ST Aero will be at the top when recovery comes: chief

Company’s growth will come from existing businesses and acquisitions

ALTHOUGH the global airline industry is struggling through severe turbulence, established aviation engineering players with geographical spread and technological capabilities will survive the downturn and emerge stronger after an industry consolidation.

And Tay Kok Khiang, the president of ST Aerospace, the aviation unit of Singapore Technologies Industries, sees his company emerging as one of the winners when the dust of the battle settles.

Despite the numerous short-term global shocks, global airline traffic has grown continually on a long-term basis, he said.

‘There has been a 36 per cent rise in air travel since the events of 9/11. Over a 30-year period, growth has been steady, though interrupted every 8-10 years. Global MRO (maintenance, repair and overhaul) spending is expected to grow from US$45.1 billion last year, to US$56 billion by 2013, and US$68.6 billion in 2018.’

And even as airlines park some 800 older planes in a bid to slash capacity, the global fleet grew by 5.6 per cent last year. This year growth will be zero – with the global fleet number stabilising at 19,000 – as retirements are matched by new deliveries.

ST Aero – which is the world’s largest airframe maintenance and third party airframe maintenance company, surpassing competitors Lufthansa Tecknik, Hong Kong’s HAECO and AirFrance-KLM groups – has six major global bases. Besides its two Singapore facilities – Sasco and STA Engineering – its MRO bases include ST Mobile Aerospace in Alabama, San Antonio Aerospace in Texas, Panama Aerospace Engineering and Shanghai Technologies Aerospace (Starco).

The company, which accounts for almost half of listed ST Engineering’s income, is also one of the world’s leading passenger-to-freighter (PTF) conversion outfits in the world.

It is Boeing’s only approved PTF conversion centre for B767-300, MD11 and B757-200 aircraft, and recently clinched a new 10-year US$136 million deal with Boeing for the B767-300 fleet PTF. It also has a Supplement Type Certification for B757 conversion, marking its capabilities as a designer and manufacturer of airframes for that plane.

According to Mr Tay, the company has enough PTF work to keep it busy for the next five years.

‘We have 17 aircraft and 10 options for the B767 conversions, which will take four years to complete. For the 757, we just got an order for 87 aircraft from FedEx, which is replacing its less fuel-efficient 727s. We are rushing to process this as fast as we can.’

The company is also the global leader in engine repair and maintenance. It recently inked various deals with GE Aviation and CFM International to provide MRO, on-wing support, and total aircraft support for the CFM and GEnx engines. Its portfolio includes some 450 engines under total aviation support, and 600 aircraft under component total support.

And its clients include nine of the 13 biggest airlines in the world: Lufthansa, FedEx, JAL, ANA, Delta, Northwest, Qantas, Continental and US Airways. Meanwhile, it has also been picking up discount and low-cost carrier business, including fast growing players like AirAsia, Lion Air, Jetstar Asia and Cebu Pacific.

But ST Aero also faces some real challenges.

Capacity and cost cutbacks by airlines will impact its ‘nose-to-tail’ production. There is also the danger of defaults if airline customers hit the financial skids.

Parent ST Engineering’s net profit for the first quarter ended March 31, 2009, fell 30.4 per cent to $85.2 million, from $122.5 million a year earlier largely due to its key aerospace unit’s pre-tax profit being halved to $39.8 million as freighter conversion re-deliveries dried up and sales fell.

The biggest potential challenge could be competition from OEMs (aircraft and engine makers) moving downstream into MRO services. But Mr Tay does not see this as a sustainable trend.

‘Five years ago, when OEM’s sales fell, some started moving downstream to boost their toplines. But under the current circumstances, most are rationalising their operations and concentrating on margins. What OEMs are doing now is establishing strong partnership with strong global MRO players.’

Indeed, think tanks like Aerostrategy note that established independent players such as ST Aero have become increasingly important partners for OEMs and airlines which are outsourcing MRO jobs to reign in costs. Studies also project a global consolidation in the MRO segment, with bigger players like ST Aero and HAECO buying up smaller independent players.

Mr Tay reckons ST Aero’s growth will come from both existing businesses and acquisitions.

‘We will see organic growth at our existing facilities, but will acquire new capacity if it makes sense. We have $1.3 billion in cash at the group level, negligible gearing and are triple-A rated. So we have lots of capacity for leveraging. Cash is not a concern.’

The issue, rather, is finding a right target, he added. And ST Aero is currently looking for its seventh global base.

Historically, the company has enjoyed annual growth of about 8 per cent. But growth alone is not enough, said Mr Tay.

‘It has to be strategic growth which delivers profitability. It has to enhance our competitive position.’