Saturday, January 29, 2011

Resurgent Interest in Indian MRO

Overhaul & Maintenance Feb 01 , 2011 , p. 37 
Neelam Mathews

Though a list of potential partnerships has fallen through, India’s aftermarket potential remains high.
By Neelam Mathews

NEW DELHI—As the Indian economy swings back post-recession with an 18% increase in passenger traffic over last year, the fleet of 421 aircraft will increase by 50 in 2011, paving the way for regenerated interest in MRO facilities.

Despite exaggerated promises, the MRO industry in India has not been able to deliver. The country’s only third-party provider, Air Works India Engineering, has been on an expansion spree for want of competition to get the first-mover advantage.

“The Indian aviation industry is one of the most dynamic, with potential for exponential growth as fleets are expected to grow to over 720 in the next four years,” says Ravi Menon, executive director of Air Works. “The challenge is to build up efficiencies for a cost-effective model.”

Air Works India Engineering is ramping up for in-country fleet growth of up to 720 aircraft in the next four years.Credit: AIR WORKS INDIA ENGINEERING
The current MRO spend in India is around $500 million—a figure that is expected to grow to $1 billion by 2020. At the onset, India appears to have all the resources it takes to launch an MRO. However, low labor costs, a lack of space at airports, the regulated environment, customs duties and a high tax regime offset its advantages.

The industry has long felt that MRO receives step-sisterly treatment. “There are too many other things for the government, and MRO issues get sidelined,” Menon says. “There is an urgent requirement to form a body to address reforms if India wants to look at itself as serious MRO hub.”

The volume of MRO work sent out of the country includes airframe maintenance worth $30 million, engine maintenance worth $300 million, component work worth $125 million and APU work worth $20 million—a total of $475 million, says Chander Bhatia, airframe and engines training manager for Kingfisher Airlines.

Despite the fact that costs remain about 25% lower in India, companies here find they can barely break even in the face of competition from neighboring countries such as Singapore and China. MROs in these regions pay airlines for ferry costs to retain repeat business, which increases in volume as fleet sizes grow, says Menon.

Asia Pacific, China, and India are expected to be among the strongest growth regions, and mid- and long-term growth in Asia will be solid, says Mike McBride, CFO and executive VP of U.S. consulting firm TeamSAI. But as of yet, India’s MRO activity hasn’t shown spectacular growth or development. In the past, players such as Lufthansa Technik, which announced a JV with GMR Hyderabad International Airport Ltd., have pulled out, not seeing a viable business case in India. The failure of the GMR joint venture, however, does not affect component and engine part services or expansion plans at Lufthansa Technik’s own Services India subsidiary.

Hyderabad airport operator GMR now is going ahead with the project with new partner Malaysian Airlines Engineering, which will provide certifications, technical and management expertise, and operations, training and maintenance know-how.

“The timing of this partnership, representing MAS Engineering & Maintenance’s first foray into the Indian aircraft maintenance market, is perfect, as the Indian market is experiencing strong aircraft growth with manufacturers bullish on aircraft orders,” Malaysia Airlines Executive Director Tengku Azmil said at the time of the MoU signing.

Meanwhile, Air France Industries KLM Engineering & Maintenance (AFI KLM E&M) and Mumbai-based Max MRO have gained an advantage in India by becoming the first to announce a joint venture for a component repair facility.

The components business in India is estimated at around $100 million, says Franck Terner, president of Air France Industries. “This figure, I believe, is grossly underestimated,” he says. “We expect the business to grow 14% per annum for the next 10 years.”

The JV will be dedicated to component repairs, with avionics, pneumatics and hydraulics expected to form the major portion of business.

The two partners did not disclose the details of the joint venture, as modalities are still being worked out. The 10,000-sq.-meter facility is expected to be set up in the tax-free zone of Nagpur, where Boeing is establishing hangars for Air India and where Max owns land, or at another location.

“We are trying to develop a global network as the customer wants proximity to suppliers,” says Terner. “Our association will empower the JV for transfer of know-how ... it’s a long road, and there is no question to limit it to Airbus A320s.”

With Kingfisher Airlines and IndiGo, which operate mainly Airbus types, and AFI KLM E&M clients, the JV will concentrate on A320s. But partners see the A320 as a jumping-off platform to bring in Boeing narrowbody components for maintenance.

“There are many components that share a commonality between the 737s and A320s—such as radio parts, pumps and common Goodrich brakes and wheels—that we will look at initially,” says Bharat Malkani, chairman and managing director of Max MRO. “Our vision for India together is to build a network. Max MRO already has the skills, including engineering competency. We will start by focusing on our core strength—in electronics. This sector is the fastest growing in the components area in India. It is also something that does not require a vast quantity of real estate.”

Opportunities exist for setting up paint shops in the country, too. Capacity for this business has been grossly underestimated in India, says Air Works’ Menon, whose company plans to set up a state-of-the-art shop this year. Air Works bought U.K. painting specialist Air Livery in early 2010, and plans to leverage its expertise to launch a branch operation in India.

And recently, New Enterprise Associates, a mid-market private equity firm, and GTI Capital Group, an investment advisory firm, were said to be investing $27 million in Air Works. The company has refused comment.

As Indian airlines have merged and consolidated, the MRO market is set for long-term growth. “I see business for 3-4 MROs in India in the long-term,” says Menon. His forecast is based on the premise that 60 aircraft per year for a mid-range MRO will make the venture viable.

The difficulties—and future potential—are clear. “India is a difficult place [to set up an MRO], with customs and tax issues,” explains AeroStrategy partner David Stewart. “The bottom line is so many JVs were signed in the past five years and did not get anywhere….It is a relatively small market within India. By 2019, if it has resolved its infrastructural challenges, it will play a bigger role but not a huge role.”

Issues such as trained engineers and technicians will need to be dealt with. Kingfisher’s Bhatia says the global economic downturn in 2008 and 2009 saved India’s airline industry from experiencing an acute shortage in engineers. “But now that the airline industry is picking up again and aircraft orders are being filled, we are going to experience a shortage of manpower.”

MRO Ventures In India

No MoU/JV Location Year Status
1. MAS/GMR International Airport Hyderabad 2009 Operational launch slated for 2011. MAS has trained 70 technicians.
2. Air Works Engineering India Hosur 2007 The MRO is building a second hangar.
3. Air India/Boeing Nagpur 2005 Part work is an offset commitment for Air India’s Boeing buy. Construction was to start in January for 2012 completion.
4. Lufthansa Technik/GMR International Airport Hyderabad 2007 LHT pulled out in 2008.
4. Timco/HAL Bangalore 2009 Unknown
5. Airbus/Air India/Jupiter Aviation Delhi 2007 Not started
6. Airbus/HAL Nashik 2006 Did not take off
7. SIA Engineering Co./GoAir Did not announce 2006 Did not take off
8. Taneja Aerospace/Sabena technics Hosur 2007 Did not take off
9. Duke Aviation Engineering Nagpur 2009 Shelved in 2010
10. Indian Airlines/SIA Engineering Co. Delhi 2005 Shelved soon after
11. Hyderabad Aircraft Maintenance Co. (Hamco) Hyderabad 2005 Not taken off as yet
12. Kingfisher/HAL/Gamco Bangalore 2007 Shelved
13. Air India Hyderabad 2009 Unknown
14. Air India (for Boeing 737-800s) Thiruvananthapuram
In limbo
15. Cochin International Airport Cochin 2006 Has not yet found investment partner
16. Sabena technics/Taneja Aerospace & Aviation Bangalore 2007 Unknown

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