China's sheer scale means that it is going to become an major part of the MRO world, writes Colin Baker
China has long been seen as a challenging market for the maintenance repair and overhaul (MRO) industry, but a potentially lucrative one that any player with global ambitions cannot afford to ignore.
Growth rates are not the only consideration either. TeamSAI Consulting predicts that while India’s commercial airline fleet is expected to grow faster than any other region in the world (including China) at nearly 11% through 2023, it will constitute just 1.5% to 3.1% of the global fleet over the period. On the other hand, China, while expected to grow at a slower rate of 7.7%, will enjoy a more substantial share of the fleet, growing from 8% to nearly 12% of the global fleet over the period.
The story is similar in terms of new deliveries. Over the next 10 years, nearly 16,500 jets and turboprops for use in scheduled, commercial service are forecast for delivery. The deliveries to India though will represent just 4% of the fleet compared to the nearly 15% bound for China. All this suggests that despite the growth India may provide, China will remain the growth engine in the region as it builds its fleet to rival that of all of Asia Pacific.
TeamSAI sees the current baseline fleet (1,858 aircraft) growing by 9.1% annually in the first five-year period to 2,877 aircraft by 2018 and by 6.2% in the second five-year period to 3,888 aircraft in 2023. Over the ten year period, the Chinese fleet is forecast to grow by 7.7% annually and nearly double in size. China’s share of the global fleet is expected to increase from 8% in 2013 to 12% in 2023.
The Chinese MRO market in 2013 is valued at US$3.6 billion doubling in 10 years to US$7.8 billion
in 2023, an 8.1% compounded average annual growth rate. This is nearly double the rate of 4.3% for the Asia-Pacific.
Given this background, and the growth fuelled by the tendency for West European and US carriers to send their wide-bodied aircraft to China for heavy maintenance, it's not difficult to see why companies have been investing heavily in China.
TeamSAI estimates that there are over 80 MROs "of various descriptions" in China, 25 of which provide MRO services (aircraft, component and engine) to commercial operators. The consultant says that many aircraft MROs appear to be supporting Western operated international aircraft types, such as the Boeing 747, 777, and Airbus A330, A380.
Ameco Beijing has invested CNY1.5 billion (US$245.2 million) in its facility expansion programme from 2005 to 2010, including an A380 hangar, a Boeing 747 painting & overhaul hangar, a new warehouse and logistics centre, an energy-saving and environmental-friendly boiler house as well as a significant extension of the Ameco Aviation College.
"Now, all of the above mentioned facilities are completed and enjoy good utilization," says Ameco. "This and next year’s investment will focus on our VIP capability and selected additions in the component and engine business. The next big wave of hangar investment will be in conjunction with the new airport in the South of Beijing."
St Aerospace has also been investing heavily in China. "Over the last 12 months, we have made plans to expand our facilities in Guangzhou," says Chang Cheow Teck, President, ST Aerospace.
In 2010 the Singapore-based MRO provider established a joint venture with Guangdong Airport Management Corporation (GAMC) – ST Aerospace (Guangzhou) Aviation Services Company, to establish a commercial aircraft heavy maintenance facility. "The new hangar is expected to be completed by December 2013 and operational immediately after. Upon completion, this hangar can accommodate one wide-body and two narrow-body aircraft simultaneously," says Chang.
"Additionally, we have received the Land Certificate for the purchase of 147,000m2 of land which will allow us to build four wide-body aircraft hangars. Each hangar can accommodate two wide-body and one narrow-body aircraft simultaneously. We plan to start constructing the second hangar once the first hangar is completed, and target to complete in the fourth quarter of 2014."
The new facility will initially offer line and heavy maintenance services, while leveraging ST Aerospace’s network to provide on-wing engine services and EcoPower engine wash services to its customers.
"With all these new expansion plans, we hope to better support Chinese and international airlines that already have operations in the southern part of China as well as other carriers flying into Guangzhou and Shenzhen, " explains Chang.
In Xiamen, ST Aerospace (Xiamen) Company is a joint venture company with Xiamen Aviation Industry Company (XAICO). Incorporated in 2008, it commenced operations with the induction of the first engine, a CFM56-7B from long-term customer Xiamen Airlines, in October 2011. In 2012, the Xiamen facility received 18 engines in 2012 from both Chinese and regional customers. Engine input is expected to increase to about 30 engines this year..
The company also has a joint venture with China Eastern Airlines in Shanghai - Shanghai Technologies Aerospace Company, which has seen over 700 aircraft go through its doors since it started operations in 2005. "We have been seeing a healthy fill rate for both our hangars in Hongqiao and Pudong, and we are expecting it to be sustained for the rest of 2013," says Chang.
"Our hangars in China are currently well utilised," notes Chang. "We have a healthy fill rate and are expecting to see a sustained and steady hangar rate. Despite labour costs increasing on a worldwide basis, not only in China, we remain competitive in terms of our technical expertise and extensive portfolio of professional capabilities."
"In the short term, the growth in hangars appears to be on track with near-term growth forecasts. However, if additional facilities come on line too fast, there is certainly a risk of overbuilding capacity at least by a few years, " says Chris Doan, TeamSAI’s Chairman and CEO. A key challenge is labour - or lack of it. This is common to the aviation industry all over the world, but China has some challenges that are home-grown.
The country's working age population has begun to shrink sooner than expected, warns the International Monetary Fund, and will soon go into "precipitous decline". The IMF warns that the surplus of peasants from the countryside looking for work peaked at 150 million in 2010 and will disappear soon after 2020, with a labour shortage of nearly 140 million by 2030.
Boston Consulting Group says that “productivity-adjusted wages” in China were just 22% of US levels as recently as 2005. They will reach 43% by 2015, or 61% for the American South.
What this means for the aerospace industry is unclear, but China is certainly responding. TeamSAI notes that there are five universities apparently dedicated to aviation programmes within China. They are the Civil Aviation University of China, the Civil Aviation Flight University of China, the Civil Aviation Management Institute of China, the Guangzhou Civil Aviation College, and the Shanghai Civil Aviation College.
In 2011, there were 50,000 students enrolled in some type of aviation programme, according to the Civil Air Administration of China (CAAC) at these five universities. TeamSAI notes that this is 14,000 more students than that reported in 2007 (a 38% increase in four years). 16,000 new student enrolments were recorded in 2011 alone, which is 4,000 more enrolments than in 2007 or a33% increase, says the consultant.
"Clearly, local Chinese universities see a big market in aviation and are aggressively adding programmes to support the growth. Students appear to be following," notes Mike McBride, executive vice president of TeamSAI Consulting.
Chang at ST Aerospace agrees. "For the moment, we are not facing any particular difficulties for recruitment in China thanks to the presence of professional aviation institutes and universities," he says. "Manpower resource is indeed an important part of our maintenance and engineering services, and it is always an important consideration in our overall sustenance and growth. This is why we will always tap on the local market of the countries in which we operate for skilled personnel."
He adds, "We have trainees worldwide – China is no exception. Through training, we hope to build a pool of good and skilled employees in the long run. We have a healthy staff retention rate, which in turn helps us to ‘equip’ the company with experienced professionals as well as reduce replacement needs."
Ameco Beijing is confident that it will avoid problems with labour shortage. "We continuously recruit graduates from Middle School and qualify them in a three-year vocational training programme to become aviation mechanics with a wide and solid qualification."
The company also runs one-year programmes with college graduates and many other advanced programmes for engineers and type-rated technicians. English language and procedural training of course is also in its portfolio. "All this is done in our own Ameco Aviation College (AAC) or at customer site," says the company.
AAC is providing a sufficient number of highly skilled newcomers, says Ameco. "AAC is a huge advantage for Ameco in the training of mechanics, and the graduates from AAC are an indispensable asset for the company. It offers basic maintenance training, basic skill and type-rating training and one of the key examination stations for personnel seeking basic or managerial licenses."
However, dealing with the labour cost issue poses another challenge. "As the labour rate advantage equalizes, the value proposition any MRO can offer quickly changes to favour speed, quality, and customer service," says McBride.
"Labour arbitrage opportunities may adjust whereby lower-margin airframe work may stay closer to home in the coming years as it becomes more expensive to send aircraft abroad for certain maintenance. Alternatively, higher margin work (such as engines and components) may continue to drive OEMs and large independent MROs to expand service centres in areas they see the most demand," adds Doan.
At least for certain types of maintenance, third party work may prove more difficult to attract than in the past. "It is important to recognize that the outsourcing of heavy aircraft work to Asia was primarily an economic decision," says Doan. "Even with aircraft ferry costs rolled into the economics, it was not unusual for US airlines to claim 35-40% reductions in costs compared to their previous in-house costs. Now, add the shrinking gap in labour rates and the high cost of fuel, and the airline customer is quickly approaching an economic disadvantage for not seriously looking at domestic options."
However, the likes of Ameco are confident of their ability to attract and continue to attract third party business. Some 80% of revenue of aircraft overhaul is from third party customers.
In addition to its long-term customers, last year Ameco says it also attracted new customers from throughout Asia as well as Africa, North America and Europe. "The future focus will be to further increase the third party business," says the company.
However, Ameco seems to realise that it cannot rely as much on labour arbitrage as it has done in the past. "We expect that international competitiveness and the cost development in China will become more and more a topic for the industry. To increase efficiency and productivity is our answer to this. As one measure for example, we started Lean Management in 2007 which helps optimizing the working processes for high quality services, cost savings and shorter turnaround times."
Most MROs in China have been joint ventures. "Joint ventures abound in China and the MRO business sector is no different - they are likely to continue and even grow. This is mostly driven by the fact that one cannot enter the Chinese market without a Chinese majority partner. Many of these relationships have reached a mature state now and will be entering a renewal stage in the next few years so it will be interesting to see who decides to continue and who swaps partners," says McBride.
"The recent loosening restrictions which banned private airlines in China stands to have a significant impact on the future of the market, especially with regard to who the players will be in this market," says McBride. "In all likelihood there will be a number of new entrants into the market who will attempt to achieve scale quickly via mergers and there is also a high potential that some of these new entrants will attempt to join forces with existing state-owned airlines."
McBride says, "Hainan Airlines is currently the only private airline based in China. Hainan has been aggressive in its pursuit of MRO joint ventures in the past, so I would expect them to take advantage of this change in regulations on the airline side. Some external (non-Chinese) airlines might come together to create the scale required to enter the market, but for the most part, the only other candidates in China are state-owned. Merging private enterprise with a state-owned entity is rife with challenges, so limited activity is expected."
"Many Chinese companies are eager to form joint ventures with Western companies to build from their client base, knowledge base, and to gain insight on how to overcome many of the support constraints such as parts and tooling logistics, technical support, etc.," notes McBride. "In time, China likely will move toward providing MRO offerings by wholly-owned Chinese entities, especially as the growth shifts to accommodate the expansion of China based airlines."
HAECO Sees Profits Drop
HAESL Group saw a dip of 21.1% in attributable profits, from HK$455 million to HK$359 million in the first half of 2013 compared with a year ago, as it battled headwinds on several fronts.
"results were adversely affected by reduced demand for engine overhaul services resulting from the early retirement of Boeing 747-400 aircraft belonging to Cathay Pacific. However, the effect of this was mostly offset by stronger than expected demand for overhaul of Trent 700 engines, " said group chairman Christopher Pratt.
Taikoo Engine Services (Xiamen) Company Limited (TEXL) overhauled more engines and as a result reduced its losses in the half-year. The operations of Taikoo (Xiamen) Landing Gear Services Company Limited (TALSCO) continued to be affected by a fire which occurred in November 2012 and no landing gear overhaul work was done in the first half of 2013. A partial resumption of services is slated for the early 2014.
"The results of the Group’s other joint ventures in Mainland China improved over those of the same period last year as output volumes increased and facilities were better utilised," said Pratt.
"The overall labour market in Hong Kong continues to be tight. HAECO in particular continues to suffer from a shortage of skilled and semi-skilled labour," he added.
"The outlook is challenging. Forward bookings for HAECO’s airframe maintenance services in Hong Kong are weak by historical standards and are in any event constrained by the shortage of skilled and semi-skilled labour."