Draft Civil Aviation Policy: Wind beneath the Wings of the Indian Aviation sector?
Prashant Kataria December 18, 2015
The Ministry of Civil Aviation (“MoCA”) had recently issued the Draft National Civil Aviation Policy (“Policy”) which, after public consultation, it may implement in its entirety or in part. The Government believes that this sector has a multiplier effect on the economy and hence wishes to promote it in a significant manner. While the Policy covers many important issues related to the aviation sector, this blog aims to highlight a few key takeaways relating to safety, single window system, 5/20 Rule, Scheduled Commuter Airlines, Code Share Agreements, airports and FDI which may help in taking the sector as a whole to the stratosphere.
Safety and Single Window
On the safety front, the Policy states that the government regards aviation safety highly and shall focus on pre-empting and preventing incidents and safety violations will be treated with zero tolerance. The Directorate General of Civil Aviation (“DGCA”) shall also implement safety programmes and plans along with safety management systems to proactively identify operational hazards and apply appropriate risk management principles for the mitigation of these hazards, which is definitely a move in the right direction and should bolster higher degree of care by the operators and confidence amongst the end-users. Additionally, as per the Policy, the DGCA shall also strive to create a single-window system for all aviation related transactions, queries and complaints. If implemented properly, this could also greatly help in cutting down red-tape.
As a big step towards rationalizing the “5/20 Rule” (which meant an airline had to have been flying on domestic routes for 5 years and also have a fleet strength of at least 20 aircraft before it could make an application to service foreign destinations), the Policy has invited suggestions on three possible options, namely (i) the 5/20 Rule shall continue as it is, (ii) the 5/20 Rule shall be abolished, or (iii) domestic airlines shall need to accumulate 300 Domestic Flying Credits (“DFC”) to fly to SAARC countries and countries with territory located entirely beyond a 5000 km radius from New Delhi and 600 DFCs before starting flights to the remaining parts of the world. One of the ongoing requirements suggested under option (iii) is that the domestic airlines will be required to accumulate at least 300 DFCs per annum after commencing international operations in order to maintain their international flying rights. In case of a new airline, this requirement shall commence from the financial year immediately following the year in which it accumulates its first 300 DFCs. Furthermore, airlines shall also be permitted to trade the DFCs while intimating the DGCA under option (iii). While the suggestion to do away completely with the 5/20 Rule might be optimal, it shall need to be seen over a period of time how effective and welcome the option (iii) will be.
Scheduled Commuter Airlines
The Policy also proposes to give a boost to regional connectivity through scheduled commuter airlines (“SCA”). The eligibility criteria for SCAs will be INR 20,000,000 in terms of paid-up capital to facilitate easy entry for new players. A SCA shall have no restrictions on number of aircraft and its aircraft can be with a capacity of 100 seats or less. One of the requirements they will have to meet is to operate a minimum number of flights per week to certain destinations under the Regional Connectivity Scheme (“RCS”). However, Route Dispersal Guidelines (“RDG”) (guidelines issued in 1994 to ensure better connectivity to Jammu & Kashmir, North-East India, island territories, tier-2 and tier-3 cities), which are applicable to scheduled commercial airlines, will not be applicable to SCA, thus giving an additional concession to SCAs. Other benefits proposed to be accorded to SCAs are (i) permission to enter into code-sharing arrangement with Indian and foreign airlines and freedom to sell their DFCs to other Indian carriers, (ii) permission to self-handle its aircraft, (iii) rationalisation by MoCA of certain fees and charges like those for landing, parking, navigation and other airport charges at non-RCS airports for SCA aircrafts for a period of 10 years for a particular route, and (iv) coordination by MoCA with the airport operators and Airport Authority of India (“AAI”) to ensure adequate space allocation at Indian airports for SCAs. It is hoped that smaller players shying away from investing in full-fledged scheduled commercial carrier may be attracted to the SCA model which should be beneficial to the entire sector in the long run.
Code Share Agreements
In a big move, code-share agreements shall be freely allowed between Indian carriers and foreign carriers for any destination within India on a reciprocal basis. In this regard, international codeshare between Indian and foreign carriers is proposed to be completely liberalized, subject to there being an air service agreement (“ASA”) between India and the relevant country, with no prior approval required from the MoCA, other than intimation by the Indian carrier to the MoCA 30 days prior to starting the code-share flights. This should make entering into such agreements much easier for Indian and foreign carriers and in turn boost their revenues.
The Policy states that calculation of tariff at all future airports will be on a ‘hybrid till’ basis and 30% of non-aeronautical revenue will be used to cross-subsidise aeronautical charges, which should be welcome by future airport operators. Furthermore, it is clarified that airports shall continue to be developed through public-private partnership (“PPP”) mode, however AAI will “closely monitor” the capital expenditure of all future greenfield and brownfield airports developed through the PPP model. Additionally, it has also been proposed that the operators of future airport projects will not levy airport charges, concession fee and royalties, etc. on MRO, cargo, ground handling, ATF infrastructure other than a reasonable lease rental. These appear to be a bit harsh on airport concessionaires as it greatly reduces the aeronautical revenues that can be earned by them.
The Policy states that subject to the Government deciding to go in for open skies (which essentially means permitting unlimited flights, above the existing bilateral rights, directly to and from major international airports within the country as notified by MoCA) for countries lying within a 5000 km radius of New Delhi, an increase in FDI limit in airlines from the current 49% to above 50% shall be examined. In case this increase in FDI limit does occur, we should definitely see more JVs in this sector as the foreign operators would then have control, hence making the deal much more appealing to such foreign carriers.
While the recommendations made in the Policy appear to be making the right noises at the right time when the Government is trying to give an impetus to the Indian economy as a whole, those keeping a close watch on the aviation sector shall have to wait and see how many of these recommendations (and in what form) shall eventually be implemented by the MoCA and in what form. Nevertheless, the right noises made by the Policy should definitely attract interest in this sector and give rise to some interesting deals in the near future.
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