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Wednesday, February 1, 2006

ST Aerospace: Balancing A Global Reach With Consistent Quality And Service

If you could hear the sound of steady progress toward global presence for maintenance, repair, and overhaul (MRO) services by Singapore Technologies Aerospace Ltd., it might well be the hum of a just overhauled CFM56-3 engine. Or the hum in the front office of fleet customers such as Northwest Airlines or Japan Airlines as operations managers celebrate ahead-of-schedule turn time. ST Aerospace has set records for the fastest turn time on B747 Section 41 modifications and on DC-10 and MD-ll passenger-to-freight (PTF) conversions (30 completed to date). In at least one instance, the MRO provider was able to save a customer as much as 15 days turn time over the usual time required for an engine project.

Then there's the hum of phone lines between original equipment manufacturers (OEMs) such as Boeing, Airbus, BAE Systems, Honeywell, and Pratt and Whitney with ST Aerospace for passenger-to-freighter conversions and engine/avionics upgrades at its facilities most convenient to customers. This hum is the sound of success.

The numbers add up

ST Aerospace has three business segments: aircraft maintenance and modification (AMM), component engine repair and overhaul (CERO), and engineering and materials services (EMS). Within these segments, the company has been executing a patient, careful strategy to extend its broad range of capabilities into Asia, the U.S., Europe, Australia, and China. Since 1975, the worldwide network of ST Aerospace companies under the ownership of Singapore Technologies Engineering Ltd. has worked on over 7,000 aircraft engines and currently offers an inventory of 8,000 parts and spares. In 2005 financial results released January 9, profits and revenues are up for ST Engineering by 12%, at $242.8 million profit after tax (profit attributable to shareholders). ST Aerospace, as one of four business sectors for ST Engineering and representing 45% of total revenues, earned $128.8 million in profit before tax (profit attributable to shareholders).

According to Kok Khiang Tay, president of ST Aerospace, the company's international outreach is not finished by a long shot. "On our long term radar screen, depending on good business cases and the right partners, is the potential for establishing facilities in Turkey, South and Central America, and Eastern Europe." Its growing customer base includes airlines and OEMs already mentioned plus All Nippon Airways, US Airways, Qatar Airways, Valuair, Jetstar Asia, Rolls Royce, Parker Aerospace, and three freight forwarders (UPS, FedEx Express and DHL). Among military customers are the Republic of Singapore Air Force, Royal New Zealand Air Force, Philippines Air Force, and the Venezuelan Air Force. More than 5,400 engineers, technicians, mechanics, management and non-technical staff work in 22 associated facilities on an estimated 50 different types of commercial and military fixed wing and rotary wing aircraft. ST Aerospace has grown its technical staff by nearly a thousand over the past five years (see chart page 21), and 40% of technicians have 10 years of employment or more.

Achieving a vision

The company's vision statement reads, "Be a global, world-class aircraft engineering and aviation services company." Key to this vision is making service facilities available in major geographic markets, and ST Aerospace continues that steady march. Its most recent foray was announced in December, 2005: an agreement to purchase a 67% stake in SAS Component A/S (SASC) for $98.5 million. SASC is a wholly-owned subsidiary of Stockholm-based SAS AB airlines. Tay tells AM that SASC "has quite a complementary customer base in Europe and Scandanavia, which will increase our presence in those parts of the world."

Since SASC will continue a multiyear material supply agreement with SAS AB and other airline operators, this "big business in small parts" acquisition has the potential to add components to the existing ST Aerospace inventory and create economies of scale. Tay emphasizes that ST Aerospace already adds some 400 to 600 components annually and proactively for new aircraft, and has repaired over 600,000 components to date.

ST Aerospace has the option to purchase the remaining shares in SASC, but there is no commitment to do so at this time. Regulatory finalization on this initial share purchase should be completed by the end of first quarter, 2006. In 2005, four of China's emerging airlines awarded component support agreements to ST Aerospace: China United Airlines, United Eagle Airlines, Okay Airways, and Spring Airlines (see sidebar page 21). Total value of these five-year agreements is $57 million.

Scandanavia to Shanghai: ST Aerospace entered a joint venture with China Eastern Airlines last fall to begin operating Shanghai Technologies Aerospace Co. Ltd. (STARCO). STARCO has finished its first year of operations providing service for Boeing and Airbus aircraft at Hongqiao International Airport, and achieved FAA certification.

In the U.S., ST Mobile Aerospace Engineering in Mobile, Alabama, and San Antonio Aerospace L.P. in Texas provide 25% of ST Aerospace business annually. Between the two facilities, 15 hangars provide MRO for both wide and narrow bodied aircraft from U.S. carriers such as Northwest, U.S. Airways, and United (prior to its bankruptcy). Tay comments that 50% of commercial aviation is flown in the U.S., and the company's focus at these U.S. facilities is primarily on expanding the airframe MRO customer base.

Further measure of how well ST Aerospace is achieving its vision can be seen in the fact that the company is one of only two or three MRO providers with design engineering capability--sufficient to design and prototype unmanned aerial vehicles (UAVs), the Fantail and the Skyblade II. Eventually, Tay hopes to produce these UAVs in volume. In addition, the company is a design partner with Eurocopter on development of the EC-120 helicopter.

Running the world's largest independent MRO business isn't always smooth sailing. There's been a glitch or two: in 2003, ST Aerospace closed DalFort Aerospace at Love Field in Dallas, Texas after two years of unprofitable operation. Virginia Aerospace LLC bought the facility in December, 2003 for around $7 million.

Quality in totality

Tay points out that as an independent MRO, ST Aerospace has no allegiance to a particular customer, or prejudice for particular aircraft types, servicing both narrow and wide body commercial and military aircraft for customers from Israel to Qatar and Bangladesh. Their only prejudice, perhaps, is on high-end service quality and safety, and customers willing to pay to ensure these benefits. "We believe that quality has to be pursued in totality," Tay states. The company's many ongoing programs in skill development, process efficiency and environmental improvements support this commitment. And their turn time rate remains a strong draw. "It is one of the key reasons customers come to us," Tay asserts. "A couple of days saved in turn time can mean everything."

The emphasis on quality is also demonstrated in customer service via the corporate philosophy of "one customer, one relationship," assigning specific personnel to each customer program. In Tay's view, customers want three elements of service: ensured quality and safety, proven performance turn time, and a high level of attention to their specific needs and requirements. He says "we follow our philosophy at many levels. I personally interface with customer CEOs, our operations or general managers interface with the directors of maintenance for major customers, and the quality staff works with all customers to understand their needs. At these different levels, we usually achieve at least two face-to-face meetings with most customers every year."

Also of assistance to customers is the e-CRM (Customer Relationship Management) system, a web-based, interactive platform. From a laptop computer, customers can access the status of their projects in progress. This update from the shop floor provides the chance to review and approve project activity, and has been expanded over the past several years from the airframe MRO prototype to additionally include engine MRO and component management.

There's proof in the purchase orders that this customer service approach is working. ST Aerospace has signed a 10-year maintenance and repair contract with UPS worth approximately $438 million, and has a recent MRO network agreement with Airbus Industries. The Singapore Ministry of Defense has awarded them a contract for use of five EC120 Colibri helicopters to conduct pilot training; ST Aerospace will own and maintain the helicopters and provide full technical and logistic support over a 20-year period, to the tune of $73.4 million. They are also authorized service centers worldwide for Sikorsky, Bell Helicopter, Honeywell, Rolls Royce and Sargent Control and Aerospace for hydraulics. In May, 2005, the first B777 from Nippon Airways was inducted for its heavy maintenance check and modifications at ST Aerospace in Singapore through a new service agreement with the carrier.

Outlook and challenges

Key goals for ST Aerospace in 2006 include signing up a launch customer for a 15-pallet B757 freight conversion program, expanding services at STARCO, capitalizing on the SASC acquisition, continued development of the UAVs, and induction of new customers to its trademarked Maintenance-By-The-Hour services (see sidebar page 21). For every new customer, the challenge is to provide problem solving and value added reliability and maintainability to their aircraft, "with services consistent in every dimension, including personnel interface," Tay asserts.

In a single huge hum of activity capitalizing on every inch of the 3,345,404 square feet of hangar space owned by ST Aerospace, 24 wide body and 33 narrow body aircraft could be in MRO service simultaneously around the globe. Yet even the importance of this level of capitalized equipment and facilities does not sell a customer on its own. Tay observes that the best sales tool the company has is the positive performance experience provided by its technicians, mechanics and management.

He describes it as a ripple effect: a customer is well satisfied with service and price for an airframe project, for example, and decides to bring in engine and/or component business. Eventually, there's a need for design engineering support, and the cus-tomer returns for that as well. With its breadth of MRO capabilities and growing reach in facilities around the world, the company seems to be giving a new global definition to the "one stop shop."

Low-cost carrier alert: maintenance by the hour

There's a burgeoning market these days for low-cost carriers, but this can create bottom-line cost pressures on MRO service in order to meet the less expensive passenger fares. ST Aerospace offers its trademarked Maintenance-By-The-Hour (MBH) program, which can benefit this market. On a fixed fee per flight hour basis, the level of services and flexibility for how often they are conducted can be customized to fit various budget constraints.

As with regular customers, services can encompass airframe, engine, and components or spares. Among customers taking advantage of MBH is Shanghai-based Spring Airlines. The five-year agreement for component management and maintenance support, secured in June 2005, is worth about $21 million. Xiu Zhi Zhang, Spring Airlines' CEO, comments that ST Aerospace provides exacting standards of aircraft performance, customer service and uncompromising safety standards, which fits traveler expectations as well as the low-cost business model of Spring Airlines' operations.

Singapore Technologies
Aerospace Ltd.
540 Airport Road
Paya Lebar, Singapore 539938
PH: (65) 6287 1111
FX: (65) 6280 8213

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