Union Budget 2019 India: The aviation sector is set to get a major boost with the government proposing to make India a hub of maintenance repair and overhaul (MRO) activities and aircraft financing, besides relaxing foreign direct investment rules for overseas carriers.
Policies would be changed to foster growth in MRO services, a long-standing demand of the industry. Further, aircraft leasing businesses, including leveraging opportunities at the financial special economic zone-International Financial Services Centre (IFSC)-will also be on the agenda. The Budget has also increased allocation to the regional connectivity scheme (Udan) by around 10% to `480 crore in FY20. India boasts of the third-largest domestic market in the world behind USA and China. It carried 139 million passengers in 2018, up 18.6 % year-on-year.
Aviation experts noted that the government will have to create a level playing field in terms of rationalising tax levies on MRO and aircraft leasing activities to fulfill its ambitions. For instance, the domestic MRO activities are taxed at 18% as compared to 5% in nearby countries Sri Lanka, Singapore and Thailand, forcing airlines to do service jobs on aircraft overseas. These services include periodic engine checks, propellers and airframes, besides the intensive and multiple checks at the end of lease tenor of aircraft. The proposed enhancement of foreign direct investment in aviation could ease divestment of national carrier Air India and Jet Airways, which is facing bankruptcy proceedings.
Currently, the FDI limit in scheduled commercial airlines stands at 100% but foreign carriers are barred from holding equity stake in domestic carriers above 49%. This is some kind of a spoiler as non-aviation firms are often not keen to pick up stakes in airline firms. Airlines like Qatar Airways have shown interest in picking up stakes in Indian carriers if the FDI rules are relaxed. Also, increasing FDI cap could help domestic carriers like GoAir to fuel international expansion.
"Relaxing FDI norms will give flexibility to airlines and remove their economic constraints. It bodes well for the proposed disinvestment of Air India as well," Peeyush Naidu, partner, Deloitte India, explained.
The ministry of civil aviation had set up a working group last year to formulate policies for aircraft leasing in India. As per the ministry, passenger traffic is expected to grow six-fold to 1.1 billion by 2040 and the number of operational airport would double to 200 till that period. The fleet size of domestic airlines is poised to reach 2,350 planes in 2040 from 600-odd currently. According to plane makers Boeing and Airbus, this would translate into $5 billion financing each year.
Experts believe the government will have to amend banking regulations for leasing business to take shape in India. "The government should allow banks to participate in leasing. Technical and legal conditions for leasing or re-possessing planes should be simplified," an airline executive noted.
Sunil Bhaskaran, MD & CEO, AirAsia India, believes the Budget proposals could bring down costs for domestic carriers and boost the travel industry. "The proposal to introduce aircraft financing and leasing will bring down the costs for carriers. Also, the announcement of identifying and developing 17 iconic tourism sites will boost domestic air travel demand," Bhaskaran said in a statement.
As per the Economic Survey 2018-19, the annual import of MRO services by airlines in India is currently about `9,700 crore. With airlines’ fleet growing annually by 100, the size of the domestic and imported Indian airline MRO is set to grow annually to `36,000 crore once the fleet size reaches 2,000 aircraft.
"Currently the size of operations to have big MRO players is not there. It will take some more time but we should be ready for it. We need a fiscal push as favourable tax regime to get overseas carriers to undertake MRO services here," Jagannarayan Padmanabhan, practice leader and director, transport and logistics, Crisil, said.
Airbus India also welcomed the Budget proposals for the aviation sector. "We look forward to support from the government for tax reform to incentivise airlines and to boost the maintenance, repair and overhaul industry so that the cost of servicing aircraft in India is not only competitive but distinctly attractive." Anand Stanley, president & managing director, Airbus India and South Asia, said.