Impetus Required for the Indian Aviation MRO Sector

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

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 2018-2019, 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.

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

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 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.