Presentation on theme: "MRO Strategy for the Airline In-House or Outsource 17th March 2011"— Presentation transcript:
1 MRO Strategy for the Airline In-House or Outsource 17th March 2011
2 Agenda Indian Aviation Growth MRO Market (World and India) Airline Cost – E&ME&M Activites – IndiaIn-house vs. Outsourcing (Factor to consider)Reasons for current E&M activities in IndiaComparison of In-house vs. Outsource
3 Domestic & International air traffic growth – India CAGR FY 06 – FY 10 : 17 %CAGR FY 06 – FY 10 : 20 %Domestic passenger growthInternational passenger growthPassengers in MillionsPassengers in MillionsFirst few slides I cover the potential India has in the airline and MRO market.CAGR for India’s domestic passenger has been 17% and for International passengers it is 20%.The graph show 9 months data for the financial year Despite that International passenger shows steady growthSource: Published data, research estimates
4 Domestic traffic volume Forecast According to Airbus data, on Global Market forecast - India’s domestic traffic volume will be the highest in the next 20 yearsSource :Airbus GMF2010
5 India fleetCurrent fleet size of India is 411 commerical aircrafts with narrowbody dominating the market.By manufacturer, it is Airbus taking the lead, closely followed by Boeing and then ATR.As we go forward, it is the Airbus NB who will maintain the leading positionTotal commercial fleet size :411Source : MRO Prospector
6 Forecast – South Asia & India No: of aircraftsAccording to Boeing’s data, South Asia will require over 1800 aircraft by 2030India’s fleet is expected to be double by 2020.Source : Boeing CM0 2010Source : MRO Prospector
7 MRO Market forecast USD Billions Global MRO market is around 44.4 billion of which India shares 1.4% (which is approximately USD 620 million) .By 2020 the world market is estimated to be around USD 68 billion and India’s share would be around 2.2% (which is approximately USD 1.5 billion)Source : MRO Prospector
8 MRO value by activities Here is the breakup of MRO market by acitvites for the World and India regionThis is for the current MRO market of USD 620 million.But this will change as more MROs set up shops in India.India ‘s MRO market is approximately USD 620 millionSource : MRO Prospector
9 Value of MRO market in India USD M illionsThe CAGR for MRO market-India is estimated to be 10.7% over the next 10 yearsSource : MRO ProspectorSource : MRO Prospector
10 Typical – Airline major costs The major cost contributors for the airline areFuelPersonnelAcquisition CostAirport related costE&M CostThese are the major cost contributors of the airlines in India irrespective of their typeLet us focus on the E&M cost which is one of the major cost contributors to the airline’s operating cost
11 E&M Activities E&M Activites Labor Material Typical Line Maintenance HighLowIn-houseLight Scheduled ChecksHeavy Scheduled ChecksOutsourcedEngineComponentsAPULanding GearThese are broadly divided E&M activities of an airlineThe first 3 categories are more labor intensive activities. Of which line and light schedule checks are normally done in-house.It does not require facility, it is done during TAT of the aircraft within the operating network / night stops. India has labor advantage for this category of workHeavy checks such as “C” & “D” are also labor intensive. This has higher ground time. For NB it is around 5-7 days for “C” and days for “D” check. India has labor advantage for this work also but this one requires facility and higher skills sets.Currently India’s average aircraft feet age excluding Air India is below 5 years (4.5 years) and hence most of the airlines outsource this activity out of India due to lack of adequate facilities. With growing and aging fleet in India, this category will have to be looked into.Example: Jet Airways with its B737 fleet will have around 10 to 13 “D” Checks each years and around “C” checks each year. This is enough to fill up 2xNB bays for the entire years. Ofcourse these checks needs to be sequenced in order to fall in a pattern one after another and this requires planning.Other like Engine, Components, APU and Landing gear are more material intensive activities. Requires higher skill sets, requires expensive facility and tooling. These are outsourcedBut currently there is enough CFM56 engines in the country to justify setting up one engine over haul shop. Closely followed by APU GTCP-131 model which is coming to a sufficient volume to justify one engine shop in the country. This is a good case of OEMs to set shops in India in collaboration with the airlines.
12 Current Indian MRO market & Outsourcing locations MalaysiaSingaporeUAEJordanChinaFranceGermany% of WorkThis is the graph on percentage of in-house vs. out-sourced activities in IndiaAlong side are the countries where the majority of the work is outsourcedSource : ACAS
13 In house or OutsourceThe Major factors that dictate the decision to Outsource MRO activity In house vs. Outsource are:-Maintenance PhilosophyEconomy of scale / sufficient volumeAvailable resource / – skilled manpower, facility (or build and plan)RegulatoryEconomic feasibilityTax impactsFavorable policies / schemesGeographic locationExisting Service Providers (in-country and regional)Each of E&M Activities needs to be evaluatedE&M strategy has to be periodically reviewedHere are the key factors that an airlines needs to check whilst deciding between in-house & outsourcing. Outsourcing is further split into in-country vs. sending work out of the country.Let us go through each one of these factors. Airlines need to ask these questionsWhat is the MP: like having young fleet – impacts the E&M activities of the airlineIs there sufficient volume in the airlines to do work in-houseAre there good availability of resources: such as trained / trainable manpower. Financial health of the airlineWill the Regulatory approvals have an impactHow does the economic feasibility look considering the time & cost of training & building of the facility.What are the tax impact: Such as service tax, sales tax, withholding tax, corporate tax, customs and duties. Does these taxes makes the project uneconomical as compared to outsourcingAre there favourable policies and schemes such as the SEZ which removes all these tax burden.Is there advantage of geographical location to tap regional businessWho are the existing Service Providers – can they be locked in with good price with long term contractEach of E&M Activities shown in earlier slides needs to be evaluated considering these factorsE&M strategy has to be periodically reviewed by airline with long term viewOutsourcing is good and outsourcing in-country even better . But are there any of the above factors that’s making it unviableMaintenance is mandatory. But airlines have to decided which one is most economical. Be it expanding the in-house capability OR outsourcing.
14 E&M Activities Line Maintenance / Light Maintenance Checks Does not require facility (done within the operating network)More labor intense, less downtime and lower skillsCurrently it is better to do in-houseHeavy Scheduled Checks (Base Maintenance)Mostly outsourced due to shortage of facilitiesRequires facilityMore labor intensive, higher ground time and higher skillsHas good potential for in-country MROs but there are service tax, sales tax, VAT, customs dutyCollaboration model coupled with SEZ benefits.Engines / APU / Components / Landing GearOutsourced (out of country)Requires sufficient volume for overhaul shopsMore material intensive, high skillWithholding taxCollaboration model coupled with SEZ benefits for some selective typesLet us apply these factor to the maintenance activities.Line / Light Maintenance Checks – Currently it is economical to do this work in-house.In-country outsourcing is possible but there is Service tax problem- For Heavy Checks – Collaboration model such as JV with MRO or OEM with SEZ benefits is a good option.- There are few Engine & APU models which are increasing in volume to justify MRO in India.It is coming up as a good feasible case for in-country outsourcing.Airlines can go for collaboration with OEMs or MRO with SEZ benefits
15 In-house vs. Outsourcing Sufficient volumeComplete controlProactive for uncertaintyThird party revenueLong lead timeInvestment CostInflexible to fleet changes – DownsizingInflexible to cater to mix fleetOutsourceQuick startupPredictable cost (PBTH model)Contracts – Performance & PenaltyFlexible to fleet changesAirlines can have mix fleetReactive to uncertaintyCould have exit penaltiesTaxes: withholding, sales tax,Here are some of the pros and cons of In-house vs. Outsourcing.In-house one need sufficient volume to justify setupUnder in-house you have full control which is not the case in outsourcingOne can be pro-active for any problems that is likely to come up like, avoiding labor strike. Where as in case of outsourcing it is more reactive. Such a case comes under excusable delays and burden the airline with excess cost.Excess capacity can be used for third party revenue. But again third party needs to do its feasibility And check whether sending work is an economical option, despite tax burden.Some of the negative points for in-house capability is that it requires longer lead time for setupThere is high investment costIt is inflexible to fleet changes such as downsizing / phase out of aircraft during bad time, which may result in excess capacityIt is inflexible for mix fleet. Because each aircraft type will require ramp up costSome of the pros of outsourcing is that airline can get support from day one on your fleet if the MRO is existingThen under PBTH there is predictable costBut airline needs to be careful and should have watertight contract which ties performance guarantees with penalties.Some of the negatives for outsourcing areReactive to problem. Airlines would only know once the performance deteriorates or work stopsOutsourcing may not have investment cost but the contract may have lock in period with exit penalties to protect the investment done by the MROOutsourcing in country has tax problems like service tax, sales tax and withholding tax for partial work done in country.In a nut shell there is no fixed model. Therefore I repeat, that airlines need to validate the E&M strategies periodically to see what's the best option taking a long term view and doing risk analysis.
16 Thank you Contact: Haris M. Ansari General Manager - Corporate Projects PlanningJet Airways (India) LimitedMobile:Direct (Tel):Website:
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