128173 million, the calculated price $312 million). These facts validate the conclusion that the actual production of Airbus aircraft ofthese lots was either 710 years before the sale, orthere is an unprecedented dumping (lowering of theprice by a factor of 1.52) caused, according to somedata, by the lower rate of price rise for aircraft in 2005

    Yv

    1

    0

    1985

    1990

    1995

    2000

    2005

    2010 T

    y = 1.087 (T1994)

    4

    3y = 2.6 1.025(T2007)

    y = 1.087 (T2009)2

    2015

    2020

    Forecast I basic

    Forecast II optimistic

    Fig. 4. Factual array of contract and declared catalogue prices for planes by year of manufacture and the trends of contract pricesrefined by formula (3) (notation see in Figs. 1, 2).

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    STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 21 No. 4 2010

    GALCHENKO, TEGIN

    2007 from 8.7 to 2.5% per year and by the sale inaccordance with a forecast that is optimistic for consumers from the countries of Western Europe, theUnited States, and Canada (Table 2).

    The possibilities for the two world aviation giants tofinance dumping are obvious. Scandals are constantlyarising in which the Americans accuse the Europeansof the use, for example, of starting payments fromthe states supporting their continental manufacturer, and the Europeans point to the federal and localaid to the Boeing 787 program, and resources are flowing from military and NASA orders [13].

    It is significant that Russia, purchasing foreign aircraft, finances, among others, the dumping oppositionof the two aviation giants. Twothirds of aircraft thathave come to Russian aviation companies are mediumhaul narrowbodied liners, which could have beensuccessfully replaced by domestic analogues.

    In our opinion, dumping (and, possibly, corruption), along with the current world crisis, is having ahighly destructive effect on the domestic aviationindustry. In 2008, Atlant Soyuz and AeroflotCargorefused one after the other ordered and built Il96planes. Aeroflot purchased 11 new A320 and twoA330 airbuses (the share of foreign brands in the aviation fleet of the leading national carriers exceeded66%). The second largest Russian company Sibir hasacquired four new A320s and thus has equipped itselfwith 100% foreign brands (a similar situation exists forTransaero, i.e., 95% foreign brands). AirBridge haspurchased two new Boeing 747s. To this, over 80 secondhand aircraft of Western manufacture of 1987

    2002 must be added.2

    No doubt, one of the causes for dumping is alsolower demand, but, in addition, it is likely that sinceabout 20052007 the annual rise of market prices forsome CA and MTA specimens of the first group countries has sharply dropped from 9 to 2.53%. The possibilities of price dumping were able to arise after theintegration in the 1990s of part of Eastern European,in particular, Russian, enterprises in the system ofwestern aviation production, which created preconditions for lower cost of products. Indirectly, this isshown by the time of appearance of signs of pricedumping, i.e., the middle of the first decade of the21st century, which can be explained by the 15yeartemporary lag [1] of the reaction to the investments inthe 1990s. Thus, the Verkhnesaldinskoye Metallurgical Production Association (VSMPO) alone (since

    2 The carrier purchasing a considerable number of foreignmachines and building around them a whole system of personnel training and material and technical support will hardly infive or ten years change horses at the crossing; the payment willbe too high (business in our country is not known for its patriotism); in 2007, this was stated quite clearly in so many words byValerii Okulov, the former head of Aeroflot [21]).

    2007, 60% of shares have been bought by Federal StateUnitary Enterprise Rosoboroneksport) provides up to40% of Boeings needs for titanium, 60% of EADSsneeds, and 100% of Embraers needs (data from theVSMPO report [22]).

    The specified forecast of the number of militarytransport aircraft in the national air forces in 2022. Thefleets of military transport aviation (MTA) arefinanced by allocations according to the appropriateitems of expenditures of the national military budgets(NMBs), which are roughly proportional to the totalinvestments in aviation. The quantity of MTA of thenational air forces (NAFs) to 2022, i.e., N22, were calculated by a method based on the hypothesis of proportionality of changes in NMBs and expenditures onpurchases of aircraft:

    (4)

    where = 1.011.03 is the average yearly coefficientof technical losses by evaluation statistics of decreasein the number of the MTA planes; N9307 the numberof planes of a weight of over eight tonnes in the MTAof an actual country in 2007 of 19932007 production; 1.025 is the average yearly coefficient of USdollar inflation [24]; N93 is the number of aircraft inthe MTA of an actual country in 2007 of productionbefore 1993, constructively calculated for a lifetime upto 2022 (for example C130H, Il72); T 2015 is theconventional year of delivery of the production airplane (approximately equal to the halfsum of the predicted years of the start and end of the serial production in the 20072022 period); S0822 is the predictedcost ($ million) of the purchased serial airplane atdate T; C7807 is the cost ($ million) of the delivery ofplanes included in the MTA of an actual country in2007; Bav9322 is the average NMB for the 19932022period (forecast); Bav7807 is the average NMB over the19782007 period; and C9307 is the cost ($ million) ofthe delivered airplanes in the MTA of an actual country in 2007 built in 19932007.

    In the forecast of the number of MTA, the data byNMBs and aviation fleets before 2007 [2328] areused. The conventional period of the purchase of newairplanes is 2015, which allows the increase in thenumber of the purchased equipment of earlier years ofproduction and vice versa. The predicted number ofairplanes can be increased by an inversely proportionaldecrease in their weight.

    The analysis of the forecast (see Table 2) shows thatthe quantitative set of MTA transport aircraft of the airforces of most countries to 2022 will decrease. Anexception is China, the growth of the military budget

    N22 15 N9307

    15 N93+

    + C7807Bav9322/Bav7807 C9307( )/ 2022T( )S0822( ),

  • STUDIES ON RUSSIAN ECONOMIC DEVELOPMENT Vol. 21 No. 4 2010

    A LONGTERM FORECAST OF MARKET PRICES 391

    of which is much over 10% per year. Some countrieswill manage to retain the present level (Australia,Algeria, Angola, Venezuela, Greece, Denmark, India,Spain, Italy, Canada, Columbia, Malaysia, Nigeria,the Netherlands, Republic of Korea, Syria). Suchcountries as Brazil, Indonesia, Iran, and Turkey willbe able to retain the numerical strength by organization of their own aircraft production or by buyingthem from the countries of the second group. The latter concerns also almost all other countries, includingmost countries of the European Union, Argentina,Egypt, Israel, Jordan, Mexico, United Arab Emirates,Saudi Arabia, Republic of South Africa, and Japan.The situation in these countries can be explained bythe influence of the limited military budgets of theleading world countries in the 1990s (accounting forthe 15year lag) and by the insufficient rate of theirgrowth at present.

    CONCLUSIONS

    Thus, the cases of China and other abovementioned countries show that attempts to retain thequantitative composition of MTA should lead either toan increased military budget (or, at least, its share allocated to the purchase of MTA), or to purchases fromthe countries of the second group (Russia, Ukraine,China), or to application of both measures. However,note that the equipping of air forces with MTA aircraftis nowhere in the world thought of as a priority task ofmilitary budgets, so any increase in the share allocatedto this purpose can hardly be expected. In this connection, signs of serious interest in the purchases of theUkrainian aircraft have appeared even in the leadingNATO countries [29]. In the near future, the possibility of production of these aircraft within westernbrands has appeared. Russian Mi8/17, Mi26,An26, and An124 aircraft are used in the interests ofthe coalition of allies in Iraq and Afghanistan. Indeed,in the United States, the national program of production of MTA airplanes is limited to the heavy C17, theproduction of which is at present ending; the mediumC130 (being modernized for already over 50 years),the deliveries of which also seem to be close to completion; and the still being developed light V22 heliplanes, the production of which is likely to be reducedin comparison to the former plans. In the EuropeanUnion, the situation with the postponed production ofthe medium MTA A400 aircraft and limited deliveriesof light C27 and C295 aircraft is no better than in theUnited States. In fact, this is practically a full list of themain produced and developed models of MTA of thecountries of the first group. There is a high probabilityof the situation where the military leadership of mostcountries of the world will have to surrender to aninvoluntary numerical reduction of the MTA fleet.

    Countries that have at present small numerical formations of MTA and insufficient growth of militaryexpenditures (Bulgaria, Bolivia, Finland, Switzerland)are likely to try to look for a solution in view of involuntary surrender of their own MTA in such measures asthe joint use of C17 aircraft and western secondhandaircraft. This list of countries should be supplementedby most countries not mentioned in Table 2.

    Similar processes are occurring also in civil aviation and can be calculated by similar procedures withreplacement of the NMB parameter by the budgets ofoperators.

    REFERENCES

    1. A. V. Galchenko and V. A. Tegin, Longterm Forecasting of the Investments in Civil and Military TransportAviation, Problemy prognozirovaniya, No. 5 (2007).

    2. D. Danilkovich and V. Shvarev, Evaluation of the WorldMarket of Aerotechnics in 20042013, Rynki vooruzhenii 8 (10).

    3. D. Danilkovich and V. Shvarev, Analysis of the Stock ofOrders for Aircrafts in 20092013, Rynok vooruzhenii8 (10) (2008).

    4. D. Danilkovich and V. Shvarev, Analysis of the WorldMarket of Military Helicopters and UAV in 20042012and to 2016. Analysis of the Stock of Orders for MilitaryHelicopters and UAV in 20092013, Rynki vooruzhenii,8 (11) (2008).

    5. D. Danilkovich and V.Shvarev, Analysis of the WorldMarket of Military Helicopters in 20012010 and to2015, Rynki vooruzhenii, 7 (10) (2007).

    6. The Program of the MTC Globemaster3 Delivery tothe MTA of Austria Is Accomplished, Voennotekhnicheskoe sotrudnichestvo, No. 11 (2008).

    7. The Air Force of Canada Have Accepted the FourthMTC Globemaster3. The Fifth MTC Globemaster3has come in the Air Force of Great Britain, Voennotekhnicheskoe sotrudnichestvo, No. 15 (2008).

    8. Military Aircrafts of the World. Reference Book, Ed. byN. N. Novichkov (Inform. Agentstvo ARMSTASS,2005) [in Russian].

    9. Helicopters of the World. Reference Book, Ed. byN. N. Novichkov (Inform. Agentstvo ARMSTASS,2005) [in Russian].

    10. Reference Book on Abroad Military and Civil Aircraftsand Helicopters (TsAGI, 1985) [in Russian].

    11. Technical Information. Reviews and Abstracts from International Press (TsAGI, 19841991) [in Russian].

    12. SAR Report in the USA Congress on the Cost of Aircraft Purchases in 2006, no. 34 (2006).

    13. Vzlet, No. 3 (2009).14. K. K. Valtukh, Development of Probabilities of Eco

    nomic Theory, Vestnik RAN, No. 1 (2008).15. K. K. Valtukh, Theory of Value: Statistical Verification,

    Formation Report, Relevan Conclusions, Vestnik RAN,No. 9 (2005).

    16. Rynki vooruzhenii, 9 (6) (2009).17. Vremya novostei, March 5 (2008).

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    18. M. Sergeev, Russian Aircraft Industry: Flights inDream and in Reality, Nezavisimaya gazeta, May 29(2008).

    19. The Ministry Fixes a Term to the Russian AviationIndustry, Novosti VPK, May 27 (2008).

    20. P. Daffi and A. Kandalov, A.N. TupolevThe Man andHis Airplanes (Moskovskii rabochii, Moscow, 1999) [inRussian].

    21. V. Shcherbakov, The Holding Creaks at the Seams.Business Ignores the National Interests, NGNVO, May23 (2008).

    22. Yu. Fedorinova, Vedomosti, March, 10 (2009).

    23. Crosscountry Military Expenditures, SIPRI Yearook,19882000, http://www.ecaarrussia/org/ecabul5ru/html

    24. D. Danilkovich and V. Shvarev, Analysis of the Dynamicsof Changes of the World Military Expenditures,Rynki vooruzhenii, 8 (3) (2008).

    25. Military Forces of Abroad Countries, Zarubezhnoevoennoe obozrenie. 19992008 [in Russian].

    26. The Air Posture of Certain Abroad States, Zarubezhnoevoennoe obozrenie, Nos. 1, 2 (1991), Nos. 1, 2, 3 (1993).

    27. Review of the CIS countries, Military Technology,No. 1 (2006).

    28. V. Shvarev, Characteristic of the Markets of Arms andMilitary Technology of Advanced Countries in the19891996 Period, Voennotekhnicheskoe sotrudnichestvo, No. 45 (1999).

    29. E. Grebenyuk, The West Asks AID from Ukraine inCreation of MTC, Ekonomisheskiye izvestiya, October 21(2009).

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