Sunday, April 08, 2012

Indian aviation maintenance, repair and overhaul business set to soar

India's aviation maintenance, repair and overhaul (MRO) business is set to rise as a result of the government's plan to slash high custom duties on aircraft parts, tires and other equipment.

Finance Minister Pranab Mukherjee in the Finance Bill 2012-13 has proposed to provide full custom duty exemption to new, retreaded tires as well as testing equipment for aircraft which will be imported by third-party MRO units.

Aircraft parts and tires currently attract around 30 percent basic and additional customs duty on import. Due to this, the domestic MRO sector had become uncompetitive.

Reading out his budget recipe, Mukherjee said: "India has the potential of establishing itself as a hub for third-party MRO of civilian aircraft."

According to a civil aviation ministry report, the Indian MRO industry is expected to triple in size from Rs.2,250 crore ($440 million) in 2010 to Rs.7,000 crore ($1,369 million) by 2020.

However, this is quite small when compared to present size of per annum MRO business in the UAE ($1,565 million) and China ($1,956 million).

Yet, sectoral experts and passenger carriers have welcomed the move which they say can offset cost and give a boost to the country's MRO and airline sectors.

"It's a bold policy measure that will help the domestic aviation ancillary units grow, very similar to what happened in the auto boom of the 1990s," Amber Dubey, director (Aerospace) in consultancy firm KPMG, told IANS.

According to Dubey, the proposal will give advantage to the domestic MRO sector, which can utilise the abundant cheap labor in the country.

"Globally, labor constitutes around 50 percent of MRO's total expenditure. Leveraging India's relatively inexpensive pool of manpower of engineers and technicians will help MRO players."

It is also expected that the measures will come as a relief to the ailing domestic airline industry as well which incurs high costs on sending aircraft abroad for repair and maintenance.

"It will help save the significant cost involved in sending empty aircraft and crew to foreign locations for repairs," Dubey added.

Cash-strapped national carrier Air India sees the proposals as a boost to its own plans for the MRO business.

"The proposal will help us cut cost but more importantly assist us in our other plans for the MRO sector. We aim to transfer nearly 7,000 employees to our upcoming regional MRO facility for third-party work for generating extra revenues," a senior Air India official told IANS.

The airline said the proposal will help maintain a higher margin on its third party MRO work.

"Till February 2012 we had generated a total revenue of around Rs.14.3 crore in the northern region alone. This margin will increase with reduction in custom duty on parts."

Some industry experts think the plan may eventually not work out as other provisions mandate an MRO to stock spares only for a period of three months after which it has to pay the custom duty.

"MROs can only stock spares for a period of three months, falling which it will be required to pay the import duty. Similarly, spares have to be accounted for and it has to be ensured that they are used only for the aircraft for which they have been imported," said Rohit Kapur, president of Business Aircraft Operators Association (India).

"This defeats the purpose of spares stocking and also introduces an 'inspector raj' where the MROs will have to be frequently audited by the authorities."

Kapur said the country had the advantage of cheap labour, but this will be offset by high taxes and regulatory environment. A clear focused strategy for the sunrise sector was the need of the hour, he added.

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