D Anand Bhaskar
01 Jan 2023
Bringing Indian MRO Up to Scale
For Indian aviation to achieve balanced, sustainable growth and meet the country’s needs for the long term, more focus needs to be accorded to strengthen the nation’s indigenous Maintenance, Repair and Overhaul (MRO) sector, aside from notching up spectacular growth in the numbers of civil aircraft to be inducted in India over the next 20 years (2000+ from the current 700 aircraft) or perhaps, the growth in operational airports (141 today, expected to grow to 220 by Year 2030).
The domestic MRO sector plays an important role in aviation as it ensures the availability and airworthiness of aircraft which airlines and operators use to transport the 400,000+ passengers being flown almost daily by them. It is important that the aviation sector’s three key components viz. airports, airlines, and MRO (or the aftermarket) move forward synergistically since pure fleet inductions, without a comprehensive and supportive aftermarket ecosystem, will not be able to sustain this growth.
On the face of it, the projections for the MRO sector look promising. As NITI Aayog noted in its 2022 report on the MRO Sector in India, the Indian civil aviation industry has been the centrepiece in the development of the MRO industry in the Asia-Pacific region and is projected to depict a substantial growth of 9.1 percent by 2031. The report also mentions the market size of the domestic MRO sector, which was worth USD $1.7 billion in 2021, and is expected to reach USD $4.0 billion by 2031, [CAGR of 8.9 percent, compared to the global average of 5.9 percent], presenting a huge opportunity for homegrown MRO.
Atmanirbhar Global hub
True to its declared ambition of making India a global MRO Hub, the government too has taken a few steps including lowering the Goods and Services Tax (GST) on domestic MRO services from 18 percent to 5 percent with full Input Tax Credit, from April 2020, treating transactions sub-contracted by foreign OEMs and MRO companies to domestic MROs as exports with zero-rated GST, waiving custom duty on tools, toolkits and spares imported by MROs, and permitting the automatic route, in order to encourage companies to set up MROs in India and also to promote the business of indigenous MROs.
To attract more investments, the Ministry of Civil Aviation also announced a new ‘MRO Policy’ in 2021 which included key reform measures such as land leasing through open tenders and the abolition of Airport Authority of India’s (AAI) royalty. Additionally, instead of the existing short-term period of 3-5 years, land allotment for establishing MRO facilities has now made long term for about 30 years. For the first time, the policy also identified eight airports for investments in MRO facilities --- Begumpet (Telangana), Bhopal (Madhya Pradesh), Chennai (Tamil Nadu), Chandigarh, Delhi, Juhu (Maharashtra), Kolkata (West Bengal), and Tirupati (Andhra Pradesh).
All these steps are essential as the recent geopolitical events (such as Covid-19 and the Ukraine war) of the last couple of years and the consequential supply chain disruptions have strengthened the need for the country to become increasingly self-reliant in key areas (aviation being one such area) to minimise economic risk and shock. With our large, growing market and our highly dynamic geopolitical environment, the need for the country to become self-reliant (or Atmanirbhar) was never greater!
Distance to Go
Unfortunately, the ground reality is far from promising. Given that other MRO centres such as Singapore and Hong Kong have had a head-start, the development of the Indian MRO sector needs fast tracking via definitive and concrete steps to ensure that the nation catches up with the early movers in this industry for competitive relevance. Interestingly, like most other markets, customers prefer the convenience of a one-stop shop or destination but in the case of Indian MRO sector, the industry is not there yet, since capabilities for more lucrative areas in the MRO value chain, other than Airframe MRO viz. Components, Landing Gear and Engine MRO --- either do not exist or exist in a highly limited scale, in India today.
As per the latest information available for 2019-20, a significant portion of needs of Indian MRO especially in the above-mentioned areas, are currently met via countries such as France, Germany, Jordan, Malaysia, Singapore, Turkey, United Arab Emirates (UAE) and the USA where such facilities exist or have been created by the OEMs. In fact, the import of MRO services only by airlines in India stood at a massive USD $1.26 billion or INR 10,430 Crores (against a market size of USD $1.7 billion), for 2019-20, highlighting the massive opportunity that exists for Indian MRO players and the government, to address --- both in terms of business and job creation, aside from also saving invaluable foreign exchange.
All this becomes important when seen against the context of India being the world’s fastest growing aviation market today and by 2024, expected to become the world’s 3rd largest aviation market. In fact, most people may not be aware that aircraft orders from India are driving OEM aircraft sales. In what may be an interesting statistic, we must realize that since 2010, Indian airlines have placed collective orders for aircraft and engines in excess of USD $85 billion ($55 billion + $30 billion) worth a cumulative forex outflow of about INR 70,000 Crores for 1000 odd aircraft – only from commercial aviation!
With Aviation being and continuing to be a dollar-denominated business, the need for an indigenous engineering and maintenance ecosystem becomes even more critical, to offset the high cost of aircraft acquisition (and resulting spends on fuel), while maintaining competitive airfares.
What is noteworthy however, is that even after 75 years of independence, about three-quarters (75 percent) of the Indian MRO spend goes abroad, leaving major Indian MRO players such as Air Works, GMR Aero Technic, AIESL, and others to address only 25 percent or USD $400 - $500 million worth of the market, despite Indian MROs and the country having invested and developed significant (if not all) capabilities to carry out these checks indigenously, including several highly remunerative ones as End-of-Lease or re-delivery checks.
A typical re-delivery check, worth about $300,000, could be worth much more if one adds the value of parts and components needing replacement – which could be as high as USD $2-$3 million. Such remunerative checks unfortunately become even more expensive in India --- by nearly $360,000-900,000 per aircraft, given the levy of an import GST duty of 18 percent. Duties of 5 to 28 percent on spare parts imported for such checks make the whole proposition further costlier, defeating the business case for such revenue generating checks to be undertaken in the country and forcing airlines and leasing companies to instead get them done abroad, depriving Indian MROs of significant business. Airlines in India spend around 15 percent of their overall revenue on maintenance, which is the second most expensive item after fuel (45 percent of operating expenses) for them.
An important reason that puts India on the global MRO map is its cost advantage. Labor costs, which form a considerable share of overall costs for airframe and component maintenance are comparatively lower in India, thereby ensuring higher labour arbitrage as compared to its global counterparts. It is estimated that local MROs’ workforce labour charges range between $35-$40 an hour, which are almost 50 percent lower than in Western Europe or the US.
Competitive cost structure and capabilities will continue to be the primary drivers to compete and succeed in the MRO sector in the foreseeable future. Consequently, for India to realize its ambition of a MRO Hub, the total cost of MRO service delivery (including labor arbitrage) needs to be made competitive with those that exist in other countries or regions. For example, if Singapore has a 0 percent duty on spare parts, then India too has to necessarily create or facilitate an equivalent ecosystem to be able to attract and effectively compete with pre-established MRO centers and countries for business.
In addition to speed, a conducive duty & tax structure overhaul, even the Indian regulatory framework needs urgent simplification to enable easier and faster compliance by industry players. This includes having a framework for mutual recognition and acceptance of standards across disparate aviation authorities such as between the DGCA, EASA and the FAA. Compliances increasingly need to be shifted to stakeholders/ operators with frequent audits and penalties, instead of having guidelines that deter one from entering the MRO or aviation sector itself in the first place.
With private-public partnership becoming the increasing norm for infrastructure (airport) creation, there is also a need to review and update the current Operation, Management and Development Agreements (OMDAs) in a way that integrate provision of MROs services at the upcoming airports itself. However, gaps remain even on this front. Some Indian MRO providers offer Line maintenance for incoming foreign airlines across international airports, and this forms some 8 percent market in value terms. However, the business case for outsourcing Line maintenance cost to MRO specialist firms does not exist (since 15 percent of billing value of an MRO is payable as Royalty to the airport operator), negating the possibility of airlines to achieve savings on their operational cost via outsourcing the line maintenance function.
India also needs to address its MRO engineering roadmap. For too long, the country’s capabilities have grown in silos such as Civil and Defense. While that was perhaps relevant earlier, it is not the case anymore. From an asset standpoint, Civil-Defense convergence is already underway – P-8I and 737; Dornier in both civil and defence; Mi-17 again for civil and defence. Why should maintenance then not be integrated, optimizing resources, avoiding duplication, and disparity in policies?
This also covers the highly trained yet currently inaccessible pool of defense maintenance personnel. Facilitating availability of this talent by removing existing regulatory gaps will not just boost in-country talent availability but would also help MROs lower costs, realize convergence, and save national resources.
Notwithstanding the above, there are a host of other aspects which support the growth of India’s MRO sector. These include the availability of a low-cost, English-speaking diverse pool of engineers as India is globally recognized for its strong engineering curriculum. This holds true for the MRO industry as well, wherein the scope of benefitting from a strong and competent workforce is considerable. One of the most significant benefits that India provides to the rest of the world in the MRO space is the availability of highly qualified engineers with the capability of being trained for an array of technical MRO activities.
As per NITI Aayog’s 2022 report, Indian MROs face considerable barriers to breaking into the existing value chains involving OEMs, internationally established MROs, and airline operators. Impediments are also faced with respect to the implementation of offset clauses, credit accessibility, availability of infrastructure, licensing and certification, taxes/duties, and land lease rentals, to name a few.
And to overcome such market or value-chain entry barriers is where Indian MRO needs help, given that Engine and Component categories are expected to comprise about 80 percent by value of the overall MRO spending and grow more rapidly in the upcoming future. For the Indian MRO sector to remain meaningful and for the country to become an MRO Hub, the presence of Indian MROs in these areas requires considerable and urgent support from the government as well as the OEMs who must look beyond ‘Business Case' analogies and partners or invest collectively with Indian MROs in return for access to the expanding India market by displaying their readiness to share technology and IPRs and eventually claim a rightful and well-deserved slice in the India aviation growth story.
I must emphasize that the Indian MRO ecosystem is ready, and indigenous players have the willingness, capability, and enthusiasm to take on global tasks. The sector has already proven that it can deliver world-class work – demonstrated by undertaking Phase 32 checks on the mission-critical platforms such as P-8I for the Indian Navy, within India (outside of the USA, for the very first time), successfully, in addition to numerous other country-specific projects.
Not strengthening domestic MROs’ capabilities and ensuring that they scale up the Value chain is not an option or a choice. Besides the reduction in foreign exchange outflows and other benefits such as employment generation, the manufacturing of components and spares within the country will also eventually be bolstered if more MRO activities are undertaken within the country driving Indian aviation’s long-term viability.
With an economic multiplier of 3.1 and employment multiplier of 6, India’s civil aviation sector has a significant impact on the country’s economy, and an increase in indigenous capacities will eventually boost overall economic growth and faster turnaround time while creating a sustainable end-to-end ecosystem for commercial, general, and military aviation.
About the Author
Anand is the Managing Director (MD) and Chief Executive Officer (CEO) of the Air Works Group since 2019, having joined the Company as its Chief Financial Officer (CFO) in 2010.
As a Chartered Accountant with over 30 years of experience in planning and establishing Greenfield Projects, Project Funding, Mergers & Acquisitions, and Six Sigma projects. Anand architected Air Works’ strong global expansion post-2010, helping it become India’s first and only multinational MRO with a presence in France, the United Kingdom, the Middle East, and the USA, with multiple engineering & maintenance facilities and a comprehensive service portfolio including several new ones such as Interiors & Finishing, Avionics, Asset Management, and Training. Before Air Works Group, Anand worked for Genpact, Canon India, Pepsi, and GE.