Hong Kong's MRO giant explores new areas to meet changing industry needs.
HONG KONG—Maintenance providers have always been forced to adapt when airline fleets and operating models go through a transition phase. The Hong Kong Aircraft Engineering Co. (Haeco) is no exception, and it is responding to the latest airline evolution by broadening its capabilities and looking for new ways to partner with customers.
These efforts have prompted Haeco to dramatically change its approach to cabin maintenance and component support, as well as expand the work sscope at both its Hong Kong base and its subsidiary companies in China. Its success is demonstrated by Haeco receiving Aviation Week's 2012 MRO Award for leading independent maintenance organization.
Like the rest of the MRO industry, the company is facing the prospect of declining numbers of older, maintenance-heavy aircraft such as the-400. Meanwhile, the first of the next generation of aircraft like the 787, and the are making their presence felt.
“One of the effects of the new-generation aircraft, certainly initially, is that they will require less labor-intensive work,” says Haeco Commercial Director Summit Chan. He notes, however, that this is nothing new. In its more than 60-year history, Haeco has dealt with the phase-out of the Tristar, then the 747 Classics, and now the 747-400s.
“It's a trend that is inevitable—manufacturers continue to make more reliable and less maintenance-heavy aircraft,” says Chan. “So that means we have to capture this trend in our business model.”
Among Haeco's new programs is its Cabin Maintenance Center (CMC) in Hong Kong, which is a partnership with its largest customer Cathay Pacific. Under the CMC deal, Haeco has established a dedicated operation for maintaining and repairing cabin equipment, and has assumed greater responsibility over this aspect of the aircraft.
This is a good example of the company putting more focus on an area that has become increasingly important to customers. Historically, MROs have been more concerned about the technical requirements of aircraft during line maintenance, says Chan. The priority was on getting the aircraft certified and released for the next flight in good time, and cabin features were sometimes overlooked, particularly if a problem was not visually obvious.
But cabin quality is becoming increasingly important for airlines as they use interiors as a market differentiator. Airlines have invested heavily in everything from seats to inflight entertainment.
Chan says the CMC was established in recognition that “the old business model doesn't work” now. “As the investment in the cabin has changed, the effort to look after the cabin has also changed,” says Chan.
“Ownership of cabin quality now rests within the CMC,” he says. This unit specializes in cabin equipment, and by maintaining it well, can save airlines money by reducing the need for part replacement.
Another area of growth for Haeco is inventory technical management (ITM), with a Cathay arrangement again playing a key role. ITM involves pooling parts inventories for use by a number of carriers. Haeco has previously had arrangements like this for individual aircraft types, but a new ITM partnership with Cathay will be fleet-wide.
The Cathay deal is Haeco's largest step into ITM. “This is a business where you need scale to achieve certain cost synergies,” Chan notes. “The trend is more towards outsourcing of component support to companies like ours. There are a few big players [in the industry] with whom we will be competing, but we will be focusing on the Asia-Pacific region.”
ITM offers airlines a better cost structure for component work compared to owning their own inventory. It has been particularly popular for low-cost carriers, since component inventories tie up a lot of capital and managing them can be labor-intensive. “Many carriers want to concentrate on running the airline and outsource certain things to reliable service providers,” says Chan.
Cathay's Engineering Director Christopher Gibbs (see interview pg. 12) says many of the details of the ITM contract are still being discussed. But he sees advantages to both sides. “The objective is for Haeco to build a business in inventory management, and then obviously for us to share the benefits,” Gibbs says. “It would put our inventory to better use, because it could be used by other operators.” He notes that Cathay “wouldn't need to add inventory in proportion to the number of aircraft, so there's a scale benefit there.”
Another new capability in the Haeco Group's portfolio is its cabin completion center for corporate and business aircraft, at its Taikoo (Xiamen) Aircraft Engineering Co. (Taeco) subsidiary in Xiamen, China. Part of one of its hangars at the Taeco facility is dedicated to this work.
“We entered into that business to try to capture the growth in that segment in China, or foreign customers wanting to do a conversion on aBusiness Jet or an Airbus Corporate Jet,” says Chan. Haeco has added design capabilities, so it can offer a complete service.
The company also is ramping up its landing gear subsidiary in Xiamen, and a composites shop in Jinjiang, China, which is a joint venture with Spirit AeroSystems. Engines are another growing sector, particularly through a joint venture established within Hong Kong, and the Taikoo Engine Services operation in Xiamen.
New areas of growth have helped the Haeco group rise profits despite slowdowns in some areas. In March, the company reported an HK$821 million ($105.7 million) profit for 2011, up from HK$701 million in 2010.
One of the challenges Haeco has had to deal with is the 2009 slump in the cargo industry, which caused a sustained downturn in conversions of passenger aircraft like the Boeing 747-400. But this area is rebounding, and the company foresees particularly strong demand for conversions of smaller aircraft in the Asia-Pacific region, such asand .
The new generation aircraft also figure in Haeco's plans. Since Hong Kong is one of the world's most important cargo hubs, most of the carriers that will operate the 747-8F are already Haeco customers. The company does line maintenance for A380s, and expects to do the same forand Airbus .
The first heavy checks on these aircraft are not due for several years, however. “In due course we will be ready,” Summit says. “We are going to develop the capabilities, one way or another.”
A major part of Haeco's strategy in recent years has been investing in facilities outside Hong Kong. The company now has a stake in 16 subsidiaries and affiliates, mainly in China but also in Singapore and Bahrain.
The first of these was Taeco in Xiamen, which was established in 1996 and has grown to six hangars—twice as many as Haeco has in Hong Kong. The Shandong facility now has five narrowbody hangars. Haeco “foresaw the [potential] in China in the 1990s,” Chan says. While there has been an increase in MRO competition in China, demand has also skyrocketed.
The expansion of the Chinese facilities does not mean that Haeco is shifting its growth away from Hong Kong, says Chan. Rather, it reflects the different stages of maturity of the lines of business. Each facility specializes in certain types of MRO work, so the growth curves are different. Geographic expansion has occurred in parallel with growth in functionality, Chan stresses.
Even though there are more physical constraints at crowded Hong Kong International Airport, Haeco is still planning to add more capacity there. The company intends to build a fourth hangar in Hong Kong, although it has yet to decide the timing.
Chan says Haeco “may push the button” on the fourth hangar project this year. At that point it would solicit bids for construction, and it would take about 18 months to complete the project from that point. The hangar would be smaller than the three existing ones.