MRO IN­DIA SPE­CIAL

IM­PE­TUS RE­QUIRED FOR THE IN­DIAN AVI­A­TION MRO SEC­TOR COR­RECT POL­ICY IM­BAL­ANCES by BHARAT MALKANI, MAX AERO­SPACE AND AVI­A­TION TECH­NOL­OGY IN AVI­A­TION MRO

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

IT IS PRO­POSED TO lever­age In­dia’s engi­neer­ing ad­van­tage and po­ten­tial to achieve self-reliance in this vi­tal avi­a­tion seg­ment. The govern­ment will adopt suit­able pol­icy in­ter­ven­tions to cre­ate a con­ge­nial at­mos­phere for de­vel­op­ment of MRO in the coun­try,” Fi­nance Min­is­ter Nir­mala Sithara­man said dur­ing the Bud­get speech in the Par­lia­ment in­di­cat­ing the govern­ment’s se­ri­ous in­tent in boot­strap­ping the Main­te­nance, Re­pair and Over­haul (MRO) in­dus­try in In­dia. Ac­cord­ing to the Min­istry of Civil Avi­a­tion (MoCA), In­dia’s air­lines op­er­ate 614 air­craft and have 700 more on or­der. In­dia has 99 ap­proved air­craft main­te­nance com­pa­nies of which 12 are ca­pa­ble of un­der­tak­ing ma­jor main­te­nance of large air­craft. Ma­jor play­ers in In­dia’s MRO in­dus­try in­clude Air In­dia Engi­neer­ing Ser­vices Limited (AIESL) owned by the Air In­dia group, GMR as well as Air Works. By 2040, the MRO in­dus­try in the coun­try is pro­jected to con­trib­ute $540 mil­lion in an­nual rev­enue from the cur­rent $50 mil­lion. As the third largest and fastest grow­ing avi­a­tion mar­ket in the world, the share of two per cent of MRO busi­ness glob­ally is a huge op­por­tu­nity since only about 10 per cent of In­dia’s com­mer­cial air­craft fleet is be­ing ser­viced by In­dian MRO com­pa­nies.

MRO BUSI­NESS IS­SUES. The MRO busi­ness is cap­i­tal in­ten­sive and re­quires sig­nif­i­cant in­vest­ment in terms of in­fra­struc­ture, ma­te­rial, train­ing of man­power and tech­nol­ogy. Ex­pen­di­ture in MRO ac­counts for 15 per cent of to­tal rev­enues, which is the sec­ond high­est ex­pense af­ter fuel cost. The MRO sec­tor is a tough in­dus­try, is highly reg­u­lated, is all about flight safety and is, thus, very im­por­tant as a sec­tor of the In­dian civil avi­a­tion in­dus­try. Of course, things take time to build, but in the last five years, things have come a long way and now ba­sic build­ing blocks are in place.

The low-cost base and ed­u­cated labour force should make In­dia a ma­jor player in the global MRO busi­ness. How­ever, with In­dia’s avi­a­tion sec­tor, a lot needs to be done on fast track to achieve the de­sired goal. In In­dia, the skewed tax struc­ture, enor­mous roy­al­ties, skill re­ten­tion chal­lenges and reg­u­la­tory in­con­sis­ten­cies, have let for­eign MRO ser­vice providers gain a lion’s share of In­dian busi­ness. The In­dian govern­ment needs to tackle four key ar­eas with in­ci­sive fo­cus – GST, roy­al­ties, cus­toms pro­ce­dures and skills re­ten­tion.

MRO com­pa­nies in In­dia pay a GST rate of about 18 per cent. While this has re­duced in the re­cent years, it is still higher than In­dia’s near­est MRO com­peti­tors, Sin­ga­pore and Malaysia, who charge seven per cent. The In­dian air­lines, there­fore, avail MRO ser­vices out of the coun­try. IndiGo’s fleet of over 200 Air­bus A320 air­craft move to the Philip­pines or Malaysia for heavy checks. GoAir gets the CFM56 en­gines of its Air­bus A320 air­craft for over­haul at MTU Aero En­gines’ fa­cil­ity in Zhuhai in China. One ex­cep­tion is Air In­dia which un­der­takes its fleet checks at its sub­sidiary, AIESL.

The In­dian Na­tional Civil Avi­a­tion Pol­icy (NCAP) 2016 will help the avi­a­tion sec­tor to grow. NCAP 2016 re­moved many pro­ce­dural hur­dles faced by the MRO in­dus­try and have been duly wel­comed by them. The duty-free pe­riod for com­po­nent im­port was in­creased from one to three years. For­eign air­craft were al­lowed to come to In­dia for MRO for a pe­riod of six months in­stead of 15 days ear­lier, with­out any per­mis­sion. MROs were re­quired to pro­vide proof of their re­quire­ments of parts or or­ders from their clients. This has been done away with. For­eign pi­lots and MRO ex­perts will be pro­vided visas and Tem­po­rary Land­ing Per­mits promptly. Air­port roy­alty and ad­di­tional charges will not be levied on MRO ser­vice providers for a pe­riod of five years. The govern­ment of In­dia does im­pose a GST of five per cent on the in­voice value of the MRO done abroad, but air­lines can take a set-off against the same. To fa­cil­i­tate re­pairs of dam­aged sub-as­sem­blies like en­gines and land­ing gears of for­eign car­ri­ers, the no­ti­fi­ca­tion has been re­vised to en­able ad­vance ex­port of ser­vice­able parts. There is also a cash flow is­sue. Most In­dian car­ri­ers are fac­ing a cash crunch. They do not want to pay 18 per cent GST today and then claim a set-off later. It is much sim­pler to fly the air­craft abroad and work with es­tab­lished global MRO providers.

The coun­try’s suc­cess­ful Re­gional Con­nec­tiv­ity Scheme to stim­u­late re­gional air links hope­fully will al­low the MRO in­dus­try to grow as well. These two in tan­dem need to be dove­tailed and must be armed with a de­tailed plan.The Bud­get has in­creased al­lo­ca­tion to the re­gional con­nec­tiv­ity scheme (UDAN) by around 10 per cent to ` 480 crore in Fi­nan­cial Year 2019-2020. The MRO in­dus­try in In­dia should have a mas­ter plan for ro­bust de­vel­op­ment and build an ecosys­tem to fuel its growth. This will pos­si­bly bring more in­vest­ment into In­dia, build­ing a ro­bust do­mes­tic MRO in­dus­try and more im­por­tantly, bring back jobs that we have consistent­ly lost to com­pe­ti­tion out­side, in an un­even play­ing field. These ser­vices in­clude pe­ri­odic en­gine checks, pro­pel­lers and air­frames, be­sides the in­ten­sive and mul­ti­ple checks at the end of lease tenor of air­craft.

AIR­CRAFT LEAS­ING PROPO­SI­TIONS. With the preva­lence of sale-and-lease-back model among In­dian car­ri­ers, re­de­liv­ery main­te­nance forms a ma­jor part of an air­line’s and lessor’s MRO re­quire­ments. This presents a large op­por­tu­nity for both com­po­nent re­pair and heavy main­te­nance. Cur­rently, this is done mostly out­side In­dia due to var­i­ous le­gal and tech­ni­cal rea­sons. The MoCA had set up a work­ing group last year to for­mu­late poli­cies for air­craft leas­ing in In­dia. As per the Min­istry, pas­sen­ger traf­fic is ex­pected to grow six-fold to 1.1 bil­lion by 2040, and the num­ber of op­er­a­tional air­ports would dou­ble to 200 till that pe­riod. The fleet size of do­mes­tic air­lines will reach 2,350 planes in 2040, from the present 614. Ac­cord­ing to Boe­ing and Air­bus, this would re­quire $5 bil­lion fi­nanc­ing each year.

Ex­perts be­lieve the govern­ment will have to amend bank­ing reg­u­la­tions for leas­ing busi­ness to take shape in In­dia. The govern­ment should al­low banks to par­tic­i­pate in leas­ing. The pro­posal to in­tro­duce air­craft fi­nanc­ing and leas­ing will bring down the costs for car­ri­ers. Tech­ni­cal and le­gal con­di­tions for leas­ing or re-pos­sess­ing planes should be sim­pli­fied.

IN­DIA’S MRO CAN­VAS. As per Eco­nomic Sur­vey 20182019, the an­nual im­port of MRO ser­vices by air­lines in In­dia is cur­rently worth ` 9,700 crore. With air­lines’ fleet grow­ing an­nu­ally by 100, the size of the do­mes­tic and im­ported In­dian air­line MRO is set to grow an­nu­ally to ` 36,000 crore once the fleet size reaches 2,000. Poli­cies would have to be re­drafted and fine-tuned to fos­ter growth in MRO ser­vices with dis­cus­sions of the MRO play­ers.

Cur­rently, the size of op­er­a­tions to have big MRO play­ers is not there in In­dia. It will take some more time but we should be ready for it. We need a fis­cal push as favourable tax regime to get over­seas car­ri­ers to un­der­take MRO ser­vices here. For the plan to suc­ceed, plan­ning needs to be done with the global mar­ket in mind. It is not easy to wean away In­dian car­ri­ers from their well-es­tab­lished MRO ser­vice providers out­side In­dia. It has to be a five year mis­sion, in­volv­ing con­tin­u­ous di­a­logue be­tween cen­tral and in­ter­ested state gov­ern­ments, DGCA, air­lines, Orig­i­nal Equip­ment Man­u­fac­tur­ers (OEMs) and the MRO in­dus­try. Cur­rently, how­ever, the In­dian MRO sec­tor is able to pro­vide TypeI ser­vices only and can­not han­dle more com­plex tasks such as checks and main­te­nance of air­frames, sys­tems and en­gines. Nearly 60 per cent of the MRO spend is on en­gine and com­po­nent re­pairs. This is where In­dia has to fo­cus on.

Air­craft paint­ing is labour in­ten­sive and re­quires in­tense at­ten­tion to de­tail. Even a task like this was not done in In­dia ear­lier, a coun­try where man­power has al­ways been in abun­dance and was in­stead out­sourced to the United King­dom

THE MRO IN­DUS­TRY IN IN­DIA SHOULD HAVE A MAS­TER PLAN FOR RO­BUST DE­VEL­OP­MENT AND BUILD AN ECOSYS­TEM TO FUEL

ITS GROWTH

(UK) which has one of the high­est labour rates in the world. Air Works ac­quired a com­pany in the UK, learnt the skills of air­craft paint­ing and is now of­fer­ing paint­ing fa­cil­ity in In­dia, to large in­ter­na­tional cus­tomers. The chal­lenge for Air Works re­mains the high im­port duty which even now is 15 per cent, ren­der­ing the com­pany un­com­pet­i­tive against over­seas MROs. Mak­ing paint duty free in In­dia will also help In­dia com­pete with the UK, the UAE and Sin­ga­pore, where there are no du­ties on paint­ing air­craft.

Air­bus In­dia also wel­comed the Bud­get pro­pos­als for the avi­a­tion sec­tor. “We look for­ward to sup­port from the govern­ment for tax re­forms to in­cen­tivise air­lines and to boost the MRO in­dus­try so that the cost of ser­vic­ing air­craft in In­dia is not only com­pet­i­tive, but dis­tinctly at­trac­tive,” said Anand Stan­ley, Pres­i­dent and Man­ag­ing Di­rec­tor, Air­bus In­dia and South Asia.

The Govern­ment of Gu­jarat has am­bi­tions of de­vel­op­ing a ma­jor MRO hub at Dholera near the cap­i­tal Gand­hi­na­gar, with the po­ten­tial of man­u­fac­tur­ing air­craft parts and ca­pa­ble of com­pet­ing at the global level. As per re­ports, an Air In­dia MRO fa­cil­ity in Hy­der­abad is seek­ing to ex­pand and up­grade its op­er­a­tions to serve a wider range of air­craft while work­ing to­wards EASA 145 cer­ti­fi­ca­tion. The MRO set up in 2015, is in talks with ATR, maker of smaller pas­sen­ger air­craft, to set up a ser­vic­ing fa­cil­ity and cer­ti­fi­ca­tion aligned to the main­te­nance will en­able the Air In­dia fa­cil­ity to re-cer­tify for­eign air­craft be­ing de­ployed in the coun­try. Mi­gra­tion of In­dian skilled labour to over­seas mar­kets is a ma­jor chal­lenge that MRO businesses in In­dia are fac­ing be­cause of strict reg­u­la­tions on work­force cer­ti­fi­ca­tion and em­ploy­ment norms by the OEMs and third party ser­vice providers.

REC­OM­MEN­DA­TIONS:

Task Force: A high-pow­ered task force for an ag­gres­sive pro­mo­tion of MRO needs to be con­sid­ered un­der the lead­er­ship of a Joint Sec­re­tary of MoCA. The task force may have mem­bers from rel­e­vant Min­istries and reg­u­la­tors. It should also have rep­re­sen­ta­tives from the air­lines, OEMs and MRO providers. The mil­i­tary MRO seg­ment also needs to be seam­lessly dove­tailed into the over­all MRO sec­tor and hence, a rep­re­sen­ta­tive from the mil­i­tary may also be in­cluded in this task force. The task force may an­a­lyse the var­i­ous op­tions and ac­tion re­quired to make In­dia a global MRO hub, de­velop a clear roadmap and re­port out­comes to the Min­is­ter of Civil Avi­a­tion.

Free Trade Zones: MROs and com­po­nent ware­houses need to be de­clared as free trade zones with zero rate of GST

POLI­CIES WOULD HAVE TO BE RE­DRAFTED AND FINE-TUNED TO FOS­TER GROWTH IN MRO SER­VICES WITH DIS­CUS­SIONS OF THE MRO PLAY­ERS

THE GOVERN­MENT MAY CON­SIDER RE­STRICT­ING IN­DIAN AIR­LINES FROM TAK­ING AIR­CRAFT ABROAD FOR RE­PAIRS, EX­CEPT IN CASES WHERE THE RE­QUIRED FA­CIL­I­TIES ARE NOT AVAIL­ABLE IN IN­DIA

and a ten-year hol­i­day on cor­po­rate tax, cap­i­tal gains tax and div­i­dend dis­tri­bu­tion tax. There is no loss of in­di­rect tax rev­enue since the GST will be re­cov­ered from the end con­sumer – the air­lines.

Ad­di­tional In­cen­tives: In or­der to build an MRO ecosys­tem in high-tech sys­tems such as en­gines and avion­ics, there could be ad­di­tional in­cen­tives pro­vided for MROs in­vest­ing in these cat­e­gories. The MRO fa­cil­i­ties will re­quire an­cil­lary in­dus­tries and ser­vices. These in­clude re­pair and test­ing fa­cil­i­ties for avion­ics, elec­tri­cal equip­ment, hy­dro-me­chan­i­cal and pneu­matic com­po­nents, com­pos­ite struc­tures and air­craft in­te­ri­ors. There will be a large re­quire­ment for su­per-spe­cialised train­ing fa­cil­i­ties. This has to be cap­tured in the in­cen­tive pack­age in close co­or­di­na­tion with the Aero­space and Avi­a­tion Sec­tor Skill Coun­cil.

States Ecosys­tem: An MRO ecosys­tem needs to be es­tab­lished near large air­ports. Busy air­ports such as Mum­bai are al­ready con­gested. This cre­ates an op­por­tu­nity for pro­gres­sive state gov­ern­ments to cre­ate an in­cen­tive pack­age over and above the cen­tral pack­age and at­tract large OEMs or MRO providers to their state.

Abol­ish Roy­al­ties: The MoCA may con­sider the is­sue of a no­ti­fi­ca­tion abol­ish­ing all roy­al­ties and charges other than rea­son­able lease ren­tals levied by air­port op­er­a­tors on MROs for a pe­riod of five years.

MRO Flight Out Re­stric­tion: The govern­ment may con­sider re­strict­ing air­lines from tak­ing In­dian air­craft abroad for re­pairs, ex­cept in cases where the in­fra­struc­ture and tech­ni­cal knowhow is not avail­able in In­dia. Such a re­stric­tion may be ap­plied five years af­ter the tax anom­alies are re­moved, giv­ing am­ple time to de­velop the MRO ecosys­tem in In­dia. Dis­rupt­ing ex­ist­ing re­la­tion­ships be­tween In­dian car­ri­ers and for­eign MROs is not easy. The MRO task force may con­sider ad­di­tional in­cen­tives like cap­i­tal sub­sidy and in­ter­est sub­si­dies to at­tract in­vest­ments.

MRO as As­set Man­age­ment: There is a pos­si­bil­ity that OEMs and lessors may pro­vide air­craft as a ser­vice, sell­ing seat hours in­stead of air­craft. MROs will then shift into be­ing as­set man­age­ment plat­forms in­stead of sim­ply fixing de­fects and per­form­ing planned checks. This may re­quire a rad­i­cal change in mind­sets, ca­pa­bil­i­ties and fi­nan­cial strength of In­dian MROs.

GMR Aero Tech­nic (GAT) MRO fa­cil­ity based at Ra­jiv Gandhi In­ter­na­tional Air­port in Hy­der­abad, In­dia

Ecopower En­gine Wash by AIESL owned by Air In­dia group

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