A MASSIVE contract for Hong Kong Aircraft Engineering (Haeco) to convert 10 Boeing 747-200s to freighters will not save the company from disappointing earnings next year, managing director Andrew Herdman says. Mr Herdman said Haeco was converting the 747 Combi aircraft for United States firm Atlas Air at a loss because tough global competition had brought down rates. The contract, won early this month, was understood to be worth more than $600 million. The first Atlas aircraft is being worked on and nine others will be converted over a 21/2-year period. Atlas operates freighters for several airlines including British Airways, China Airlines, Emirates, KLM, Lufthansa and Varig. 'The number of people who are capable of doing 747 conversions is small and the picture looks quite attractive for the future. There is going to be a need for freighters of all types,' Mr Herdman said. 'It comes with an entry price, though. It [the bidding for the Atlas contract] was fiercely competitive and the rates reflect that. They are below economical levels.' Haeco's staff numbers had been reduced this year in a bid to cut costs, he said. While he would not give specifics, he said numbers were being brought down through normal retirement and staff turnover. Employee turnover at Haeco, which had 5,400 workers in January, normally runs at about eight per cent to 12 per cent a year. Mr Herdman would not give a staff count expected for the end of this year. 'We are still recruiting, but our numbers have dropped slightly,' Mr Herdman said. 'We've come down a little bit through normal retirement and labour turnover.' He said despite the staff reductions and the big contract, next year was expected to be a negative year, with rising operating costs putting a squeeze on margins and increasing competition further lowering rates. 'The seeds of recovery are there. The airlines are definitely starting to show signs of recovery,' he said. 'But I'm not too optimistic about '96, although by '97 it should be improving. 'It has to. The rates need to go up. Nobody can work at these rates for too long.' Analysts have forecast a consensus 14 per cent drop in earnings for the year to December 31, to $356.2 million. A further decline is expected for 1996, to $354.9 million, according to the November issue of the Estimate Directory. Attributable earnings for the year to December 31 last year fell 7.5 per cent against the previous year, to $413.6 million, and directors announced the company's first dividend cut in 10 years. A second dividend cut was announced in August, when Haeco reported a 19 per cent slump in attributable earnings for the first half of this year, to $174.2 million - the lowest level in four years. Mr Herdman said 1997 was expected to show an improvement because demand for freighter conversions would increase. Mr Herdman said the conversion market was less competitive than the general aircraft maintenance market, with two firms in the US and one in Israel certified to carry out such work. Haeco entered the 747 conversion market only this year with a contract from South African Airways that was completed in September. Its second jumbo conversion was completed for Evergreen International Airlines of the US last month. A typical 747 conversion took about 21/2 months, Mr Herdman said: 'We are on our way to establishing ourselves in this segment. We see it as a growth segment.' 'We think it's going to be less crowded than general aircraft maintenance and as we do more we are aiming to get our turnaround time down. Our aim is to get better.'