Photo: SIA Engineering Company
SIA Engineering Company (SGX: S59) is a stock that has always been on my watch list. As the market leader for aircraft maintenance and repair in Singapore, they seem to be a business that’s not only recession-proof, but also one that has built a reputation of providing world-class standards of safety and deliverability over the years.
I mean… who else wants to fly in an aircraft that’s not properly maintained or undergoes substandard checks? In the aviation industry, safety is everything and there is no room for compromise.
SIA Engineering’s reliability and reputation is well-known and it is no surprise the company is a partner of many of the industry’s giants — Boeing, Airbus, Royce Rolls, etc.
Here are some brief notes about SIA Engineering Company (SIAEC):
- Singapore Airlines is their major shareholder and own a 77.55% stake in the company
- SIAEC provides line maintenance to more than 60 of the 100 airlines at Changi Airport
- SIAEC has been paying dividends even during crises and recessions (e.g. 9/11, 2003 SARS outbreak, 2008/9 global financial crisis, euro debt crisis)
Now before we purchase any stock, it is important that we understand what the company does, how it actually generates its revenues and how well-positioned they are in its industry… and that’s what I aim to help you achieve in this article.
Let us start by taking a quick look at SIA Engineering’s business model and how they make their money.
While they are not technically part of the group’s operations, I’ve included Joint Ventures & Associates in this chart because this segment contributes a huge bulk of profits to SIAEC and ignoring this segment would not complete the overall picture of how SIAEC makes its money.
As you can see, there are four segments in SIAEC. All four segments are independent of each other and assume different roles in the company. Let us explore each segment in detail:
Aircraft Maintenance & Component Overhaul
They call it heavy maintenance and this is where all the major aircraft checks are done at one of the six hangers owned by SIA Engineering Company.
Simply put, to ensure the safety of the aircraft, all aircraft must make regular visits to the hanger to undergo scheduled “A”, “C”, or “D” checks. In this case, airlines with an MRO (maintenance, repair & overhaul) contract with SIAEC will send their aircraft to the hangers for checks and repairs.
- A Check: required every 600 flying hours (about 2 months)
- C Check: required every 7500 flying hours (about 20 months)
- D Check: required every 25,000 flying hours (about 5 years)
As fees are based on man-hours, ‘D’ checks are usually the most expensive as it typically takes 1-2 months to complete.
I have also taken the liberty to collate the data of SIAEC’s A, C, D checks over the past five years. The number of hanger visits (especially ‘D’ checks) have been falling and the drop has impacted their revenue.
You can read about why SIAEC’s hanger visits are falling here — 3 Things I Learned from SIA Engineering’s AGM 2015
This segment is usually the largest contributor to the SIA Engineering Company’s revenue. In addition to all the scheduled checks, any other major inspections, repairs, engine modifications, cabin modifications, inflight system retrofitting are also done at the hangers.
SIAEC’s fleet management serves as a “knowledge-based support” for airlines who only want to focus on their key competencies (ticket sales, flights, delivering cargos and mail, opening new routes, etc.)
The fleet management programme was introduced in 2001 to help airlines outsource their engineering operations and maintenance programme. A “no-frills” way to describe this business segment is – Technical Support.
It is comprised of two units: Fleet Technical Management (FTM) and Inventory Technical Management (ITM) services.
Fleet Technical Management (FTM) provides airlines with a full suite of engineering support activities like maintenance planning, troubleshooting, component monitoring, documentation, etc.
Inventory Technical Management (ITM) services provides inventory management like providing spares, vendor sourcing and purchasing, warehouse services, component repairs, etc. Both units provide fully customizable services and are intended to get an aircraft airworthy and ready-to-fly.
Here’s a look at the segment’s revenue figures and the fleet managed over the past ten years.
The math is pretty straightforward, the higher the number of fleets SIAEC managed, the higher the revenue. So there are two ways that SIAEC can grow this segment:
- Secure contracts with new airlines who want to outsource their fleet management
- Growth of the current airlines they are currently managing
So how is SIAEC doing on this front? I’ve taken the liberty to help you consolidate the data below:
From the data gathered, we can see that most of the airlines that have consistently renewed their fleet management contracts with SIAEC are “family-owned” (Silk Air and Tiger Airways).
Another point to note is that many of the airlines listed are either budget airlines or smaller players in their respective countries. And if you look at the trend, the renewal rate for these “smaller” airlines are not exactly fantastic.
Line Maintenance is the second largest contributor to SIAEC’s group revenue and this business unit covers airports beyond Singapore. As of 2015, SIAEC’s line maintenance network covers 34 airports in 7 countries, including Australia, Hong Kong, the United States, Indonesia, Philippines and Vietnam.
Line maintenance includes checks and repairs on any critical systems that are needed for flying (i.e. radio systems, navigation, communications, radar, engine, landing gears, structural repair, etc.) when an aircraft is on ground. An aircraft needs to pass the checks before line maintenance certifies them to be “fit-for-flight” again.
Other services include technical ramp handling, towing of aircraft, providing potable water and servicing of toilets in the aircraft. One important point to note is that since these activities do not require much technical/engineering skill, DNATA & SATS can compete easily with SIAEC on these “non-engineering” services.
Here’s some data over the last 10 years about this division:
As you can see, line maintenance revenue has increased in tandem with number of flights handled by SIA Engineering.
In Singapore, SIAEC has over 50% market share in this sub-industry. An increase in the number of flight movements in Singapore Changi Airport will therefore increase the number of flights handled, thus improving the revenue of the division. With Terminal 4 opening in 2017 and Terminal 5 scheduled for 2020, flight movements are expected to increase in Changi Airport.
Joint Ventures & Associates
This is where the business of SIA Engineering gets interesting; it is SIAEC’s strategy for growth. You see, instead of depending on Singapore’s air traffic alone, SIAEC has strategically sought joint venture partners to expand their business.
This is done in two ways:
- Becoming an authorized partner for OEMs (original equipment manufacturers) like Rolls Royce, Pratt & Whitney, and Boeing who provide SIAEC’s clients direct access to critical OEM support, spare parts, and proprietary technology.
- Strategic partnerships to provide line maintenance services at foreign airports — which ties us back to how SIAEC has successfully grown its line maintenance business over the years.
At this point of writing, SIAEC has 26 joint ventures in 9 countries:
Source: SIA Engineering Company
Now because SIAEC owns stakes in these joint ventures, SIAEC also gets a share of profits as well. So while these joint ventures are technically not part of SIAEC’s operations, they have contributed a huge bulk of profits (50-55% of total profit) to SIA Engineering.
With the right partners, this segment could be the next stage of growth for SIA Engineering. For example, in July 2014, SIAEC signed an agreement with Boeing to provide fleet management services to Boeing’s customers at point of sales. SIAEC will hold a 49% equity stake in the joint venture.
Then again, you should always note what type of services these JVs bring to the table. For example, if the fleet management business only caters for smaller airline players, then it would be very interesting to see how SIAEC can grow this segment together with Boeing.
So, there you have it! The 4 key segments of SIA Engineering Company. I hope that by going through this, you have a clearer overview of SIAEC’s business functions and allow you to understand the company better before you invest!
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