SIA’s fortune is soaring, so why is SIAEC’s stalling?

IT HAS been a bumper year for Singapore Airlines (SIA), with record earnings and sky-high bonuses for employees. But the ride has been more turbulent for its maintenance, repair and overhaul (MRO) arm, SIA Engineering Company (SIAEC).

The national carrier is giving eligible employees bonuses of up to 8.15 months for FY2023, while staff at wholly owned subsidiary Scoot will be receiving up to 6.26 months of performance and ex-gratia bonuses.

SIAEC, in contrast, has not chosen to broadcast its bonuses this year. Indeed, The Business Times (BT) understands that there has been some unhappiness among rank-and-file employees at SIAEC over their more modest payouts.

Of course, even though SIA is the parent company of SIAEC, the latter’s own financial performance should determine its employees’ bonuses. And, the divergence in financial performance is clear.

SIAEC posted an operating loss of S$26.3 million for the 12 months ended Mar 31, 2023, though this was more than offset by the S$77.8 million share of profits from associated and joint venture companies.

Net profit was down 1.8 per cent year on year, at S$66.4 million. Revenue rose 40.6 per cent to S$796 million, but this was only about 80 per cent of pre-Covid figures.

In contrast, SIA registered a net profit of S$2.2 billion for the full year ended March 31, 2023 – having reversed a S$962 million loss. That was on the back of record revenue of S$17.8 billion, up 133 per cent from the previous year.

About 74,200 flights took off or landed at Changi Airport in the first three months of 2023, more than double the approximate figure of 36,200 for the same period in 2022.

In March, flights handled by SIAEC’s line maintenance unit in Changi reached 79 per cent of pre-Covid levels – up from 38 per cent in March 2022.

With more flights, one might expect SIAEC’s earnings to be soaring. Yet, that has not been the case.

Manpower woes and wage pressures

Labour has been a major contributor to SIAEC’s costs. In FY23, staff costs expressed as a percentage of revenue stood at 53.6 per cent. The ratio would have been higher, at 55.1 per cent, if not for wage support grants. In the largely pre-Covid period of FY20, staff costs were a much lower 48.4 per cent of revenue.

SIAEC chief financial officer Ng Lay Pheng said at a briefing on May 9 that the rise in staff costs was partly due to increases in headcount and overtime pay, along with the lifting of pandemic-era pay cuts and no-pay-leave arrangements.

A post-pandemic labour shortage is also driving up wages for new hires. The pandemic saw an exodus of foreign engineers and technicians from the MRO sector, many of whom have not returned, an airline executive – whose carrier contracts with SIAEC for MRO services – told BT.

Some 3,000 new roles in Singapore’s aerospace sector need to be filled by end-2023, said Minister of State for Trade and Industry Alvin Tan in Parliament this February.

To improve productivity, SIAEC has adopted “transformation initiatives”. These include the use of robots and artificial intelligence technology.

Riding the China wave

In time, productivity gains and government schemes to attract and retain skilled workers should alleviate some of SIAEC’s manpower woes.

Meanwhile, the pursuit of revenue growth may be what ultimately brings SIAEC back to pre-pandemic levels – and beyond.

In Parliament, Tan noted that the demand for aerospace manpower is partly driven by expectations that the MRO sector will grow further following China’s reopening.

SIAEC has yet to expand to China. The country represents a potential opportunity for the company, according to CGS-CIMB analysts Kenneth Tan and Lim Siew Khee in a report on May 22.

They cited the example of ST Engineering’s aerospace arm, which on May 17 announced a joint venture with a Chinese cargo airline to provide MRO services in China’s Hubei province from 2025.

“SIAEC is not ruling out M&A (mergers and acquisitions) as long as the assets are a strategic fit for SIAEC’s core MRO business,” the analysts wrote. “The group is open to expanding into China should the right opportunity arise.”

With a war chest of some S$633 million in cash and cash equivalents as at Mar 31, and hardly any debt outside of lease liabilities, inorganic growth via M&A is certainly an option.

This is especially as organic growth within the MRO sector remains uncertain, even as airlines post glowing numbers.

Work in SIAEC’s hangars has skewed towards light maintenance checks over heavy checks. In FY23, the number of light checks at its Singapore base rose 63.2 per cent to 568, while the number of heavy checks increased only 1.1 per cent to 94.

Heavy checks refer to more detailed inspections and overhauls, which typically require higher man-hours and generate more revenue.

This is partly because SIA – whose contracts accounted for more than half of SIAEC’s FY23 revenue – has taken delivery of new Airbus A350 and Boeing 787 aircraft, which require fewer man-hours for checks.

Unlike SIA, which can easily raise ticket prices as demand soars, SIAEC’s contracts may be tougher to renegotiate or reprice.

By pursuing inorganic growth, SIAEC could stand to diversify some of its revenue base too.