Wednesday, July 28, 2021

INDIA’S MRO SECTOR: DESERVES A LOT MORE LOVE AND SUPPORT

by Bikram Vohra

The MRO sector in India could by now have been a robust adjunct to aviation especially with the multiple carriers that suddenly found traction in a nation with a potentially enviable double-digit passenger growth. However, sad to say, red tape, a myopic vision vis a vis government policy and an as yet not fully realised capital expenditure investment have all ensured that the eight brave MRO entities that function in India still fight against the tidee. The rely on the hope that thing will change.

Written a short two years ago the scenario would have read something like this:

That there is no shortage of labour and expertise in the country is a given. It is just that the infrastructure is not competitive and that skill is easily available elsewhere at a better price. For example, Indigo was sending its aircraft to Sri Lanka because there they got themselves a better deal. The basic cost was less and the efficiency higher purely because it had been tooled for MRO activity. Again, one of the major flaws in the system at home has been bureaucratic delay and this is best reflected in an anecdotal fashion.

A major airline sends its aircraft to an MRO based in India for all four major services: engine maintenance, airframe checks, component verifications and line maintenance before signing off the plane as airworthy. During maintenance, it is discovered that a certain part has to be changed. Now, that part is not available in India because there is no great demand for storing these hundreds of spares and it has to be imported. Into the mix comes Customs because now duty has to be paid on that part. This can be a cumbersome task and over the decades, it has been difficult to navigate this mental block. That item is going to be put into an aircraft and it will fly out of the country ironically as an export.

In a time conscious business, such delays are destructive.

That message has still not got through. The 5% levy of duty on all parts has been hugely detrimental to the maturing of the MRO sector. Then again, if these parts were classified under the generic category they attracted a GST of 18% that rather made the bottom line bloated and into the no thank you column.

Another reason why carriers and foreign-based MRO entities balk at setting up in India is the delay in getting started. Meetings are prolonged and getting the paperwork together is an exhausting process. While other carriers have their own in-house set ups to carry out the whole gamut of MRO activity for decades Air India and Indian Airlines never got going even when the intent made sense to have such a branch. In terms of their geographical spread, MRO service providers in Asia Pacific are concentrated in China, Singapore, Malaysia, and Dubai. By now, India should have been spoken of in the same breath as Lufthansa Technik and Air France Industries and KLM Engineering and Maintenance. However, the truth is a lot different. This is best seen in the fact that for its vital 6 year and 12 year thorough checks India’s carriers still fly their fleets abroad.

A few attempts have been made by foreign-based parties to galvanise the Indian MRO segment but several factors come into play. For one, the red tape involved in getting clearances is exhausting and getting approvals not easy without a major international partner. The labour costs are higher in India compared to the neighbouring countries including UAE, Jordan & Singapore. Sri Lanka scores here. Skilled Indian engineers and aeronautical experts find jobs abroad because they are more lucrative. Again, land around airports is expensive and the cost of starting up very difficult despite the fact that it is a labour intensive industry.

Most importantly, there is no base airline to feed an MRO set up and make it stable. Indigo is the perfect candidate for playing this role.
For the tough ones who have ventured into this field the margins are low, hovering between 7 and 10 percent, which keeps investors away. Customs duties rob one of even more profit.

Moreover, how would one write of the MRO India issue today?

From the relatively sad history to March 2020 when the government gave the MRO sector a boost after it adjusted rates to 5% from a backbreaking 18%. It also equated the place of supply for B2B MRO services to the location of the recipient thereby making it easier to function. It also acted as a spur to give carriers a viable option at home rather than going abroad.

Those who had laboured long under stringent rules were at last given a break where full input tax credit was extended to them; a fiscal courtesy not extended to foreign MRO providers. Again, aiming to make Indian equivalents more attractive.

There are eight major players operating in the Indian MRO market including Air India Engineering Services Ltd, Air Works India (Engineering) Pvt. Ltd, Deccan Charters Limited, Indamer Aviation Pvt. Ltd, Max MRO Pvt Ltd, Taj Air, Bird ExecuJet and GMR Aero Technic Ltd.

The average cost on MRO activities is 12 to 15% of total expenditure for a carrier. If India sets its house in order, we are looking at a robust $2.5 billion industry by 2028.

An Airbuzz report can be cited on the lift of the MRO priority: The year 2020 saw a few positive aspects for the Aviation Industry, including MRO. First good news came for the industry on April 1, 2020 with the announcement of reduction of GST from the prevailing 18 per cent at that time on MRO services to five per cent. A tremendous boost to the Indian MRO industry, which was still not functioning due to the lockdown.

Then came the announcement of the Finance Minister’s statement on MRO. Nirmala Sitharaman said that the Government would take steps to make India an MRO hub. She went on to say, “Tax regime for MRO ecosystem has been rationalised. India has all the capacities, manpower and soft skills required. Aircraft component repairs and airframe maintenance segment is worth around 800 crore and would increase to 2,000 crore in three years. Convergence between Defence sector and the civil MROs will be established to create economies of scale. This will lead to maintenance cost of airlines to come down.”

This has given a great boost to the Indian MRO Industry. Subsequent to the FM’s statement, a joint working group has been formed under the Joint Chairmanship of V.L. Kantha Rao, Additional Secretary (DP), Ministry of Defence, Vandana Aggarwal, Senior Economic Advisor, and Ministry of Civil Aviation with six other members in order to establish convergence between Defence sector MRO and civil Aviation MRO operations. This group is working currently and very soon will give its recommendations to the Government.

The one major issue that is still outstanding is the snapping or bypassing the civil aviation diktat that airports will not levy royalty or any billing for five years on MRO providers. This was an incentive to give these entities a chance to get their acts off the ground and be fiscally viable. However, in reality the airports have not been following the spirit of the letter and have been charging MRO providers under different headings but bleeding them still the same. Airport surrounding land has been another contentious issue. Having MROs away from airports reduces their attractiveness dramatically. They need land adjacent to an airfield.

There is also a problem with the certification process with MRO companies holding back on the American, European and Indian tri-certification till the last minute to save costs and then having to rush to get them since they are integral to the contract.

Perhaps the change in the tax policy will herald a new era and these eight stalwarts will get the fruit of their labours because it is a 1 billion plus industry in India even though that is only 1% of the $45 billion global market. Why India should not have, a larger share is an anomaly.

A wiki report puts it succinctly: the industry does have the credibility to attract MRO work not only from India but also South East Asia, Middle East and Eastern Europe. The key issue, which the government will need to address, is ensuring that adequate infrastructure is made available in a timely and easy to access manner for the industry and ensure that it creates a level-playing environment for Indian MROs when they compete with their global peers to attract business into the country. The government must also push the domestic MRO companies to work towards achieving globally recognized certifications. The fleet of various airlines includes a mix of directly purchased aircraft and aircraft that are leased. Since most of the leasing companies are either European or American it is imperative for the Indian MRO companies to have either global certifications such as EASA to be able to perform MRO activities.

To ensure that the government gets the message and understands fully that with India in the forefront of the global aviation growth graph anything that helps the MRO sector helps India the ten year old MRO Association (a decade old on June 8 2021) must get a lot more proactive. It not only must demand some long-term reforms enacted such as the exemption of basic customs duty on aircraft spares and extending the duty-free period for spares consumption from three months to one year but also seek to create a competitive environment with foreign MROs.

This vibrant sector only needs a little love and some common sense and understanding of its potential.

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