Aviation MRO in INDIA - the Opportunities and Challenges!

India, with its growing aircraft fleet size, strategic location advantage, rich pool of engineering expertise, and lower labour costs has huge potential to be a global MRO hub.

At present, Airlines operating in India get nearly 90% of their MRO done abroad, mainly due to cost advantages resulting from the comparatively high tax burden, cumbersome operating procedures, and the inadequate MRO service facilities available in India.

India’s current MRO market size is estimated to be around USD 750 million. As per Boeing itself, the market is expected to grow at 7% CAGR for the next 7 years to reach USD 1.2 billion by 2020. With the fleet size likely to double by 2020, the need for a strong domestic MRO industry is critical and not just desirable.

A strong MRO industry could achieve the following benefits in next 10 years:

  1. Create thousands of Jobs for Aerospace engineers and other professionals.
  2. Save and earn foreign exchange by attracting national and international carriers to Indian MROs.
  3. Reduce dependency of Indian carriers on other countries for their MRO requirements.
  4. With the induction of more aircraft in India every year and the existing ones getting aged, the opportunities for employments, saving in foreign exchange, and the revenue earned by taxes will increase every year.
  5. Make India an attractive MRO hub in this part of the world.

Central Government, State Governments, and various other agencies imposed taxes and levies on the Indian MRO industry at various points in time without considering the overall impact of these on the development and growth of the industry.

At present Domestic scheduled carriers outsource most of their MRO activity to third‐party service providers outside the country. It’s a matter of major concern that Indian carriers find it more cost effective to fly empty aircrafts and crew to overseas MRO hubs for maintenance of their fleet. At present, Indian MROs are mainly equipped for Line maintenance. We need to build more sophisticated facilities and upskill our workforce to do the heavy maintenance work which is mostly outsourced now.

Very recently even Air India, like all private Indian carriers started depending on MRO facilities located in South Asia, South East Asia, and the Middle East. MRO business worth nearly USD 450 million has been estimated to be outsourced by the scheduled carriers to other countries in FY 12. This is a colossal loss of revenue, employment, and loss of revenue through taxes to the government which also foregoes the corporate tax on the profits of these overseas MRO service providers.

In the absence of a well‐developed MRO base in India, there are currently around 40 overseas MRO providers approved by the Directorate General of Civil Aviation (DGCA) to conduct work on Indian‐registered aircrafts, in locations such as the UK, Germany, France, Romania, Jordan, Israel, the UAE, Sri Lanka, China, Singapore, Malaysia and Australia, while the plans by some of the large global MRO players to set up base in India are yet to materialize.

Recommended initiatives that could boost the Indian MRO industry:

  1. Review the collective implications of various taxes imposed by the Central and State Governments especially VAT on MRO industry.
  2. Review the procedural hurdles faced by MROs in importing spares, using the services of foreign experts, creation of necessary infrastructure etc. and address issues immediately to put Indian MROs on the growth trajectory.
  3. Review the Aircraft maintenance engineering courses available in India for their suitability in meeting the skill sets required by the industry.
  4. Encourage setting up of comprehensive MRO facilities in India to take care of the growing requirements of aircrafts operating in India.

The government would earn significantly larger revenues from the multiplier effect of MROs, generation of local employment and the growth of ancillaries. The State government would earn VAT on every rupee spent by employees on consumption goods plus get a share of the income tax, excise duty, and service tax paid by such employees to the Central government. Every incremental job yields incremental revenue for the State government.

Some of the positive measures taken by the government over the past few years:

  1. Extension of time period for consumption/installation of parts, and testing equipment imported for Maintenance, Repairs and Overhaul (MRO) of aircraft by MRO units from 3 months to one year.
  2. MRO industry for the first time is allowed to go in for ECB.
  3. The Royalty charged by the AAI, from MRO, reduced from 36.3% to 13%.
  4. Testing equipment can now be imported duty-free by the MROs.

While the above measures have helped the industry, it needs more support to capitalize on the enormous business opportunities available.

Some of the important corrective measures suggested are:

  1. Review of the VAT charged on MROs with a view on the sustainability of the business when VAT is paid along with other taxes and levies.
  2. States should consider extending benefits like exemption from State electricity duties, Stamp Duty, land benefits, etc. to attract MROs.
  3. Review of the Service tax imposed on MRO industry considering the fact that when MRO work is done abroad, the Airlines need not pay any tax at all.
  4. Airline industry is primarily a ‘service’ industry, thereby, full Cenvat credit for MRO activities should be extended to the airlines without any restriction since airlines, at times may not be in a position to claim full credit.
  5. Rationalize the Customs duty exemption on import of MRO tools and consumables: The existing Customs exemption covers only parts and testing equipment for MRO operations.
  6. Review of royalty charged by AAI on MRO: The Airports Authority of India (AAI) charges 13% royalty from Indian MROs, which renders them uncompetitive. This is over and above the rents that MROs pay to AAI for use of the airport premises. A royalty over the rent is only making Indian MROs more uncompetitive.
  7. Simplify and standardize the Customs requirement to produce certificates from end-user airlines for import of aircraft parts: Under Customs law, MROs are granted exemption from Customs duty for import of aircraft spares, subject to submission of requisite documents in the prescribed manner to the satisfaction of the Customs authorities. While importing spares, Customs authorities at different airports have varying requirements of documents, many of which are tedious and impractical.
  8. Customs should allow 24x7 clearance of aircraft parts at six major airports: Unlike for air cargo at major airports, the Customs department has fixed working hours for clearing aircraft spares. This further leads to delays in custom clearance which is critical in quick turnaround especially in situations like ‘Aircraft‐on‐Ground’ (AOG). A 24x7 window for custom clearance of aircraft spares would go a long way.
  9. Distinguish MRO as a separate category through amending Aircraft Rules: MROs have been clubbed with Ground Handling Agencies (GHA) for security and other related procedures at the airport. There is no distinction made between these two very distinct services. This causes avoidable issues related to airport passes, etc. and subsequently delays. MRO, by definition, should be declared a separate category by the Government, through amendment of Aircraft Rules, 1937.
  10. Accord infrastructure status to MRO industry: The MRO is an integral part of the airport infrastructure. The government may consider extending tax benefits on lines of 80IA to MRO.
  11. Encourage airports to support MRO as a strategic activity: The MRO facility has to be located at the airport itself ­ there’s no choice! The Government should take a holistic view and should ensure that adequate space is mandatorily allocated at Indian airports for MRO. Else certain airport operators may take a narrow view of the same and allocate precious airport land for other commercially attractive activities. Globally, all major airports have dedicated MRO hubs that also lead to higher revenues for the airport by way of higher aircraft movements and hangar rentals.
  12. Provide SEZ status to MRO hubs: The government should encourage Indian airport operators and Indian carriers to partner with MRO providers and develop Aerospace Parks at the airports. These Parks could be dedicated for MRO and aerospace manufacturing activities with unrestricted access to the runways. The government should accord Special Economic Zones (SEZ) status for such Parks, treat goods and services produced therein as ‘deemed exports’ and provide full tax exemptions.
  13. Develop globally competitive skills and capabilities: Given the industry challenges, not many MRO players in India possess globally competitive end‐to‐end capabilities. Very few players have global certifications from USA’s Federal Aviation Administration (FAA) or European Aviation Safety Agency (EASA) or UAE’s General Civil Aviation Authority (GCAA) to undertake heavy maintenance works on Airbus and Boeing jets. The Government of India may consider reimbursing 30‐50% of the cost of obtaining global certifications as an incentive to the industry.

Finally:

  1. A strong MRO industry is critical to the growth of the aviation sector in India. It produces employment, and revenue to the government through taxable outcomes. India has a huge potential to be a global MRO hub due to its growing aircraft fleet size, strategic location advantage, rich pool of engineering expertise, and lower labour costs.
  2. It is a matter of major concern that Indian carriers find it more cost effective to fly empty aircrafts and crew to overseas MRO hubs than to get them serviced in India. This is because Indian aircrafts can simply fly to competing countries, buy spares and get the maintenance done, and fly back, without paying any taxes to the Indian government.
  3. A coordinated effort by the government, airlines, airports and the Indian MROs to strongly promote the Indian MRO industry is the need of the hour. Civil Aviation Ministry may appoint a Inter Ministerial Group to support the MROs in facing the challenges and capitalize on the opportunities available.

Rajendra N Johri, MRO Association of India
George Cheriyan, TheAviationspace Network
July 8, 2014