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National Civil Aviation Policy: Exciting Times Ahead?

By: Mansi Singh

The much awaited Civil Aviation Policy (“the Policy”) obtained cabinet clearance on 15th June 2016. This is the first time since independence that an integrated Civil Aviation Policy has been brought out by the Ministry of Civil Aviation (“MoCA”) of the Government of India.

India’s galloping economy and the burgeoning middle class have helped to make it one of the fastest growing aviation markets in the world. The Policy aims at providing an ecosystem for the harmonized growth of various aviation subsectors, i.e. airlines, airports, cargo, maintenance, repair and overhaul (“MRO”), skill development, etc. The cornerstone of the Policy is creating affordability, connectivity and enhancing the ease of doing business in India. Government is convinced that this will make India the third largest civil aviation market in the world by 2022 and will be the key to realizing its target of growing domestic passenger traffic from 80 million in 2015 to 300 million by 2022.

Highlights of the Policy

  1. 5/20 Rule replaced: Under the 5/20 rule, only those airlines that had at least five years of operational experience and a fleet of minimum 20 aircraft were allowed to fly overseas. The aviation ministry had seen aggressive opposition by older airlines such as Jet Airways, Indigo, SpiceJet and Go Airlines to the scrapping of the 5/20 rule whereas the new entrants such as Vistara and AirAsia were in favour of it being scrapped. The Policy discarded the controversial 5/20 rule and now any domestic airline can fly overseas provided it deploys 20 planes or 20 per cent of its total capacity[1] for domestic operations. As a result, passengers will now have the opportunity to benefit from the presence of more players and gain from the increased competition. However, the domestic deployment requirement appears to be an attempt to pacify the existing players as new airlines such as Vistara and AirAsia will take a year or two to increase their aircraft fleet to 20.

  2. Regional Connectivity Scheme (“RCS”): The Policy aims at enhancing regional connectivity within India through fiscal support and infrastructure development. As part of RCS, the government aims to connect under-served and un-served destinations for which the fares have been capped at Rs 2,500 ($35 approximately) for one-hour  RCS will take ‘flying to the masses’ by connecting India’s remote unconnected regions, thereby increasing tourism and generating employment. While the government objective is laudable, the dream of regional connectivity can become a reality only when it is supported by adequate infrastructural backing. While the major airports of the country are running close to capacity, the regional airports are woefully lacking in basic infrastructure.  The capping of fares will require ‘buy in’ from relevant state governments, who are expected to forego their lucrative tax revenues to help maintain the airfare levels.  This is easier said than done.

  3. Liberalized ‘open skies’ and ‘code share’ agreements: The regime of bilateral rights and code share agreements will be liberalised leading to greater ease of doing business and wider choice to passengers. India will have an open-sky policy for countries beyond a 5,000 km radius from Delhi on a reciprocal basis, which will enable such countries to have unlimited access in terms of number of flights and seats to Indian airports. This is expected to increase flight frequencies with these countries.

  4. Ground Handling Policy: The existing ground handling policy is being replaced with a new framework to ensure fair competition. The airport operator will ensure that there will be at least three Ground Handling Agencies including Air India’s subsidiary/JV at all major airports. At non-major airports, the airport operator will decide on the number of ground handling agencies, based on the traffic output and airside/ terminal building capacity. All domestic scheduled airline operators including helicopter operators will be free to carry out self-handling at all airports.

  5. Single-window system: A transparent single-window system is proposed to be created for all aviation related transactions, queries and issues. The services rendered by Director General of Civil Aviation will be fully automated by implementing eGCA project on priority. Conspicuously, the policy omits any reference to the much awaited Civil Aviation Authority that would have replaced the Director General of Civil Aviation.

  6. Maintenance, Repair and Overhaul: As the MRO business of Indian carriers is around $ 1 Billion, 90% of which is currently spent outside India, the government is keen to develop India as an MRO hub in Asia, attracting business from foreign airlines in line with the ‘Make in India’ initiative of the Government of India. MoCA will persuade State Governments to make VAT zero-rated on MRO activities. Airport royalty and additional charges will not be levied on MRO service providers for a period of five years from the date of approval of the Policy.

  7. Airport Infrastructure Augmentation: The Policy aims at the development and modernization of airports and upgradation of quality of services. The Ministry will continue to encourage development of airports by the State Government, the private sector or in public-private partnership mode and endeavour to provide regulatory certainty. Future green-field and brownfield airports will have cost efficient functionality with no compromise on safety and security. The Policy is silent on whether some of the large Airports, Authority of India (“AAI”) run airports will be privatised. The Policy has also skirted the issue of public listing of AAI and the privatisation of the bleeding Air India.

  8. Foreign Direct Investment: Unfortunately, the Policy remains silent on the foreign direct investment (“FDI”) limits. While FDI limits in most aviation sectors such as ground handling, MRO, airport projects, etc. is upto 100%, restrictions on FDI in airlines have remained unchanged at 49%. Such restrictions on FDI are evidently inconsistent with the government’s objective of expanding the aviation sector.

Conclusion The key focus of the Policy appears to be to make flying affordable and accessible. While it may have been sensible for the government to dispense with the much despised 5/20 rule entirely, it has chosen the middle path in order to soften the blow on airlines that were made to wait out for five years under the earlier policy.

Overall, the Policy is definitely a step towards major reform in the aviation sector. Having said that, the one worrying aspect is that the Policy does not adequately address the issue of creating structures for managing growth. Without a clear infrastructure augmentation plan in place and a time-bound roadmap for implementation, the Policy objectives may not be fully achieved.

[1] Total capacity to be calculated on the basis of average number of seats on all departures put together.


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