Unexplored Segment: MRO offers opportunities to domestic players

MRO offers opportunities to domestic players

India, with its growing aircraft fleet, strategic location, pool of engineering expertise and lower labour costs, has great potential to become a global maintenance, repair and overhaul (MRO) hub. The domestic MRO market is estimated to be $700 million-$900 million, and is growing at about 8 per cent annually, against a 4 per cent world average. The increase in the commercial and business fleet size has been a major factor driving the demand for MRO services in the country. With the fleet size likely to double by 2020, there is a critical need for a strong domestic MRO industry. Although the industry is relatively underdeveloped, it is experiencing rapid expansion. India has an added advantage in terms of availability of low-cost manpower, over other MRO hubs such as the US, Europe and Singapore. However, high tariffs and customs duties have been the biggest challenges facing the domestic MRO market. This has resulted in foreign MRO service providers being preferred over Indian ones, resulting in a loss of opportunity, employment and growth for the Indian economy. Despite these challenges, the central government in its 2019-20 budget highlighted the need to leverage the engineering advantage and potential to achieve self-reliance in the MRO segment. The government will adopt suitable policy interventions to create a congenial atmosphere for MRO development in the country.

Current scenario

Airlines in India spend about 15 per cent of their revenues on maintenance – the second highest cost item after fuel – with about 90 per cent of this demand being outsourced to MRO service providers based in the UK, Germany, France, Romania, Jordan, Israel, the UAE, Sri Lanka, China, Singapore, Malaysia and Australia. The primary reason for this revenue leakage from the country is a dearth of companies providing comprehensive third-party MRO services in India. Indamer Aviation Private Limited, Air Works India Engineering Private Limited, Max Airospace and Aviation Private Limited, Hyderabad Aircraft Maintenance Company and Hindustan Aeronautics Limited are some of the key MRO service providers, operating in Mumbai and Hyderabad. However, the growing demand for MRO has recently attracted interest from a number of airport developers. For instance, the GMR Group has signed an agreement with the Lufthansa Group to set up MRO operations at the Rajiv Gandhi International Airport. The Gujarat government plans to develop Dholera airport as an MRO hub to provide high quality services at a reasonable cost to aircraft parts manufacturers, along with airlines and other companies in the industry. In 2018, AAR Corporation announced a joint venture with Indamer Aviation for the development of a new MRO facility in Nagpur. Air India Engineering Services Limited (AIESL), which until recently undertook maintenance only for national carrier Air India, has decided to provide MRO services for other airlines. AIESL has entered into agreements with domestic operators such as Jet Airways, GoAir, AirAsia India and SpiceJet to carry out their base maintenance work at its MRO facilities.

Issues at large

Despite the government’s push, development of MRO units is not progressing at the desired pace. The primary concern is a lack of interest among domestic players to set up MRO units, a result of the high rate of taxes and royalties at Indian airports. Some of the airports (Delhi and Mumbai) have been charging MRO providers rents that are 50-100 per cent higher than those charged at facilities in Europe and Turkey. Currently, the goods and services tax on aviation MRO in India stands at 18 per cent, which is more than double the tax charged in Singapore and Malaysia. Although the Airports Authority of India has permitted MRO works to be carried out at airports across the country, the complexity of rules and regulations makes it practically impossible. Further, the creation of MRO infrastructure requires a level of investment, both initial and recurring, which most MRO service providers find economically unviable to support. Another issue facing the Indian MRO industry is that most domestic players currently provide only primary services, with secondary and tertiary services being outsourced to foreign players.

Future outlook and the way forward

From a maintenance perspective, the Indian aviation market is fragmented and has its own challenges, with over 60 different aircraft types, each demanding its own set of technical manpower and maintenance technology. The government’s National Civil Aviation Policy, 2016, aimed to boost the MRO market, is yet to deliver the desired results.

However, the future outlook for the sector is promising, owing to the competitive advantage India has in terms of a rich pool of engineering expertise and lower labour costs. In order to fully tap this advantage, much needs to be done on the policy front. The need of the hour is to address the issues pertaining to unavailability of land at reasonable rents, along with high rates of taxes and royalties. It needs to be recognised that the development of the MRO industry can have a multiplier effect on the economy through providing a boost to ancillary and associated industries and services like training institutes, and component repair and testing, thereby contributing to better employment opportunities.