High cost of HK inflation

ENGINEERS employed by the Hongkong Aircraft Engineering Co (HAECO) joint venture in Xiamen will be paid a fraction of what their counterparts in Hongkong are earning.

Mr David Turnbull, HAECO's general manager, said wages would be ''about a fifth of what we are currently paying our engineers at Kai Tak'' and would make the base one of the cheapest maintenance facilities in Asia in terms of labour costs.

The average salary for an aircraft maintenance engineer at HAECO with five years experience is about $10,000 a month before allowances and overtime are taken into account.

But in Beijing, for example, an engineer employed by the Aircraft Maintenance and Engineering Corporation (AMECO) earns between 500-600 yuan (about HK$673-$805) a month.

''With various licences and shift allowances this can go up to 700 yuan, a month,'' a company spokesman said.

At the Guangzhou Aircraft Maintenance and Engineering Co (GAMECO) wages average 1,200 yuan a month and reflects the high cost of labour in Guangdong province.

Last year, for example, per capita Gross Domestic Product (GDP) for urban residents in Guangdong was US$550 (HK$4,290) compared to a nationwide average of US$242.

When the US$63 million Xiamen joint venture was announced last month, Mr Turnbull blamed wage inflation as one of the principal reasons for the move.

HAECO employs about 5,000 engineers at Kai Tak, and labour accounts for 65 per cent of operating costs.

The new company will be known as the Taikoo (Xiamen) Aircraft Maintenance Co with the principal share holders being HAECO (41 per cent), China Xiamen Corporation for International Techno-Economic Co-operation (20 per cent) and Cathay Pacific (10 per cent).

Other mainland partners are being sought for the joint venture which is expected to begin operation in 1996 with a 750-strong workforce.

Mr Turnbull said HAECO was recruiting engineers in Xiamen and planned to complement such staff with about 100 engineers from Hongkong for the first two to three years of operation.

He said engineers recruited in Xiamen would be brought to HAECO to ''weave them into our operations'' and would stay with HAECO for two years before being transferred to Xiamen.

He said initially the facility would not have the capacity to carry out a full aircraft overhaul.

Two years ago HAECO bought a 29.1 per cent stake in ASTA Aircraft Services of Australia. A subsidiary of government-owned Aero-Space Technologies of Australia, ASTA was established in 1988 to cater for the growing market in third-party heavy engineering for aircraft.

By 1994, ASTA will be handling the bulk of Cathay Pacific's heavy engineering work.

It was no secret that Cathay and HAECO have been looking for a joint venture partner in China for some time to offset rising costs in Hongkong.

Industry speculation suggested a possible deal with GAMECO but, after careful consideration, it was thought to be less cost effective than Xiamen - 45 minutes flying time from Kai Tak.

An industry source said: ''Labour costs at Xiamen would be on par with those being paid in Beijing . . . perhaps slightly lower.'' Mr Bob Menke, GAMECO general manager said: ''The problem China faces at the moment is that there aren't enough engineers to keep up with the demand.'' Last year China's aviation industry grew about 25 per cent and is expected to expand by another 20 per cent this year. The world average for last year was less than five per cent.

The Civil Aviation Administration of China (CAAC), the country's regulatory body, recently issued a warning to airlines and maintenance bases against poaching from one another by pushing up wages.

Mr Menke said China was no longer the lowest per capita income country in the region in terms of aircraft maintenance. ''Countries such as the Philippines, Sri Lanka and Bangladesh are way ahead of China in costs. Vietnam, Laos and Cambodia, once they come on stream, will also provide China with some healthy competition.'' LESS than 30 years ago Australia was the dominant maintenance base in the region. Today Japan, Singapore and HAECO provide some of the best maintenance facilities in the world with Malaysia and Thailand catching up.

Not long ago international carriers avoided China when it came to aircraft maintenance.

Safety standards and the level of maintenance left much to be desired. If an aircraft landed in Beijing with a problem that could be fixed elsewhere the aircraft would be flown out if the move did not put passenger lives at risk.

''No one would risk having their aircraft worked on in China,'' said one industry source with 30 years' experience in the region.

''But all that has changed. China has gained respectability as an aviation maintenance centre.'' So much so that some of the aviation world's leading players have seen the enormous potential China offers with its cheap, skilled labour force and have established joint ventures to take advantage of its expanding aviation industry.

China has two internationally recognised maintenance facilities: AMECO which is a joint-venture operation between Germany's Lufthansa and Air China in Beijing; and GAMECO, a $26 million joint venture between China Southern Airlines, Lockheed Aircraft Services of the United States and Hutchison China Trading of Hongkong, and is based at the Guangzhou Baiyuan International Airport.

A source said while China's maintenance skills were ''among the best in the world you still have a problem with efficiency and productivity. It simply takes longer to get things done in China than in more developed countries''.

''For example a D check, that is a full aircraft overhaul, can take up to two months to complete. In China it can take three months. The extra month the aircraft is on the ground can cost an airline up to $1.5 million in lost revenue,'' the source said.

''Obviously downtime [the time an aircraft is on the ground] will be longer in the beginning,'' Mr Turnbull said.

''But I don't see that as being a problem because if we manage the transition correctly, labour costs are going to be substantially lower, low enough to successfully compensate for an initial increase in downtime.

''We hope that after about two or three years, our operations in Xiamen will be as fast as Hongkong's. Of course all this is easier said than done, but I think we can manage to make it a substantially lucrative move.''