- The Washington Times - Tuesday, January 7, 2003

SINGAPORE, Jan. 7 (UPI) — After expanding in the United States and Europe last year, state-controlled defense conglomerate Singapore Technologies Engineering is eyeing aircraft maintenance, repair and overhaul business in China.

Tay Kok Khiang, president of ST Aerospace, a company of ST Engg, told a news conference Tuesday that the company was in "specific negotiations" with a Chinese counterpart to form a joint venture there. "We have always been interested in expending in China. We are now well established in the U.S. and in Europe, and the next area of our focus will be China. We have been in various discussions with various partners and we hope it will come to some fruition this year," Tay said.

ST Engg is the biggest independent aircraft MRO facility in the world, not affiliated to an airline. When taking account the affiliation, which brings extra-business, it is the third one, after British Airways and Air France Industries. Amongst its main MRO customers are FedEx, UPS, Boeing, United Airlines and Continental Airlines.

While the U.S. airline industry represents 50 percent of commercial aviation and the European one represents 25 percent, China is currently the fastest growing, with an estimated 7-percent growth rate. The Asian country is in fact expected to be one of the biggest aviation markets within the next 10 to 15 years.

Talking to United Press International, Tay specified the company was in negotiations with a Chinese airline to set up a joint venture. Currently, the vast majority of Chinese airlines' MRO business is done "in-house" and Tay anticipates this trend to continue.

"Chinese airlines do outsource, but only selectively, in the more complex area," he said. "I believe the tendency will be to stay in-house but with partners, hoping to raise the standards of quality and improve efficiency."

Last year, ST Aero acquired San Antonio Aerospace (the former Dee Howard Aircraft Maintenance). It has also expanded in the United Kingdom through a joint venture with FR Aviation, setting up Bournemouth Aviation Services Company, which specializes in maintenance and modification of commercial narrow-body aircraft.

Both companies lost money in 2002 due to start-up cost, but Tay is optimistic that San Antonio Aerospace will turn profitable this year.

Meanwhile, the company does not anticipate to be affected by the on-going financial difficulties of United Airlines, which has filed for Chapter 11. Tay is optimistic that the company will emerge "stronger" from Chapter 11, provided there is an agreement with the unions. But he also pointed that United Airlines was only one amongst a range of customers and did not represent a big portion of ST Engg's MRO business. Tan Pheng Hock, president and chief executive office, added the firm had provisioned "less than $5.75 million" against the airlines' debt.

The company announced Tuesday that its 2002 net profit fell 3.4 percent to $190.4 million due to provisions for restructuring costs and higher expenses. Chief Financial Officer Kuah Boon Wee pointed to a 53-percent drop in interest income, as well as restructuring charges in the third quarter, behind the decline in net profit. The aerospace operations, which account for about half of ST Engg's business, saw a 6-percent fall in pre-tax profit, reflecting the weak global aerospace market.

"The business outlook continues to be challenging with the U.S. commercial aerospace industry of particular concern," Tan said.

"It is obvious that the aviation industry is under pressure and has been for the last year. But the latest indications, like load factors, are that things will improve," Tay added.

The company believes it is well-positioned to take advantage of the upturn in the industry when it comes.

The aircraft maintenance, repair and overhaul industry is expected to benefit from the consolidation of the airline industry, as MRO outsourcing will reduce their cost. "There will definitely be a tendency for outsourcing over the coming years, because of the current very high cost structure of airlines. Most airlines today recognize it will be an (financial) advantage for them to outsource. This is certainly what all the low-cost airlines that have started are doing," Tay pointed.

In the last year, a number of MRO companies have ceased operations as the industry consolidates itself, and Tay anticipates this trend to continue this year.

(All figures in U.S. dollars.)

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