Fig 1 - Operating Segments
SIAEC has 2 core operations in repair and overhaul as well as in Line Maintenance. Line management makes up around 35% of total revenue while repair and overhaul makes up the other 65%. However, if we were to look at the results, line management makes up 65% as compared to 35% for repair and overhaul. This implies that line management is a much more profitable business for SIAEC as compared to repair and overhaul.
Repair and Overhaul
Under the rules of aviation authority worldwide, planes have to undergo periodic inspection before they are allowed to fly off (being deemed airworthiness). This rule is implemented to ensure the safety of passenger as a faulty plane is fatal in the air. Other than the scheduled routine maintenance, SIA also provides other services like aircraft modification, paint stripping, conversion of aircraft cabin interiors and e.t.c. Fees are typically being charged based on a fixed fee per man-hour as well as cost of all the materials used.
Commonly, there are 4 checks which a plane has to undergo throughout its lifespan in order for it to be approved for flying off. These are known as the "A", "B", "C" and "D" check. "A" check is the most basic level of check and will be done every 500 flight hours. "B" check is an expanded form of "A" check and is done every 4-6 months. "C" check involves the whole aircraft and is performed every 15 months or 5000 flight hours. The aircraft will have to be put out of service for around 1-2 weeks when performing a "C" check. Last but not least, "D" check is performed every 25,000 flight hours or 5 years, whichever is earlier. This is the most comprehensive and expensive check and will take around 1-2 months to complete. For the reason of cost, some airline might choose to scrape off the plane before it reaches its next "D" check.
Theoretically, we can hence view this part as fairly resilient as an airline has to continue its scheduled maintenance unless they choose to ground it or scrap it. Decision to ground an aircraft may not be the most cost-efficient move. Planes are not cheap and with a lifespan of 15 years (for SIA's plane), grounding it for a year or 2 will represent a waste of capacity. Other planes will also has to bear with heavier load and should the airline decides to de-ground it all the previous check missed will have to be carried out. For your information, "Aircraft maintenance and overhaul costs" represent 3% of total revenue for SIA.
Figure 2 - Number of Registered Aircraft
Given that SIA and its subsidiaries and associates account for a huge percentage of total revenue, let's have a look at their number of registered aircraft throughout the past 5 years. As seen from the table, there has only been a slow increasing trend for SIA, Silkair and Tiger Airway (30+% owned by SIA). During the difficult time of 2008 to 2009, we hardly see any contraction in the numbers. For 31-Mar-12, 2 planes has been transferred to Scoot. From 31-Jan-2007 to the latest data as of 30-Jun-2012, there has been an increase in total number of aircraft from 128 to 156, representing a 20% increase.
Figure 3 - Number of Checks Performed by SIAEC
Digging into the 11 years data, I have compiled the number of checks performed by SIAEC as well as its maintenance and overhaul revenue. I have also highlighted recessionary year in orange - namely 2001 9/11, 2003 SARS and 2008 GFC. For FY 2007/2008, there is a revised maintenance schedule that extend the interval between each check, creating a drop in A check for 2007/2008. From the table, we can easily deduce that a normal financial crisis is not enough a dampener for SIAEC as revenue manages to hold on well. However, a greater aviation crisis like SARS is able to reduce its revenue by 20%. One point to note is that as customers are charged based on man-hour, an "A" check revenue is not equal to that of a "C" check or "D" check. Depending on the extent of check, an "A" check requires 500-1000 man-hours as compared to 1000-8000 for "C" check and 20,000-50,000 for a "D" check.
Line Maintenance and Technical Ground Handling
For line maintenance, its job is to "release certification, such as aircraft transit checks, night-stop checks and rectification of defects as well as maintenance and repair of aircraft radio systems, navigation and
communication systems, radar and cabin management interactive video systems". SIAEC's main task is to ensure that the aircraft has done all relevant checks before they are issued with the airworthiness certification.
For technical ground handling, they provide services "such as push-back and towing of aircraft, water and lavatory servicing and the provision of aircraft ground support equipment". To sum up, this division is highly correlated with the number of flights received by Changi Airport as the higher the number of flight, the higher the revenue is. SIAEC has approximately 80% market share in Changi Airport Singapore.
This division also enjoys a high profit margin of 20% as noted earlier as a result of the low expenses involved. For Repair and Overhaul, material cost and equipment depreciation are involved resulting in a much lower profit margin. However, for line maintenance, it is relatively asset-light and fees are charged based on a flat fee per flight handled basis with the bulk of the cost being manpower.
Figure 4 - Flights handled by SIAEC at Changi Airport
Just as how the number of departure flights have increased over the years, number of flights handled by SIAEC has also shown a similar trend. Revenue is also correlated with the number of flights being handled. Hence, this division will be in sync with future growth in air traffic at Changi Airport, especially with the ASEAN Open Skies agreement in 2015 where traffic is expected to expand by at least 5% per year. Air traffic is relatively stable apart from the 2003 SARS where there is a 25% drop in revenue as a result of a drop in number of flights handled.
To conclude, both of SIAEC's core operations are relatively stable even during a normal recession. Should a crisis like SARS occur once again, we can then expect some significant drop in revenue at a range of 20-30%. The line maintenance business also have a chance to grow in line with the air traffic at Changi Airport. However, SIAEC has a huge proportion of earnings coming from its investment, associates and JV, which we cannot overlook.
Investments, Associates and Joint Ventures
Not willing to be solely dependent on Singapore's air traffic for growth, SIAEC has been constantly seeking growth through external partnership. Its external partnership strategy is a two-pronged approach where it partners with well-known high-tech OEM to build its expertise as well as seeking overseas partner to start line maintenance business to grow its revenue base.
Figure 5 - Joint Venture with OEM
It has always been part of the strategy to invest in a joint venture with established OEM to expand the breadth and depth of their services. Not only will they get an increase in revenue, SIAEC will also be able to provide better technical expertise for its MRO customers. Partners can also benefit from the customer base of SIAEC in Singapore.
Some of the major partners involved are like Rolls-Royce and Pratt & Whitney which are 2 of the 3 largest aero-engine manufacturers. A wide range of repair services are also provided like hydraulic pump, thermal coating, engines, fuel accessory, turbine, aircraft cabin, landing gear, compressor and avionics. These services help SIAEC to market itself as a one-stop service contractor that can take care of all needs.
Figure 6 - Line Maintenance Joint Venture
While SIAEC have joint venture in Pan Asia Pacific Aviation Services and PT JAS Aero-Engineering Services, they seemed to have adopted a new strategy ever since the joint venture of Aviation Partnership (Philippines) Corporation was formed in 2005. The strategy has been to make use of line maintenance activities which require lower capital expenditure and start-up time to expand into repair and overhaul services at a later stage. The line maintenance partnership will allow them to forge a critical mass of customer base and business volume.
After the partnership with Cebu Pacific Air in Philippines, SIA Engineering (Philippines) commences operation in 2009 becoming their first overseas based heavy maintenance facility. In 2007, SIAEC acquired Aircraft Maintenance Services Australia (AMSA) which offers line maintenance services in Sydney, Brisbane, Coolangatta, Melbourne, Adelaide and Perth. After the success in Philippines, SIAEC went on to establish Southern Airports Aircraft Maintenance Services (SAAM) with Southern Airports Corporation. Having commenced operation in late 2010, there has been plan to expand to other airports in Vietnam and to scale up operations to provide heavy maintenance.
To conclude, SIA Engineering will be a better way to take advantage of growing air traffic rather than SIA which is subjected to fuel cost, higher capex and more intense competition. While its resilience is respectable, expect some decline in both top-line and bottom-line during a global epidemic on the scale of SARS. There has also been signs that they are seeking to expand beyond their stronghold in Singapore to countries like Philippines, Vietnam, USA and Indonesia. Meanwhile, shareholders can benefit from the slow and steady growth in air travel industry in Singapore with our 2 IRs, F1 and other events.