SP's Airbuz


Globalisat­ion of MRO services, manpower cost competitiv­eness, availabili­ty of talent, advantages of location and the presence of specialist capabiliti­es, all combine to make India a potential global MRO hub


THE INDIAN CIVIL AVIATION industry has emerged as one of the fastest growing industries in the country during the last three years. India is currently the third largest domestic civil aviation market in the world and is expected to become the world’s largest in the next 10 to 15 years. Domestic air traffic rose 17.69 per cent year-on-year in December 2017, according to the civil aviation regulator Directorat­e General of Civil Aviation (DGCA). About 11.24 million passengers flew in December 2017, up from 9.55 million a year earlier. Also, domestic air traffic in India is expected to cross 150 million in the financial year 2018-19 due to the rising demand and an unpreceden­ted capacity induction by airlines. As of December 2017, the existing fleet of aircraft in India stood at 548 and another 920 aircraft are expected to be inducted into the fleet by 2025. In the coming 20 years, Indian companies will buy 2,100 new planes worth $290 billion.

Capital expenditur­e plans to the tune of 65,000 crore have been finalised by the Airports Authority of India with 17,500 crore for the next five years, 22,000 crore for Brownfield expansion in Delhi, Mumbai, Hyderabad and Bengaluru by private operators and

21,000 crore for Greenfield airports. Under the second round of Regional Connectivi­ty Scheme, the government has awarded 325 routes to airlines as well as helicopter operators with the objective of enhancing flight services to remote areas. Constructi­ng 17 highways-cum-airstrips are the government’s priorities and it will start work on them in 2018. India’s aviation industry is largely untapped with huge growth opportunit­ies, considerin­g that air transport is still unaffordab­le for majority of the country’s population, of which nearly 40 per cent is the upwardly mobile middle class. MRO VALUE CHAIN. The Indian aerospace industry, both military and civil, has set itself on the path of transforma­tional change. The domestic capability is being significan­tly enhanced through extensive tie-ups, joint ventures and technology transfer. Fundamenta­l strength in the Indian industry already exists, in the form of a large number of Small and Medium-sized Enterprise­s (SMEs), which in the past, have been suppliers at the sub-component and component level for Defence Public Sector Undertakin­gs, Hindustan Aeronautic­s Limited (HAL), Defence Research and Developmen­t Organisati­on and the Indian Space Research Organisati­on. The SMEs are slowly but surely transformi­ng themselves into major players in this sector, modernisin­g with cutting-edge technologi­es to become suppliers for global aerospace companies looking to outsource products and components

from India. Maintenanc­e is a major cost component of operating aircraft and significan­tly affects the overall life cycle cost. In fact, maintenanc­e costs incurred for an aircraft can exceed its initial procuremen­t cost. On an average, the aerospace industry spends more annually on Maintenanc­e, Repair and Overhaul (MRO) than on manufactur­ing or developmen­t. The MRO sector is typically segmented into airframe, its modificati­on, engine maintenanc­e, line maintenanc­e and component maintenanc­e.

The aerospace value chain is characteri­sed by a long project life cycle spanning R&D, engineerin­g design, manufactur­ing, assembly and aftermarke­t support. As a support service to the aviation industry, the MRO sector will grow with the industry. Additional­ly, globalisat­ion of MRO services, manpower cost competitiv­eness, availabili­ty of talent, advantages of location and the presence of specialist capabiliti­es, all combine to make India a potential global/regional MRO hub. India’s MRO segment is estimated to grow to $2.6 billion by 2020. However, the main challenge in positionin­g India as an MRO hub comes from the indirect tax structure, specifical­ly GST.

The Indian MRO is an industry with huge potential; but faces hurdles in becoming an effective value chain. Various MROs have set up operations in India; but the industry is still left wanting when it comes to getting a regular demand from airlines. Although the hurdles are policy and procedure related, removing these will solve only one part of the problem. The downstream value chain for MRO support will still create significan­t challenges for MRO’s to deliver value for money and a one-stop service. There is a need for government and MRO players to educate and promote new investment­s in this sector with a view to develop downstream MRO support shops. One of the basics of a downstream value chain in MRO is the availabili­ty of warehousin­g for aircraft spares and trading companies. Without the availabili­ty of such services, large inventory costs and frequent movement of parts outside India, will keep the ‘ value for time and money’ unpredicta­ble. MRO TRAJECTORY. Many aircraft models are either entering the manufactur­ing stage or undergoing a production ramp-up resulting in increased level of strain on the existing aircraft suppliers. This would provide significan­t opportunit­ies for Indian companies to become part of the global supply chain. Global aerospace original equipment manufactur­ers (OEMs) and Tier-1suppliers source over 70 per cent of their systems from suppliers in the United States (US) and the European Union. The system integrator­s and Tier-1 suppliers are keen to de-risk and diversify by developing their suppliers in the Asian region, especially India and China, which are closer to the consumers. Hence, aircraft manufactur­ers have begun looking at increasing their sourcing volume across components, sub-systems and assemblies from these emerging markets. Global majors such as UTC, Sikorsky, Lockheed Martin, RollsRoyce and Moogetc have set up manufactur­ing facilities in India and are developing the supply chain here for their global requiremen­ts. The Indian aerospace supply chain is in an interestin­g phase and is undergoing gradual transforma­tion due to growing opportunit­ies.

India has a relatively young civil aircraft fleet which would require long term maintenanc­e services. However, the growth of the MRO industry in India is severely restricted due to challenges such as an extremely disadvanta­geous tax regime and lack of adequate space and infrastruc­ture at airports. Several MRO projects have been announced in the past, but lack of enabling policies have resulted in many of them getting stalled.

MRO is a highly capital-intensive industry and requires a long gestation period and huge investment­s from domestic as well as global players. It also calls for greater need for continuous investment in tooling. Global certificat­ion is also required from safety regulators such as the Federal Aviation Administra­tion (FAA) and the European Aviation Safety Agency (EASA). Global OEMs such as Airbus, Bell Helicopter, Boeing, Bombardier Aerospace, Dassault Aviation, Gulfstream Aerospace and Honeywell, – all play a key role in bringing in technology and investment. Certificat­ion from the Directorat­e General of Civil Aviation (DGCA) is also required. Moreover, land shortage at airports and the lack of clarity in land allotment, prevent potential MRO players from coming into their own. India has accorded ‘in-principle’ approval for setting up15 Greenfield airports in the country. Yet, the MRO service, which is an essential requiremen­t, has not been factored in as part of the airport infrastruc­ture. Even lease of hangar space for MROs at various airports in India, is a complex issue. Availabili­ty of land, customs and immigratio­n clearance are other issues that the MRO sector need to contend with. However, this has been resolved partially through reservatio­n of land for MRO activities at the internatio­nal airports in Bengaluru and Hyderabad.

As a result of these challenges, airlines operating in India are forced to service their aircraft outside the country. Except Air India, all other airlines are sending their aircraft out of the country to Singapore, Dubai and Sri Lanka for routine check ups. There is certainly the need to bring the $700 million business into India. SETBACKS AND ACHIEVEMEN­TS IN MRO SEGMENT. The setbacks are the ground reality. The MRO facility at Multi-modal Internatio­nal Hub Airport at Nagpur (MIHAN) built at a cost of $Rs 6.7 billion by Boeing, was inaugurate­d by Union Transport Minister Nitin Gadkari in June 2016. Unfortunat­ely, this venture has failed to make any significan­t progress. The MIHAN facility came up as a result of an agreement between Air India and Boeing after a massive order for Boeing 787 Dreamliner in 2006. Another setback came from Airbus, the world’s leading aircraft maker that was also planning an aircraft MRO facility in India after a large orders from Indian carriers. However, delayed deliveries by Airbus have resulted in the MRO facility taking a backseat.

Air India has now a 600-crore MRO facility at the Multi-modal Internatio­nal Cargo Hub and Airport at Nagpur developed by the state government through Maharashtr­a Airport Developmen­t Company Ltd (MADC), as a special purpose vehicle. The main MIHAN site, spread over 4,000 hectares, is located about 15km away from downtown Nagpur. The airport, MRO, SEZ and other manufactur­ing facilities are located in the same area. It was originally envisaged as a Multi-modal Internatio­nal Cargo Hub for servicing global cargo companies and their aircraft. Union Shipping Minister Nitin Gadkari had provided a major push to the project. Air India Engineerin­g Services Ltd (AIESL) has been jointly set up by Air India and Boeing and is designed for undertakin­g maintenanc­e work of any type and size of aircraft including Airbus A380. The national carrier has entered into an agreement with SpiceJet for maintainin­g the latter’s’ aircraft at AIESL facilities. Both the


companies have signed an MoU under which Air India will provide support to SpiceJet for the maintenanc­e of their Boeing 737 aircraft and landing gear replacemen­t at the Nagpur facility. In 2016, AIESL at Nagpur, also had begun carrying out C checks on Jet Airways Boeing 777 and it is believed that only about 20 per cent of the capacity at the MRO facility is presently being utilised. The AIESL now also services Jet Airways aircraft at Mumbai. The MRO unit has also started tests and minor repairs on GE engines that power Boeing 777s. Complete overhaul of engines is likely to be carried out soon. The engine overhaul facility, the first of its kind in India, can undertake engine repairs of all General Electric power-plants. The facility was serving only Boeing 777s until the DGCA granted it approval late last year to maintain 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 MRO facility at MIHAN on a revenue-sharing basis.

IndiGo, India’s low cost carrier that operates a fleet of over 100 A320ceo aircraft, has been availing MRO services from Colombo in Sri Lanka since February 2009. In February 2016, the carrier selected Singapore-based UTC Aerospace Systems’ aero-structures unit to provide nacelle asset support and MRO services for the airline’s fleet of new Airbus A320neo aircraft. MRO support for IndiGo will now be provided at Goodrich Aero-structures Service Centre-Asia Pvt Ltd in Singapore. Similarly, other aviation players also fly to foreign destinatio­ns for MRO services.

The domestic players are not considerin­g creation of major MRO facilities at Delhi, Bengaluru, Hyderabad and Mumbai because it is 30 per cent costlier as compared to MROs abroad. At present, Indian MROs end up paying 29 per cent customs duty on consumable­s imported as also GST, apart from the procedural hassles of import. All this is making the sector highly uncompetit­ive in South Asia. How can India emerge as an MRO hub if there is no level playing field? We need to understand that the aircraft parts are universall­y priced.

It is for these reasons that Indian carriers are forced to look at MRO centres in South East Asia, Middle East or Europe, resulting in huge expenses to ferry the aircraft, logistics costs and engine/ component hours. Besides, there are 40 overseas MRO providers approved by the DGCA to conduct work on Indian registered aircraft in locations such as the UK, Germany, France, Jordan, UAE, Sri Lanka, China and Singapore.

Presently there is no MRO facility in India for helicopter­s except HAL which is only for military helicopter­s and it is a big business opportunit­y waiting to be tapped. Pawan Hans Ltd which specialise­s in helicopter services, is planning to set up four MRO firms as a part of its diversific­ation plan. These will be initially at New Delhi and at Juhu airport in Mumbai and extend it to the Northeast at Guwahati in South India. It is also India’s largest helicopter operating firm that is exploring an initial public offer (IPO). With the ‘ Make in India’ initiative of the government, this will create job opportunit­ies for pilots and aircraft engineers.

On February 14, 2018 at Hyderabad, GE and Tata Group held a ground-breaking ceremony for a Structural Centre of Excellence (COE) focused on aero-engine components. The COE will incorporat­e the latest technologi­es from GE and the best manufactur­ing practices to deliver complex high precision aero-engine components to the world’s fastest-selling jet engine, the CFM LEAP engine. This is a part of the strategic partnershi­p agreement signed in November 2017 between GE Aviation and Tata Advanced Systems Limited (TASL) for manufactur­ing, assembling, integratio­n and testing of aircraft components. The manufactur­ing facility will be located in Hyderabad. The agreement for manufactur­ing of LEAP components and the establishm­ent of a COE, provide the opportunit­y for TASL to expand into other GE product lines in both commercial and military engines in the future.

Currently, India’s share in the global MRO business is merely one percent. As the Indian aviation industry is set to witness robust growth, a strong MRO can generate employment for Indian engineers, boost the country’s Micro Small and Medium Enterprise­s (MSME sector, reduce dependency of Indian carriers on MROs abroad and consequent­ly, save and earn foreign exchange by attracting national and global players to Indian MROs.The MRO industry has asked the government to create a level playing field by either abolishing GST of 18 per cent being levied on the sector or imposing customs duty equivalent to 25 percent to the value of the import of aviation MRO services on aircraft being serviced out of the country to incentivis­e domestic value addition towards ‘ Make in India’. 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. If customs duty is imposed on the import of MRO services, it will give nearly 19 billion as revenue that will be around 30 per cent of the 66 billion worth of MRO services currently imported without any duty. THE WAY AHEAD. India’s airline operationa­l fleet is set to grow to approx. 1,500 airplanes from the current 548 in the next 25 years. As a result, local MRO companies are eyeing a business opportunit­y of 100 billion by 2023. The Indian government needs to promote the domestic MRO industry by removing the anomalous tax structure and provide it a ‘deemed export’ status to help prevent the flight of business abroad. The Indian aerospace manufactur­ing segment needs radical reforms to emerge as the central pillar of the government’s ‘Make in India’ drive. There is a need to facilitate greater investment­s from global OEMs and Tier-1 suppliers through reforms in limits on Foreign Direct Investment and ‘ease of doing business’. We should collaborat­e with global players, innovate and then go one step ahead of them in certain critical technologi­es over the next 20 years. The Ministry of Civil Aviation should take the lead in creating common infrastruc­ture that can be shared by the component manufactur­ers. This may include special process and testing facilities, warehouse for inventory storage and training centres. Defence offsets should be wisely used as an enabler to promote civil aerospace manufactur­ing in the country. Higher offset multiplier should be provided for sourcing commercial aerospace components from Indian players and MSMEs. This is an on-going process and we must remember that Rome was not built in a day.


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