The value of autopilot

More capacity in aviation & infrastructure will have benefits

Last week, the government published a draft of the new civil aviation policy. The overall thrust of the draft has been well received, both by industry experts and investors, who bid up the prices of the two listed domestic airlines. The main thrust of the policy is to significantly expand the space for new capacity to enter. Outside a radius of 5,000 km, an open skies approach is proposed, which will remove all restrictions on the number of flights to and from destinations pretty much all over the world. Within that radius, which covers West and South Asia as well as the countries to the east, flying rights will be auctioned. This will allow, particularly, the West Asian carriers, which have been aggressively expanding into India, to continue to do so - but with the payment of the licence fee, which will accrue to the government. Further, the current cap on 49 per cent on foreign direct investment is proposed to be eventually raised to above 50 per cent, paving the way for strategic investment by foreign carriers.

The benefits of further capacity expansion will be significant. Notwithstanding the massive expansion in the airline industry over the past decade, there are still challenges to commercial viability, as well as policy-related restrictions on expanding capacity. The proposed measures pave the way for a significant expansion in capacity along with a potential rationalisation between domestic and international routes, which will provide much more convenient access to a much larger number of domestic destinations.

But there are components to the draft policy that carry unfortunate reminders of a discredited micromanagement approach. For one, the ambivalence on the much-despised "5/20" rule distorts the playing field against the new domestic players. It makes no sense to allow any foreign carrier to offer services while younger domestic carriers are denied permission to fly overseas. This rule needs to be done away with to create a genuinely competitive environment. Second, the government seems to be unable to resist the temptations to cross-subsidise air travel, an instrument that has been used for many years with limited success. Imposing a cess on some routes reduces demand on those, while lower fares on the less dense routes do not guarantee that traffic will increase. This obsolete approach must be replaced with a new one that emphasises development of an ecosystem that encourages flying to and from new destinations. This requires significant investment in airport infrastructure, which could be done through public-private partnerships as the policy proposes, but needs to apply reasonable user charges on airlines, which make the airports financially viable. The bottom line is that an effective civil aviation policy must encourage investment and expansion of services, which will be rendered viable through sustained growth in demand.