BUSI­NESS SCOPE FOR CIVIL MRO IN IN­DIA

It is ex­pected that ap­prox­i­mately 10,000 air­craft would be in ser­vice in the re­gion by 2035, cre­at­ing an op­por­tu­nity for the ma­jor MRO play­ers in the re­gion

SP's Airbuz - - Front Page - BY SUKHCHAIN SINGH

IN­DIA, WITH ITS GROW­ING air­craft fleet size, strate­gic lo­ca­tion, rich pool of en­gi­neer­ing ex­per­tise and lower labour cost, has a huge po­ten­tial to be the global Main­te­nance, Re­pair and Over­haul (MRO) hub on a long-time hori­zon. The cur­rent mar­ket size of MRO is es­ti­mated at about $700-800 mil­lion which is ex­pected to reach $1.2 bil­lion by 2020. In­dia has the po­ten­tial to be­come the third largest avi­a­tion mar­ket by 2020 and the largest by 2030. The growth of the in­dus­try is be­ing pro­pelled by the de­vel­op­ment of air­ports, pres- ence of sev­eral low-cost car­ri­ers, a lib­er­alised FDI pol­icy, in­creas­ing adop­tion of in­for­ma­tion tech­nol­ogy and fo­cus on im­prov­ing re­gional con­nec­tiv­ity. In the ab­sence of qual­ity in­fra­struc­ture, air­lines carry out main­te­nance out­side In­dia at the near­est avail­able MRO lo­ca­tion (South East Asia, Mid­dle East or Europe) in­cur­ring a ferry flight, lo­gis­tics costs and en­gine/com­po­nent hours. There are about 40 over­seas MRO providers ap­proved by the Direc­torate Gen­eral of Civil Avi­a­tion (DGCA) to con­duct work on In­dian reg­is­tered air­craft in lo­ca­tions such as the UK, Ger­many, France,

Jor­dan, UAE, Sri-Lanka, China and Sin­ga­pore with 90 per cent of an MRO work-scope go­ing out­side In­dia.

MRO MAR­KET. With over 1,000 air­craft on or­der, In­dia is poised to be­come the third largest buyer of com­mer­cial pas­sen­ger planes in the world, with only the US and China ahead of it. Hav­ing re­ceived huge or­ders from In­dian car­ri­ers, air­craft man­u­fac­tur­ers such as Air­bus plan to build MRO fa­cil­i­ties in In­dia. In Jan­uary 2017, Spice­Jet fi­nalised a deal worth $22 bil­lion to buy 205 air­craft from Boe­ing and has tied up with Air In­dia En­gi­neer­ing Ser­vices Ltd (AIESL) for MRO fa­cil­ity at Nag­pur. The In­dian busi­ness avi­a­tion mar­ket is com­plex from a main­te­nance per­spec­tive as it has over 60 dif­fer­ent air­craft types op­er­at­ing in a to­tal of about 350 air­craft ( busi­ness jets, tur­bo­props and he­li­copters). Each type of air­craft re­quires trained tech­ni­cal man­power, tool­ing and ap­provals from the reg­u­la­tor and the OEM to en­able world­class MRO ser­vices. There­fore, the in­dus­try is highly frag­mented and hence has its own chal­lenges to counter.

Air­lines in In­dia spend about 15 per cent of their rev­enues to­wards main­te­nance, the sec­ond-high­est cost item for air­lines af­ter fuel. Gen­er­ally, air­lines carry on-tar­mac in­spec­tions (A and B checks) in-house and work with third-party MROs for en­gine, heavy main­te­nance (C and D checks) and mod­i­fi­ca­tions. Pri­vate oper­a­tors and Non-Sched­uled Oper­a­tors Per­mit (NSOP) hold­ers are re­quired by the Direc­torate Gen­eral of Civil Avi­a­tion (DGCA) to set up a CAR 145 ap­proved main­te­nance shop or work with a DGCA-ap­proved third party MRO. Most pri­vate oper­a­tors and NSOP hold­ers pre­fer the out­sourced model for line main­te­nance and use OEM/DGCA ap­proved fa­cil­i­ties for en­gine, heavy main­te­nance and mod­i­fi­ca­tions.

In 2016, AIESL at Nag­pur be­gan car­ry­ing out C checks on Jet Air­ways Boe­ing 777s and it is be­lieved that only about 20 per cent of the ca­pac­ity at the MRO fa­cil­ity is be­ing utilised. For the rest, Air In­dia is eye­ing ex­ter­nal busi­ness to raise its turnover from 1.3 bil­lion to two bil­lion in a year by ser­vic­ing air­planes of other air­lines. The AIESL now also ser­vices Jet Air­ways air­craft at Mum­bai. An MRO agree­ment had been signed with Spice­Jet and talks are un­der­way with an­other low-cost car­rier. AIESL, a joint ven­ture be­tween Air In­dia and Boe­ing, is de­signed to un­der­take MRO work on any type and size of air­craft in­clud­ing Air­bus A380. AIESL has also started tests and mi­nor re­pairs on Gen­eral Elec­tric (GE) en­gines that power Boe­ing 777s. Com­plete over­haul of en­gines is likely to be car­ried out soon. This en­gine over­haul fa­cil­ity, the first of its kind in In­dia, can un­der­take re­pairs of all GE power-plants. The fa­cil­ity was serv­ing only Boe­ing 777s un­til the DGCA ap­proved late last year, main­te­nance of Air­bus A319, A320 and A321 air­craft. Staff-crunched Air In­dia, how­ever, is look­ing for a pri­vate player to take on a 30-year lease for the six-bil­lion MRO fa­cil­ity at MIHAN on a rev­enue-shar­ing ba­sis.

Cre­ation of MRO in­fra­struc­ture re­quires a level of in­vest­ment both ini­tial and re­cur­ring which most MROs do not find eco­nom­i­cally vi­able to sup­port. While heavy main­te­nance will be the grow­ing need as In­dia’s fleet ex­pands and ages, en­cour­ag­ing MRO play­ers to in­vest, there are shorter-term op­por­tu­ni­ties for nim­ble sup­pli­ers and oper­a­tors as well. The In­dian MRO play­ers must con­tin­u­ously up­grade their fa­cil­i­ties and pro­vide ca­pac­ity to un­der­take eco­nom­i­cally, checks for com­mer­cial fleet, both In­dian and in­ter­na­tional.

END OF LEASE CHECKS. Given the rise in the In­dian sale-and-lease-back model which of­ten sees air­craft chang­ing hands at least once ev­ery six to ten years, re­de­liv­ery main­te­nance of air­craft is ex­pected to be a huge re­quire­ment. An air­craft on an op­er­at­ing lease is owned by the lessor and op­er­ated by the lessee. The lessor grants the lessee ex­clu­sive use of its air­craft for an agreed pe­riod of lease term. For new air­craft, this term is of­ten eight to 12 years for a nar­row-body and up to 12 years for a wide-body. The op­er­a­tor is charged a monthly rental fee for the du­ra­tion of the lease. The lessor col­lects main­te­nance re­serves as pro­tec­tion from the risk of the lessee fail­ing to pay for any ma­jor main­te­nance items on the air­craft when due in the lease term. These are most of­ten re­lated to heavy air­frame main­te­nance, en­gine per­for­mance restora­tion. over­haul, re­place­ment of en­gine life-limited parts (LLPs), land­ing gear and APU main­te­nance. Since these are costly items, the lessee pays into a re­serve ac­count, based on the air­craft or en­gine util­i­sa­tion, thereby cre­at­ing a fund to cover the cost of such main­te­nance. All op­er­at­ing lease agree­ments spec­ify the main­te­nance and gen­eral con­di­tion in which the air­craft is re­quired to be re­turned to the lessor by a given date, at the end of the lease term. These are the re­turn or re-de­liv­ery con­di­tions. Air­craft re­de­liv­er­ies are timed around a sched­uled heavy air­frame check when­ever pos­si­ble. At the end of the lease, the lessor would like the air­craft re­turned with the air­frame, en­gines, land­ing gear and aux­il­iary power unit (APU) in a con­di­tion which would al­low op­er­a­tion for a year or two with­out any ma­jor main­te­nance com­ing due. The lessor and lessee will of­ten agree to a ‘ mir­ror in/mir­ror out’ ar­range­ment, whereby the re­turn con­di­tion should, at a min­i­mum, re­flect the con­di­tion in which the air­craft was ini­tially de­liv­ered at the start of the lease. The main­te­nance checks are un­der­taken out­side In­dia at the lessor’s des­ig­nated MRO fa­cil­i­ties. This is huge busi­ness and calls for out-of-the-box think­ing to be un­der­taken in In­dia. With heavy checks and over­hauls be­ing done grad­u­ally in In­dia, the need to have com­po­nent over­haul in the coun­try with a global print, is a ne­ces­sity. The com­po­nents over­haul along with es­tab­lish­ing MRO heavy checks, will have to go hand-in-hand to en­sure In­dia has a global pres­ence in the in­dus­try to make it eco­nom­i­cally vi­able.

COM­PO­NENTS MRO. Ad­e­quate fa­cil­i­ties for Main­te­nance and Re­pair of planes are avail­able in the coun­try. How­ever, for over­haul, only limited fa­cil­ity is avail­able. There­fore, some In­dian Car­ri­ers send their air­crafts to for­eign coun­tries to carry out the over­haul main­te­nance ser­vices in DGCA ap­proved main­te­nance or­ga­ni­za­tions lo­cated abroad. How­ever, car­ri­ers avail main­te­nance ser­vices from DGCA-ap­proved main­te­nance or­gan­i­sa­tions de­pend­ing upon their com­mer­cial con­sid­er­a­tions, du­ra­tion for ac­com­plish­ment of main­te­nance and lease re­quire­ments. There are 109 ap­proved MROs in In­dia of which seven are ca­pa­ble of car­ry­ing out over­haul of planes. Air­craft com­po­nent MRO ser­vices are es­sen­tial in en­sur­ing the smooth op­er­a­tion of air­craft. MRO providers are reg­u­lated by var­i­ous avi­a­tion au­thor­i­ties, such as the FAA, CASA and EASA. Air­craft com­po­nent MRO ser­vices in­clude main-

CRE­ATION OF MRO IN­FRA­STRUC­TURE RE­QUIRES A LEVEL OF IN­VEST­MENT BOTH INI­TIAL AND RE­CUR­RING WHICH MOST MROS DO NOT FIND ECO­NOM­I­CALLY VI­ABLE TO SUP­PORT

ten­ance, re­pair, and over­haul of avion­ics, elec­tron­ics, me­chan­i­cal ac­tu­a­tors, fuel sys­tems, car­bu­ret­tors, land­ing gear and aux­il­iary power units. Asia ac­counted for the largest share in global air­craft com­po­nent MRO mar­ket. It is an emerg­ing re­gion in the long-haul in­ter­na­tional mar­ket and it re­lies heav­ily on the small and medium wide-body air­craft. More­over, it is ex­pected that ap­prox­i­mately 10,000 air­craft would be in ser­vice in the re­gion by 2035, cre­at­ing an op­por­tu­nity for the ma­jor MRO play­ers in the re­gion. Asia ac­counted for the largest share in global air­craft com­po­nent MRO mar­ket as well. A num­ber of the ma­jor MRO ser­vice providers such as Air­bus and Honey­well, are present in the re­gion, gar­ner­ing high mar­ket share in the re­gion. The air­craft MRO mar­ket is ex­pected to grow at an es­ti­mated CAGR of 6.17 per cent. To meet this grow­ing de­mand, it is im­por­tant for the MRO ser­vice providers across the globe to en­sure pro­vi­sion of ef­fi­cient and high-qual­ity main­te­nance for air­plane com­po­nents. The key play­ers in global air­craft com­po­nent MRO mar­ket are Delta TechOps (US), Lufthansa Tech­nik AG (Ger­many), Air France In­dus­tries KLM En­gi­neer­ing & Main­te­nance (France), HAECO ( Ja­pan), Honey­well In­ter­na­tional (US), ST Aero­space (Sin­ga­pore), AAR Corp (US), Barnes Aero­space (US), FL Tech­nics (Lithua­nia) and Turk­ish Tech­nic, Inc (Turkey). This is an un­tapped po­ten­tial. How­ever, to be glob­ally com­pet­i­tive the MRO play­ers must have scale of pro­duc­tion in their favour. Tie ups with in­ter­na­tional play­ers to pro­vide com­po­nent re­pairs and over­haul in In­dia for the lo­cal air­lines with as­sured re­pairs for the re­gional air­lines as well. The busi­ness has to be highly com­pet­i­tive in­ter­na­tion­ally to suc­ceed and sus­tain.

GST AS SHOW-STOP­PER. The avi­a­tion MRO in­dus­try has asked the gov­ern­ment to cre­ate a level play­ing field by ei­ther abol­ish­ing 18 per cent GST be­ing levied on the sec­tor or im­pos­ing cus­toms duty on air­craft be­ing ser­viced out of the coun­try. The in­dus­try has made a rep­re­sen­ta­tion to the Min­istry of Civil Avi­a­tion (MoCA) seek­ing an ex­emp­tion from GST, ar­gu­ing that it makes ser­vic­ing air­craft in In­dia costlier than abroad. The air­lines can­not get a re­fund for GST paid be­cause there is no pro­vi­sion for re­fund avail­able on econ­omy class seats, which form a sub­stan­tial part of the air­line ca­pac­ity in In­dia. Also, pre-GST, zero VAT was paid on spares in Ma­ha­rash­tra and ser­vice tax on labour. Post-GST, it is 18 per cent on com­bi­na­tion of spares and labour. Over­seas MRO units have gained since the im­ple­men­ta­tion of the GST regime, be­cause there is no cus­toms duty on get­ting a plane over­hauled and its spares abroad and bring­ing it into In­dia.

SKILL DE­VEL­OP­MENT. A re­port by the In­ter­na­tional Civil Avi­a­tion Or­gan­i­sa­tion (ICAO) states that for ev­ery 100 jobs cre­ated in the avi­a­tion sec­tor, an ad­di­tional 610 new jobs are cre­ated in the lo­cal econ­omy. To meet the grow­ing de­mand and need for ca­pac­ity ad­di­tion, es­ti­mated to be 3.3 lakh by 2025, MoCA has un­der­taken a va­ri­ety of skilling ini­tia­tives. Avi­a­tion Sec­tor Skill Coun­cil (AASSC) has iden­ti­fied 70 job roles for de­vel­op­ment and for­mu­la­tion of Na­tional Oc­cu­pa­tional Stan­dards (NOS) and Qual­i­fi­ca­tion Pack. These also in­clude the MRO sec­tor and an op­por­tu­nity to aug­ment the skills for the work­force in the avi­a­tion do­main.

The Na­tional Civil Avi­a­tion Pol­icy-2016 has de­tailed out­line of the MRO in­dus­try. With the ex­pected growth in com­mer­cial avi­a­tion do­mes­tic as well as in­ter­na­tional, the air­lines are work­ing on very thin profit mar­gins to re­main com­pet­i­tive. There is siz­able busi­ness in the MRO mar­ket in the In­dian sub­con­ti­nent. The op­por­tu­nity is here and now to be grabbed with both hands. The eco-sys­tem and gov­ern­ment ini­tia­tives are the need of the hour to nur­ture this in­dus­try in the Make in In­dia con­text.

A NUM­BER OF MA­JOR MRO SER­VICE PROVIDERS SUCH AS AIR­BUS AND HONEY­WELL, ARE PRESENT IN THE RE­GION, GAR­NER­ING HIGH MAR­KET SHARE IN THE RE­GION

Heavy main­te­nance at Air In­dia En­gi­neer­ing Ser­vices

GMR Aero Tech­nic’s MRO fa­cil­ity

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