More News
AVIATION | Staff Reporter, Singapore

SIA Engineering to lean on joint ventures following global B737 MAX aircraft grounding

The grounding of B737 MAX aircraft will hit main airline operations.

SIA Engineering’s revenues and operating margins may have to rely on joint ventures (JVs) and associates to sustain its growth as its earnings are forecasted to remain under pressure in 2019 due to additional headwinds stemming from the grounding of the B737 MAX aircrafts worldwide, according to a report by DBS Equity Research.

The firm ended its FY 2018/2019 on a dismal note after profits fell 13.9% YoY to $160.9m from $186.8m in FY 2017/2018, whilst revenue dipped 6.8% YoY from $1.09b to $1.02b due to a decline in airframe and fleet management revenue.

Despite an improvement in Q4 2019, its overall FY 2019 earnings before interest and taxes (EBIT) margin of 5.6% compared poorly to its FY 2018 EBIT margin of 7.2%, DBS analyst Suvro Sarkar noted. He added that this marked the third year of annual decline in core EBIT margin amidst a secular downturn in hangar utilisation and competitive market environment for heavy maintenance operations.

Also read: SIA Engineering profits down 13.9% to $160.9m in FY2018/2019

“The grounding of Boeing’s newest most popular aircraft model has led some airlines to defer heavy maintenance checks on older planes to mitigate the sudden shortage of available planes. This puts a spanner on the demand for heavy maintenance checks in the near term,” Sarkar explained. “The recently established line maintenance stations in Japan, and the new line maintenance joint venture (JV) between NokScoot and SIA Engineering, which is slated to begin operations at Don Mueang airport later in the year, are also unlikely to be significantly earnings accretive in the near term, given that they are still nascent and in the start-up phase.”

He further added that contribution from SIA Engineering’s fleet management segment will likely be muted, as operating margins could diminish due to its inadequate scale, and noted that the number of aircraft under management could shrink further as the firm continues to transfer more Boeing aircraft under management to BAPAS.

On the other hand, associates and JV profits came in at $32.3m in Q4 2019 and $113.9m for the full year FY 2019, respectively, which includes some one-off items. Excluding these, associate and JV contributions would have come in at around $134m, which would imply an annual increase of around 22%, in line with the recovery in engine maintenance, repair and operation (MRO) cycle, and commencement of support for new engine types, Sarkar noted.

“Additionally, demand may also be bolstered by problems at the new Trent-1000 TEN engine, which was recently added to the list of engines that require rectification work, similar to issues with its predecessor, the Trent-1000 engine,” Sarkar added. “Capabilities for new engine types will also be a boost as Eagles Service Asia, the JV between SIA Engineering and Pratt & Whitney, begun servicing PW1100-JM PurePower Geared Turbofan engines in Q4 2019.”

SIA Engineering’s long-term prospects are also boosted as it anticipates the GE state-of-the-art engine facility in Singapore to be operational by mid-late 2022. “We expect the group to continue expanding its portfolio of JVs and associates through strategic partnerships with original equipment manufacturers (OEMs),” Sarkar added.

That said, overall earnings growth projections for FY 2019/2020 remain pretty flattish, he noted. 

Do you know more about this story? Contact us anonymously through this link.

Click here to learn about advertising, content sponsorship, events & rountables, custom media solutions, whitepaper writing, sales leads or eDM opportunities with us.

To get a media kit and information on advertising or sponsoring click here.