AEROSPACE AND DEFENCE

4th Annual Conference on

Airport Development and Modernization
Focus on MRO

9 February 2010
 The MRO industry is closely linked to fate of the airline
industry…

Global MRO 45 44
Revenue (USD Bn)
42
41

38

36 36

Source: Aerostrategy

2003 2004 2005 2006 2007 2008 2009

Though the fall is not as steep as that in global airline revenues

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Global MRO clusters

Existing Emerging
 Central US  Mexico
 South Florida  Brazil
 Southern California  North Africa
 Quebec  Eastern Europe
 UK  UAE
 France  Malaysia
 Germany  India
 Singapore
 Eastern China

India faces stiff competition with other low-cost locations

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India today has a miniscule share in the MRO market…

Africa India
E Europe
3% 1%
Latin America 3%
5%

Middle East N America

5% 34%

China
5%
2009
USD 42 Bn

Aspac
17%

W Europe
Source: Aerostrategy
27%

This is likely to change now…

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 The fleet size in India is expected to grow significantly…

1400
Number of aircrafts
(Scheduled airlines)
850

409

2009 2018 2029

Source: DGCA, Aerostrategy, Boeing

This adds significantly to India’s bargaining position

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India enjoys other inherent advantages…

 Geographical advantage
 Skilled manpower
 Acknowledged for frugal engineering
 Existing Indian MRO players moving up the value chain
 Indian diaspora in global MROs
 Outsourcing from Defence and Homeland Security Forces

The key building blocks seem to be falling in place

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India is therefore expected to lead the global growth in MRO
during 2008-18

8.5%
7.6% CAGR
6.5% (2008-18)

4.1%

2.5%
1.9% 1.8%
0.9%
0.3%

ia a st a ac e e ca ca
d in a ic p p p ri ri
In Ch E er s uro uro Af e
le m A E E m
d A E A
id tin W N
M
La
Source: Aerostrategy

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The global MRO revenues are expected to grow at around 3% pa,
reaching USD 55 bn by 2018

Global MRO
Revenue (USD bn) 55 55
54
53
52
50
48
46
44

2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Aerostrategy

…driven primarily by India, China and Middle East

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Engines and component repairs are typically controlled closely
by the OEMs

Modifications
8%

Airframe
Engine
14%
34%

2009
USD 42 Bn

Line
22%
Component,
Source: Aerostrategy 22%

Airframe and modifications provide a good starting point

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New relationships are being forged in the Indian MRO space…

 NACIL–EADS Airframe MRO at Delhi airport

 USD 40 million to be invested over 5 years

 Capacity of over 100 narrow body and 10 wide body aircraft per year

 250 to 300 Indian technical personnel.

 Services to other customers in Asia Pacific and Middle East

 NACIL-Boeing JV (Investment USD 100 million) at MIHAN Nagpur

 NACIL-Aerostar for engine repair at Mumbai Airport
 MAE-GMR-Jet Airways JV at Hyderabad (Investment USD 65 mn)
 MAE-GMR JV at Subang, Malaysia for handling Spicejet fleet

Cont’d…

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New relationships…cont’d

 Airbus, Airspace Infrastructure and Airlogic JV for spare parts and logistics
support - Spares Support Solutions India, Pvt. Ltd. (SSSI)
 Air Works and TAAL at Hosur, Tamil Nadu
 Duke Aviation at MIHAN Nagpur (Investment USD 150 mn)
 Cochin Airport planning an MRO and training academy
 Varman Aviation (MRO projects BSF, Sri Lankan Air Force etc)
 CFM International - a 50:50 JV between Snecma and GE will establish a
new CFM56 maintenance training center at Hyderabad Airport
 HAL - TIMCO JV for airframe MRO at HAL's Bangalore airport

More such are expected in the near future

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MRO industry faces several challenges…

 Complex and hi-tech – high risk of obsolescence

 Lumpy investment – USD 50-100 million
 Highly regulated – approvals from DGCA, FAA, EASA etc
 Long gestation period – 2-3 years
 Highly competitive – within and outside India
 Employee attrition – skills are of global relevance
 No policy support – for taxation, subsidies, land etc
 No industry body for MRO – fragmented at the moment
 Zero tolerance for errors – human lives at stake

These would need a combined effort of the stakeholders and the

government
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Tax and regulatory regime…

 100% FDI permitted under the automatic route for MRO

 No tax holiday – taxed at regular corporate tax rates of 33.99% (Indian company)
and 42.23% (foreign co) or at 10.56% on royalty/ technical services fee
 Import of spare parts is currently not liable to Customs Duty, if imported for
servicing aircrafts, subject to conditions
 Services entailing maintenance/repair of the defective spares are taxable under
the category of ‘Maintenance or Repair Services’ at the rate of 10.30%
 VAT implications would arise where MRO operations involve transfer/supply of
parts in India
 Can be subject to local taxes like entry tax, octroi, municipal taxes etc

Some of the above would get addressed by the introduction of

GST. The timeline is a bit uncertain though.
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The way forward…

 MRO industry needs to be organized. Large players need to take lead.

 Forge alliances with leading global players for technology and global orders.
Look for acquisition opportunities.
 Continuous focus on innovation, cost optimization, quality and timely delivery
 GoI needs to play a crucial role by:
 Creating a special incentive policy for MRO sector, for a limited period
 Assisting in land acquisition near existing airports
 Streamlining issuing of clearances from DGCA
 Introducing MRO courses in technical institutes with the help of industry
 Assisting in funding support for a limited period
 Leveraging the learnings of the offset policy adopted by the Ministry of
Defence, for ensuring transfer of technology to Indian companies

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The vision is to become global leader in MRO

Global
leadership

• Negligible govt support

Partial • Cutting edge R&D
independence • Aircraft assembly
• High reputation
• Premium labour rates
• Policy support • Global clients
Complete
• Labour arbitrage
dependence • Low end R&D
• Tier 2/3 manufacturing
• Use of global MRO cos • C and D Checks
• Loss of forex, time • Indian clients

The past The present 2020?

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India has proved the world wrong many times…

2009

2008

1984

1975

1974 Perhaps it’s time to do it

again…
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 Thank you!

Sources of information: Aerostrategy, Frost and Sullivan, The Hindu, CII-PwC report on aerospace industry, Machinist, KPMG database.

© 2010 KPMG, a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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