Economic Stimulus: Case of Glass Half Full or Half Empty for General Aviation MRO

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Economic Stimulus: Case of Glass Half Full or Half Empty for General Aviation MRO

There has been severe setback to the aviation industry during the lockdowns and suspension of flights due to COVID-19 pandemic. Prolonged and sustained efforts are needed by all stakeholders for inducing momentum to attain its pre-COVID-19 status. Initially the momentum will be slow till the social distancing norms and travel restrictions remain. Entire global community is on the guard and is cautious in undertaking a flight. The slow momentum in airline business will continue till availability of medicine or vaccination to deal with COVID-19 is found. Corporate and charter flying will be preferred by business big wigs, to avoid commercial travel under the prevailing conditions. General Aviation, Medical evacuation and charter flights may see small raise in demand. Also, there may be a small increase in number of small aircraft segment for meeting this incremental need.

The economic package announced by the Government of India is contrary to the expectation of many. The relief is mainly in terms of reforms and not a direct injection of cash. The Companies that can gear themselves up in exploiting these amendments, reforms and fiscal relief are going to reap the benefits of impending growth in future.  The survivability of MROs associated with Airlines and commercial air services will directly be linked to their sustainability on available volume of flights and passengers. These MROs as such enjoy benefit of the volume of similar type of aircraft.  However, the real struggle will be for the aircraft MROs which are service provider to General aviation, NSOPs, private aircraft and Business jets. This segment has wide variation of aircraft, low volumes, and stiff competition. To remain in business for many of these small enterprises, will be the challenge.

I pondered over various provisions of the economic package, and tried to figure out, those that can be exploited by a General Aviation aircraft MRO, to remain afloat, competitive and achieve growth.

Change in Definition of MSME and status of General Aviation MRO

Most of the GA MROs are as such Small Enterprises and are availing the associated privileges. It is interesting to know the number of GA MROs now falling into the category of MSME, earlier not in this category.  The answer will sure be none or at best a few. Therefore, change in definition of MSME will not bring any added benefit to this section of MRO.

Emergency Working Capital Facility for Business

Subject credit line is available for meeting the temporary liquidity mismatch, arising out of the lockdown. This temporary credit line is available till 30th Jun, at a low interest rate of 7.5%. This will give relief to the General Aviation MROs to tide over the current crisis that is being faced in meeting the expenses like airport rental payments, inventory cost, salaries to employees and to manage fixed expenses and other operational issues. The cash flow crisis is mainly from non-realization of dues from the customers. Almost, all customers have lost their earnings due to the cancellation of flights. The accrued receivables by MROs from the Non-Scheduled operators are expected once the flights resume and the business picks up. This scheme is a relief to tide over the cash flow issues and kick start the business again. The scheme will help both Operator and the MRO. The re-payment for the emergency credit can be made in 18 EMIs with six-month moratorium period but there will not be any extension given to repay. The scheme validity is up to June 30, 2020.

Fund of Funds for MSME

This scheme will provide credit and finance for MROs falling in the category of MSME. “The Fund of Funds will help with growth potential and viability even as they face severe shortage of equity,” FM, Nirmala Sitharaman said, while announcing the COVID-19 relief package. Government of India is soon going to approve Rs 10,000 crores “Fund of Funds” to buy up to 15% equity in MSMEs. That means, up to 15 per cent of the amount a MRO can raise from the capital market, which will be contributed by the government through the Fund as equity.  This will ensure availability of working capital.

No Global Tender upto 200 Crore Procurement

This policy of Government will achieve required results in case it is applicable to both procurements, as well as service contracts like repair and overhaul. In that case, the aircraft MROs are likely to get repair and overhaul orders from Ministry of Defense. This will require appropriate amendment to the existing Defense Procurement Manual (DPM) and Defense Procurement Procedures (DPP).  This policy amendment will ensure more work for Indian MROs and their growth. This will also, encourage MROs to setup repair and overhaul facility for components like Landing Gear, Gear Box, Rotor Blades, propellers etc. in India.

India to become a global hub for Aircraft Maintenance, Repair and Overhaul (MRO) 

This is a dream that all aviation experts in India want to realize. This requires real push from the stakeholders. Towards achieving this, convergence of Defense MRO will be the key. This means the General Aviation MRO can become an outsourced facility for Defense equipment maintenance.  There are many tasks that the defense services can off load to existing MROs. For example, in the case of Mi-17 series aircraft, being airlifted for Overhaul, the tasks of helicopter components and engine removal, packing, transporting components and structure for overhaul and post Overhaul their assembly can be outsourced to MRO. This can be directly tasked by the Ministry of Defence (MoD) or outsourcing these tasks to Indian MROs could be mandated upon the OEM/ OEM Authorised overhaul facility. This could be introduced through amendments in DPM and DPP as a mandatory clause in the Request for Proposal (RFP).

Tax regime rationalization

The GST in case of MRO services has recently been reduced to 5% from 18%. This will definitely make Indian MRO competitive but to get a definite edge over MROs in the neighboring countries, it is necessary that the concession fee / airport royalty is also kept low. At present, concession fee on airports operated under PPP model is as high as 30%. This aspect needs serious consideration and should be capped at a reasonable limit, especially on MROs which fall under MSME category. Concession fee being over and above rentals charged on the infrastructure facilities, land and services adds up to high running cost. Therefore, a model to charge rental and profit sharing linked to turnover of the MRO needs to be evolved. Unless these costs are rationalized and kept low, attracting business from abroad will not be an easy proposition.

Major engine manufacturers in the world would set up engine repair facilities in India in the coming year

The Aeroengine facilities and expertise are both weak areas of Indian MROs. Setting up good Engine overhaul facilities with collaboration or under ‘Make in India’ program will not only buildup capability, this will also generate expertise. These facilities can also come up under defense contract offset clause. Close coordination between Ministry of Defence (MoD) and Ministry of Civil Aviation (MoCA) is required to exploit offset amount in the larger interest of India in becoming Atmanirbhar Bharat.

Post COVID-19 is going to be a difficult period for the Humanity. Wide spectrum of businesses will be affected, and change will be felt in all walks of Life. Only those companies which see the Glass as half full today will be able to see it completely filled in future and prosper. The Aviation industry will see growth that higher than expected in future.


PS: The data and figures quoted is taken from the open source information