South Korean MRO Initiative Draws Early Interest

A new aerospace cluster being developed in South Korea could become a player in the Asian MRO industry.

An aerospace business cluster being developed in South Korea is set to shake up the country’s MRO sector and could also have ramifications for the broader Asian industry.

Some South Korean carriers have already expressed interest in conducting MRO operations at the Aeropolis development near Cheongju, south of Seoul. National, state and city governments are supporting the project and have policy objectives to establish it as a center for both commercial and military MRO. 

More domestic and foreign companies are expected to move to the Aeropolis. A subsequent development phase will encompass manufacturing and other aerospace industries.

The Aeropolis is beside Cheongju International Airport and within the Chungbuk Free Economic Zone (CBFEZ). The state authority responsible for this zone is overseeing the aerospace cluster.

Site preparation began in 2013 for the 153,000-m2 (37.8-acre) District One, which will include initial aircraft MRO operations. The cost estimate for this work is 45.2 billion won ($40 million) although the actual cost is likely to be about 38 billion won.

Substantial earthwork is required to bring the land to the same elevation as the airport runway and to prepare it for construction. This phase is expected to be finished by December, and more specific preparations—which could include roads and other infrastructure work—will take another six months.

Tenants likely will begin construction of hangars in the second half of 2017, says Sung Hong, senior business development specialist for the CBFEZ Authority. It probably will take another 1-2 years for MRO operations to begin. One option being considered is to have the main District One tenants form a joint venture, making it easier for the government to provide construction subsidies.

Four airlines interested in the Aeropolis signed memoranda of understanding (MOU) with the CBFEZ to explore options. Together, these carriers account for a significant slice of South Korea’s airline fleet. The late withdrawal of one of these prospective tenants would likely cause the CBFEZ to adjust its plans but will not jeopardize the broader project.

Most of the airlines involved outsource their maintenance to other countries in Asia, although some also do airframe work in Korea. 

MRO operations at the Aeropolis probably will focus first on light airframe maintenance through to D checks, according to Hong. However, in the longer term the Aeropolis could handle the full gamut of MRO activity, including passenger-to-freighter conversions and engine overhauls.

Hong expects two double-bay hangars will be built initially, taking advantage of a government subsidy for the construction of such facilities. However, this operation may eventually need more hangars. 

Discussions also have been held with other Korean as well as foreign airlines about having work done at the Aeropolis. If the land earmarked for District One is not sufficient for the aircraft MRO tenants, there is flexibility to expand this area, Hong says.

Military MRO also is expected to be part of the Aeropolis. The government has signaled it would like some South Korean military maintenance to be performed in Cheongju, says CBFEZ Authority Commissioner Sang Hwon Jeon. There is a strong possibility that the air force’s new F-35 fighters will have their MRO base there.

Earthwork is expected to begin on the second Aeropolis district in October. The 321,000-m2  site will be larger than the first and is expected to be ready for buildings to be constructed by 2018. The estimated cost of preparing this sector is 111.7 billion won.

District Two will be focused on businesses supporting aircraft MRO, including component repair and manufacturing and avionics. Eight companies have signed MOU agreeing to move some of their operations there, potentially accounting for 60% of the land available in District Two. Further ahead, a third and much larger District Three is planned.

The Aeropolis will gain some advantages from its location, its planners say. Cheongju is considered a ground transportation hub and is at the junctions of major rail lines. Cheongju’s airport is a 24-hr. joint military-civil facility and has runway and taxiway expansion projects underway to add capacity. It is regarded as the farthest-north airport where military MRO activities can occur.

Cheongju is close to the economic powerhouse of Seoul and is adjacent to the new administrative capital of Sejong City. South Korea itself is well located between the world’s second- and third-largest economies, China and Japan. The country is a major hub for air and sea freight, within Asia and globally.

The Cheongju region is regarded as a center for the high-tech industry, which would provide an advantage for avionics work in particular. Several universities and technical schools with aerospace courses are in the area, yielding a potential pool of qualified employees. Many of these institutions have signed cooperation agreements with the CBFEZ Authority.

Central and local government support is another advantage. Substantial incentives and tax breaks are available for businesses establishing themselves at the Aeropolis, which is within the only free economic zone in Korea that includes an airport with an attached MRO development. In an important policy change, the Korean government this year allowed foreign entities to fully own local MRO businesses. Previously, foreign ownership was limited to 49%.

Other policies will help the project indirectly. The government has indicated it wants to foster a strong MRO industry in Korea, and is encouraging airlines to have more of their maintenance conducted in their home market, says Jeon.

For Korean carriers, working within the Aeropolis could provide a way to align themselves with the government’s policy direction. Such a move also could allow airlines to outsource the maintenance they currently conduct in their own facilities, since a joint venture would potentially be more cost-efficient.

The government could provide more support by using trade offsets in military purchasing deals to stimulate the transfer of technology needed by Korea’s MRO industry. The country has one of the world’s 10 largest military budgets.

An assessment of demand for the Aeropolis MRO operations identified extensive potential business from Korean and overseas airlines, Hong says. The MRO market for Korea-based airlines is about $1.6 billion per year, of which more than $700 million is outsourced overseas. These carriers are expected to add more than 100 new aircraft by 2018.

The rapid growth of Asian low-cost carriers and Chinese airlines also presents opportunities, because there is not enough MRO capacity in the region to accommodate these expanding fleets.

On the military side, more than 70% of Korea’s MRO needs are outsourced overseas, says Hong. This is a potential market worth almost $780 million a year. In addition, major upgrades are scheduled for some military fixed-wing and helicopter fleets, and new types will be added soon. The government naturally will have stronger influence over military MRO decisions than civil.

The most obvious challenge for the Aeropolis MRO operation is competition, from inside and particularly outside the country.

There are relatively few civil aircraft MRO providers in Korea, of which Korean Air is the largest. However, most of its work is on its own aircraft, as well as South Korean and U.S. military aircraft. 

Jeon notes that the Aeropolis will not impinge on Korean Air’s business, since the new enterprise will mostly be pursuing work currently conducted offshore or is for new aircraft programs. There is greater available area for growth at the Aeropolis than at Korean Air’s main MRO base.

MRO businesses in China and Southeast Asia generally enjoy a labor cost advantage over companies in more established economies, which makes them tough competition. But Jeon says Cheongju has a lower average labor cost than Korea’s existing MRO locations such as those in Seoul and Busan. As a new enterprise, the Aeropolis will also have lower seniority costs.

Hourly rates are not the only factor in competitiveness, Jeon notes. With new aircraft types becoming more complex, there is a greater focus on advanced-technology expertise. The Korean workforce has proven to be highly skilled in this regard, and the country is a global leader in many high-tech and industrial sectors that support MRO. The country has the world’s leading ratio of research and development investment versus GDP, according to some studies.

South Korea also does not have the same problem as other countries with attracting new aerospace workers, Jeon says. The sector is still regarded as prestigious by Korean students, so there is a steady stream of high-quality workers entering the industry.

Jeon believes the Asian MRO industry needs to have a greater voice in the global arena. To help address this, the Aeropolis has facilitated a gathering of executives of leading MRO companies from across the region to discuss common issues and challenges. One meeting has already been held in Cheongju, and another is planned for November. This initiative could result in a more formal Asian MRO industry group, says Jeon

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