Reforms take wing

Airlines with 20 aircraft can fly abroad, new aviation policy pushes regional linkages

The Union Cabinet on Wednesday cleared the new Civil Aviation Policy, paving the way for better regional connectivity and making it easier for new airlines to fly abroad by amending the controversial 5/20 rule.

Now, any domestic airline can fly abroad if it deploys 20 planes or 20 per cent of its total capacity for domestic operations, whichever is higher. The proposal to amend 5/20 rule had divided the industry with the Federation of Indian Airlines opposing the relaxation and Tata group-owned airlines AirAsia India and Vistara seeking it.

SKY IS NO MORE THE LIMIT
Rs 2,500 fare cap for one-hour flights; hybrid till for determination of future tariffs at all airports

• End of 5/20 era: Domestic carriers will no longer have to operate for five years before they can fly abroad. They, however, will still have to deploy 20 aircraft or 20% of total capacity in India, whichever is higher
• Who could benefit: Vistara, with 10 jets, is at least a year away from having 20 planes
• AirAsia India has only six A320 planes but its CEO said it would accelerate fleet expansion plans

While Vistara, with 11 jets, and AirAsia, with six, are being seen as main beneficiaries, executives at both airlines said they wanted complete abolition of the 5/20 rule. AirAsia group CEO Tony Fernandes said the 20 aircraft requirement was too big. Fernandes, however, hailed the overall policy and said it was a "big day" for Indian aviation. "Almost an end to vested interests. Power to the people. Well done @narendramodi (PM Modi). You kept your word," Fernandes wrote on Twitter.

Airline stocks rose by up to 3.5 per cent after the Cabinet decision. Shares of SpiceJet went up by 3.5 per cent to close at Rs 66.40, InterGlobe Aviation gained 1.9 per cent to Rs 1,008 and Jet Airways rose 0.2 per cent to Rs 561 on the BSE.

Vistara CEO Phee Teik Yeoh said, "It is very encouraging to see that the government has established a policy which promotes the overall growth of the industry. We would have preferred, of course, that the 5/20 rule be completely abolished to ensure that Indian aviation achieves its full potential."

The policy aims to enhance regional connectivity through a mix of sops, viability gap funding and fare cap of Rs 2,500 for one-hour flights. The government plans to revive unused airstrips and develop no-frills airports. A special scheme in this regard will be rolled out in the next quarter. The government will not fund the regional connectivity scheme through two per cent levy on domestic and international tickets, as proposed in the draft policy last year. Instead, viability gap funding will be provided through a small levy per departure on domestic flights.

Most airlines have opposed the fare cap on one-hour flights. Mittu Chandilya, former CEO of AirAsia India, said: "The surprising part of the policy was the Rs 2,500 cap. By putting a mandate on anything commercial, you are treading on dangerous line. How can an airline keep ticket prices low when costs are high?"

However, Sharat Dhall, president, Yatra.com was quoted by Press Trust of India as saying, "By subsidizing the shorter domestic routes for the airlines, the government has given a strong push to regional connectivity by capping fares and thereby expanding the market."

The civil aviation ministry's policy thrust is to encourage regional connectivity and to boost maintenance-repair-overhaul (MRO) business and aerospace manufacturing industry in India. The draft policy had proposed zero service tax on MROs but the final policy is silent on it. However, in a relief to MRO service providers, airport royalty and additional charges will not be levied for five years.

However, the ministry's plan to auction additional traffic rights to countries within 5,000-km radius did not get the Cabinet's approval. There have been reservations regarding proposal to auction traffic rights and the proposal had been opposed by global airlines.

The government has also given go-ahead for open-skies agreements on a reciprocal basis with South Asian Association of Regional Co-operation (SAARC) members and countries located beyond 5,000 kms.

Passenger numbers on domestic flights jumped 21 per cent in 2015 to more than 80 million. The government aims to increase that number to 300 million by 2022. International travel is growing more slowly, at 9 per cent a year, but newer airlines are eager to start flying overseas where routes can be more lucrative than in the fiercely competitive domestic sector.

The government also approved hybrid till model for determination of future tariffs at all airports unless specified in concession agreements. A hybrid till model is a combination of the existing single till model, under which all airport activities - including aeronautical and commercial - are taken into consideration while determining airport charges, and the dual till model, under which only aeronautical activities are taken into consideration to fix airport charges. While single till leads to fewer charges for airlines, a dual till increases revenue of airport operators. A hybrid till would help woo private players to develop more airports in India, while leading to cost escalation for the airlines.

The government has also modified the route dispersal guidelines, increasing the number of Category-I routes (largely metro-to-metro) from 12 to 18. This will result in more flight to Kashmir and North East.

Amber Dubey, partner and head, aerospace and defence, KPMG India said, "The highly illogical and anti-competition 5/20 rule has been replaced with 0/20, which effectively translates to 3/20 as it will take at least 3-4 years to have a 20 aircraft fleet." Dubey said the policy is unfortunately silent on issues like formation of an independent Civil Aviation Authority (CAA), privatisation of Air India and listing of AAI.