India Adopts Long-Awaited National Aviation Policy

by Neelam Mathews

 - June 29, 2016, 3:00 AM

New Indian carrier Vistara stands to be a beneficiary of the long-delayed reforms of the country's air transport policy. [Photo: Neelam Mathews]

India released a national civil aviation policy on June 17 after two decades of fits and starts, as the country works to properly develop its fledgling infrastructure and prepare for a forecast 20 percent annual traffic growth until 2020. Within three days of the announcement, India radically liberalized its restrictive foreign direct investment regime by opening ten sectors, including defense and aviation.

Ministry of Civil Aviation secretary Rajiv Nayan Choubey called June “a fun month,” while admitting challenges of implementation lay ahead and that “nuts and bolts” of the policy still required fine-tuning. “We are concerned that if we fall behind our growth curve, we will face civil aviation slumps,” he said. “We have told OEMs to bring in an attractive leasing package [for small players]. This will help regional connectivity take off.” Embraer has forecast India could absorb 100 of its E2 narrowbodies within the next decade.

Highlights of the policy include incentives for the regional connectivity scheme (RCS) to boost travel to Tier 2 and Tier 3 cities, development of unused airstrips and doing away with the controversial “5/20 rule,” which stipulated a startup must fly domestic routes for five years and operate at least 20 aircraft before starting international service. Under the new rule, airlines with 20 aircraft can start flights abroad immediately. A likely beneficiary, one-and-a-half-year-old Vistara, now flies 11 A320s and plans to add two more by October. Planning a fleet of 20 Airbuses by June 2018, the operator, which is joinly owned by India's Tata and Singapore Airlines (SIA), already has started viewing opportunities beyond India. “We are evaluating whether and how soon we need to advance the induction of aircraft,” Vistara CEO Phee Teik Yeoh told AIN.  

Vistara’s international operations would allow SIA to use Delhi as a transit hub en-route to Europe, said K. Ajith, an analyst at Singapore-based securities trading and investment firm UOB in a report. Given SIA’s membership in the Star Alliance, Vistara’s entry into the alliance as a regional member appears likely, said an airline official. Star refused to comment on the prospect, however.

Meanwhile, some existing carriers have expressed disenchantment with India’s new policy.

“There is no mention of reducing cost of operations including the high taxation on aviation fuel, landing and parking charges, and improvement in air traffic management that will help us burn less fuel and help economics of airlines,” said one domestic airline official. “Major airports are congested. Why not relax the rule to construct a second airport in metro cities within 150 kilometers of the existing ones?”

Although the new foreign direct investment (FDI) policy now allows foreigners to own 100 percent of Indian airlines, airlines based outside of India can own no more than 49 percent while overseas investors such as sovereign wealth funds not associated with the carrier can own the rest, Choubey said.

SpiceJet chairman and managing director Ajay Singh expressed some reservations about that part of the new policy. “We [in India] have to be clear what we want,” he said. “Do we want to grow our own airlines or help others build their hubs outside India?”

The policy makes no mention of the formation of an independent Civil Aviation Authority (CAA), privatization of Air India, market listing of Airports Authority of India (AAI) and ongoing discussions about the spinoff of Air Navigation Services from AAI, observed KPMG.