Asian maintenance operations continue to expand, but could airline capacity cuts and economic uncertainty caused by the spread of SARS stunt their ambitions?

Maintenance, repair and overhaul (MRO) shops in Asia are refusing to stunt their expansion plans even as airline capacity cuts are now beginning to affect their region.

This year alone new maintenance hangars are being opened in at least five Chinese cities and firms throughout the region have ambitious expansion plans for 2004 and beyond. For example, Guangzhou Aircraft Maintenance Engineering (GAMECO) will more than double its overhaul capacity overnight when it moves to Guangzhou's New Baiyun Airport at the end of the year.

Most maintenance firms in the region have been able to weather the global airline crisis that has battered much of the industry over the past two years. Their relatively low-cost structure, selection of strong customers and drive to introduce new business lines have given them the edge over firms outside Asia. But Asian MRO shops face a new storm as the military conflict in Iraq and the spread of the Severe Acute Respiratory Syndrome (SARS) virus results in yet another round of airline capacity cuts and the grounding of more aircraft before overhauls.

Overhaul cancellations

In March, Taikoo Xiamen Aircraft Engineering (TAECO) lost a Boeing 747 overhaul when it was cancelled by an undisclosed European customer. Hong Kong Aircraft Engineering (HAECO) had two Boeing 777 overhauls deferred from May to June after Continental Airlines decided to suspend its New York Newark-Hong Kong service. GAMECO also had one maintenance postponement last month when a lease deal between an overseas firm and an Asian carrier was shelved as the SARS virus began to spread.

The mysterious flu-like virus has deterred travel to and within the region, forcing Asian carriers over the past month to implement steep capacity cuts. These reductions have already started to eat into line maintenance operations - especially in SARS-stricken China, Hong Kong and Singapore - and threaten to have a knock-on effect on overhauls. More importantly, SARS has struck in the back yards of Asian MRO shops and has affected customers that were not stung so badly by the September 2001 terrorist attacks or the outbreak of war in Iraq last month.

"A lot of line maintenance activities have been reduced because of flight cancellations," says TAECO marketing director Hans Chow. "In terms of heavy maintenance, it has not happened yet, but we believe it will come very soon."

MRO firms throughout the region are trying to be resilient by finding alternative sources of revenues to offset what they hope will be a short-term downturn in business from Asian passenger carriers. Some firms are adding capabilities for new aircraft or engine types while others are introducing new modification lines, including cargo conversions and cockpit door reinforcements.

Firms also hope to quickly fill any overhaul slots that become vacant by lining up new customers and additional business from existing customers. Asian shops can be an attractive alternative to carriers outside the region looking to curb costs and offset declining revenues.

HAECO, for example, expects to gain additional work from Northwest Airlines as the carrier looks to maintenance outsourcing as part of a broad cost-cutting exercise. "They have been closing their maintenance bases in the USA," says HAECO commercial general manager Ashok Sathianathan. "We have gained from that they're talking about additional aircraft being outsourced to us."

Asian carriers with in-house maintenance organisations are also hopeful of taking on more third-party business as airlines from outside the region look to reduce their maintenance costs. Garuda Indonesia last year spun off its maintenance unit, which is now seeking European Joint Aviation Authorities certification in a bid to attract European carriers. Singapore Airlines subsidiary SIA Engineering, meanwhile, plans to open a fourth hangar next year. The resulting 15% increase in maintenance capacity is intended to help the firm grow its third-party business, which now only accounts for 20% of revenues.

Unlike their counterparts in mainland China, maintenance firms in Hong Kong and Singapore rely heavily on airlines outside Asia. But these firms have largely avoided the financial woes besetting most European and US carriers.

HAECO primarily maintains 747 freighters for Northwest Airlines and United Parcel Service (UPS), insulating the firm from passenger capacity cuts. Meanwhile, overhaul deferrals at HAECO's third US customer - Continental - are expected to only last a few weeks, assuming its Hong Kong service is resumed in June as planned.

Rival Singapore Technologies Aerospace (ST Aero) also relies heavily on airlines outside the region, but similarly has been able to escape any major repercussions from the downturn, in part because it serves a large base of cargo carriers - including DHL, FedEx and UPS. ST Aero president Tay Kok Khiang points out its passenger customers are some of the largest in the world and "have strong operational fundamentals".

"We have not experienced any slowdown in MRO work of a significant nature from any of our customers so far," he says. "In fact, some of our customers have increased their requirement."

GAMECO, TAECO and other Chinese firms, meanwhile, have been able to dodge the downturn in the industry over the past two years by focusing mainly on Asian carriers. Chinese carriers, in particular, keep on expanding, offering joint venture MRO shops in the country plenty of expansion opportunities.

GAMECO, a joint venture between China Southern Airlines and China's Hutchison Whampoa, opened a new overhaul line in the northern Chinese city Zhenghzhou last year and business development director Joey Lo says a second line could open "very soon".

Expansion in Zhengzhou partly depends on GAMECO moving to the New Baiyun Airport in October as scheduled. The centre will have 11 or 12 overhaul lines, compared with five at the existing airport. "We're still optimistic about China," Lo says.

Ameco general manager Walter Heerdt says overhaul requests for 2002 and the first half of 2003 were greater than its capacity. As a result, Ameco has decided to add a third overhaul line at its Beijing centre next year. Ameco, which is owned by Air China and Lufthansa Technik, also plans to begin offering 777 overhauls.

"We see a lot of opportunities for the future, so therefore we are increasing our capacity," Heerdt says.

He says the firm, like many other MRO shops in the region, has been able to weather the industry downturn by carefully selecting its customers. Besides Air China, Ameco counts Asiana, Lufthansa and leisure operator Thomas Cook as key customers.

Consolidation benefits

Ameco, GAMECO and other Chinese JV MRO shops also hope to benefit from this year's consolidation of the Chinese airline industry. Ameco could pick up new business from the smaller Chinese carriers being merged into Air China, while GAMECO is eying the new China Southern subsidiaries.

German firm MTU, which opened a joint venture engine maintenance facility earlier this year in Zhuhai with sole customer China Southern, also believes the airline consolidation movement will lead to additional customers.

"The mergers with the other airlines is good news for us," says MTU Zhuhai marketing manager Sophie Liao. "It can facilitate us, but the competition is very tough."

ST Aero is also targeting China as it expands its capacity. In the second half of this year the firm plans to open a new joint venture facility at Shanghai's Hongqiaoairport with China Eastern Airlines. A second joint venture facility with China Eastern is planned for Shanghai's Pudong airport in 2005.

"We are certainly going ahead with our expansion plans in China," says Tay.

HAECO already has a presence in China through its majority stake in TAECO, which it co-owns with Beijing Kai Lan Technology Development, Cathay Pacific Airways, Japan Airlines, SIA Engineering and Boeing.

In recent years HAECO had directed its expansion to China rather than Hong Kong. Sathianathan promises this trend will continue. Last month TAECO opened a third hangar at its Xiamen centre. Meanwhile, sister company Shandong TAECO Aircraft Engineering (STAECO) plans to open a second hangar next month.

The new Xiamen hangar will help the firm expand its cargo conversion business. Boeing has selected TAECO as the modifications shop for its new 747-400SF programme and TAECO is also looking at the potential for converting Airbus A300-600s, Boeing 757s and MD-82s.

"With passenger traffic down, we are focused on cargo conversions," Chow says. "What else can you go for?"

ST Aero, similarly, has worked hard to build its cargo conversion business and is one of the modification shops involved in Boeing's 757SF programme. ST Aero is also trying to build its bundled "maintenance by the hour" offering. The firm already has a component management and support services package deal with Malaysia's AirAsia and is looking to extend this to additional customers.

More recently, ST Aero has taken the unusual step of adding wet-lease services, starting with a Boeing 737-300 deal with Biman Bangladesh Airlines. Tay says the new service, added at the request of Biman, "shows our commitment to meet the varied needs of our customers".

HAECO, also in an effort to diversify its business, has started to offer total care asset management services for the Airbus A340-600. Part-owner Cathay Pacific is the launch customer for this service, and the firm is pitching it to other A340-600 operators. Sathianathan says HAECO is also looking at offering a similar service for Air Hong Kong's new fleet of A300-600 freighters.

"It's a different kind of growth we are targeting," Sathianathan says, explaining that cargo conversions are highly labour intensive and can be done more cost effectively by TAECO.

HAECO is also trying to push the installation of cockpit door reinforcement kits as flight cancellations at its Hong Kong base eat into its line maintenance operation. The firm performs line maintenance for most carriers at Hong Kong, but new work for its line mechanics is required to keep them busy as SARS grapples the region. Cockpit door installations are the perfect solution because they can be done outside, take several days to complete and help "fill the gap" until line maintenance activity returns to normal.

"The impact of SARS is mainly on line maintenance, not heavy maintenance," Sathianathan says. He adds that line maintenance is being "pretty badly" hit, but believes the company has enough heavy maintenance work to survive the crisis. GAMECO's Lo says his customers are even fighting for overhaul slots this quarter because some carriers are trying to bring maintenance forward to take advantage of aircraft downtime caused by the SARS-related capacity cuts.

Maximising downturn

"Four operators are talking to us to schedule their maintenance early because they are grounding aircraft," Lo says. "Because of the flight cancellations they want to maximise their downturn."

But executives at other MRO shops claim most airlines do not want to touch their grounded aircraft. SARS, they point out, has driven down revenues, forcing carriers to cut costs and avoid any unnecessary capital expenditures.

Overhauls have not yet been too affected because carriers are generally committed to long-term maintenance contracts and had several aircraft requiring heavy maintenance when the capacity cuts began last month. Even the construction of new hangars is usually done on the heels of new or expanded maintenance contracts. But the extension of temporary SARS-driven capacity cuts in Asia could ultimately bring bad news for both the airlines and their maintenance suppliers.

"The knock-on effect will come two, three, four, six, eight months later," says TAECO commercial general manager Johann Benade. "How severe, I don't know."

Tay agrees, saying out there will be a time lapse before an impact is felt, if any, by ST Aero: "It is difficult to foresee what will happen in the longer term, whether the reduction in flying will continue and for how long."

Source: Flight International