Untapped Potential: Policy impetus to improve MRO and cargo segments

Policy impetus to improve MRO and cargo segments

The ancillary segments of civil aviation, such as maintenance, repair and overhaul (MRO) and cargo infrastructure, have not been focused on by policymakers for a number of years, despite their significant potential. However, over the past year, with attention from the government, things seem to be moving in the right direction in these segments.

Market potential

In recent years, there has been a rise in the demand for MRO services driven by India’s booming aviation market, increasing demand for aircraft and the growing scale of operations by airline operators. At present, India has a fleet of 413 aircraft (as of June 2016) and over 720 aircraft in the order books of airlines. In addition, in July 2016, AirAsia and GoAir signed contracts  worth $12.5 billion and $7.7 billion respectively with Airbus for the purchase of new aircraft. While AirAsia has placed an order for 100 single-aisle A321neo aircraft, GoAir has placed an order for 72 A320neos, at current list prices. This represents a significant potential for the MRO market in the country. The growth numbers also present an optimistic outlook – the Indian civil aviation MRO market size was estimated at $1.2 billion in 2015 and is expected to reach $4.3 billion by 2025.

However, the present state of affairs puts Indian MRO players at a competitive disadvantage versus their global counterparts. Currently, airlines operating in India outsource 90 per cent of their MRO service requirements to foreign service providers operating out of South Asia, Southeast Asia and the Middle East. The Indian MRO segment constitutes only about 1 per cent of the global MRO industry.

The creation of cargo infrastructure has gained pace over the past decade with the modernisation of metro airports. At present, India has a cargo handling capacity of about 5 million tonnes. Of this, about 55 per cent is located in the privately operated airports of Delhi, Mumbai, Bengaluru and Hyderabad. According to the International Air Transport Association, India is expected to grow to become one of the 10 largest international freight markets by 2018.

Over the past year the market for cargo services seems to be improving with the stabilising economy. Total air cargo movement has grown by 7.08 per cent to reach 963,000 tonnes during April-July 2016-17, from 899,000 tonnes in the same period last year.

Moreover, the domestic cargo segment has been performing better than international cargo. Between 2009-10 and 2015-16, domestic air cargo witnessed a compound annual growth rate (CAGR) of 8.71 per cent owing to expansion in domestic trade, significantly higher than the 5.47 per cent CAGR for international cargo.

Increased government focus

In line with the government’s Make in India and “promoting e-commerce” initiatives, both cargo and MRO development are presently being emphasised.

The government has plans to develop India as an MRO hub and is taking steps in this direction. The key growth drivers working in the segment’s favour include low labour costs, strategic geographical presence (placed in between the Gulf countries and Southeast Asia) and the increasing fleet of airlines. Besides, a pick-up in the MRO segment will augur well for both airport operators (through higher revenues) and airlines (by way of lower aircraft servicing and MRO costs).

Some major facilitating measures have been announced in the 2016-17 budget, in line with the vision of establishing India as an MRO hub. The concessions announced include zero service tax on MRO services, the simplification of import processes for aircraft spares, exemption of customs duty for maintenance tools and toolkits, and the removal of the one-year window for using duty-free parts.

The New Civil Aviation Policy, 2016 too includes some key policy changes for these ancillary services. It has now included MRO and cargo facilities that are co-located at

an airport under the “harmonised list” of infrastructure, which is likely to enable these ancillary services to avail of benefits given to infrastructure sectors.

Key incentives offered for cargo operations at airports falling under the ambit of the Regional Connectivity Scheme (RCS) include no levy of airport charges for operations and for terminal navigational landing and nominal rates for route navigation facilities. A concessional rate of 2 per cent excise duty on aviation turbine fuel used by cargo operators drawn from RCS airports for a period of three years is also being provided. Cargo operators, however, are not entitled to viability gap funding. Moreover, the establishment of the Air Cargo Logistics Promotion Board to promote growth in air cargo by way of cost reduction, efficiency improvement, space augmentation at existing airports and better inter-ministerial coordination is also likely to be beneficial.

Further, in January 2016, the central government gave its ex post facto approval to an MoU signed between the Airports Authority of India (AAI) and the Singapore Cooperation Enterprise for cooperation in civil aviation. The salient features of the MoU comprise collaboration in the areas of master planning, design, traffic development, cargo handling and management. Earlier in November 2015, the government had signed MoUs with the governments of Finland, Kazakhstan, Kenya, Sweden, Norway, Denmark, Oman and Ethiopia to ensure cooperation in various subsectors of civil aviation, including air cargo.

Recent developments and plans on the anvil

The growing realisation of the importance of the MRO and cargo infrastructure segments has brought about some important developments since 2015-16.

Metro airports

On June 6, 2016, a new common use domestic cargo terminal was opened at the Chhatrapati Shivaji International Airport in Mumbai. The new terminal has an annual handling capacity of 300,000 metric tonnes and will be used by all airlines except Air India and Blue Dart, which have their own cargo handling facilities. The terminal is operated by the Container Corporation of India on a revenue-share basis with Mumbai International Airport Limited.

In December 2015, AAI announced plans to establish an MRO facility near Chennai airport. AAI is reportedly in the process of acquiring nearly 50 acres of land to set up the facility. Besides, a detailed project report is being prepared by RITES Limited for establishing an international air cargo hub at Chennai airport. However, no further update is available.

Meanwhile, the development of MRO and fixed-base operation facilities at the Indira Gandhi International Airport in Delhi at an investment of Rs 1.5 billion is also in progress. The Bird Group, along with its joint venture partner ExecuJet Aviation, had announced in February 2016 that it would soon invite bids for the appointment of a consultant for designing the terminal building which will be dedicated to private and business jets under the Delhi MRO facility project. The tendering process is currently under way.

Other airports

AAI plans to create common user domestic cargo terminals at 24 AAI airports in a phased manner. The corporatisation of cargo operations has also been approved by AAI’s board.

Vijayawada airport in Andhra Pradesh is shortly expected to have a cargo and cold storage facility for preserving perishable goods at the airport while the development of the Bhiwadi greenfield airport as a cargo airport in the National Capital Region is also being planned.

Besides, in March 2016, the common user domestic cargo terminal at Indore airport commenced commercial operations. The facility has been provided by GSCE Private Limited and has a capacity of scanning 60 tonnes of goods per day.

In July 2016, the Haryana government announced plans to establish an international airport and a cargo airport in Hissar. The state government has allocated Rs 500 million in its 2016-17 budget for the airport’s development. In the same month, an announcement was made for a dedicated import cargo storage area adjoining the export freight terminal at the Tiruchirapalli International Airport, at a cost of around Rs 900,000. Almost 60 per cent of the work has been completed at the new storage area. The need for this facility arose as the existing area is being converted into an international courier terminal which is due to be commissioned soon.

In August 2016, the Union cabinet approved the leasing out of 4,050 square metres of land to the Assam Industrial Development Corporation for establishing a centre for perishable cargo at the Guwahati International Airport. Subject to the signing of the agreement, land will be leased by AAI at a token licence fee of Re 1 per annum for a period of seven years.

Other key projects in the pipeline include plans to set up an MRO unit at GMR Aerospace Park in Hyderabad by Turbo Aviation, a proposal to develop an MRO facility at Ankleshwar in Gujarat by Gujarat State Aviation Infrastructure Company Limited and the issue of a tender document for developing a cargo complex under the Surat airport modernisation project.

The way forward

Despite the tremendous opportunities offered by the two segments, the scenario so far has not been very promising. Other than Air India, which has in-house MRO services, most  aircraft of private airlines are flown overseas (Sri Lanka, Singapore, Malaysia, the UAE, etc.) for MRO works. As a result, 90 per cent of the MRO business of Indian carriers worth Rs 50 billion is lost to these economies. Besides, there are several financial, legal and procedural limitations hindering the growth of the domestic MRO industry. Further, air cargo volumes in India are also very low due to the high charges and turnaround time as compared to other countries.

In a nutshell, India must try and ensure that these ancillary segments fulfill their potential in order to support the vision of becoming the third largest aviation industry in the world by 2020 and the largest by 2030. Air cargo, particularly domestic, has a high employment potential, especially for semi-skilled workers. Thus, the need for active policy measures and incentives from the government to provide a fillip to the growth of these segments is now more important than ever.