Indian Aviation Set To Get Boost

Neelam Mathews

Feb 16, 2016

Faced with regulatory bottlenecks and high taxation, and a fledgling infrastructure, India’s aviation industry–having grown by 20 percent in 2015–is set to get a boost a new civil aviation policy. While the government has said it aims to provide a level playing-field to aviation-related sectors including airlines, airports, MRO organizations and GA, systems and processes will need to be simplified and made transparent. This is believed to be one of the conclusions of the draft aviation policy that is expected to be released imminently.

The policy recognizes an eco-system will be needed to handle a high-growth market that saw 70 million domestic tickets sold last year, with forecasts for 300 million by 2022 and 500 million by 2027. International ticketing is expected to touch 200 million by 2027 also.

Thorny issues remain, however. The government has not decided on the 5/20 rule that disallows start-ups from flying internationally until they have completed five years of operations and have at least 20 aircraft. The industry is visibly split on this, with established airlines lobbying the government not to lift the rule. “The 5/20 impacts not only Vistara and Air Asia India, but it is holding back the true potential of Indian aviation” said Phee Teik Yeoh,CEO, Tata SIA-owned Vistara, to AIN. “There is no global parallel to this. The regulation is discriminatory to [new] Indian airlines as foreign carriers that do not meet these criteria are allowed to operate in Indian skies.”

So intense is the fear of additional competition in the arena that airlines such as SpiceJet the second largest budget carrier in India, are discussing openly the issue of Substantial Ownership and Effective Control (SOEC) of airlines, even as the aviation policy looks at increasing the 49 percent ownership by foreign airlines in domestic Indian airlines. “Unfortunately, we are perhaps the only country in the world that does not define ‘effective control’ or properly enforce it,” said a candid Ajay Singh, chairman and managing director SpiceJet Airlines, “so that airlines such as AirAsia India and Vistara, [which are] clearly controlled by their foreign parents, continue to operate in India [but are] blatantly flouting the principal of effective control.”

“Indian policy allows airlines from any country to set up domestic airlines that are effectively owned and controlled by their parent, and in some cases by foreign governments themselves,” said Singh separately, in a statement. His concern is that these new carriers “will claim entitlement to bilateral rights to fly to overseas markets including to their “home” markets. “In such a situation, these airlines can potentially obtain rights from their countries into India and from India into their countries, thereby establishing monopoly control over key routes to and from India,” he added.

Indian airlines have over the years lost market share to cash-rich Middle East carriers supported by their governments. There is an industry view that a proposal in the draft policy that seeks to auction bilateral rights will ensure that such rights are cornered by financially stronger global airlines to the detriment of domestic airlines.

Until effective control is addressed by the policy, said Singh, “the 5/20 rule affords some protection to domestic airlines. It ensures airlines that seek to utilize India’s share of bilateral rights and fly abroad must first fly domestic routes.”

Singh was of the view that relaxing the 5/20 rule and the rules of ownership and control should be considered strictly based on reciprocity and for clear strategic advantage. “The [new] civil aviation policy is an opportunity to help create powerful global airlines that are Indian owned and controlled. In our view, this opportunity should not be sacrificed for short-term gains, if any,” said Singh.

Business Aviation Protection

Meanwhile, the ministry of civil aviation has accepted a plea that the Business Aviation Operator Association (BAOA) has been making on allowing small commuter airlines to run both scheduled and charter services. BAOAhas also asked for import tariffs placed on general aviation aircraft to be rolled back to zero, going back to 2007.

“There is no logic to this duty because scheduled airlines do not pay it. If you want the hinterland to be connected, the roll-back will help regional connectivity as more aircraft will be imported,” said R.K Bali, managing director,BAOA to AIN.

A significant number of airports remains under-utilized and will be helpful to promote regional connections envisaged by the policy, said R.K. Srivastava, chairman of the Airports Authority of India. Of the 476 airports/airstrips in the country, AAI owns and manages 125, of which 94 are operational. The policy is looking at reviving disuse airstrips also, depending on demand.

While the Policy does not put a cap on the number of ground handling agencies eligible to operate at domestic airports, the Ground Handling Association of India has asked for a cap, and a ban on allowing domestic airlines and charter operators to carry out self-handling. “Foreign investors like us have backed this infrastructure project and have already seen significant erosion of value due to non-implementation of the original [promised] Policy. Since [2007] we have invested substantially in designing, upgrading and commissioning world-class ground handling facilities and operations at these airports,” said Murali Ramachandran, CEO of  Celebi.

However, there is a bright star on the horizon that brings hope to the MRO businesses burdened by heavy taxes; the tax on MRO services is to be reduced to zero, while aircraft maintenance tools and tool-kits will be exempt from customs duty. To enable economies of scale, the period for which the spare parts imported by MROs can be stored tax-free will also be extended to three years.

“The policy is still evolving and could be more robust. It should not take 20 years to settle. The government should also look at the private sector as partners in growth,” Shrinath Sundaram, director, VinMn Aerospace, said toAIN.