Analysis
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MRO Focus: Asia

The rising economic tides that have surged across the Asia-Pacific region in recent years continue to lift the aerospace business and with it, a fast-growing Asian MRO sector. Even choppy waters in China’s stock market this past summer don’t appear to be slowing the tide appreciably in the region’s $16.5bn MRO business. David Armstrong reports.

The rising economic tides that have surged across the Asia-Pacific region in recent years continue to lift the aerospace business and with it, a fast-growing Asian MRO sector. Even choppy waters in China’s stock market this past summer don’t appear to be slowing the tide appreciably in the region’s $16.5bn MRO business. David Armstrong reports.

The prime driver of growth in the Asia-Pacific region is the robust demand by Asian carriers for aircraft. Collectively, the region’s airlines flew 6,800 aircraft in 2013, constituting 26 per cent of the world’s fleets. They have ordered 3,500 new aircraft for delivery by 2023.

The Association of Asia-Pacific Airlines (AAPA), a 16-member trade group based in Kuala Lumpur, declares: “In spite of the economy, we have seen continued passenger growth year-on-year.’’ AAPA members include Japan Airlines, Thai Airways International, Philippine Airlines and Korean Air.

Evergreen Aviation Technologies Corp. (EGAT), a Taiwan-based corporate relation of EVA Air, shares the optimistic outlook. “The low incidence of aircraft deferrals vis-à-vis aircraft delivery backlogs to airlines in Asia is an index for a robust air travel market,’’says EGAT spokeswoman Marina Chu.

This is good news for MRO providers of all sizes, including mid-sized enterprise EGAT, a joint venture of GE Aviation and Taiwan’s Evergreen. EGAT describes its core business as “Boeing widebody airframe maintenance, ageing airframe structural repairs, turnkey modifications, as well as a centre of excellence on GE engine maintenance.’’ EGAT counts Delta Air Lines, All Nippon Airways and Lufthansa among its customers.

EGAT grew revenues to $650m in 2014 from $453m in 2010, increasing return on capital to 17.1 per cent in 2014 from 14.1 percent in 2010. Very few Asia-Pacific airlines perform inhouse MRO, according to Martin Eran-Tasker, AAPA technical director. “However, many have created an MRO operation as part of the airline group or are partnering with MROs such as AAPA members Cathay Pacific, Singapore Airlines, Garuda International and Malaysian Airlines. However, with the increasing number of new aircraft entering the fleet and the high reliability of components and systems, many airlines have already or are considering entering into original equipment manufacturer (OEM) total care maintenance programmes.’’

All told, Asia held 27 per cent of the $61bn global MRO market in 2013, passing Europe to become the world’s second-largest regional MRO market. North America, with 31 per cent, is No. 1, as reported previously by ATE&M, citing research by ICF SG&B (now ICF International).

Asia is expected to leap to number one by early next decade. Moreover, Asia’s MRO spend is expected to average 5.3 per cent annual growth through 2023, compared to 3.9 per cent annual global growth, and reach $27bn by 2023.

Asia-Pacific’s major MRO providers operate regionally and globally, usually in joint ventures with partners from North America and Europesuch as Lufthansa Tecknik (LHT). Established players in Asian MRO include Singapore ST (Singapore Aerospace), Aircraft Maintenance and Engineering Corp. Beijing (Ameco Beijing), Hong Kong Aircraft Engineering Company (HAECO) and Singapore Airlines’ SIA Engineering Company (SIAC). China, Hong Kong and Taiwan host humming hives of MRO activity, as does small-but-mighty Singapore, where about 25 per cent of the region’s MRO is done.

While Asian legacy airlines are being challenged on long-haul routes by blue-chip Middle Eastern rivals and on short-hauls by low-cost carriers (LCCs), generally strong national economies in the region and expanding middle classes continue to lift Asia-Pacific aviation and with it, MRO.

Kenneth Herbert, MD at investment bank Canaccord Genuity, says that “(Asian) airline stocks have outperformed other stocks.’’ Herbert, a research stock analyst in San Francisco, attributes this to strong passenger growth and
the fact that “China’s airlines are making more money.’’ Low operating costs don’t hurt, either. According to Herbert, some of Asian aviation’s current prosperity is down to low labour costs — especially outside China, where wages are steadily rising.

Trans-Pacific collaboration

MRO dealbooks are bulging, stuffed with trans-Pacific tie-ups. Some big deals in the last year or so, Herbert says, have come about “for geographic reasons. They give access to certain countries’ markets, they push costs down and they allow companies to work with fewer suppliers.’’

Earlier this year, Ameco Beijing absorbed Air China Technics, part of a joint venture with Lufthansa. Launched in 1989 with Air China holding 60 per cent of the operation and Lufthansa 40 per cent, Ameco Beijing — which operates the largest MRO facility in Asia at Beijing Capital International Airport — was restructured this past spring. Now, Air China, Beijing’s flag carrier, holds 75 per cent of the JV, to Lufthansa’s reduced 25 per cent.

In an earlier deal, closed in June 2014, Hong Kong-based HAECO spent $388.8m to acquire TIMCO Aviation Services, based in Greensboro, North Carolina, and renamed it HAECO Americas. HAECO — a unit of Swire Pacific Group that works frequently on MRO and cabin interiors for Swire stablemate Cathay Pacific Airways — picked up five US MRO facilities. HAECO operates additional Asian facilities in China, Hong Kong and Singapore.

In another trans-Pacific move, AAR Aviation Services, based in the US state of Illinois, signed a memorandum of understanding this past September with Korean Air to establish a major MRO facility. The forthcoming plant is being built in South Korea, primarily to serve third-party customers, according to AAR and the airline.

Still — more new MRO facilities are in the pipeline. Not coincidentally, many will be located outside China, despite China’s large, skilled workforce, huge domestic market, modern infrastructure and bustling MRO sector. Again, labour costs enter the calculus. “Over the past years, rising labour rates in China have had an impact on the Asian MRO sector,’’ remarks Frank Martin, head of Maintenance Advisory Practice for Seabury Group in Minneapolis, Minnesota. “Carriers have a new labour arbitrage situation and are re-evaluating the outsourcing throughout Asia.’’

“Asia’s MRO business is primarily driven by airframe and modifications,’’ Martin says. “The labour arbitrage for European and American carriers was central to the sector’s growth in Asia. However, in recent years, the industry has looked into higher value content, specifically component solutions.’’

China still dominates

Although many Asian airlines outsource MRO to third-party providers and OEMs, a few are investing in new facilities of their own. Notes AAPA’s Eran-Tasker: “Garuda is an example, as it has made significant investment in narrowbody facilities.’’ Indonesia’s GMF Aero Asia, a Garuda offshoot, is constructing a hangar in Jakarta for up to 15 narrowbody
aircraft. In Taiwan, EGAT says: “A new hangar is being built at EGAT to accommodate an additional two widebody aircraft or four narrowbody aircraft. With an expected completion timeframe of 4Q 2016, EGAT will be able to concurrently accommodate a total of nine widebody aircraft and three narrowbody aircraft.’’

China will remain a major MRO player. Seabury Group’s Martin notes that Singapore powerhouse ST Aerospace, which derives 50 per cent of its business from Asia, has grown in the Middle Kingdom in a big way. The company runs MRO operations in Guangdong province, Xiaman and Shanghai.

China’s big footprint notwithstanding, several Southeast Asian countries, among them Indonesia, Malaysia and the Philippines, are positioning themselves as lower-cost MRO alternatives. “They’re trying to build up an indigenous MRO sector,’’ Canaccord’s Herbert says. To compete with China, Southeast Asian countries need
to upgrade their infrastructure and recruit sufficient numbers of skilled mechanics and technicians, he observes. “Consider an established airline like Fed Ex... That airline is not likely to go to a start-up (MRO) in Indonesia, for example.’’

Skilled labour shortage?

Looming over these considerations is a big question: Who is going to do all this work? With skilled Asian aerospace workers drawn to burgeoning Middle East locales like Dubai, Abu Dhabi and Qatar, training and retaining a deep pool of skilled workers is no small matter. The Boeing Current Market Outlook, 2013-2032, estimates that 215,300 new MRO personnel will be needed in the Asia-Pacific region by 2023, nearly half of them (93,000) in China.

Remarks Herbert: “You can train a mechanic to fix cars and trucks in one to two weeks. It takes six, 12, 18 months to train a mechanic to fix an aircraft. Aircraft are much more strictly regulated than automobiles. And yet the pay rates are not that much higher for working on aircraft.’’

MRO companies active in Asia seek to meet rising demand by training workers themselves. Lufthansa Technical Training runs training programmes in Singapore, Manila and Taiwan, with additional programmes in Haikan and Xi’an, China in a JV with HNA Group. ST Aerospace’s in-house academy has trained an additional 3,000 aircraft mechanics and technicians in Singapore.

Challenge of new aircraft

As technologically advanced new generation aircraft such as Boeing’s 787 and Airbus’ A350 and A380 join airline fleets, the new aircraft types bring challenges to MRO providers. Much remains to be learned when the new generation become seriously in need of MRO care.

The appeal of 21st century aircraft is undeniable. Made with metal alloys and carbon-reinforced polymer plastics, they are lighter than aluminum-body aircraft and boast lower fuel burn. Riddled with sophisticated electronics,
they offer enhanced connectivity in the air for passengers and crew and faster data capture. “The aircraft are more technologically advanced than ever before,’’ Herbert notes. “The amount of data is astronomically larger than before.’’ Thus the need for speed.

More broadly, says Seabury Group’s Martin, “The reliability of current aircraft allows OEMs and airlines to increase the intervals of the current aircraft types, as exemplified by A320 airframe or CFM56-7B engines, which are much more reliable than expected. In the case of the new generation aircraft, the technology requires major investments in training, tooling, test benches and spares, which will reshape the industry, just like the transition from analog to digital did over the past two decades.’’

For his part, Canaccord’s Herbert estimates that new generation aircraft may require just two to three visits during the lifetime of the aircraft for mainframe work, three or four visits for engines. Might the new aircraft, from an independent MRO provider’s perspective, be TOO good, cutting into billable hours?

EGAT suggests one answer: “The trend toward lower average regular maintenance per airframe will increase as the use of corrosion-free composites in airframes increases. However, unplanned repairs of such airframes will be more time-consuming than legacy aluminum airframes. That said, the higher number of aircraft requiring maintenance will be partially offset by lower airframe maintenance per event of new composite aircraft. Therefore, the airframe MRO market is expected to experience net positive growth.’’

OEMs muscle in

Industry analysts point out that the technological complexity of new generation aircraft could well allow major OEMs like Airbus and Boeing to keep more work for themselves, at a cost to traditional MROs.

“We see OEMs following the engine market models, trying to capture as much of the aftermarket as possible,’’ says Martin. “The component OEMs need to make the business case for new platforms to work. However, with the massive content of material, OEMs have a certain control of the aftermarket through their parts sale anyway. The airframers are entering the market with flight-hour agreements on components or integrated solutions like Boeing’s Gold Care. The competition from OEMs is definitely increasing and the classical MROs must continue to innovate to maintain their place in the market.’’

Robots, unmanned aircraft vehicles (UAVs) and 3D printing could help MROs do that. But widespread, advanced application of these evolving technologies belong more to the future than the present.

Some interesting baby steps are being taken. According to media reports, LHT is using a robot for stationary repairs on composite material fuselages and wings. Moreover, Air France Industries KLM Engineering & Maintenance has employed a 3D-printed scanner to check 777s for hail damage. In future, applications like these could be much more common.

UAVs — drones — are avidly embraced by everyone from filmmakers to estate agents to excited hobbyists. In aerospace, not so much. “Unmanned robot drones for external airframe inspections are in their infancy,’’ comments EGAT’s Chu. “Approval and certification of such activities are expected to be prolonged, as regulation to assign responsibility becomes an issue. One cannot simply blame the robot for making mistakes, unlike humans.’’

3D printing is another matter. This is the new technology that strikes the most optimistic chords among MRO providers and pundits. “We are sure 3D printing will have a positive impact on the MRO supply chain,’’ Martin declares. Already, EGAT is an equity partner in a new-make aircraft and engine-parts company called Evergreen Aviation Precision. (aka PRECISION), which uses 3D printing and computer-controlled machinery in a 105,000ft2 facility to build airframe structural parts for Boeing and GE.

Cautious optimism

Looking ahead, MROs and industry analysts range from bullish to cautiously optimistic for 2016 and beyond in spite of the slowing Chinese economy and sluggishness in world trade.

The most immediate concern would seem to be China, considering the outsized impact it has on the region’s politics, security and economics. But turbulence in the world’s second-largest national economy hasn’t had a measurable impact as of late 2015. “It is too early to say about the Chinese effect,’’ says AAPA’s Eran-Tasker. “The outlook for air passenger markets remains positive, with competitively priced fares underpinning robust consumer demand. The outlook for air cargo markets is more uncertain, given signs of weakness in global trade activities.’’ In any case, analysts point out, it can take 12 to 18 months for effects from wobbles such as China’s to play out in MRO.

Tepid world trade is a concern. But again, Asia is holding its own compared with much of the European Union, Brazil and others, and this is reflected in passenger numbers. Asia-Pacific passenger air traffic in August was up 7.2 per cent over August 2014, though cargo growth was flat, according to AAPA.

Asia-watchers predict that the region’s MRO market will continue to expand. A forecast published in Japan’s Nikkei Asia Report in September 2015 predicts MRO spend in Asia will rise by four per cent from 2015 to 2024. Separately, US media outlet MarketWatch published an estimate that MRO spend in Asia-Pacific will grow 3.36 per cent from 2014 to 2019. Underlying the consensus on growth is a shared conviction that outsourcing from North America and Europe will remain robust.

“Relative to the rest of the world, growth will be good’’ in the region, Herbert forecasts. “Not double-digit, but high single digits. Asia will still see some nice growth.’’

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