Jason Corcoran in Moscow -

Some new life was breathed into Russia's aging aviation industry last week when a Siberian businessman launched SkyExpress, the country's first budget airline, and the government said its "SuperJet," the first new design of a Russian plane since Soviet times, went into production.

The Kremlin announced plans to produce 700 SuperJet passenger aircraft in the coming years. State-owned aviation giant Sukhoi will make the SuperJet 100 to replace the ageing Tu-134 aircraft, which is widely used by Russian airlines.

The 40-metre fuselage, a wing and a tail fin of the very first SuperJet 100 were delivered on January 29 to the Zhukovsky Central Aerohydrodynamic Institute to the southeast of Moscow for stationary tests under a cloak of secrecy.

"It's all a big mystery so far," says Marina Alexeenkova, vice president of research at Renaissance Capital. "Nobody has seen the Superjet and we don't know who is going to supply parts and the components or what the price will be."

According to Defence Minister Sergei Ivanov, the Sukhoi SuperJet will make its maiden flight later this year, while mass production is expected to begin in 2008.

Sukhoi said it had contracts to sell over 50 of the 100-seater SuperJets to Aeroflot, Dalavia, Air Union and other airlines, while 70% would be reserved for sale on the international market.

The Kremlin's aviation holding company United Aircraft Company (UAC) has said it may cooperate with European Aeronautic Defence and Space Company (EADS), which makes the Airbus planes, on civilian aircraft.

UAC, one of the national champions set up to "rescue" struggling key sectors, was officially registered in November and is expected to begin operations sometime in the next two months. The company will finance its further development with an IPO in late 2007 or early 2008.

Ivanov said UAC's plans involve, "raising the share of Russian-made civilian aircraft on the world market to 5-7% before 2012 and to 10-12% by 2015."

Shares in EADS jumped by 1.7% to €25.00 on January 29 following a report in business magazine Capital suggesting it might sell a 20% stake in Airbus to Russian state interests. EADS strongly denied the report, though state-owned bank VTB already owns a 5% stake in EADS and President Vladimir Putin said in September the stake may be transferred to the UAC. And Renaissance's Alexeenkova says the government is certainly interested in investing in foreign aviation assets given the globalisation of the industry.

Russian companies are now involved in the R&D and production of Airbus planes. Irkut, the Russia defence company which is part of UAC umbrella, has broadened its cooperation with Airbus since signing a 10-year contract in 2004 to supply parts for the A320. It's also supplying parts for the A330/A340 family and will assist in the conversion of the A320 into freighters.

EasyJetski

Meanwhile, budget airline SkyExpress completed its inaugural flight on January 29, safely delivering 91 passengers to Sochi from Moscow's Vnukovo Airport.

Passengers paid as little as RUB900 ($35) for a return ticket to Sochi - a fraction of what the former state airline Aerolfot charges.

The airline, which is starting with just two planes, aims to gain a 7% share of domestic Russian flights by the end of 2007, and 25% by 2011.

Scheduled flights to Rostov-On-Don will begin on February 9 with two flights a day and service to Murmansk on Russia's icy northeast coast with one daily flight will commence on February 14.

Billionaire Mikhail Fridman's Alfa Group is also considering setting up a low-cost airline, but could wait to see how SkyExpress fares.

Aeroflot, previously known as "Aeroplop" because of it safety record and outrageous delays, has its plans to move with the times. Its chief executive, Valery Okhulov, said last year Aeroflot would attempt to build domestic market share to 30% by 2010 from the current 14%.

The airline, which recently introduced internet booking, is expanding European and Asian services and is investing $150m in Moscow's new Sheremetyevo-3 terminal, with banks chipping in another $300m-400m.

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