Started as an analysis of STE, ended up being a look at MRO.
IntroductionSTE works in 4 segments. Breakdown of revenue and profit:
Since 2003, Aerospace has been responsible for 50% of the profit. So we concentrate on it first. I'll look at the other segments later if got time.Types of MROCommercial vs Militiary: ST Aerospace (STA) works on both military and commercial MRO. No breakdown given between them, but I read somewhere it was abt 50/50 in 2004 (lost the link). The discussion here applies to commercial, but keep in mind the distinction when looking at market share figures below.
What exactly does MRO involve?- Line maintenance. A routine inspection, a bit like refilling the oil/water/tires/brakes on your car. Performed at Airport gate. Includes A Check and B Check.
- Components overhaul and repair. The MRO provider must stock all the different parts at different airports and repair/replace them when required.
- Engine Overhaul. Like tuning or reconditioning/replacing the engine in an old car Performed at specialized facilities.
- Heavy airframe maintenance. Scheduled inspection and maintenance of the complex moving/electronic parts of a plane (eg: landing gear, brakes, rudder, ailerons). Performed in special hangars. Includes C Check (every 12 to 17 months, during which the aircraft
is opened up extensively for inspection for wear, corrosion, and cracks) and D Check (involves the disassembly of an aircraft at a specialized facility. Occurs on a flying hour basis, eg: 22,500 hrs for a B747).
- Heavy airframe modifications. Turnkey projects. eg: converting a passenger plane to a freight plane.
An
estimated breakdown of these segments of the global 2003 Commercial MRO market (from
aerostrategy.com):
STA handles 2 to 5 above. It does not do Line Maintenence (I think).
From STA's 9-month end Sept 07 results, their revenue breakdown between the MRO types is:
MRO Type
| Revenue
(SGD millions)
| %
|
Aircraft Maintenence and
Modification (4 and 5 above)
| 259
| 52%
|
Components/Engines
repair/overhaul (2 and
3 above)
| 206
| 41%
|
Engineering and Materials
Services (don't know)
| 37
| 7%
|
|
|
|
Competitive Advantage (Market Share)The MRO market is fragmented, but undergoing consolidation. (From Aug 08
article-1): The largest player Lufthansa Technik (LHT) had
U$ 5.6 billion in revenue in 07 with only 12-14% of the worldwide MRO market.
Most players have less than 100m revenue (from
here, probably includes Military as well):
STA was identified as among the worlds top 4 players:
| Company | Desc | Total
Revenue
(USD)
| Revenue
from
ext
customers | source |
Lufthansa
Technics
| Owned by parent
Lufthansa.
| 4.5bn
| 2.2bn
| LHT's financials |
Air France
Ind-KLM
| Owned by Air
France/KLM
| 3.6bn
| 1.2bn
| AFI-KLM's
financials |
ST
Aerospace
| Subsiduiary of STE,
public listed,
independent of
airline. GLC.
| -
| 1.2bn
| STE's 07 AR
|
SR Technics
| Private Swiss
company.
Dubai backers.
| -
| 1.55bn
| Company website |
|
|
|
|
|
Geographically, STA is most active in Asia and US. In the 9 months ended Sept 08, 40% of their revenue was from Asia, 37% from the US, and 20% from Europe. The 40% from asia may have been from Changi or from STARCO (China JV).
According to MRO type, STA has its largest market share in Airframe maintenance and modifications. This 2005
article (charts
here - see scenario2) places ST Aerospace as number one for
commercial,
third party (ie: not for parent airline) Airframe maintenance. A 2008
article places it as 2nd on checks for wide-body jets.
Conclusion: STA is probably the 4th largest MRO provider by revenue. It is 3 to 4 times smaller than the two largest providers (who are integrated with their airlines). The MRO market is highly fragmented. It is the first or second largest provider of Heavy Airframe Maintenance. It is expanding overseas through JVs, but it may still rely a lot on Changi as a hub (40% revenue), not sure.
Long Term Trends within the MRO IndustryMRO demand is determined by:
- The number fo planes operating. Long term, I expect this to boom in Asia, due to the proliferation of LCCs, and the ASEAN Open Skies agreement (supposedly by 2015).
- The age of the planes operating. Boeing has a graph showing how Heavy Airframe Maintenance costs (number 4 only above) increase throughout a plane's lifespan (p34, here):
- C Checks are performed every 12-17 months, and D Checks are performed avery few years. From the age profile of airlines fleet (eg: based on the number of planes brought in previous years, it should be possible to determine how many planes are due for these Checks). I have not found this information on the internet.
- The percentage of planes being serviced by 3rd party MRO providers (instead of the airlines themselves). This should grow. LCCs outsource MRO as part of their business model (and AirAsia has awarded a lot of contracts to STA). April 2004 article: "(Globally) Airlines continue to insource 64% of heavy maintenance" (so this has growth potential).
Other notes on trends, for different MRO segments:
For the heavy maintenance industry, where STA is the largest player:
- (article-1) It is "transitioning from being a very fragmented and geographically regional business to one where we're seeing a greater influence of global franchises, if you will, where you have economies of scope".
For Engine and overhaul/repair:
- (Aug 2006 article): At over 7 percent, the fastest growing sector is the engine MRO segment, followed by the heavy maintenance segment.
- Previously (2000), MRO providers were being squeezed by engine maker (providing long term warranty services with their engines). That trend has now have reversed (2004), and engine makers are seeking partnerships with MROs instead (see p3 here)).
Components:
- (article-1) "The trick is you need a cache of inventory in Asia, Europe and North America to support your customers, because more and more of these contracts are integrated ones that combine asset management and MRO."
Conclusion: Long term the Asian MRO industry should grow, due to LCCs and increased air tracffic.
Cyclical FactorsAirlines are a notoriously cyclical business, which is now in a slump. MRO industry
last suffered a slump in 2004.
A short term slump will not affect heavy airframe manitainence. A long slump will. See the 2nd (coloured) quote from Tan Pheng Hock (STE President) in this
Apr 2003 article.
Airlines reduce MRO operations by more than their capacity. That is, MRO spending reductions is more pronounced. See the graph by aerostrategy on slide 12
here. They give some numbers: in 2002/2003, US airlines capacity dropped 4%, but MRO spending dropped 12%. They estimate a general 5-10% decline in MRO spending, thoufh Asia and LCCs may not be hit so hard.
Asian Airlines expect flat
capacity growth in 2009. Changi Airport's passenger growth seems to be flat in late 2008, while cargo growth slumped 20% (Jan 09
article):
Conclusions:
- So far, passenger growth flat, cargo down big.
- Slump in passenger is probably better in Asia because it is currently in the 'expansion' stage (new LCCs, and Free Skies agreement).
- I think a record number of planes has been ordered in the past few years, so they will need C/D Checks sometime in years to come.
- Thats all I can make out. We only know the future after it has occurred. I can't predict the timing, or how the stock market will react to it.
- Would be useful to know the age structure ('demographics') of the airline fleets, esp. how many aircraft were acquired in the recent boom.
Business ModelRead somewhere that labor costs form 70% of COGs. STA did not give a breakdown.
ThreatsLHT has opened an MRO facility in the Phillippines. I guess its cheaper to fly the planes there to perform D Checks. C Checks would probably still be performed at hub airports.
Other thoughts:Recently a lot of GLCs raised cash from the market (eg: DBS, AReit). May we expect STA to do the same, as a way to expand their geographic each in a consolidating, fragmented industry?
In 2005,
STE considered buying SIAEC from SIA. (LKY recommended this). Mabye buy SIAEC instead, as a potential takeover target? However, this acquisition would not help STA extends its geographic reach.
Misc articles:
