MRO Strategy for the Airline In-House or Outsource 17th March 2011

Agenda Indian Aviation Growth MRO Market (World and India) Airline Cost – E&M E&M Activites – India In-house vs. Outsourcing (Factor to consider) Reasons for current E&M activities in India Comparison of In-house vs. Outsource

Domestic & International air traffic growth – India CAGR FY 06 – FY 10 : 17 % CAGR FY 06 – FY 10 : 20 % Domestic passenger growth International passenger growth Passengers in Millions Passengers in Millions First 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 2011. Despite that International passenger shows steady growth Source: Published data, research estimates

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 years Source :Airbus GMF2010

India fleet - 2010 Current 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 position Total commercial fleet size :411 Source : MRO Prospector

Forecast – South Asia & India No: of aircrafts According to Boeing’s data, South Asia will require over 1800 aircraft by 2030 India’s fleet is expected to be double by 2020. Source : Boeing CM0 2010 Source : MRO Prospector

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

MRO value by activities Here is the breakup of MRO market by acitvites for the World and India region This 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 million Source : MRO Prospector

Value of MRO market in India USD M illions The CAGR for MRO market-India is estimated to be 10.7% over the next 10 years Source : MRO Prospector Source : MRO Prospector

Typical – Airline major costs The major cost contributors for the airline are Fuel Personnel Acquisition Cost Airport related cost E&M Cost These are the major cost contributors of the airlines in India irrespective of their type Let us focus on the E&M cost which is one of the major cost contributors to the airline’s operating cost

E&M Activities E&M Activites Labor Material Typical Line Maintenance High Low In-house Light Scheduled Checks Heavy Scheduled Checks Outsourced Engine Components APU Landing Gear These are broadly divided E&M activities of an airline The 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 work Heavy 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 21-30 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 40-53 “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 outsourced But 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.

Current Indian MRO market & Outsourcing locations Malaysia Singapore UAE Jordan China France Germany % of Work This is the graph on percentage of in-house vs. out-sourced activities in India Along side are the countries where the majority of the work is outsourced Source : ACAS

In house or Outsource The Major factors that dictate the decision to Outsource MRO activity In house vs. Outsource are:- Maintenance Philosophy Economy of scale / sufficient volume Available resource / – skilled manpower, facility (or build and plan) Regulatory Economic feasibility Tax impacts Favorable policies / schemes Geographic location Existing Service Providers (in-country and regional) Each of E&M Activities needs to be evaluated E&M strategy has to be periodically reviewed Here 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 questions What is the MP: like having young fleet – impacts the E&M activities of the airline Is there sufficient volume in the airlines to do work in-house Are there good availability of resources: such as trained / trainable manpower. Financial health of the airline Will the Regulatory approvals have an impact How 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 outsourcing Are there favourable policies and schemes such as the SEZ which removes all these tax burden. Is there advantage of geographical location to tap regional business Who are the existing Service Providers – can they be locked in with good price with long term contract Each of E&M Activities shown in earlier slides needs to be evaluated considering these factors E&M strategy has to be periodically reviewed by airline with long term view Outsourcing is good and outsourcing in-country even better . But are there any of the above factors that’s making it unviable Maintenance is mandatory. But airlines have to decided which one is most economical. Be it expanding the in-house capability OR outsourcing.

E&M Activities Line Maintenance / Light Maintenance Checks Does not require facility (done within the operating network) More labor intense, less downtime and lower skills Currently it is better to do in-house Heavy Scheduled Checks (Base Maintenance) Mostly outsourced due to shortage of facilities Requires facility More labor intensive, higher ground time and higher skills Has good potential for in-country MROs but there are service tax, sales tax, VAT, customs duty Collaboration model coupled with SEZ benefits. Engines / APU / Components / Landing Gear Outsourced (out of country) Requires sufficient volume for overhaul shops More material intensive, high skill Withholding tax Collaboration model coupled with SEZ benefits for some selective types Let 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

In-house vs. Outsourcing Sufficient volume Complete control Proactive for uncertainty Third party revenue Long lead time Investment Cost Inflexible to fleet changes – Downsizing Inflexible to cater to mix fleet Outsource Quick startup Predictable cost (PBTH model) Contracts – Performance & Penalty Flexible to fleet changes Airlines can have mix fleet Reactive to uncertainty Could have exit penalties Taxes: withholding, sales tax, Here are some of the pros and cons of In-house vs. Outsourcing. In-house one need sufficient volume to justify setup Under in-house you have full control which is not the case in outsourcing One 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 setup There is high investment cost It is inflexible to fleet changes such as downsizing / phase out of aircraft during bad time, which may result in excess capacity It is inflexible for mix fleet. Because each aircraft type will require ramp up cost Some of the pros of outsourcing is that airline can get support from day one on your fleet if the MRO is existing Then under PBTH there is predictable cost But airline needs to be careful and should have watertight contract which ties performance guarantees with penalties. Some of the negatives for outsourcing are Reactive to problem. Airlines would only know once the performance deteriorates or work stops Outsourcing may not have investment cost but the contract may have lock in period with exit penalties to protect the investment done by the MRO Outsourcing 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.

Thank you Contact: Haris M. Ansari General Manager - Corporate Projects Planning Jet Airways (India) Limited Mobile: +91 9820507287 Direct (Tel): +91 22 40191205 Email: hansari@jetairways.com Website: www.jetairways.com