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2 Looming Risks for SIA Engineering Company Ltd

SIA Engineering Company Ltd (SGX: S59), or SIAEC for short, provides extensive aircraft maintenance, repair and overhaul (MRO) services to more than 80 international airline carriers and aerospace equipment manufacturers worldwide. At Singapore’s Changi Airport, SIAEC provides line maintenance to over 50 airlines passing through Singapore.

The group has a long track record of delivering excellent service to a wide-ranging clientele of internationally renowned airlines. However, of late, SIAEC has seen its business battered by headwinds in the MRO industry. Here are two key risks affecting SIAEC which investors need to take note of.

1. Engine efficiency and maintenance cycles

SIAEC’s core business is in airframe and line maintenance, and the airline industry has seen a shift to aircraft with a lower maintenance frequency. The longer intervals between maintenance checks are due to various advanced technologies employed by the Original Equipment Manufacturers (OEM) players as well as the greater use of composite materials within the aircraft as well as the airframe. However, SIAEC will be negatively impacted as less mandatory checks also translates into lower revenues. In its FY 2019 earnings report, the group cited a decline in engine shop visits and heavy checks as a key reason for the year-on-year revenue decline.

More efficient engines equate to a longer maintenance cycle — planes which used to be checked once per year may now need to be checked once every two to three years. This implies that a structural change is occurring where the overall number of checks required for all MRO players has declined. The pie is, therefore, shrinking for MRO companies as the largest aircraft engine manufacturers, such as General Electric CompanyRolls-Royce Holdings PLC and United Technologies Corporation (manufacturer of the Pratt and Whitney brand), continue to improve on their engine specifications.

Newer planes are also coming on stream to replace older aircraft, and by virtue of these aircraft being new, would also require less heavy maintenance checks.

2. Fiercer competition

Singapore, which used to be the dominant hub for aircraft MRO in Southeast Asia, is under threat from low-cost rivals in Indonesia, Thailand and Malaysia. The maintenance arms of the national carriers for these three countries are seeking to replicate the success of SIAEC and boost revenues by providing services to rival carriers.

Given their lower labour costs as compared to Singapore, this gives these competitors an advantage over SIAEC as well as the aerospace arm of Singapore Technologies Engineering Ltd (SGX: S63).

SIAEC needs to innovate and diversify

Given these challenges, SIAEC needs to ensure it continues to innovate in order to provide value-added services to clients. This may slow the decline in airframe maintenance revenue but is unlikely to totally halt it. SIAEC should also form more strategic alliances and joint ventures in order to broaden its earnings from such associates, thus mitigating the decline in profits from its core business.

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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 Royston Yang does not own shares in any of the companies mentioned.