By Cindy Silviana and Chayut Setboonsarng
JAKARTA/BANGKOK (Reuters) - Singapore, the dominant hub for aircraft maintenance, repair and operations (MRO) in southeast Asia, the world's fastest-growing aviation market, is under threat from low-cost rivals in nearby Indonesia, Thailand and Malaysia.
As the cheaper challengers look to muscle in on a lucrative market - with annual output of S$8.9 billion ($6.57 billion), Singapore accounts for a quarter of all Asia's MRO business - Singapore-based MRO firms are having to scramble higher up the value chain.
With government backing, the maintenance arms of national carriers Garuda Indonesia (JK:GIAA), Thai Airways International (BK:THAI) and Malaysia Airlines are looking to follow the example of Singapore Airlines' (SI:SIAL) SIA Engineering Co (SI:SIAE) and boost revenues from providing services to rival carriers.
"This is a real threat for the Singapore-based MRO companies," said Corrine Png, CEO of transport research firm Crucial Perspective. "The lower end and more labor-intensive heavy maintenance work for the more common aircraft models will face more competition from these locations given their much lower labor costs."
SETTING UP NEXT DOOR
Shares in Garuda Maintenance Facility AeroAsia Tbk (GMF AeroAsia) (JK:GMFI) began trading last Wednesday after the company raised $95 million from an IPO. The shares fell 9 percent in the first three days of trading, though Png noted liquidity was hampered by Garuda selling only 10 percent to the public.
The maintenance offshoot of Indonesia's national carrier wants to raise another $200 million by selling a 20 percent stake to a potential strategic partner - to help it expand existing operations and build a new maintenance facility on Batam Island - just 31 km (19 miles) off Singapore's coast.
GMF AeroAsia has a longstanding partnership with Air France Industries KLM Engineering & Maintenance, which said last month it signed a letter of intent with GMF AeroAsia to "move up" that partnership. It declined to say whether it planned to buy a stake.
GMF AeroAsia CEO Iwan Joeniarto told Reuters the company aims to be a global top-10 MRO provider by revenue from 2021 - it currently ranks 13th - citing a strategic location and manpower costs a fifth lower than Singapore as its competitive advantages.
He said revenue from the Garuda Group currently makes up close to two-thirds of GMF's total, and he wants to switch that to 40 percent, with the rest coming in from new customers.
The $50 million Batam facility, targeted to open in 2019, will seek U.S. and European regulatory certifications that would give it a broader customer base, Joeniarto said.
In Thailand, the government wants to turn U-Tapao airport near Pattaya into a maintenance hub with help from investors including Airbus (PA:AIR), which signed a memorandum of understanding with Thai Airways in March to develop a major MRO facility.
Kanit Sangsubhan, Secretary-General of Thailand's Eastern Economic Corridor Office, said he expected a formal joint venture agreement would be signed in the first quarter of next year. An Airbus spokesman declined to comment on the timing.
Thai Maintenance, the MRO arm of Thai Airways, does 70 percent of its work for the national carrier, but that could drop to 50 percent over time as it attracts outside customers, Kanit said.
"There are plans to eventually spin off Thai Maintenance as its own company," he added.
Malaysia Airlines, which this month gained European approvals to perform major modifications and repairs in avionics, aircraft structure and cabin interiors, intends to take on more third-party contracts over the next 18 months, CEO Peter Bellew said.
Last week, Airbus bought the 60 percent of Malaysia's Sepang Aircraft Engineering it didn't already own for an undisclosed price. The Kuala Lumpur-based facility, which has opened a second hangar that can handle two A320s at a time, serves several southeast Asian airlines including Singapore-based low-cost carriers Scoot and Jetstar Asia.
SINGAPORE MOVES HIGHER
SIA Engineering, which now earns only a third of its business from Singapore Airlines, has set up a joint maintenance center with Philippine low-cost carrier Cebu Air (PS:CEB) near Manila - a cheaper location than Singapore.
And rival Singapore Technologies Engineering (SI:STEG), the world's biggest MRO firm, has a large facility in Guangzhou, China.
As the threat grows at the low-end, the Singapore government is looking to move up the value chain, focusing on research and development and high-tech aerospace manufacturing work in partnership with companies like Rolls-Royce Holdings (L:RR).
Rolls-Royce, SIA Engineering and the Singapore government are investing up to S$60 million in a joint laboratory to work on advanced manufacturing technologies involving 3D printing and robotic solutions.
Professor Tan Sze Wee, executive director of Singapore's Science and Engineering Research Council, part of the Agency for Science, Technology and Research, said the city-state had in the past competed for MRO work based on productivity and cost.
"But the MRO sector as a whole, which leverages on the larger Asia aerospace sector, is a growing pie," he said.
"There are more players coming in from low-cost sites. We will be starting to segment this not just because of productivity or costs but for the more advanced technology. You need the talent to do that, which will take a while for regional countries to catch up."