Divesting its engineering arm will not solve SIA's woes

SIAEC has a higher ROE than the parent airline.

Various reports have stated that Singapore Airlines should divest SIA Engineering (SIAEC) or integrate SIAEC with ST Aerospace as part of its transformational plans.

For analysts at UOB Kay Hian, this is not the answer to the airline's woes given that SIAEC has a much higher return on equity (ROE) than the parent airline and it provides a buffer to the airline operations.

More so, about 60% of SIAEC’s revenue accrues directly from SIA and the unit is vertically integrated with SIA’s operations with regard to maintenance-by-the-hour packages and sale-and-leaseback of SIA’s fleet, providing revenue and cost synergies.

SIAEC also generally benefits when SIA places new orders and this can be evidenced by an engine JV with GE, following SIA’s purchase of GE9X Engines for the Boeing B777-9s.

"SIAEC’s MRO is focused on wide-bodied aircraft, while ST Aerospace is focused on narrow-bodied aircraft," analysts K Ajith and Sophie Leong said.

They furthered, "With checks now being done mostly on apron, it makes little sense for ST Aerospace to acquire SIAEC’s hangars. The former is better off acquiring hangar space or MRO intellectual property from a lower-cost centre."

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