Air India sale: Non-commitment to protect global routes a deal dampener?

Govt will retain Air India's international bilateral flying rights for only six months which may dis-incentivise potential buyers if the rights are re-allocated to other airlines after that

Governments in the past had always provided Air India preferential treatment while allocating bilateral flying rights. These rights, the result of air service or transport agreements signed by India with nations across the world, specify the number of seats or frequency of flights that can be operated by a country with the other. 

India has air-service agreements with 115 nations that allow millions of seats (or passengers) every week to be flown by airlines between destinations to and from these nations. These sovereign rights are exclusively owned and allocated by the Indian government.

The preliminary information memorandum for selling Air India released by the government states that potential buyers can retain these rights only for a period of six months without specifying whether they would be given to other private Indian airlines after the expiry of this period.

With Air India being privately owned, the Indian government would not be obliged to protect the airline’s rights.

“Bilateral rights are given in perpetuity. They may be sovereign rights but the entire sale of Air India is based on the strength of its operations and the destinations that it flies to. I am not aware of the technicalities but you cannot tell the buyer after six months that your bilateral rights are not yours anymore. That would be detrimental to the disinvestment process,” said Jitendra Bhargava, former executive chairman of Air India.  

The big deal with Air India’s bilateral rights

As of November 2019, the national carrier had been allocated more than 200,000 seats a week to operate flights one way to 42 cities in more than 30 nations across the world. India’s total entitlements touch almost a million on these routes. At present, half of all international passenger traffic by India’s domestic carriers is handled by Air India and its subsidiary, Air India Express. 

On some of the most lucrative routes, Air India has been allocated a lion’s share of the rights in tune with the previously stated policy of protecting the national airline. For instance, under the air services agreement between India and the UAE, both nations have a capacity entitlement of a little over 66,500 seats a week in one direction. 

Almost half these seats have been allocated to Air India. A fourth of 51,000 seats on the Abu Dhabi route are with Air India. More than 80 per cent of the bilateral rights with India on the Sharjah route and various destinations to Saudi Arabia are with it. It has a virtual monopoly to fly to the US, Canada and certain European destinations. Though Jet Airways took away a part of Air India’s business post liberalisation of rights allocation policy in 2004 and despite the recent incursions of airlines like Indigo and Spicejet on the Gulf route, Air India still rules the international skies among domestic carriers flying abroad.

Take the case of non-Gulf routes like the US and Canada. Indian carriers can operate any number of weekly flights to the US. But Air India is the only Indian airline which, with its long-haul wide-bodied aircraft, is capable of operating regular flights to the country. It has been allocated 37 weekly one-way flights by the Indian government, of which it has used 33. It has been allocated seven weekly flights to Canada of which its uses only half its entitlement.

An average of 13,234 passengers flew one way between the two countries every week. While Air India is the dominant carrier to the US, it faces much stiffer competition from other international airlines on its European routes. Nevertheless, it is the only domestic airline operating to many countries in Scandinavia and Africa. 

“Air India should have grandfather rights over these bilateral rights as they have some great valuable slots at airports abroad. There is great value in assuring these rights for years to the new buyer. Six months is a big disincentive for anyone. Will the new buyer have to again request the government to retain these rights after six months? It will take six months for any buyer to just settle down in managing the airline. I don’t know what the government is trying to achieve with this condition” said Sanat Kaul, president of International Foundation for Aviation, Aerospace & Development

The case for re-allocating Air India’s rights  

The discretionary nature of allocation of bilateral rights, where the Indian government has allocated rights keeping Air India’s interests in mind over the years, has had repercussions on the ground. A 2015 Vistara-sponsored report by the Centre for Aviation (CAPA) noted, “The cruel irony is that the Ministry of Civil Aviation exhorts Indian carriers to increase their utilisation of bilateral entitlements to keep pace with foreign airlines, while at the same time denying rights to certain Indian carriers that are prepared to do exactly that. India’s bilateral policy stance should be clarified to provide transparency and predictability allowing carriers to better plan and to meet India’s national interests and economic ambitions.”

In many ways, the sale of Air India that would facilitate the allocation of more bilateral flying rights to other domestic private airlines will also be another fructification of a policy remnant of the Atal Bihari Vajpayee era. 

In 2003, a committee on civil aviation headed by former cabinet secretary Naresh Chandra and with HDFC director Deepak Parekh as one of its members, had red-flagged the preferential treatment of Air India when it came to allocating bilateral rights. The Naresh Chandra committee had recommended, “Private airlines based in India should be allowed to provide international air transport services to and from India. Private airlines have spare capacity in the domestic segment and under-capacity in the international segment (particularly during the peak season), and we are presently using barely 40% of our bilateral rights. In view of this, it makes eminent sense to allow domestic private carriers to operate international services.”

The expansion of international operations of other private airlines and re-allocation of Air India’s repository of bilateral rights more equitably after the six-month period for its new buyers could well achieve what the Naresh Chandra committee had recommended to the Vajpayee administration almost two decades ago. 

A look at Air India’s slot utilisation paints a dismal picture. With 140,000 seats a week, excluding the unlimited ones to nations with which India has open sky agreements, the national airline was utilising just 110,000 seats. Of the 273 weekly flights it was allowed on other destinations it was flying just 97 a week. 
 

Air India’s under-utilisation of its bilateral rights is manifested by the dynamics that have unfolded on the Gulf route specifically to Dubai and Abu Dhabi in the UAE. These are the most popular destinations for Indians – either as the final stop or as a layover for flying to Europe and North America. In 2004-05, the Indian government liberalised its bilateral rights policy and significantly increased seats every week to many countries including the UAE. 

Some private airlines like Jet Airways started flying on this route.  The Comptroller and Auditor General (CAG) of India had red-flagged how Air India lost out in this liberalised policy framework especially on lucrative Gulf routes in reports tabled in 2011 and 2016 mostly due to bad management decisions guided by political considerations.

The unofficial “sixth-freedom” rights came under scrutiny. Though global aviation is governed by five official rights, bilateral agreements often incorporate four others. According to International Civil Aviation Organisation (ICAO), sixth-freedom rights allow a particular airline to carry traffic between two other countries through its home country. 

The CAG had observed, “The sequence of events relating to the Dubai sector clearly demonstrates the one-sided benefits to Emirates airline/Dubai through enhancement of entitlements and additional points of call in India. This evoked repeated protests from Air India about the funnelling of sixth freedom traffic by Emirates through Dubai from interior locations in India without any reciprocity. Even change of gauge facility at Dubai airport that would have provided an opportunity to funnel traffic in smaller capacity aircraft from interior Indian locations and take them forward to US/UK/Europe in larger capacity aircraft was not adequately pursued (by the government). Clearly, while Dubai managed to protect interests of its airlines, India’s ministry of civil aviation failed to obtain appropriate quid pro quo while granting concessions.”

Air India’s potential buyer would have a challenging time wresting the lucrative sixth-freedom traffic from various international airlines. But undeniably, the commercial potential of this traffic is huge. While it is difficult to ascertain the monetary value of sixth-freedom traffic that can be routed to US and Europe through middle-eastern hubs like Dubai, the CAG had estimated that such traffic constituted more than half the traffic of major international airlines. 

This ranged from 71 per cent of Etihad’s total traffic from India, 66 per cent for Emirates and 77 per cent for Lufthansa, among others. When the CAG asked Air India to ascribe a monetary value to the loss caused by the diversion of traffic by other airlines through Abu Dhabi and Dubai, the national carrier pegged the losses at $636 million and $244 million every year respectively. Clearly, for Air India’s potential buyer, who wouldn’t be bogged down by political compulsions or bureaucratic procedures, this represents a huge market to capture from other more efficiently run global airlines.  

Kangaroo-in-the pouch approach is dead

The preliminary information memorandum states that post-disinvestment bilateral flying rights would continue to be with the buyer only for six months. These include both utilised and unutilised slots of the national airline in various countries. In its 2018 memorandum, there was no clarity to potential buyers on these rights being part of the package. The document simply stated bidders would be provided information about Air India’s bilateral rights ‘at the request for proposal stage'. The 2020 memorandum states that after the expiry of six months, “continued availability of such bilateral flying rights shall be as per applicable ministry of civil aviation’s sector regulations.” India’s National Civil Aviation Policy 2016, a brainchild of the Modi government to radically alter India’s domestic and international aviation landscape, had set out an elaborate plan to allocate bilateral rights to various airlines to fly to 115 nations with whom India has signed air service agreements over the years.

The government had planned to enter into more ‘open-sky agreements.’ An open-sky policy provides for unlimited flights between two countries with no restrictions on either the weekly number of seats or frequency of flights. Under the erstwhile Manmohan Singh government, India had signed an open-sky policy with the US. Under the Modi government, it signed one with Japan in 2017. India also has similar arrangements with Bhutan and various South Asian Association for Regional Cooperation (SAARC) nations for specific tourist destinations. 

Before the revamp of the aviation policy, the ministry of civil aviation would send requests by other domestic airlines (like the erstwhile Jet Airways) for bilateral slot allocation to Air India for its comments. Air India could agree to such requests if its entitlements were being under-utilised or turn down the request if it saw good business on the route. Air India had a virtual monopoly for lucrative Gulf routes for many years with no other domestic airline being allocated those rights.

The intention was to “protect Air India’s” international flying rights at any cost. Infact in July 2014, then minister of state for civil aviation in the Modi government, GM Siddewara, had told Parliament, “The Government has laid down guidelines for allocation of traffic rights on international sector, which provide a level playing field to all eligible private airlines while retaining the primacy of the national carrier, namely, Air India. The allocation of traffic rights to an applicant airline depends on the availability of traffic rights under respective bilateral air services agreement and the traffic rights are allocated to private Indian carriers after considering the operational requirements of Air India.” With Air India up for sale, this kangaroo-in-the-pouch approach could well be history once the sale is complete.

What it means for India’s other private airlines

Indigo, Vistara and Spicejet, which have announced big global ambitions, could be allocated some of Air India’s existing bilateral rights after the expiry of the six-month window. Reports suggest these airlines have been asking for more international rights but the government hasn’t yet taken a call on granting the same. Nevertheless, India’s airlines seem to be readying themselves to receive at least a part of Air India’s lucrative rights post-disinvestment. 

Vistara has reportedly ordered six wide-body planes as part of its plan to almost double its fleet strength to 42 planes by March 2020. This includes the wide-bodied Boeing 787 Dreamliners, which would allow it to fly to the US and medium-haul planes like Airbus A 321 Neo which would bring Europe within its operational reach. Indigo and Spicejet too are reportedly eyeing wide-bodied planes for operating long-haul flights to North America and Europe. 

India is sitting on bilateral rights of almost a million seats a week on routes to which Air India flies currently. While some of these seats especially in the Gulf, South East Asia and certain European destinations have been given to private airlines, the government is still unable to use its entitlements because India’s domestic airlines do not have the requisite fleet strength, airport slots and operational capabilities to use them.

For instance, though India has bilateral agreements with various African nations, no Indian airline except Air India operates these destinations. To some popular destinations like Egypt and Ethiopia for which Air India has bilateral rights, it chose to allow Air Egypt and Ethiopian Airlines to transport passengers as part of its code-share agreements with them. Similarly, Air India has been allocated 11,200 flights a week to Netherlands but doesn’t service the country. KLM, Netherlands' national airline, ferried almost 250,000 passengers annual on this route. The erstwhile Jet Airways which operated to Amsterdam ferried almost 200,000 passengers a year. 

Indigo which also has a part of the bilateral rights flies to Amsterdam via Istanbul with a code-share agreement with Turkish Airlines. With wide-bodied planes in its kitty, Indigo could well reclaim Jet’s passengers with non-stop flights to Amsterdam. A report by Kotak Securities in March 2019 stated, “We believe Indigo can expand the international market similar to its expansion of the domestic market, by connecting new destinations at affordable fares. However, we note that expansion of international operations is subject to bilateral flying agreements negotiated separately with each country. Possible vacating of some of these flying rights by a competitor can be a positive for Indigo.”

With the government clearly stating that it won’t guarantee rights beyond six months to a new buyer, the so called ‘vacation of slots’ post disinvestment could well be a boon for Indigo and others. An official involved in the disinvestment process told Business Standard, “I don’t see Air India’s rights being given to other airlines for the next two years at least. That’s because at present only Air India has the capacity for long haul flights to Europe and America. Moreover other airlines won’t ask for rights until they have slots at international airports. Other airlines need to get attractive slots at airports to make money from any rights given to them. Thirdly, the financial health of Indian airlines is not good at the moment. Starting long haul international operations involves making losses on these routes for many months before hitting the sweet spot. With most airlines running losses, they won’t be inclined to do that till their financials improve.” The official gave an example of Indigo’s recent decision to operationalise long haul flights using Airbus A-320XLR’s only by 2023-24. 

The official said, “Indigo could well have leased these planes and started flying to US and Europe this year itself. The fact that it has decided to wait for a couple more years before asking for bilateral rights and operating on long haul routes shows that it wants to in a better financial position to move away from its core low cost business model.”  

Jet’s bilateral rights in Air India’s kitty

The disappearance of Jet Airways has made Air India’s sale more lucrative in more ways than one. After Jet Airways closure in early 2019, Air India, Indigo and Spicejet have gained the airline’s international traffic – especially from the Gulf. Jet Airways had a 31 per cent market share of international passengers among India’s domestic carriers in May 2018. With Jet’s disappearance, Air India managed to increase its market share to 58 per cent from 44 per cent in May 2019 as compared to the same period last year. Indigo meanwhile increased its market share to 27 per cent from 16 per cent. Much of this was from Jet’s bilateral rights traffic on Gulf routes. Jet’s bilateral rights, a part of which were allocated to Air India, have also been put on sale. 

These include seven flights (or 1,792 seats) a week to Hong Kong, 1,650 seats a week from Jet’s rights to Singapore, 14 flights (or 4,788 seats) a week between Mumbai/Delhi and Heathrow, 5,852 seats a week to Dubai and 5,670 seats a week to Qatar. While this allocation is ‘on a temporary basis’, the effect it would have on bagging slots at various airports further sweetens the deal. Unlike bilateral rights, airport slots are not negotiated by governments and therefore do not constitute ‘sovereign rights.’ These are assigned by airport operators or an independent body setup in any country to decide slots. 

Airport slots are specific times and dates allocated to airlines which allow them to schedule landings and plan their itineraries. While the Indian government officially denies any link between the bilateral rights it has negotiated till date and allocation of airport slots, any airline that has been assigned higher bilateral rights would be allocated more airport slots worldwide assuming it is utilising most of its bilateral rights. On sale are Air India’s 2,900 international airport slots. Almost 500 of them are at Gulf airports like Dubai, Abu Dhabi, Jeddah and Doha among others. 

Air India has 74 slots at the two London airports in addition to Birmingham. Evidently, the challenge for any new buyer would not just be retaining bilateral rights after the expiry of six months but also Air India’s slots in the future. According to International Air Transport Association’s (IATA) ‘use it or lose it’ guidelines, any airline which fails to utilise atleast 80 per cent of its allotted slots in a particular season could lose it to other airlines.