Can India Establish A World-Class MRO Industry?
Before the novel coronavirus pandemic, India was growing at breakneck speed. Home to 1.38 billion people, India is projected to overtake China in population within 10 years. Economically, it grew faster than any other major global economy in 2013-18, to become the world’s sixth-largest economy by GDP. While India’s economy has been battered by COVID-19, resulting in its sharpest economic decline on record, economists are projecting that its rapid growth will resume as soon as later this year.
Despite some high-profile Indian airline bankruptcies in the past decade, the country’s aviation sector has also grown exponentially. In 2019, prior to the COVID-19 crisis, its passenger numbers reached 144.17 million domestically, according to India’s Directorate General of Civil Aviation (DGCA). This growth had slowed from the previous year, owing to the cessation of services by Jet Airways—then the country’s second-largest carrier by fleet size—in April 2019. Nevertheless, India’s overall airline fleet had never been larger, with nearly 800 aircraft operating from the country commercially, the highest number being operated by Air India, with 127 aircraft.
However, the virus’ impact, which included a second wave in the spring of 2021, has led to reductions in fleet sizes, mature aircraft retirements, staff reductions and cuts to capacity. The International Air Transport Association (IATA) estimates that Indian capacity will return to 2019 levels only starting in 2023-24, a sluggish recovery in comparison to other large aviation markets such as the U.S., China and Europe. In the longer term, however, passenger travel is expected to double over the next two decades, while India’s cargo sector is anticipated to grow at a 6.3% annual growth rate, according to Boeing’s outlook published earlier this year.
Positives and Negatives
As the market recovers, the future of India’s MRO industry, a sector that has long struggled to keep up with the pace of commercial aviation growth, has come under the spotlight. Statistically, the numbers remain relatively healthy. Aviation Week’s 2020 Fleet & MRO Forecast, factoring in the impacts of the virus, projects the compound annual growth rate (CAGR) of MRO in India to be 8.6% from that year going through the next decade. Overall, its MRO sector is set to be worth $4.2 billion in 2030, a large increase from $1.7 billion in 2021.
The MRO segment so far has been relatively unscathed by the COVID-19 crisis, says Ram Shankar, a managing partner at Mumbai-based aviation consultancy Caladrius Aero Consulting. He cites the mass fleet groundings by airlines such as Jet Airways and low-cost carrier IndiGo as unlikely positives for the MRO segment. “The IndiGo aircraft, which naturally attained end-of-lease tenure, and the erstwhile Jet Airways aircraft distributed among other operators that were left parked during COVID-19 emerged as the savior,” he says. “Since the Indian MRO industry primarily thrives on airframe maintenance, the impact on business volumes has been minimal. However, the impact on cash flow due to delayed payments persists.”
This was felt by MRO providers such as Air Works Group, the Gurgaon-headquartered independent company, which saw airlines look to renegotiate contracts. The company’s CEO, Anand Bhaskar, recently told Aviation Week that India’s MRO industry has seen any drop-off in commercial activity offset by its work in general aviation and defense. “MRO activity overall hasn’t really fallen despite the passenger metrics of airlines doing so,” he said, citing the right mix of work between commercial, general and military aviation MRO.
However, long-term issues pre-dating the crisis remain. Problems around infrastructure, such as a lack of capacity, capability and access to a skilled workforce persist. A shortfall of domestic repair capabilities has also been cited—with Indian MRO driven by airframe maintenance over engine and components capabilities. Competition from overseas has also been increasingly felt from MRO providers in China, the wider Asia-Pacific region and the Middle East.
While MRO spending is reaching new highs, a large percentage of this—some analysts estimate 85-90%—is outsourced to overseas providers. One illustration of this is in India’s engine segment, where low-cost carrier GoAir, which typically outsources most of its maintenance, sends its engines out of country to MTU Aero Engines in China for CFM56-5B overhaul work. Over the next decade, India’s commercial fleet is forecast to more than double in size, to more than 1,600 aircraft by 2030. With demand outstripping capacity, there is a desire for more domestic maintenance providers to capture a bigger share of MRO spending.
India’s government has identified the MRO sector as providing an economic boon in India and has been aiding the industry’s efforts to establish an improved competitive infrastructure. While it is not the first time an Indian government has floated the idea of helping the domestic industry, a raft of policy adjustments was introduced in March 2020 as part of the Modi administration’s wider aviation strategy. Included in the reforms were reducing the goods and services tax (GST) applying to commercial and military maintenance activity (reduced to 5% from 18%), with full input tax credit, aimed at lessening tax liability. An additional reform was an amendment to the definition of place of MRO services supply, which was changed to location of the recipient. This move results in a levy for domestic airlines sourcing overseas MRO services. But this is more of a long-term move as India’s commercial aftermarket builds up capabilities and capacity, and it will not affect the industry immediately. India’s finance minister, Nirmala Sitharaman, told local media she believes this change will ultimately help establish more MRO service providers in India.
These measures were received positively by some in the industry. “[The Indian government has] given us a level playing [field] where repairing an aircraft in India is now the same as doing it in Malaysia,” says Air Works chief Bhaskar. However, others viewed the proposals with skepticism. Rohit Tomar, Shankar’s fellow managing partner at Caladrius Aero Consulting, believes there is a lack of strategic direction, and policymakers’ ignorance about of the economic scenarios pertaining to global MRO business is presenting challenges. “While there have been reforms like reduction in GST from 18% to 5%, these are not strategic in nature, rather merely business-as-usual changes,” he says. Tomar cites OEMs based in India as benefiting from the policy change at the expense of domestic MRO providers. “While Indian policymakers have been doling out GST reduction and doling out incentives to foreign OEMs under Make In India to develop capability within India, the government is oblivious to the fact that OEMs have undertaken significant consolidation of suppliers, thereby making it an almost controlled oligopoly market.”
Overseas investment in India’s aviation market has largely been led by OEMs, such as Boeing, Safran and Collins Aerospace, which have all established a presence in the country. In terms of MRO investment from outside players, India has seen several false dawns over the past few decades. Lufthansa Technik expressed an interest in India several times over the past few decades, but with no result. Proposed MRO joint ventures between Hindustan Aeronautics Ltd. (HAL) with both Airbus in Nashik and Pratt & Whitney in Bangalore, along with a long-mooted SIA Engineering Co. and conglomerate Wadia Group across several locations, have also failed to materialize.
While the hoped-for wave of partnerships between Western and Indian companies has not been forthcoming, optimism remains that growing MRO demand can lead to heightened activity involving creation of joint ventures, if the conditions are right. This could happen in the form of an outsourcing-of-services model adopted by Rolls-Royce in late 2020. The British engine manufacturer outsourced its existing Indian research and development center in Bengaluru to consulting firm Infosys to provide engineering, research and development services for its civil aerospace business.
However, with more capacity for MRO facilities needed, new hangar builds would be desirable. One proposed consortium that did come to fruition is U.S.-based AAR entering a joint venture with Indian general MRO provider Indamer Aviation in early 2018 to establish AAR-Indamer Technics. The facility in Nagpur, designated a special economic zone that comes with tax incentives from the government, was granted regulatory approval by India’s Directorate General of Civil Aviation (DGCA) in April. The facility opened in July this year and inducted its first aircraft—an IndiGo-operated Airbus A320-200—that same month.
“AAR brings the Western world’s tested and proven robust digital systems, high quality standards and lean processes. Indamer has the local expertise and liaison with the client and the regulator DGCA,” says Rajeev Gupta, CEO of AAR-Indamer Technics on the benefits of establishing the partnership. “The target is to be able to attract a 50% Indian market share in the short term,” he says of the joint venture’s goals. “We don’t want to focus solely on airlines in India but also focus on Indian subcontinent airlines, the Middle East and sub-Saharan Africa region.”
Gupta believes it is feasible that more joint ventures could be established in certain parts of the Indian commercial and defense aftermarkets. “Besides the heavy maintenance of the airframe, the bulk of the MRO spend is for component repair and engine overhaul. Joint ventures will focus on component manufacturing, component repairs and engine shops,” he predicts. “Indian organizations will tap into the experience of the Western world’s MROs to form these opportunities. Heavy-maintenance MRO for airframes is just the stepping-stone for the larger MRO opportunities.”
Skills and Capability Challenges
Indian technicians have traditionally been sought after in Europe, the Middle East and the Asia-Pacific region, which has meant that hiring domestically has often proved challenging, despite the country’s vast population and cost benefits. The Middle East particularly is lucrative for expatriate workers. “India has always had a pool of highly trained English-speaking technical manpower. If you look at the majority of the MROs in the Middle East region, you will find good, skilled Indian technicians at every MRO,” Gupta says.
However, a change to the workforce dynamic brought about by the COVID-19 crisis raises hopes of alleviating the skills shortfall. The global pandemic has also served to bring some of the lost Indian technician skills back to the country to work at companies like AAR-Indamer Technics, Gupta says. “Due to pandemic job losses in the Gulf and Southeast Asia, there has been an impact on MRO technicians and manpower. Because of this, we have been able to attract high-quality experienced manpower to work with us.” He adds that over the next 12-18 months, the business hopes to grow to more than 500 staff from its current 150 employees.
While the right skills are vital in carrying India’s MRO industry toward its potential, necessary capabilities are equally as important. Tomar pinpoints the building up of a component MRO sector in the country as a key priority, as the segment is projected to contribute 25% of all India’s MRO spending over the next 10 years, according to Aviation Week data. “From a value and technology standpoint, airframe MRO is just the tip of the iceberg. Building and enhancing component MRO capability will be the game changer in Indian MRO industry,” he says.
Air Works sees ramping up this capability as part of its future, and Bhaskar anticipates opportunities in components, landing gear and engines for future growth. Specifically, these opportunities will emanate from end-of-lease, cabin and interiors work. Adding capacity has also been prioritized—Air Works added another facility in the city of Kochi last year primarily focusing on A320 maintenance, which will later be expanded to Boeing 737 checks. Overall, it has added more than 40% to its capacity over the past year.
Aftermarket specialists are also turning their attention to new engine platforms. Last year, Air India Engineering Services (AIESL) gained capability for Pratt & Whitney PW1100G-JM engines at its facility in Mumbai, while GMR Aerotech, based in Hyderabad, has also been adding approvals while bolstering its base maintenance offerings over the past few years. More MROs are expected to add next-generation capabilities to their offerings over the next few years, considering the expected volume of aircraft deliveries—estimated at more than 1,000 over the next 10 years by Aviation Week.
But given current market dynamics, Tomar believes India has a window of “one to two years” in which to achieve some of its aviation ambitions. “This is before Asian MRO consolidation takes place and the power will firmly rest with Chinese companies across Asia, shared with U.S. and European OEMs,” he predicts. “Missing this window of opportunity might risk the sustainability of the Indian MRO industry.”
With aviation becoming an increasingly digitalized industry, an important part of India’s maturity as an MRO player lies in digital investments. As in many other parts of the world as the COVID-19 crisis is playing out, precrisis planned investments in IT and technology were mostly followed through and were not delayed or canceled as a means of preserving liquidity.
Ramco Systems, an India-headquartered specialist in developing aviation MRO software, counts Indian carriers including Air India, Air India Express, Alliance Air and Go-Air as domestic customers, while its MRO clients include AIESL and GMR Aero Technic.
On the topic of digitalization trends in India, Saravanan Rajarajan, director of aviation consulting at Ramco Systems, says he is seeing a higher rate of adoption of digital initiatives in the end-customer touchpoints like booking, touchless check-ins, airport operations and CRM systems. Overall, companies are using the pandemic as a period in which to speed digital projects rather than slowing them.
“We are seeing that the MRO sector is taking the pandemic as an opportunity to accelerate digital transformations,” Rajarajan says. “There were projects before COVID-19 that were put on hold due to operational priorities and decision-making delays. Indian companies are now investing in digital transformation to provide themselves with a competitive edge in the post-recovery phase,” he says.
Rajarajan adds that these have focused on certain areas. “We are witnessing focused initiatives on predictive maintenance, paperless MRO, virtual and augmented reality-based simulated training and digital collaboration, especially among MRO players. A few of our customers have also utilized this opportunity to upgrade software versions to bring new functionalities on board.”