In aerospace wars, don’t count Russia out yet

May 16, 2012, 1:00 PM UTC

FORTUNE — Russia’s dream of resurrecting its moribund commercial aircraft industry has been put on hold following last week’s spectacular crash of its shiny new prototype. But while the accident appears to solidify the commercial aviation duopoly controlled by Boeing and Airbus, the Russians, as well as other new competitors in the field like the Chinese, shouldn’t be written off just yet. With strong government support and billions of dollars at their disposal, the new start-ups are determined to grab a piece of the lucrative and growing market for commercial aircraft.

The fiery crash of Russia’s newly designed Sukhoi Superjet 100 regional aircraft last week in Indonesia has shaken the tightly knit commercial aviation industry. In addition to being a human tragedy — 45 people lost their lives — the crash was also a marketing disaster for Russia’s revamped aviation industry. The crash occurred on a demonstration flight as part of a carefully scheduled six-nation Asian road show. Onboard were journalists, aircraft consultants and representatives from a number of Indonesian airlines who were looking to add the Russian-made jet to their growing fleet.

Indonesian officials say that an investigation into the cause of the crash would take at least four months and could last as long as a year given the remote location of the crash site. The Indonesian government has refused the Russian government’s request to transfer the plane’s black box and flight recorder to Moscow, saying that it wants to ensure a fair an objective investigation into the cause of the crash.

MORE: How Dave Cote got Honeywell’s groove back

It is understandable why Russia wants to control and speed up the crash investigation. It has a lot to lose if it is determined that a design flaw of some sort was responsible for bringing down the jet. Potential customers will most likely hold off from signing any new agreements to purchase the plane until the investigation is complete, putting a dent in Moscow’s production timetable. And since the plane is Russia’s first new commercial aircraft since the fall of the Soviet Union, the fear is that customers will probably be wary of taking a peak at other new Russian jets on the drawing board.

But this isn’t the end of the road for Russia’s aerospace industry. President Vladimir Putin considers the resurrection of the industry as a point of national pride and has committed billions to the cause. Russian aircraft makers like Tupolev and Ilyushin were at one time true competitors to Boeing (BA) and Airbus. But when the Cold War ended in 1992 funding to the industry dried up.

Putin saw the collapse of the aircraft industry as a reminder of the chaotic 1990s, when Russia slipped from being a true world power to a country run by mobsters and incompetent politicians. In 2005, he merged all of the nation’s various aircraft manufacturers into one holding company, with the Russian government as the controlling shareholder. The state would now pump billions into the industry to get it going again. The goal was to sell $250 billion worth of aircraft by 2025.

The Sukoi 100 entered commercial service in April of last year and competes mostly with regional jet makers like Embrarer and Bombardier. The plane was built and designed in Russia but many of its major parts were designed by foreign suppliers such as Thales, Goodrich (GR) and Honeywell (HON), putting a western seal of approval on the airplane. It even hired Boeing as a consultant, though it most likely was not a big player in the production of the aircraft.

MORE: 100 fastest growing inner city businesses

But despite the jet’s competitive price point of around $30 million, buyers have not been forthcoming, with firm commitments secured for only 170 jets. That falls far short of the 1000 jets the Russians had hoped to sell. The Asian tour was supposed to provide a boost to the regional jet’s sales, but that has clearly nosedived.

Yet while the success of the Sukhoi 100 would have been nice, it isn’t as important as the launch of Irkut’s MS-21. Announced last fall and scheduled to be in service by 2017, the jet would target the lucrative and most profitable part of the airline industry – the single-aisle class. Today, the market is dominated by Boeing’s 737 and Airbus’ A320, which haven’t undergone a radical design change in decades. To get an idea of how important this market is for the jet makers, Boeing’s 737 aircraft accounts for around 40% of the jet maker’s commercial aviation revenue and well over half of its profits. Boeing estimates that the single-aisle market will be worth nearly $2 trillion over the next 20 years, with over half of that demand coming from Asia.

Boeing and Airbus clearly have a lock on the U.S. and Western European markets, as well as many established international carriers, but the rest of the world is up for grabs. The Russians are first targeting their own domestic market, where 75% of the aircraft are currently foreign-made. Putin has in no uncertain terms made it clear that Russian airlines should be buying Russian-made jets, now that they are again in production. Along with the former Soviet states and its satellites, the Russian aircraft industry has a built in market. Even with the crash, those customers will be buying Russian.

MORE: Entrepreneurs should be watching Africa

But the real prize is the budget airlines, especially those based in Asia. These airlines are growing fast and do not have strong brand loyalty to either Boeing or Airbus, so the Russians really have a chance to make their mark here. But the Russians will also have to compete against COMAC, China’s upstart aircraft producer, which is building its own single-aisle aircraft, the C919. So far, only Chinese airlines have ordered the prototype, with the first jet set to go into service in 2016, four years from now. It should slowly gain more customers as China starts to use its influence over certain countries to pick up a few aircraft. But international expansion isn’t critical for COMAC given its lock over the massive Chinese market. It could probably just produce planes for the various Chinese airlines and do very well.

So Boeing and Airbus may control the skies now but not for long. They will most likely lose control of the lucrative single-aisle market in the former Soviet states as well as in China by the end of the decade. While the Russian program has taken a hit with last week’s crash, strong government support will help it through this rough patch. The real show down will occur when the MS-21 hits the market. If it is as fuel efficient and advanced as the Russians claim, it could be a viable alternative to budget conscious upstart airlines in Asia, Latin America and Africa who don’t know their Boeing from their Airbus.