Aviation majors plan supply units in India

This will enable companies to spend the money kept for stocking spares under other heads.

Leading aviation companies like Boeing subsidiary Aviall, Lufthansa Technik, Singapore-based ST-Aerospace, France-based ATR, and KLM are planning to set up supply centres for aircraft components in the country.

At present, carriers like Air India, Jet Airways, Kingfisher, SpiceJet, Go Air and IndiGo have to either import spare parts in bulk and stock them or get into lease agreements with various manufacturers.

Depending on the fleet size and its age, airlines buy 30-50 per cent of the components that they need, and take the rest on lease. Expenditure on spares and components is a considerable part of engineering and maintenance, which account for over 9-10 per cent of the total operating expense of an airline.

For instance, Air India, which has a large and ageing fleet, has to provide $35 million-$40 million for spare parts during any time of the year. This figure is close to $4 million for newer carriers like SpiceJet and Kingfisher.

"Once these supply centres are set up in India, they (airlines) will have a common facility to shop for spares any time. This will decrease the transportation time. The ready availability of components will also decrease the need to stock spares in bulk. The capital spent on this can be used elsewhere," said Aviall MD Sachin Taparia.

Aviall, which will set up the first two supply centres in Nagpur and Noida, is one of the largest providers of aircraft spares and components in the world.

"Also, airlines sometimes do not know when to stock what, which is why investments are often not done in the right place and at the right time. Hence, Aviall will also study the fleets of various carriers and provide solutions," added Taparia.

Several domestic airlines like SpiceJet are also in talks with their international suppliers to set up supply centres in the country.

"We have agreements with KLM, which supplies us spare parts. We have been in talks with them for setting up supply centres in India so that we can buy from here itself," said a senior SpiceJet executive.

Lufthansa Technik, which supplies spares to Jet Airways, Simplifly Deccan and Kingfisher, is planning to set up a supply centre in Bangalore later this year.

Boeing estimates the market for spare parts for the Indian aviation industry to reach around $3 billion in the next few years.

"Since most airlines are getting new aircraft now, they will require major overhaul and change of spare parts by 2011, and that is when the spares market in India will start booming," said Taparia.

However, the industry has to overcome major taxation and infrastructure issues before the market can really boom.

For the starters, since none of the components are manufactured in India, the suppliers will have to depend on imports, which mean Customs duties of up to 50 per cent, a value-added tax of 12.5 per cent and an octroi of 4 per cent. Airlines do not have to pay these taxes when they import the parts themselves under a government policy.

"These tax issues have to be resolved before any company can have viable operations in India. Now, the only way out is setting up these centres in SEZs (special economic zones)," Taparia added.

Availl's two supply facilities are being set up in SEZs.

Lack of skilled labour is another issue. "Our agreements with various component manufacturers also include the labour and service, which these companies provide. Since these suppliers are not providing the labour, we cannot spend extra on labour ourselves. For such services, setting up of MROs (maintenance, repair and overhaul) is important so that we get these services along with the spares," said Bruce Ashby, CEO of low-cost carrier IndiGo.

Agrees Taparia. "Setting up of MROs is extremely important. Then, supply centres like Aviall will get into agreements with MROs instead of getting into contracts with airlines," he says.

Ongoing agreements with various component manufacturers would also be a hindrance to initially finding a market in the country.

"Low-cost airlines like ours do not import a large chunk of spares and mostly get into agreements with various companies. Since we have to respect the existing agreements, only 5-10 per cent of our total spend on spares and components will be eligible to be converted into agreements with suppliers in India. But this chunk will be enlarged once the market expands," said Ashby.