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Budget 2019: Develop domestic capabilities to boost aviation

Manu Kaushik     July 6, 2019

In her two hours and nine minutes long maiden speech as the country's first full-time woman finance minister, Nirmala Sitharaman, a Rajya Sabha member from Karnataka, has made some ambitious announcements for the aviation sector. The minister said that "as the world's third largest domestic aviation market, the time is ripe for India to enter into aircraft financing and leasing activities from Indian shores."

"This is critical to the development of a self-reliant aviation industry, creating aspirational jobs in aviation finance, besides leveraging business opportunities available in India's financial special economic zones (SEZs), namely, International Financial Services Centre (IFSC)," the minister said.

India is one of the fastest-growing aviation markets. At present, there are about 600 commercial aircraft in operation, and this number is expected to reach 1100 planes by 2027. The theme of the Budget for aviation particularly focussed on giving a boost to the domestic capabilities and setting up of leasing companies in India and making India a Maintenance, Repair and Overhaul (MRO) hub.

As it stands right now, India doesn't have a single aircraft leasing company, at least not a big one to cater to demands of domestic aviation players such as IndiGo, SpiceJet, GoAir or Vistara. All these airlines are heavily reliant on leasing companies for aircraft. More than 90 per cent of their aircraft are leased.

Leasing companies are based out of India primarily because they don't find viable business opportunity in the country. Aircraft leasing requires huge investments from lessors, and India doesn't have competitive debt and equity raising mechanism for such kind of investments.

"There are two issues with leasing. One is the asset funding and interest rates, and the other is cash flows that would come over a period of time. At the same time, at the end of a lease agreement, the lessors have re-leasing risk. Lessors have to be sure that they can earn revenues over a number of years. The budget is trying to say that there will be attempts at developing the aircraft financing and leasing activities in India," says Kinjal Shah, vice president at ratings agency ICRA.

Typically, aircraft leasing is for eight to 10 years, after which the chances of re-leasing are risky. That could be due to the age of the aircraft or improvements in aircraft technology (such as fuel-efficiency etc). Big leasing companies working with Indian carriers include Avolon, SMBC Aviation Capital, Aercap Holdings and BOC Aviation.

The other major aviation-related announcements from Sitharaman was creating an enabling ecosystem for growth in India of MRO industry, disinvestment of Air India, increasing FDI cap, and the role of UDAN (Ude Desh Ka Aam Naagrik) scheme in bridging the rural-urban divide. The domestic airlines get almost 90 per cent of their MRO work done overseas, particularly in the neighbouring countries like Singapore and Sri Lanka. This is due to the cost advantages in those countries and high tax rates in India.

The major MRO work in India is done by national carrier Air India, which executes maintenance work for its own aircraft and some aircraft of Indian and foreign carriers. Air India operates six MRO facilities across the country, including Hyderabad, Delhi, Mumbai, Nagpur (with Boeing), Trivandrum and Kolkata. With the growing fleet size, strategic location advantage and a strong engineering talent pool, India has a potential to become a global MRO hub. In fact, aviation consultancy firm CAPA (Centre for Asia Pacific Aviation) had projected Indian MRO market to reach $2 billion by 2020.

"Strategic investments by foreign investors and facilitation of attracting renowned international MRO players can create a snowballing effect to increase the Indian MRO penetration from current 6 per cent," points out a December presentation from MRO Association of India.

"This would provide significant opportunities for Indian operators and also save valuable foreign payment outflow," says L. Badri Narayanan, Partner, Lakshmikumaran and Sridharan Attorneys.

Although the minister refrained from detailing specific incentives for the sector, she said that "the government will adopt suitable policy interventions to create a congenial atmosphere for the development of MRO in the country".

Aviation sector experts say that this is not the first time MRO services have found a mention in the Budget speech. There have been indications in the past to build India into an MRO hub, which is in line with the 'Make in India' programme. "The issue with airlines is that when they go abroad for maintenance, there's wastage of time. Imagine if they could get maintenance done in India at competitive rates that would save a lot of time of carriers. The government needs to incentivise players in the form of subsidies or lower taxes," says the aviation analyst.

Also read: Budget 2019: Expected Sitharaman to hit 'boundaries' but she took 'steady singles', says Anand Mahindra

Also read: Arun Jaitley terms Budget 2019 blend of good economics, good politics; roadmap for economy to get back on track

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