When Hong Kong Aircraft Engineering (HAECO) cut 8% of its workforce at the end of last year, it was seen as an indication of the wider problems facing the Asian heavy maintenance industry.
In announcing the loss of 352 employees, HAECO said that the poor operating conditions of recent years had become worse since the start of the Asian economic downturn in July 1997. Airline fleets are smaller, aircraft are flying fewer hours and overcapacity in the heavy maintenance sector continues to take its toll on hourly rates.
HAECO, owned by Cathay Pacific Airways and its parent, Swire Pacific, is one of Asia's biggest maintenance operations. Its main regional rivals, such as Aircraft Maintenance Engineering (AMECO) in China and Singapore's ST Aviation Service (SASCO), are also feeling pain. In recent years, all have either expanded or announced plans to do so.
HAECO, for example, has transferred its engine overhaul work to Hong Kong Aero Engine Services, a new joint-venture with Rolls-Royce. At the same time, the company aims to expand its Xiamen-based sister operation, Taikoo (Xiamen) Aircraft Engineering, or TAECO. TAECO is a joint venture between HAECO, Cathay, Singapore Airlines, Japan Airlines, the Xiamen Government, the Civil Aviation Administration of China and Boeing. Philip Tulk, a Hong Kong-based analyst with Lehman Brothers, says maintenance overcapacity is "an old story" in Asia, although the problem has grown.
Until the downturn, most carriers had been rapidly building their fleets, giving maintenance providers hope that the years of charging uneconomical rates to keep hangars filled would soon be behind them.
Those hopes now look to have been dashed by the reduction in airline fleets and the trend towards newer aircraft needing less maintenance. "The Asian fleet is coming down in size and the Cathay Pacifics of the world are also getting rid of old aircraft, which are a big part of the business for maintenance companies," says Tulk. "That phenomenon is going to continue to be bad for the maintenance companies."
Another problem for the likes of AMECO, HAECO and SASCO, is that those airlines in the region that do not have heavy maintenance capabilities are seeking to acquire them. And those that possess such capabilities - but which are not economically viable - are unlikely to give them up in the near future.
Says another Hong Kong-based analyst: "Airlines like to have their own in-house maintenance operations so they can say they are full-house operations - that they are real airlines. There's only a slow move towards the virtual airline phenomenon.
"Many of these are national industries, just like the airline industry, so they are going to stay around whether they are doing well or not. That's not good for the big ones that aren't backed by the state."
To cope with the problems, some independents like SASCO's parent, Singapore Technologies Aerospace, a subsidiary of Singapore Technologies Engineering, have been looking elsewhere to improve revenues by buying into US businesses. ST Aerospace now has two US maintenance subsidiaries, ST Mobile Aerospace Engineering and Dalfort Aerospace. In announcing first-half profits last year, the company said that its challenge was to "increase sales from the international market", in particular from the USA, the Middle East and Europe, "to compensate for the expected decline in business from regional customers".
Others, like smaller maintenance provider Air Asia in Taiwan, are teaming with traditional rivals to share work. Privately owned Air Asia, and Taiwan's government-owned Aerospace Industrial Development recently signed a memorandum of understanding under which each will pass on work to the other in a bid to reduce "duplicate investment".
Separately, Air New Zealand and its 50% owned subsidiary, Ansett Australia, have been discussing co-operation within their respective engineering operations. The Ansett Engineering division could merge with Air New Zealand Engineerng Services outright, although the politically sensitive issue of job losses may block such a move.
While some are consolidating and others talk of outsourcing, carriers like Vietnam Airlines are looking to handle more work in house. The carrier says that it intends to be able to do its own C-checks on Boeing 767s this year. China Airlines (CAL), meanwhile, opened a major maintenance hangar at Taipei's Chiang Kai Shek airport in October last year, and says it is seeking customers from abroad "to work towards the government's goal of building Taiwan into an Asia-Pacific air hub and aircraft maintenance centre".
In line with that goal, CAL rival EVA Airways plans to expand its airframe maintenance operations. These plans are separate from the carrier's new engine overhaul joint venture with General Electric - another growing trend for tie-ups in the region. While all this will take work from the established majors, scheduled work from their core customers will help keep them in business.
AMECO is a joint venture between Lufthansa Technik and Air China, while HAECO performs most of the maintenance for Cathay and its regional operation, Dragonair. Guangzhou Aircraft Maintenance Engineering (GAMECO) carries out work for China Southern Airlines, the largest carrier in China. GAMECO is a joint venture between China Southern, Lockheed Aircraft Service International and Hutchison China Trade Holdings.
But the mass of maintenance capability in the region means overcapacity is likely to persist. "They're all going to continue to have business, but they definitely won't be as busy as they would like to be in the years ahead," says one analyst.
Asia maintenance providers
* Hong Kong Aircraft Engineering (HAECO)
* Taikoo (Xiamen) Aircraft Engineering (TAECO)
* Aircraft Maintenance and Engineering (AMECO)
* Guangzhou Aircraft Maintenance Engineering (GAMECO)
* Singapore Technologies Aviation Services (SASCO)
Source: Airline Business
