Printed headline: Wake-up Call
The MRO industry in India has taken notice as Thailand, its neighbor across the ocean, announced plans to host a full-fledged MRO venture in response to a rapid increase in the number of aircraft operating in the region.
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.
Thai Airways’ MRO arm, Thai Technical, hopes to incorporate its U-Tapao International Airport-based joint venture maintenance operation with Airbus by the first quarter of 2020, for launch in 2022. The facility will be able to support a wide range of commercial aircraft, including the Airbus A380, A350, A330 and A320, as well as Boeing types such as the 747, 777, 787 and 737.
With Thai Airways International and Airbus partnering to explore MRO business opportunities at U-Tapao, other global and domestic providers of MRO are now seeking to capitalize on the growth of the region’s commercial aviation industry.
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 narrowbody 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.
“We are excited to expand AAR’s MRO expertise outside of the Americas in partnership with Indamer, which has the local market and cultural knowledge needed for success,” says John Holmes, AAR’s president and CEO. “We are looking forward to bringing our MRO experience to central India to help serve the country’s fast-growing airlines.”
India’s GMR Aero Technic Ltd. (GATL), a 100% subsidiary of GMR Hyderabad International Airport Ltd. (GHIAL), received FAA approval for some popular narrowbody 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.
“GATL is the sole MRO provider in the South Asia region with FAA approval in place offering fully equipped workshops and aircraft painting capabilities to handle requirements for 737, A320, ATR and Bombardier Q400. It is currently developing capabilities to include MRO for widebody aircraft and the new 737 MAX variant among others,” says an official at the company.
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.
It also appears that the Tata-Singapore Airlines venture Vistara, which plans to induct more aircraft into its fleet from the Airbus A320/A321neo family starting next year, has outsourced its engineering support services to Airbus and is also negotiating with home-grown AirWorks for MRO for its fleet.
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.
“AIESL’s marketing team is already in touch with various airlines . . . and we are hopeful to sign up with new operators like AirAsia Berhad, AirAsia Thailand, Unitop China, VietJet of Vietnam, Kalitta Air, Thai Smile, CEBU Pacific Manila, Oman Air and Sri Lankan Airlines for additional stations in India. In addition to this, AIESL has also entered into agreements with domestic operators like Jet Airways, GoAir, AirAsia India and SpiceJet to carry out their base maintenance work at MRO facilities of AIESL in India,” an official of AIESL confirms.
According to industry experts, establishing parts inventories has been a very serious problem. With thousands of components needed for each type of aircraft, any MRO that wants to be a global player must be able to satisfy at least 50% of the normal requirements of an aircraft type.
AIESL is believed to be capable of meeting only 25% of these business requirements as of now. That means putting up money for the components, the test bays, the software and the licenses. According to estimates, AIESL will require around $250 million to upgrade itself to become a world-class MRO provider.
AIESL, meanwhile, has firmed up plans to open an MRO unit in Muscat, Oman, where it expects to generate yearly revenue of at least $500,000.
The Muscat facility will be a part of AIESL’s overseas expansion plan under which it first opened an international branch in Sharjah, United Arab Emirates. “Based on the experience and backed by cost-benefit analysis, the opportunity to expand to other international stations will also be explored. At present, the report for Abu Dhabi, Ras Al Khaimah and Muscat has been prepared to start AIESL line maintenance operations and achieve profitability,” a company official says.
Arun Kashyap, executive vice president and head of engineering and maintenance for SpiceJet, which was one of the first private airlines to use the AIESL services says: “We request companies offering MRO service to set up a facility in India. We need more volume. The ‘Make in India’ program should look at attracting work from Southeast Asia and the Middle East, as India, with its growing aircraft fleet size, strategic location advantage, rich pool of engineering expertise and lower labor costs has huge potential to be a global MRO hub.”
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.”
The founder and secretary general of the association, Pulak Sen, says airlines are finding it cheaper to send their aircraft overseas for maintenance even though labor costs more in foreign countries. The cost benefit that the Indian MRO industry enjoyed because of the lower cost of labor in India—$20-35/hr.—has been eroded due to the GST burden, he argues.
He was referring to countries such as Singapore and Malaysia, where GST on MRO services is levied at 7%, and to Sri Lanka, which does not levy any tax at all on the industry.
According to the association, with 500 commercial aircraft in the Indian airline fleet, the value of MRO work is estimated to be around $900 million. The value of MRO work will touch $1.75 billion in the coming years when another 1,000 aircraft are added to the fleet.
“But the industry can suffer tremendously if things remain the same,” Sen warns.
Asia, especially China and India, is set to become the largest and fastest-growing region in terms of commercial aviation, nearly doubling its in-service fleet and related MRO demand. Hence, a reduction in the GST would not only be in the interest of the MRO sector, but of the nation as well, the association head notes.
The airline industry in India spent about $950 million in 2016-17 on aircraft maintenance and servicing, but only 10% of this business went to Indian MRO companies, says a senior official from the Civil Aviation Ministry.
Amber Dubey, partner and head of Aerospace and Defense at KPMG comments: “Buying new aircraft and starting new airlines are not enough. Nobody is going to buy a car in Delhi and take it to Singapore, Thailand or Sri Lanka for servicing. Why are we in such bad shape when it comes to MRO?”
In the absence of a well-developed MRO base in India, there are currently around 40 overseas maintenance providers approved by the Indian aviation authority DGCA to conduct work on Indian-registered aircraft, in locations including the UK, Germany, France, Romania, Jordan, Israel, the UAE, Sri Lanka, China, Singapore, Malaysia and Australia. Meanwhile, the plans by some of the large global MRO players to establish bases in India have yet to materialize.
Until recently, Thailand faced a similar situation. In 2017, 60% of aircraft maintenance services for Thai carriers were provided by foreign companies. The Thai government took steps to change that situation by promoting the domestic maintenance industry, including generous tax incentives modeled on Singapore’s program. There, MRO providers are also turning to state-of-the-art technology such as automation to offer high-quality maintenance, thus keeping their competitive edge.
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.