Cheaper rivals target Singapore's aviation maintenance sector

By Cindy Silviana and Chayut Setboonsarng

JAKARTA/BANGKOK, Oct 16 (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, Thai Airways International
and Malaysia Airlines are looking to follow the
example of Singapore Airlines' SIA Engineering Co
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 labour-intensive
heavy maintenance work for the more common aircraft models will
face more competition from these locations given their much
lower labour costs."

SETTING UP NEXT DOOR

Shares in Garuda Maintenance Facility AeroAsia Tbk (GMF
AeroAsia) 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, 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
centre with Philippine low-cost carrier Cebu Air near
Manila - a cheaper location than Singapore.

And rival Singapore Technologies Engineering, 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.

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."

($1 = 1.3544 Singapore dollars)
(Reporting by Cindy Silviana in Jakarta and Chayut Setboonsarng
in Bangkok; Additional reporting by Jamie Freed in Singapore;
Writing by Jamie Freed; Editing by Ian Geoghegan)