NICHOLAS IONIDES SINGAPORE
After the hard times of recent years, consolidation has proved to be a useful tool for the beleaguered maintenance arms of national carriers in the Asia-Pacific region
A word in common use in the Asia-Pacific aircraft maintenance industry over the past two years has been "restructuring", spurred on by the region's crisis of three years ago and by general industry trends.
While a disaster for some, Asia's downturn is now seen as positive in many ways because it forced necessary consolidation, as well as more joint ventures with international companies and tie-ups with original equipment manufacturers (OEMs).
Although not exactly revolutionary in nature, airlines across the region are continuing to rationalise their maintenance, repair and overhaul (MRO) operations as another downturn looms and margins for heavy maintenance remain depressed. They hope to improve efficiency by partnering with more foreign companies and outsourcing some operations, with the main aim for many being to bring in more third-party work and much-needed foreign currency.
Insiders say this restructuring will accelerate, citing the autonomy won by some maintenance companies from their airline parents, which will allow them to compete more efficiently for third-party work and expand through partnerships. For example, SIA Engineering - the engineering arm of Singapore Airlines (SIA) - was spun off by the carrier in 2000 and listed separately on the local stock exchange.
In selling shares through the initial public offering, the carrier said it would allow SIA Engineering to expand through tie-ups with more foreign groups. The company now has 15 joint ventures in Singapore and abroad, and is searching for more.
"The company continues to be on the lookout for suitable offshore MRO facility investments that will fit into our overall growth strategy and complement our main operations in Singapore," it says. As evidence of its commitment to expanding its heavy maintenance capabilities, SIA Engineering is building a third hangar at Changi Airport and is planning to add two more by 2003.
Future uncertain
Major changes have also taken place in Australasia in recent years, with the purchase of Australia's Ansett by Air New Zealand leading to the two teaming their engineering arms. Things are up in the air now, however, after troubled ANZ wrote down its Ansett investment and Australia's second national carrier was grounded by administrators.
The two combined their MRO operations in 1999 with the establishment of Ansett Australia & Air New Zealand Engineering Services (ANNZES). The company said part of the reason for the merger was to help it secure more third-party work.
The tie-up had already been credited with helping ANNZES win an increasing amount of business from Chinese carriers, as well as helping it tie up with international OEMs. In April, for example, the ANZ and Ansett tie-up agreed to establish an engine repair and maintenance joint venture with Pratt & Whitney (P&W), based around the ANNZES engineering facility in Christchurch, New Zealand.
Group chief executive Gary Toomey, in announcing the linkage, explained that P&W would "inject new technology [and] capital, and help us develop a new foreign exchange-earning enterprise that has the potential to achieve yearly revenue growth of $80 million to $170 million over five years".
It is unclear now whether the tie-up will go ahead, or what the future is for engineering operations in Australia. Whatever the future of ANZ, such tie-ups have been increasingly popular in the region, as they are seen as being "win-win" in nature: the OEM obtains a new market base in a region closer to customers, while the MRO specialist gets a new source of customers and the international expertise of the manufacturer.
China is a market where linkages of this type have been common in recent years. GE Engine Services, for example, recently opened its first engine overhaul and repair facility in the Chinese city of Xiamen in partnership with local companies, including China Eastern Airlines.
GE Engine Services (Xiamen) is a joint venture located at Gaoqi airport. Originally established by GE Engine Services, Xiamen Aviation Industry and heavy maintenance company Taikoo (Xiamen) Aircraft Engineering (TAECO), China Eastern later agreed to take a 30% stake, while Hainan Airlines also agreed to become an investor. The tie-up is just one of many in the country, and more are certain to arise as the potentially huge Chinese aviation market continues to grow faster than any other.
Analysts say China will continue to be the main growth market for maintenance in Asia during the foreseeable future, despite the fact that competition is intense, with major MRO centres already established and growing at Beijing, Guangzhou and Xiamen. They also say component repair overhaul is where the real profits will be, as many are finding positive returns from heavy maintenance work to be elusive.
China Southern-controlled Guang-zhou Aircraft Maintenance Engineering (GAMECO) says it recorded a 7% increase in revenue in the first half of 2001 despite competition-reduced rates. GAMECO explains that the increase in sales was mainly attributable to an 18% growth in line maintenance revenue and 6% growth in component overhaul and repair revenue. These gains were crucial, as revenue from heavy maintenance work was down.
Accordingly, GAMECO is building a $109 million four-bay hangar to facilitate MRO expansion. "The under-capacity problem that has restrained [us] for years will be solved when the project is complete," the company says, adding that it is looking for a second site in China to set up a heavy maintenance operation and will look for ways to boost component overhaul revenues.
Similarly, the Beijing-based Aircraft Maintenance & Engineering (AMECO) joint venture - between Air China and Lufthansa - has also said it is looking for more third-party work to diversify away from its reliance on Air China. The two partners run the biggest maintenance company in the Asia-Pacific, and are discussing how to proceed when their 15-year agreement ends in 2004.
The third major heavy maintenance company in China, TAECO - shareholders of which include Hong Kong Aircraft Engineering (HAECO) and Cathay Pacific - is building a third two-bay hangar at Xiamen airport.
Ongoing consolidation of China's airlines may have an impact on developments in the MRO sector. Under consolidation moves approved by the Chinese Government earlier this year, Air China is taking over China Southwest and CNAC-Zhejiang Airlines; Shanghai-based China Eastern is taking over China Northwest, Great Wall and Yunnan Airlines; and Guangzhou-based China Southern is taking over China Northern and China Xinjiang Airlines.
With the three major carriers taking over smaller airlines, there may also be opportunities for technical fleet management contracts, which some MRO companies in Asia are targeting as growth areas. Similarly, AMECO and GAMECO, which are controlled by Air China and China Southern, respectively, may also see growth possibilities in new businesses in their home markets.
Outsourcing services
An example of the new synergies being created is found in SIA Engineering's April agreement with Hong Kong's Dragonair. The two signed a S$30 million ($16.5 million) contract providing for technical and inventory management for two Boeing 747-300s which Dragonair purchased from SIA.
Under the three-year deal, SIA Engineering provides project management and support services during the conversion of the 747s from combis into freighters.
SIA Engineering will also provide maintenance planning and logistics, and material management services once the aircraft enter service. The first 747 entered service in mid-September, with the second to follow in October.
SIA Engineering's head William Tan says: "Market analysis indicates that an increasing number of operators are outsourcing such services which provides them with an integrated solution to their engineering requirements in a cost-effective manner. In response we are building up capability and capacity to meet this growing demand."
SIA Engineering's focus on such work is hardly trend-setting, but it is indicative of an ever-evolving sector which has learned much from recent hard times.
Source: Airline Business
