Monday, November 21, 2011

SIA Engineering – 1H FY 2012 Analysis Part 2

Part 2 of this analysis shall focus more on the operational and qualitative aspects of the Company, and will be shorter (thankfully!) than Part 1. I will touch briefly on operational performance, major events (for MRO and JVs) as well as talk a little about prospects for SIAEC in a new untapped consumer segment for airlines.

Operational Performance

Line maintenance saw a +4.4% increase in flights handled at Changi Airport, from 54,546 to 56,967 for the half-year. The good news is that four new contracts were signed with established companies such as UPS and DHL (logistics and freight forwarding companies), while three contracts were renewed (Jetstar Asia, Air China and Air Mauritius). The issue I have is that the presentation slides do not show if SIAEC actually lost any customers. If we assume that they are simply building on their base with four new contracts then it would seem like very good news as it would indicate that the Company is slowly but steadily expanding its market and broadening its customer base. Line maintenance revenues were flat at around $194.7 million for 1H 2012.

For aircraft and component services, slightly more “A” checks were done (228 versus 224) but this was offset by fewer “C” checks (54 versus 62) and a slight dip in “D” checks (from 10 to 8). As a result of the fewer checks, revenue for this division dipped by -5.8% to $270.5 million from $287.2 million. On the bright side though, SIAEC announced that they had signed on 11 new contracts, with airlines such as Gulf Air, Air India and Vietnam Airlines. It remains to be seen if SIAEC can sustain the momentum of these contracts wins into the next financial year and beyond, and it would be good if I could attend the AGM to clarify this point with Management.

Major Events and Updates

Apparently, one gripe of mine is that SIAEC did not bother to announce the less significant events which occurred during the half-year ended Sep 30, 2011, preferring instead to rely on a set of analyst presentation slides to appraise shareholders of what transpired. In terms of strategic customers, the SIA Cargo Services Agreement worth $358 million was announced back in June 2011. However, the Transaero Cabin reconfiguration of B777 aircraft in Sep 2011 was not, and neither was the Gulf Air Cabin reconfiguration as recently as Oct 2011. Without further information being provided on these two events, and taking the descriptions at face value, I would hypothesize that these two reconfigurations are being done for existing cum new customers and that this represents MRO work which was probably not significant enough in terms of contract value) to be formally announced through SGXNet.

It was the same situation for strategic partnerships, which I had mentioned before in my comprehensive analysis of purchase that SIAEC relied on such partnerships over the years to boost their profits and cash flows aside from their core MRO and Line Maintenance business. Safran’s JV facility was announced back in April 2011, and SIAEC owns a 49%-stake in this JV; and is the second JV between SAFRAN group and SIAEC. In May 2011, the Panasoci Avionics Corp JV took off and commenced operations at Changi Airport. Recall that this was SIAEC’’s 25th JV and they own a 42.5% stake in this set-up which provides MRO services for in-flight entertainment systems. Thus, these two JVs should boost the share of profits and cash flows once they come fully on-stream in the coming months.

The next two tie-ups were not announced on SGXNet. In June 2011, SIAEC signed a GTA with Aircelle for maintenance of nacelle and thrust reverser systems on A380, A330 and A340 aircraft. Quick research shows that Aircelle is actually a subsidiary of the SAFRAN Group, and is one the leading players in the global nacelle market (; with a staff strength of 3,000. It produces large and small nacelles, thrust reversers and aerostructures. See the announcement here. So it would seem that SIAEC is expanding their co-operative agreement with SAFRAN Group whom they have worked with on two JVs already, to include maintenance of nacelles as well. For info, a nacelle is a cover housing (separate from the fuselage) that holds engines, fuel, or equipment on an aircraft.

In Sep 2011, SIAEC signed a letter of intent (meaning they have not gone to the contractual agreement phase yet; this is similar to a Memorandum of Understanding in that it is not yet legally binding) with Messier-Bugatti-Dowty (another subsidiary of the SAFRAN Group) towards appointing SIAEC as an Authorized Service Centre (ARC) for carbon wheels and brakes. According to its website (, Messier-Bugatti-Dowty (MBD) is the world leader in aircraft landing and braking systems and on-ground movement, partner to the world’s leading civil and military air-framers. Interestingly, on Sep 29, 2011, SIA had selected MBD to supply wheels and carbon brakes for its Airbus A350 XWB fleet. This may explain why SIAEC had signed an LOI with MBD for a potential setting up of an ARC.

For these two SAFRAN-related events, I guess they are still in the incubation phase and until a definitive agreement is concluded, there will be no official announcement from SIAEC. At least I feel relieved that the Company has been working hard the last few months to expand its reach, as the lack of corporate announcements and updates on SGXNet has caused me to wonder if the Company had started to rest too much on its laurels. However, there is still no news on whether SIAEC is continuing with its pursuit of Line Maintenance contracts; this after opening its sixth line maintenance JV with Vietnam’s Tan Son Nhat Airport back in November 2010.

Prospects – New Segment of Budget Long-Haul Carriers (Scoot)

With SIA ready to launch its budget long-haul carrier called Scoot, there may exist opportunities for SIAEC to capitalize on this trend to increase business. Flights will commence in mid-2012 and Scoot will operate four Boeing 777-200 planes purchased from SIA initially, with fares up to 40% cheaper than full-service carriers. Scoot plans to expand its fleet to about 14 aircraft by the middle of this decade (i.e. by 2015). Since SIAEC is already tied-up with SIA for their aircraft MRO work, this expansion would gradually bring in more business for SIAEC in terms of not just MRO work, but also possibly line maintenance and fleet management work.

But what I am looking at is not merely an extension of SIAEC’s services to cover one additional new airline. Assuming Scoot takes off in terms of passenger numbers and load factor, it will represent a new untapped consumer segment and prompt many other airlines to consider “spinning off” budget long-haul carriers in order to compete more effectively. There are still many routes out there which are popular but which may not be adequately served by existing airlines, so this new segment also allows for such routes to be explored by major players within the industry, thus opening up more opportunities not just for collaborations with airlines (for MRO, Line Maintenance and Fleet Management), but will also drum up additional business for SIAEC’s myriad JVs and associated companies to provide more products and services for a more stratified industry. It remains to be seen if all these will take off, but the next few years should bear testament to this growing trend (of cheaper long-haul travel) and hopefully spur more investments into this segment. I will write more about this once Scoot takes to the skies next year.

Evolving Industry, New Aircraft and Better Components

It is interesting to read up about the airline industry, as it is constantly evolving and the suppliers of parts and services to airlines constantly see the need to upgrade their engines, components and parts to ensure continuous improvement. Air travel is relatively new to mankind, being only about a century old, but already rapid advancements in technology have made flying extremely safe and reliable; and efficiency is also improvement by the day. With such advancements, SIAEC should have a ready stream of opportunities being presented to it in order to capitalize on business opportunities. Its reputation (hinging on SIA) and track record speak for itself, and though it faces a strong competitor in ST Aerospace, it has a much stronger financial footing and therefore can afford to be more aggressive in pursuing opportunities.

SIAEC had also mentioned in its press release that with its current slate of 25 JV and associates, it is well-poised to seize opportunities for new business through its expanded network of long-term relationships, and with major suppliers of components such as SAFRAN Group and Panasonic. This holds it in good stead to slowly but steadily expand its reach and to increase its stable of JVs and associates as it explores opportunities for working not only with existing strategic customers, but also to send out feelers to source for new partnerships.

The next few years should be interesting for SIAEC, as new aircraft such as Boeing’s Dreamliner come on board, and SIA flies its A380 aircraft and introduces its budget long-haul carrier Scoot.

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