SIA Engineering (SIE:SP) to profit significantly from JV ESA’s A320neo engine MRO facility

SIE:SP Fair Value – S$4.50

SIE:SP Rating – Outperform

20 June 2017, Singapore – SIA Engineering (SIE:SP)’s 49%-owned associate Eagle Services Asia (ESA) has been selected as a Maintenance, Repair & Overhaul (MRO) facility in Singapore for the Pratt & Whitney PW1100G-JM PurePower® Geared Turbofan™ (GTF) engines.

This GTF engine is one of two engine types that power the bestselling new generation Airbus A320neo aircraft.

Currently, there are 5108 A320neo to be delivered over the next 10 years, this does not include the major orders that are expected to be announced during the ongoing Paris Air Show.

Eagle Services Asia is a joint venture between SIA Engineering (SIE:SP) which owns a 49% stake and Pratt & Whitney, a division of United Technologies Corporation (UTX:US), which owns a 51% stake.

Chart: Airbus A320neo aircraft fleet expansion (2016 to 2026)

Chart: Eagle Services Asia shareholding structure

Asia Pacific region to be the largest operator of the Airbus A320neo

Of the 5187 Airbus A320neo aircraft in service and on order, at least 37% of these aircraft are expected to be operated by airlines in the Asia Pacific – many of whom are likely to send their GTF™ engines to Eagle Services Asia (ESA) for their maintenance, repair & overhaul. 

Chart: Distribution of Airbus A320neo aircraft by airline operator region based on the existing order backlog

ESA is one of SIA Engineering’s major profit contributors

Eagle Services Asia (ESA), established in 1998, is one of the major profit contributors of SIA Engineering Group (SIE:SP) among its stable of 25 joint ventures and subsidiaries.

Profits from associates have fallen 39% in the past 10 years. This has markedly reduced the associates’ profit contribution to SIA Engineering Group (SIE:SP) from 39% at the peak in FY07 to 18% in FY17 (year to March).

In recent years, ESA has faced declining engine MRO demand due to the accelerated retirement of older generation aircrafts (mainly the four-engine Boeing B747-400 passenger and freighter aircraft family which is powered by the PW4000 engine). Note: The PW4000 engine used to form the core engine maintenance specialisation of ESA.

Eagle Services Asia also services the General Electric/Pratt & Whitney Engine Alliance’s GP7200 engine which is one of the engines types that power the Airbus A380 aircraft which is facing the challenge of fewer new orders.  

Chart: SIA Engineering profits from associates (2003 to 2017)

Chart: Share of SIA Engineering Group’s pre-tax profits from associates (2003 to 2017)

Milestone achievement by ESA – To yield significant  profits for SIA Engineering in the longer term

It is therefore a milestone achievement for Eagle Services Asia (ESA) to be selected as a Maintenance, Repair & Overhaul (MRO) facility in Singapore for the Pratt & Whitney PW1100G-JM PurePower® Geared Turbofan™ (GTF) engines.

The PW1100G-JM GTF™ engine is one of the two engine types that power the Airbus A320neo aircraft. With the added capability for the PW1100G-JM GTF™ engine, Eagle Services Asia will become one of Pratt & Whitney’s industry leading MRO service providers located around the world that are equipped with the advance technologies required to maintain the next generation Airbus A320neo engine family.

Given the small number of Airbus A320neo aircraft in operation at present and the production and delivery delays of this aircraft type, we do not expect this new line of business to be earnings accretive for SIA Engineering (SIE:SP) in the near term.

Moreover, there will be initial start-up costs involved. Eagle Services Asia plans to invest around US$85 million to equip the facility with advanced capabilities, including an environment control system, an engine flow line system and an upgraded test cell facility, in order to perform MRO services on the GTF™ engines. The facility modifications and upgrade will start in 2018 and ESA is expected to start servicing the GTF™ engine from 2019.

However, this new line of business will be a significant earnings growth driver for Eagle Services Asia and meaningful profit contributor to SIA Engineering Group (SIE:SP)’s profits from associates in the longer term as more and more Airbus A320neo aircraft are delivered.

There are 79 Airbus A320neo aircraft in service in 2016 plus another 5108 Airbus A320neo  aircraft on order to be delivered in the coming years based on the existing aircraft orders. This implies a rapid aircraft fleet growth of 51% CAGR in the next 10 years.

Chart: Airbus A320neo aircraft fleet expansion (2016 to 2026)

22% of these Airbus A320neo will be powered by the Pratt & Whitney PW1000 GTF™ engines, 31% will be powered by the CFM International LEAP 1A engines and the remaining 47% have not announced their choice of engines yet (which could be either the PW1000 GTF™ or the LEAP-1A engines). Assuming that CFM International and Pratt & Whitney each garner half of these engine orders, 46% of the global Airbus A320neo aircraft could be powered by the PW1000 GTF™ and Eagle Services Asia will be well-positioned to leverage on the growing volume of engines due for servicing over time.

Chart: Choice of engines used to power the Airbus A320neo aircraft

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