The future of Aerospace MRO in India certainly looks bright

Importance of OEM and MRO in Defence and Aerospace Sector- Indian industry must build MRO capability with reverse engineering

India would become one of the top aviation hubs by 2040. The passenger traffic is expected to grow six- fold to around 1.1 billion. India has one of the largest aircraft order books currently with pending deliveries of over 1000 aircraft. Its commercial airline feet are likely to grow from 621 in July 2019 to around 2359 in March 2040.

For decades, the commercial aircraft MRO market in Southeast Asia has been controlled by leading players in Singapore, the regional aviation hub. Singapore-based companies have been providing maintenance services for airlines both in and outside the region.

Boeing and Airbus expect that carriers in the Asia-Pacific region will need about 16,000 new aircraft, valued at $2.5 trillion, by 2036. This implies huge opportunities for MRO service providers, as commercial aircraft must be inspected and maintained after every flight and overhauled every few years.

India, with its growing aircraft fleet, strategic location, pool of engineering expertise and lower labor costs, appears to have great potential to become a global MRO hub. India’s current MRO market is estimated to be around $700-900 million, with estimates from local authorities in India at the higher end of this range. Boeing forecasts this market to grow at a 7% compound annual growth rate and, to reach as much as $1.2 billion by 2020. With the fleet size likely to double by 2020, the need for a strong domestic MRO industry is critical, not just desirable.

AAR recently announced a joint venture with Indamer Aviation, a leading aviation company in India, for the development of a new MRO facility in the western Indian city of Nagpur. The facility, which is already under construction, will initially comprise six narrow body bays, including one bay for paint. Additional phases are planned for a total of 16 bays, as well as component repair shops.

The MRO will serve India’s fast-growing commercial aviation market and is scheduled to open with FAA, European Aviation Safety Agency (EASA) and India’s Directorate General of Civil Aviation (DGCA) certifications. Fully aligned with the “Make in India” initiative, the shop will employ Indian nationals, including some from the existing Indamer workforce. A training school licensed under Indamer’s CAR 147 certification and the government of India’s Skill Development Program will allow hundreds of students to gain skill sets and employment. The initial group of students will receive practical training at one of AAR’s MRO facilities in the U.S.

India’s GMR Aero Technic Ltd. (GATL), a 100% subsidiary of GMR Hyderabad International Airport Ltd. (GHIAL), received FAA approval for some popular narrow body aircraft types, including the 737 and A320.

The FAA approval will make GATL an authorized MRO provider for all C checks for FAA-registered 737 and A320 aircraft and for non-destructive testing inspections.

All aircraft owned by Indian carriers must be certified by the DGCA, which is backed by the licenses India has procured from the OEMs. But when aircraft are leased, apart from DGCA certification the airplanes have to be certified by an MRO accredited by the FAA or EASA.

Currently, GATL holds the largest share of the market for outsourced airframe base maintenance in India, backed by a wide set of approvals and worldwide certifications, including from DGCA and EASA.

India’s largest MRO, Air India Engineering Services Ltd. (AIESL), which until recently was performing maintenance only for national carrier Air India, has decided to provide MRO services for other airlines.

Within India, AIESL has facilities at Mumbai, Delhi, Kolkata, Hyderabad, Nagpur and Thiruvananthapuram where, apart from Air India aircraft, it services airplanes of other airlines.

So why has MRO in India failed to take off, despite a new government policy to give a push to the sector?

“Development of MRO units in this country is not happening at the pace it should. Airbus India’s president and managing director, Pierre de Bausset, says: “I haven’t seen local investors invest wholeheartedly in MROs. If it hadn’t been for taxes and royalties at some airports, which have made it uneconomical for MROs to operate in India, we wouldn’t see so many airplanes flying abroad for MRO services.”

For example, the two main airports in New Delhi and Mumbai charge rents to MRO providers that are 50-100% higher than those charged at equivalent facilities in Europe and Turkey.

“The Airport Authority of India should allow MRO work to happen at its airports across the country. Although this is permitted [in theory], detailed rules and regulations make it practically impossible. The space needs to be made available at reasonable rents and procedures simplified for MRO work to be carried out,” says an industry official. He also argues that rents for MRO shops at the two main airports in New Delhi and Mumbai need to be more reasonable.

The two main airports also impose a royalty charge of about 20% on maintenance work at the airports. And demands from the MRO industry to the government to slash these rates was sternly opposed by the airport operators.

The MRO industry also has asked the Indian government to reduce the tax burden on the sector, currently assessed at 18%. The MRO Association of India has warned that the industry could face closure if the Goods and Services Tax (GST) “anomaly is not set right.”

India, with a projected fleet of over 2300 commercial aircraft by 2040 and large orders of military aircraft, provides ample justification for global OEMs to consider India as an aircraft manufacturing base.

The 20-30 percent cost advantage in India versus USA allows OEMs to use India as a base for global exports too. NCAP 2016 allows OEMs to claim Defence offset credits in lieu of investments in commercial aerospace manufacturing. It also speaks of providing a viability gap funding in case the cost of Made in India aircraft and components work out to be higher than those supplied from their original sources.

The Government needs to engage with the Indian airline industry and global OEMs to facilitate establishment of a robust, globally-competitive aerospace manufacturing hub in India by the year 2040 than being a mere component supplier.

Leasing and MRO lead to a massive outflow of foreign exchange from Indian carriers. These sub-sectors need a massive policy support.

With its growing aircraft fleet size, strategic geographic location, rich pool of engineering expertise and low labor cost, India has a huge potential to be the global Maintenance, Repair and Overhaul (MRO) hub given a long-time perspective.

India has the potential to become the third largest aviation market by 2022. India has long been viewed with interest from MROs globally seeking a valuable gateway between the Middle East and Asia-Pacific.

This demand is being driven by a fleet growing at 9.9% annually. With over 1000 aircraft currently on order, India is likely to become the third largest buyer of commercial passenger aircraft in the world, only behind the US and China. The growth is being boosted by the expansion and development of new airports, fast expanding LCCs, a liberal FDI policy, rising adoption of new technology and focus on regional connectivity etc.

Key challenges

If India can also translate the changes that are being discussed into reality, it could be a game-changer for the MRO industry in Asia. 

Despite a rising fleet, the MRO) industry continues to struggle for relevance. The biggest challenge is the severe tax anomaly with foreign jurisdictions. This is despite the widespread appreciation of the fact that, with a fast-expanding fleet, India needs to build a robust domestic MRO eco-system. More so, given the Government's avowed commitment to push for Make in India or Maintain in India.

Airlines will need a complete MRO eco-system in India in order to switch from their current service providers. The OEMs will have to play a pivotal role in developing the MRO eco-system in India.

Investments from foreign OEMs and MROs are subject to dividend tax. These entities have already invested in MRO facilities in India's neighborhood. An investment in India will cannibalize their own investments and hurt the volume commitments that they may have made to their business partners. OEMs and foreign MROs need to be incentivized to balance out these constraints.

The focus is on developing more understanding between OEMs and MROs and encouraging small vendors to help create a healthy MRO Ecosystem in India.

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