OUTLOOK MIXED FOR SINGAPORE'S AVIATION REPAIR INDUSTRY

UNCLAS SECTION 01 OF 02 SINGAPORE 000167 NEW DELHI FOR EHRENDREICH SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EAIR EIND EINV ETRD ECON SN SUBJECT: OUTLOOK MIXED FOR SINGAPORE'S AVIATION REPAIR INDUSTRY SINGAPORE 50 ¶1. (SBU) SUMMARY: 2009 is expected to be difficult for the aviation maintenance and repair overhaul (MRO) industry in Singapore. As the recession deepens and leisure travel slows, some carriers may be forced to ground older planes and default on payments. MRO companies face challenges securing new contracts, holding on to existing customers, and paying high material and supply costs. However, there is a lag between reductions in air traffic and their effect on MRO demand, providing MRO firms useful lead time to adjust capacity. Companies anticipate the business environment will improve in late 2009 and early 2010. Several firms intend to increase hiring and training for staff to upgrade skills during the downturn to prepare for intense competition when business improves. Industry contacts emphasized that the slowdown in business will not affect MRO firms' commitment to safety. END SUMMARY. Mixed Outlook for Aerospace and MRO Industry -------------- ¶2. (SBU) The Association of Aerospace Industries Singapore (AAIS) recently surveyed approximately 40 local aerospace companies, whose responses provided a mixed outlook for 2009. About 39 percent of the companies predicted growth of 1 to 10 percent, while 34 percent expect contraction of 1 to 10 percent. Respondents identified challenges such as securing new contracts from existing customers, attracting new customers, and managing the high cost of materials. Despite decreasing commodity prices worldwide, prices for materials and supplies for MROs have remained high because a small number of local distributors control the market in Singapore, Dr. Aloysius Tay, Executive Director of AAIS told Econoff February 11. AAIS and its member companies are exploring new ways to buy direct from suppliers in the United States and the United Kingdom, and will host its first aerospace supplier exchange conference in May. Low Cargo and Passenger Traffic Will Hurt MRO Demand -------------- -------------- ¶3. (SBU) Aerospace firms are bracing for more adversity in the marketplace, CHIA Peck Yong, Senior Manager for Public Affairs at SIA Engineering, told Econoff February 13. Air cargo and passenger traffic volume has dropped in recent months due to the economy (reftel),although leisure travel numbers were buoyed by a holiday season that extended through the Chinese Lunar New Year holiday, which ended February 9. Cargo traffic has dropped so severely that SIA Engineering postponed all of its projects converting passenger aircraft to cargo aircraft, Chia said. He also pointed out that as passenger carriers trim flights, they usually ground the oldest planes in their fleets first because those aircraft are less fuel-efficient and require more maintenance. (Note: Singapore Airlines just announced it will ground 17 of its older planes to cut capacity by 11 percent. End note.) ¶4. (SBU) When carriers also reduce utilization of newer aircraft that require less servicing, the pace of scheduled maintenance checks slows, adding further downward pressure on MRO business, Chia said. However, more sophisticated aircraft require higher value work, such as laser welding, so companies can still earn solid margins even while working on fewer planes. The MRO industry also lags trends in air traffic, providing MRO firms three to six months' visibility on changes in air traffic volumes to adjust MRO capacity as needed, Chia added. Local Aerospace and MRO Projects on Hold -------------- ¶5. (SBU) MRO customers, particularly smaller carriers, are starting to default on payments, crimping cash flow at a time when MRO firms are already finding it difficult to access credit lines. Some aerospace and MRO companies have put expansion plans on hold as a result of the economic downturn, AAIS's Tay stated. SIA Engineering has postponed work on a new hangar designed specifically for the Airbus A380, Chia noted. Reports indicate that aircraft engine manufacturer Rolls Royce delayed a project to build a new facility in Singapore. (Note: Media reported that Pratt & Whitney postponed a project at Seletar Airport, but that project is in fact on track, Daniel Long, General Manager for a Pratt & Whitney division in Singapore told Econoff February 20. End note.) Companies Reluctant to Cut Personnel, Opt for Training -------------- -------------- ¶6. (SBU) Singapore's aerospace companies are doing their best to keep the approximately 19,000 people employed by the sector on the job. The AAIS survey indicated that about 70 percent of industry respondents will increase spending on training to upgrade staff SINGAPORE 00000167 002 OF 002 skills, and approximately 75 percent intend to maintain or increase hiring, compared to 24 percent that said they would cut staff. Chia said that SIA Engineering will only lay off permanent staff as a last resort. The company would first look to trim contract labor, which comprises 5 to 10 percent of SIA Engineering's personnel, then explore reducing variable portions of wages, such as bonuses and paid leave. Pratt & Whitney contacts indicated that there are no immediate plans to cut staff. ¶7. (SBU) AAIS's Tay predicted that hiring will remain flat for the highly skilled Licensed Aircraft Engineers (LAEs) who have the authority to sign off on completion of work on an aircraft. However, companies still need lower-level skilled technicians that can work on various parts of an aircraft, though they do not have the authority to sign off on the work. Companies could source talent from the local polytechnic universities to meet some of the demand for skilled technicians, but firms will likely also have to hire foreign workers to fill the gap, Tay noted. Three times as many polytechnic students graduated in 2008 with diplomas in aerospace fields than in 2003. ¶8. (SBU) Echoing Tay's analysis, Chia emphasized that the MRO business is labor intensive and requires highly skilled technicians. He anticipated that employee training programs initiated last month as part of a government stimulus package would be well utilized in the aerospace sector. The aviation and aerospace industries suffered severe downturns following 9/11 and the outbreak of severe acute respiratory syndrome (SARS) in 2003. In both cases, Chia said competition intensified during the recovery, and companies want to be in a position to win passengers and take market share when business improves. Often air carriers choose not to recommission the planes they have grounded and opt instead to buy new aircraft. Aerospace and MRO firms need to be prepared with highly skilled personnel able to work on newer planes, Chia concluded. ¶9. (SBU) During a half-day seminar held February 20 on the aerospace industry and surviving the economic downturn, the Economic Development Board and the Science Engineering and Research Council encouraged industry to continue investing in training and R&D to prepare for the economic recovery. Despite the current environment, Singapore still aims to double output and manpower in the aerospace MRO sector in the next 10 years. More than 100 companies already have MRO work conducted in Singapore, which has six percent of world market share in MRO. Safety Still the Priority -------------- ¶10. (SBU) Despite the economic downturn and challenging business environment, MRO work will continue because regulations require routine maintenance after certain periods of flight hours, Tay noted. He is confident that LAEs will continue to uphold the highest safety standards and will not sign off on aircraft repairs or allow planes to fly unless they pass the same quality standards that were in place when economic times were better. Doing so would put airlines at risk of losing their operating certificates. SHIELDS