There have been numerous recent discussions on the need for enhanced development in the Indian civil aviation industry in order to drive investment. The 2012 change in government policy, allowing for 49% foreign direct investment (FDI) in the industry, has definitely helped reshape the sector, with the possible entry of several airliners still on the anvil. The recent removal of the 5/20 rule, previously a deterrent to FDI in the Indian aviation industry, can be seen as a move to incentivize airliners to consider operating in India.
On the economic front, India appears to be the only nation among Brazil, Russia, India, China, and South Africa (BRICS) to show a lot of promise. The country’s impressive growth rates are most definitely an enabling factor for FDI, with forecast data indicating an average GDP growth rate of about 7.5% for the next five years.
However, India lags behind some of its emerging market counterparts regionally and globally with respect to the ease of doing business. The country, however, appears to be taking several initiatives to make business easier, and the recently released aviation policy by the Ministry of Civil Aviation (MOCA) can be viewed as another step in the right direction to improve the business environment and attract more investment opportunities.
So what are the major changes and implications of the new aviation policy?
- 5/20 to 0/20 Rule – In October 2004, the Union Cabinet stipulated that Indian carriers had to complete 5 years of domestic operations and own a fleet of 20 aircraft in order to fly internationally. This rule has now been quashed and airliners can now commence international operations if they deploy 20 aircraft or 20% of the total capacity (average number of seats on all departures put together) for domestic operations, whichever is higher. This change is certainly encouraging news for all new airliners that have just commenced operations and for airline companies that were potentially considering expanding to India. Among those benefitting from this rule are companies such as Air Asia India and Vistara, with Tata owning a stake in both these companies. The removal of the 5/20 rule and the recently introduced provision for 100% FDI in airlines will certainly help augment India’s position as a civil aviation hub.
- Regional Connectivity Scheme (RCS) – Under this scheme, the airfare will be capped at a price of approximately $37, indexed to inflation, for a one-way flight of between 500 km and600 kilometers. The scheme is expected to be launched for flights operating at underserved/un-served airstrips. The revival of the airports is expected to take place through a public-private partnership (PPP) model, and the scheme is expected to raise the net utilization rate of airstrips/airports in India from just 16%, given that only 75 of the 450 airstrips/airports have scheduled operations. When the new RCS policy comes into effect in the second quarter of 2016-2017, people living in small towns will have cause for cheer, as they can expect cheaper flights from Tier-II and Tier III cities.
Under the RCS, MoCA makes a provision for viability gap funding (VGF) in relation to passenger and cargo operations for airport charges, landing, parking, terminal navigation landing charges, (TNLC) and so on. - Code Sharing Agreements1
Code sharing for domestic routes – Indian carriers will be free to enter into domestic code-share agreements with foreign carriers to any point in India available under the respective Air Service Agreements (ASA). This policy may not have a major impact, as not many of the Indian carriers have entered into code-sharing agreements for domestic routes. With respect to international code-sharing agreements, the partnership between the designated carriers of India and foreign carriers will be liberalized as per the provisions relating to code-share arrangements in the ASA, and no prior approval from MoCA will be required. The designated carriers of India simply need to inform MoCA 30 days prior to commencing the codeshare flights. - Airport Development – Of the 125 airports under the Airport Authority of India (AAI), 95 are operational and 71 have scheduled commercial operations as of January 1, 2016. To accelerate the development of airports, AAI will invest in new greenfield and brownfield airports. These expected developments signal the upcoming opportunities for infrastructure companies.
- Maintenance, Repair, & Overhaul (MRO) Business Development – The MRO business in India is estimated at approximately $750 million, 90% of which is currently spent outside of India in countries such as Sri Lanka, Singapore, Malaysia, and the United Arab Emirates (UAE). In order to develop local competency in this area, the government is keen to develop an MRO hub in India, with the target of attracting business from foreign airliners and other stakeholders, and eventually growing to become the largest hub in Asia. As part of this initiative, the tools and tool kits used by the MRO companies have been exempted from the customs duty. To enable economies of scale, the restriction of one year for the utilization of duty-free parts has been extended to three years. In addition, foreign aircraft brought to India for MRO work will be allowed to stay for the entire period of maintenance or up to 6 months, whichever is lesser, provided they undertake no commercial flights during the stay period. With the increase in aircraft leasing for commercial activities, manufacturers such as Airbus, Boeing, and Bombardier are closely looking to set up MRO businesses in India, and the growth of these businesses will most definitely generate additional gross value add from this sector.
The new aviation policy will certainly help to catalyze the industry’s transformation, helping to take flying to the masses and opening up the skies to foreign investment. Among major announcements associated with the policy are the scrapping of the 5/20 rule and RCS, which have definitely caught the eye of the stakeholders. The RCS policy, which should help increase flight operations from tier 2 and 3 cities, should help facilitate job creation as airports expand, and the improved connectivity should also help spur economic growth in these cities. It will, however, be interesting to see how the government effectively implements the RCS, given that airliners have clearly voiced their unwillingness to incur losses resulting from the low price cap.
Although the new aviation policy is well thought out and progressive, the government still appears to be silent on the issue of the debt-ridden Air India. Is privatization of the national carrier still on the cards?
1A Code-Share Agreement between two airlines allows one airline (Marketing airline) to sell seats on a flight operated by another airline (Administrating airline), with the airline code and flight number of the marketing airlines. This helps in seamless connectivity for passengers.
