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Is SIA Engineering and Boeing’s New Joint Venture a Game Changer for the Former?

airplane

SIA Engineering Company (SGX: S59) had just announced yesterday that it has signed a ground-breaking joint venture agreement with The Boeing Company (NYSE: BA), subject to regulatory approval.

The joint venture, named Boeing Asia Pacific Aviation Services, will provide fleet management and maintenance services for airlines in “the Asia-Pacific and beyond”. More specifically, the services that the joint venture would provide include engineering, spare parts, repairs, and maintenance for different airlines’ respective fleets of Boeing aircraft.

The joint venture has an aim to combine “Boeing’s original equipment manufacturer (OEM) expertise and advanced e-enabling technology, as well as [SIA Engineering’s] extensive maintenance experience and intimate knowledge of airlines’ engineering needs.” Currently, the joint venture would be able to offer service offerings for Boeing 737s, 747s, 777s, and 787s.

SIA Engineering is expected to own 49% of the joint venture, with Boeing owning the rest.

According to SIA Engineering’s press release regarding the news, the joint venture has already inked a number of maintenance contracts with Singapore Airlines (SGX: C6L), the parent company of SIA Engineering. These contracts cover 27 of Singapore Airlines’ 777-300ERs and 20 787 Dreamliners (the latter group of aircraft, which are meant for Singapore Airlines’ low-cost carrier subsidiary, Scoot, have yet to be delivered).

Both parties in the joint venture are extremely optimistic about its prospects. SIA Engineering’s chief executive, William Tan, even called it a “game changer for the airline industry”.

SIA Engineering has been known to often use the joint venture model as a means to grow its business. For instance, for the financial year ended 31 March 2014, the company’s share of profits from its numerous joint ventures and associated companies made up 55% of its overall pre-tax profit of S$294 million.

This latest joint venture would allow SIA Engineering to compete with vigour for an even larger slice of the aircraft maintenance market in the region. This is attractive for the company given that the aircraft fleet in Asia is expected to grow fairly quickly; according to Singapore’s Second Minister for Trade and Industry, S. Iswaran, the size of aircraft fleets in the Asia-Pacific region is expected to triple by 2020.

Foolish Summary

With the joint venture with Boeing, SIA Engineering might have positioned itself well as a strong force in the aircraft fleet management space going forward.

But, there are still risks to consider. For instance, Lion Air, which is a low-cost carrier that previously was an exclusive Boeing operator and one of Boeing’s largest customers, had placed its largest aircraft order ever (so far) with Boeing’s rival, Airbus, instead.

If Boeing faces even more competition in the region from other aircraft manufacturers, it might affect the future growth of the joint venture with SIA Engineering as well.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.