HONGKONG Aircraft Engineering Co (HAECO) will shift a large part of its operations to China to escape Hongkong's spiralling operating costs. HAECO intends to open a new aircraft maintenance and engineering base in Xiamen, Fujian province, by 1996. Joint venture partners will include Hongkong's flag carrier Cathay Pacific. Most of HAECO's on-line servicing and maintenance work will continue to be done at Kai Tak airport, and later, hopefully, at Chek Lap Kok, but a lot of the heavy engineering will be carried out at significantly lower cost at the new mainland base. HAECO managing director Mr David Turnbull blamed wage inflation as one of the principal reasons for the need to shift north of the border. With a 5,200-strong workforce, labour currently makes up 65 per cent of its costs. Mr Turnbull expected the new base to have the cheapest operating costs in the region. HAECO, like other companies in the Swire Pacific stable, has been highly critical of Hongkong's high 10 per cent inflation rate, which it says has inflicted serious damage on its profit margins. Last year, Cathay, another Swire company, said it would set up an accountancy service centre in Guangzhou and a database in Australia to capitalise on far cheaper land and labour costs. Mr Turnbull said: ''If inflation continues at today's levels, then HAECO and other companies in Hongkong have problems on the horizon. ''One answer is to improve productivity, but that is something we cannot do forever. ''We still have two or three years' worth of good productivity improvements to be made, but after that, there will be little more we will be able to do to squeeze sweat out of our assets.'' The new venture will cost an estimated US$63 million (HK$487 million) to set up, with a 750-strong workforce operating from a hangar big enough to house two Boeing 747s, as used by Cathay Pacific. It is hoped construction work can begin this year on the hangar and accommodation for workers. Senior management and engineers from Hongkong will be relocated to China to recruit and train mainland staff. Many of the recruits will spend time in Hongkong gaining valuable on-the-job training. HAECO and Cathay Pacific will between them hold 51 per cent in the new venture, to be known as the Taikoo (Xiamen) Aircraft Maintenance Co. The Xiamen city government has shown an interest in injecting cash into the project in exchange for a 25 per cent shareholding. Final shareholdings have not been decided, but other major airlines are expected to become shareholders. Observers expect China Southern Airlines, which already has a holding share in Guangzhou Aircraft Maintenance and Engineering Co (GAMECO), to be a prime candidate. HAECO is looking to form a good working relationship with GAMECO rather than becoming its fierce rival in southern China. Talks have been taking place with a view to carrying out work together. The Hongkong company is already training 20 of GAMECO's staff as a goodwill measure, and regularly provides specialists to advise on highly technical work. The direct involvement of Cathay as a shareholder is seen as a clever tactical move to guarantee its custom. Management had been worried that Cathay, by far its largest customer, could soon start having some of its worked carried out elsewhere should escalating costs in Hongkong make its rates uncompetitive. The opening of Chek Lap Kok, supposedly in 1997, could herald the end of HAECO's aircraft maintenance and engineering monopoly in Hongkong. Four other companies and consortiums are also bidding for a franchise to offer facilities at the new airport, including one consortium led by US aviation group Lockheed, which happens to have a holding in GAMECO.