Wednesday, October 4, 2023

MRO: India’s Potential As A Major Hub

By Group Captain AK Sachdev (r)

India’s first wave of liberalisation in civil aviation in the 1990s petered out after a decade, with almost all the airlines that had come up during that period folding up, leaving just the national carriers and a couple of others standing. The second wave heralded by the launch of Air Deccan in 2003 has been good for Indian civil aviation despite sporadic instances of airlines running into trouble. 

In 2016, the forecast by the International Air Transport Association (IATA) made India the third-largest market globally for civil aviation. However, India was the third largest globally by 2023, earlier than predicted, despite the pandemic crippling the aviation industry globally. The civil aviation market in India is now the fastest growing in the world; the recent orders for 500 aircraft by IndiGo and 470 by Air India are indicators of this growth trajectory. 

Within the framework of the huge orders and the growth in this sector, it is important to focus on the implications for the Maintenance Repair and Overhaul (MRO) industry for civil aviation. 

MRO follows jet fuel, which is being the largest expenditure for any operator; it claims around 15% of the expenditure pie. Logically, when civil aviation displayed an upward trajectory in the early 2000s and the consequent pressure on MROs mushroomed, consonant policies to promote MROs should also have been enacted into place. 

However, that did not happen, and the MRO market remained stunted, fragmented, and distressed by tax issues. As an illustration, for a long time, customs duty was imposed on any component or spare that entered Indian ports or airports, irrespective of whether it was installed or kept in storage in anticipation of a failure. 

Thus, aircraft operators had to choose between two equally bad alternatives: import a component or spare that may fail at unpredictable frequencies and pay hefty customs duties or take the interminable delays in importing the item once a failure occurred. The issue was compounded by the fact that, in the former case, quite often, a component or spare outlived its shelf life without ever getting used on an aircraft.

The government’s disposition towards MRO was evident in 2012 when it hiked the royalty on Gross Turn Over (GTO) of airports and clubbed MRO with ground handling, something aircraft operators found irrational and protested about. 

The MRO Association of India (MAOI), which was formed as a professional organisation in 2011, did stellar work in dissuading the government from clubbing MRO, which is an engineering activity with ground handling. As a result, airport royalty was brought down from a whopping 36% to 16% for MROs and customs duty on items not used after entering India was removed. With MAOI’s efforts and the launch of ‘Make in India’ in September 2014 and Atmanirbhar in May 2020, things looked up for the MRO industry.

The New Civil Aviation Policy (NCAP) 2016 was aimed at breathing fresh life into civil aviation and, amongst its other provisions, prescribed infrastructure status to MRO under the ‘Harmonised List of Infrastructure’ that had been promulgated by the government in 2012. This step was aimed at providing fiscal support to the MRO industry. Even before the NCAP was promulgated, MROs had been permitted 100% Foreign Direct Investment (FDI) through the automatic route, albeit no foreign entity has invested 100% in an Indian MRO yet.

NCAP admitted that 90% of money expended for MRO was being spent outside India, in Sri Lanka, Singapore, Malaysia and the United Arab Emirates (UAE), and stated the ambition of making India an MRO hub in Asia. In synchronisation with the NCAP, several provisions were made in the 2016-17 budget. 

Some of these were: tools and tool-kits used by the MRO were exempted from customs duty, the restriction of one year for utilisation of duty-free parts was extended to three years, and to allow import of unserviceable parts, including aircraft components like engines and landing gears by MROs for providing exchange/ advance exchange, advance export of serviceable parts was permitted. Airport royalty and additional charges were waived off on MRO service providers for a period of five years from the date of approval of the policy. (More provisions can be perused in Para 18 of NCAP 2016). 

MRO activity underway; File Photo

The 339th Report on the Action Taken by the Government to the Parliamentary Standing Committee on Transport, Tourism, and Culture on Demands for Grants (2023-24) of the Ministry of Civil Aviation (MoCA), presented to Parliament on 13 March 2023 averred exemption of duty on Special Tools and Equipment for MRO, an extension of customs duty waiver that earlier applied to spares only for airlines to MRO, simplified clearance processing of parts, relaxed restrictions on utilisation of duty-free components from one year to three years, waiver of penalties on aircraft brought into the country for MRO up to six months, change of the Place of Supply (PoS) of MRO services to the location of the recipient to ensure a level playing field for MRO located in India and to incentivise the setting up of MRO in India by Indian or foreign entrepreneurs. 

In addition, in 2020, the Goods and Services Tax (GST) Council decided that the Integrated GST on MRO services provided by domestic MROs be reduced from 18% to 5%. The other decision taken related to MRO was that sub-contracted transactions by a foreign MRO company to a domestic one are now treated as export of services by an Indian entity to a foreign entity and attract no GST.

The Directorate General of Civil Aviation’s (DGCA) official site lists 150 approved Indian Air Maintenance Organisations, but it also lists 134 foreign ones. Of the Indian ones, the three largest ones (Air India Engineering Services Limited or AIESL, Air Works and GMR Aero Technic) account for 90% of MRO revenue in India. 

AIESL was not a part of the Tata deal for Air India and remains a public sector undertaking; market buzz has it that Tata may acquire AIESL whenever the government decides to disinvest in it. Meanwhile, Tata is keeping alive a parallel option of setting up its own captive MRO should the AIESL deal not work out. Indamer, in a 60/40 collaboration with AAR (a US company), has already set up an MRO in Nagpur in which Adani may soon acquire a 30% stake. IndiGo and SpiceJet have their own engineering setups. 

The introduction of new policies over the years has eased the conduct of MRO business and is expected to reduce the overall cost of MRO services by 10 to 20% over the next few years. CRISIL, a standard and poor majority-owned market analytics company, predicts that India’s annual MRO revenue could grow more than threefold by fiscal year 2028. This author spoke to Pulak Sen, Founder Secretary General of MAOI, who agreed with the prediction and said, “Indian MRO industry has come a long way from the turn of the century, and India is all set to become an MRO hub, not only for Asia but the whole world.”

Market predictions put the number of new aircraft needed in Indian civil aviation over the next two decades to 2200 (the present number is just over 700). Global technical companies are expected to increase their presence steadily. Indeed, an MRO facility for CFM LEAP engines is being built starting September 2023 by Safran within the Special Economic Zone (SEZ) area of GMR Aerospace and Industrial Park in Hyderabad. A press release by GMR states that this facility will be the largest engine MRO in the Safran Aircraft Engines network.

The cheerful picture is somewhat marred by two residual pain points, the first being the high royalties being charged over and above the rentals charged for MRO space in airports (publicly and privately operated), with Kochi and Juhu being notoriously prominent for their high charges. The second is the imposition of IGST on any component sent for repair to a foreign MRO when it is received back in India because, in keeping with industry practice, the component number is changed after the repair work has been consummated and Indian customs now see it as a new component. One hopes that these issues will get resolved soon so that India’s ambition of becoming an MRO hub is accomplished.

Gp Capt. AK Sachdev (r) is an Indian Air Force (IAF) veteran with four decades of aviation experience, and a former Chief Operating Officer (COO)of an airline

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