China's MRO firms gear up for fierce competition

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Airbus A380s have yet to arrive in China - one of the most closely watched markets in the aviation sector - but that has not stopped ST Aerospace subsidiary Shanghai Technologies Aerospace (STARCO) from building a hangar that can accommodate the superjumbo.

The facility at Shanghai's Pudong International airport, which was unveiled less than a year ago, has space at any one time for two narrowbody aircraft and three widebodies, including the A380, which has so far been ordered by only one Chinese carrier - China Southern Airlines.

STARCO's investment in the new hangar is just one indication of the perceived growth potential of the Greater China region's maintenance, repair and overhaul market. In the years ahead, MRO companies based in the region are set to add more facilities and capabilities in preparation for an expanding fleet.

china southern airlines a380, airbus
 © Airbus
Only one Chinese carrier - China Southern Airlines has orderd the A380 so far, which has yet to be delivered but that hasn't stopped ST Aerospace subsidiary Shanghai Technologies Aerospace (STARCO) from building a hangar that can accommodate the superjumbo 

In a forecast released in November 2010, Boeing estimated that China will need 4,330 new commercial aircraft over the next 20 years. This will make the country the largest market outside the USA.

WHO ARE CHINA'S MAJOR MRO FIRMS?

  • Hong Kong Aircraft Engineering (HAECO) Majority-owned by Swire Pacific, owns various subsidiaries in various destinations, including Taikoo (Xiamen) Aircraft Engineering (TAECO). Offers a wide range of services including line and base maintenance, components repair, fleet technical management and training.
  • ST Aerospace Singapore-based firm with joint ventures in China, including one with China Eastern Airlines, Shanghai Technologies Aerospace. Has also set up a joint venture in Guangzhou with Guangdong Airport Management Corporation.
  • Aircraft Maintenance and Engineering (Ameco) Beijing A 60-40 joint venture between Air China and Lufthansa, based at Beijing Capital International airport, with four hangars. Offers line maintenance, engine and component services among other services.
  • Boeing Shanghai Aviation Services Based at Shanghai Pudong International airport, joint venture between Boeing, Shanghai Airport Authority and Shanghai Airlines. Provides line maintenance, heavy maintenance and painting services, among others.
  • Guangzhou Aircraft Maintenance Engineering (GAMECO) Joint venture between China Southern Airlines and Hutchison Whampoa (China), based at Guangzhou Baiyun International airport. Has a second hangar in the pipeline, and offers heavy and line maintenance, components repair as part of its portfolio.

China is also set to be the fastest-growing market for both international and domestic passenger traffic by 2014, according to a forecast published by the International Air Transport Association in February.

The numbers are encouraging, especially after the financial downturn that dented MRO firms' profits. Hong Kong Aircraft Engineering (HAECO), majority owned by Swire Pacific, posted a 40% fall in profit in 2009, as demand for heavy and line maintenance services plummeted.

Last June, it forecasted that 2010 would be "challenging" due to weak demand for passenger to freighter conversions of Boeing aircraft and heavy maintenance services in mainland China. Its engine overhaul joint venture in Hong Kong had also been receiving less work, it said then.

As demand fell during the recession, airlines began parking or retiring their aircraft, which directly affected business as carriers cut back on line maintenance or scaled down heavy checks, says HAECO's commercial director Summit Chan.

HAECO's Xiamen-based subsidiary Taikoo (Xiamen) Aircraft Engineering (TAECO) was similarly affected, says its executive general manager (commercial) Jacqueline Jiang.

"Base maintenance was hit. In 2009, customers reduced their packages or cancelled them as they parked their aircraft. In the first half of 2010, heavy maintenance demand was still relatively weak," she adds. Demand for freighter conversions was also down as airlines tried to contain costs.

However, demand for MRO services bounced back in the second half of 2010, say Chan and Jiang. In 2011, demand in the cargo market is expected to be strong, with cargo conversions coming back, adds Jiang.

With demand in the MRO sector expected to be strong this year and in the years ahead in the Greater China region, companies have committed to opening new facilities and are looking to expand their capabilities into other sectors, such as business aviation.

haeco maintenance hangar, haeco
 © HAECO

Singapore-based ST Aerospace has set up a new heavy maintenance joint venture in Guangzhou with Guangzhou Airport Management. Called ST Aerospace (Guangzhou) Aviation Services, the new outfit is to begin operations in the second half of 2013, and received a business licence from Chinese authorities earlier this year.

It will complement STARCO's three hangars at Shanghai's Hongqiao and Pudong airports, says the company's vice-president and general manager Andy Lau. The Shanghai facilities offer capacity for three narrowbody aircraft and six widebodies.

Fill rates for the Shanghai hangars are strong, says Lau. The Hongqiao facilities were at 95% capacity in 2010, while the Pudong hangar was 99% filled.

In Xiamen, TAECO is planning to open its sixth hangar in May 2011. "The construction is almost completed," says Jiang. The double-bay widebody hangar will allow TAECO to handle 12 widebodies and five 737s or 757s simultaneously, the MRO firm has said.

TAECO's parent HAECO is now studying the possibility of building a fourth heavy maintenance hangar in Hong Kong. "We are leaning towards building it," says HAECO's Chan. The new hangar would be smaller than the company's existing three hangars due to limited space, but still provide all the capabilities that HAECO now offers, he adds.

In addition, it would also offer capabilities for new aircraft types like the Boeing 747-8 freighter and the Airbus A350. Cathay Pacific Airways, which accounts for 30% of HAECO's total group business, has ordered both aircraft types.

Guangzhou Aircraft Maintenance and Engineering (GAMECO) is meanwhile beginning construction of a second hangar near its base at Guangzhou Baiyun International Airport, and is likely to complete it in 18 months.

The new facility will have capacity for eight narrowbodies, says GAMECO's general manager Bill Norman. The company, which added 250 staff last year, aims to add more than 200 this year. Its staff level has reached 4,000.

cathay pacific boeing 747bcf @ taeco mainentance hangar, taeco
 © TAECO

In addition to ramping up capabilities for commercial aircraft, MRO firms are also looking at other sectors of aviation. STARCO, for example, is studying a move into business aviation and is talking to fixed base operators. "We will try to make use of our current facility and move on from there," says Lau. Discussions are at an exploratory stage.

While MRO firms in China and Hong Kong are looking to expand their capabilities, it is not just business from Chinese carriers that they hope to attract. A sizable chunk of revenues at these companies come from non-Chinese airlines, and MRO companies say that continued business from international airlines is vital to being profitable.

This is because China's four biggest airlines - Air China, China Southern Airlines, China Eastern Airlines and Hainan Airlines - all have their own MRO facilities or joint ventures, and winning new business from them can be a challenge.

GAMECO, which is partly owned by China Southern, says that competing for work from Air China and China Eastern is not a priority. "We compete for work from other airlines in China," says Norman. For example, it has signed a memorandum of understanding for maintenance of Chengdu Airlines' aircraft.

Ameco Beijing, which is 60% owned by Air China, has said 60% of its total revenues come from China's flag carrier. For the remaining 40%, it depends on non-Chinese carriers. United Airlines is its biggest international customer.

"If you want to prosper as an MRO provider in China, you have to look at international customers. It's a challenge and it impacts your strategy," Ameco's former chief executive and general manager Andreas Meisel has said.

For TAECO, which is not affiliated with any major Chinese carrier, less than 10% of revenues come from Chinese airlines, says Jiang. Cathay Pacific Airways and All Nippon Airways are among its major international customers. HAECO and TAECO also have joint ventures with smaller airlines in China, such as tie-ups with Shandong Airlines' parent Shandong Aviation group and Sichuan Airlines group.

"The Chinese market is challenging," says Jiang. "When we are facing the leading airlines, they already have in-house capabilities. But for some aircraft types, they might not have the comprehensive MRO services and that is where we come in. That gives us an advantage."

Diversifying services also offers a means for MRO firms to remain profitable as the global aircraft fleet becomes younger in line with new aircraft types coming on stream in the years ahead. "Some of the new aircraft will replace the older types, which are more labour intensive. When these aircraft retire, the work demand per aircraft will come down," says HAECO's Chan.

This could affect the "earning capacity" of the firm's hangars, and this is why HAECO is also focusing strongly on its other business sectors such as components repair and fleet technical management, he adds. "This will help make our portfolio more diversified," says Chan.

With many players jostling for position in Greater China's MRO market, companies say keeping prices competitive is a challenge, especially when taking into account rising labour costs in China.

"With stiff competition, we have seen price wars among some of the other MRO providers in China," says STARCO's Lau. Chinese airlines are "cost conscious," says TAECO's Jiang. "The challenge is to provide a good service at a competitive price."

With China's labour costs going up, its MRO companies are seeking routes to greater efficiency. "We will have to compensate with better efficiency," Ameco's former chief executive Meisel has said. "Two to three years ago, we began looking at processes to make them leaner and faster."

STARCO expects labour costs in China to continue rising, along with other challenges posed by foreign exchange fluctuations and a high attrition rate among staff. However, it believes these challenges are manageable, given the opportunities in China.

ST Aerospace's president Chang Cheow Teck says: "We believe we are well poised to gain from the MRO opportunities that will increasingly present themselves, on the back of the continued growth of the economy and the recovery of the global economies."