Revolution on the anvil

By Ramesh Raja
In Issue 3
December 11, 2015
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Will the new draft civil aviation policy see the light of day?

INDIA_AVIATIONAfter telecommunications and internet, India is on the threshold of another revolution. This time, it’s in the sky. Thanks to the Draft National Civil Aviation Policy 2015 released recently by the ministry of civil aviation – if all goes well – flying is going to be affordable for the masses. The policy focuses on 16 critical areas of the Indian civil aviation industry ranging from safety to regional connectivity, bilateral traffic rights, code-sharing, route dispersal guidelines, fiscal support, helicopters, scheduled commercial agreement and maintenance, repair and overhaul (MRO) operations. Many of the rules date back to 1930s. The government’s proposals in NCAP 2015, have been placed in the public domain, as it looks for feedback from various stakeholders. The final policy will be unveiled after adding in the recommendations, if any, from stakeholders and obtaining the needed approvals.

Since air travel in India is mostly confined to a tiny section of the population that lives in cities, putting it out of the reach of hundreds of millions, the new draft aviation policy gains weight from the fact that “if every Indian in the middle class income bracket takes just one flight per annum, it would result in a sale of 300 million tickets, a big jump from the 70 million (7 crore) domestic air tickets sold in financial year 2014-15.” As per the draft policy, this will be possible if the air fare, especially on the regional routes is brought down to an affordable level. The reduction in costs will require concessions by the stakeholders, primarily the central and state governments and airports.

According to NCAP 2015, the government’s vision is to create an ecosystem to enable 30 crore domestic ticketing by 2022 and 50 crore by 2027. Similarly, to increase international ticketing to 20 crore by 2027. The draft policy states, “India has the potential to be among the global top three nations in terms of domestic and international passenger traffic. It has an ideal geographic location between the eastern and western hemisphere; a 300 million-strong middle class and a rapidly growing economy. Despite these advantages, the Indian aviation sector has not witnessed the level of growth it should have and at present, it is ranked 10th in the world.”

The government proposes to develop no-frills airports at a cost not exceeding Rs 50 crore, in an endeavour to strengthen regional air connectivity. At present, as cited in the draft, only 75 of the 476 airstrips/airports have scheduled operations. Besides, based on a regional connectivity scheme (RCS), which will come into effect from April 1, 2016, the policy speaks of capping regional air fares to Rs 2,500 per passenger for a one hour flight. The funds for the regional connectivity scheme is to be raised by levying a two per cent cess on airline tickets on major routes.

Over the much-argued 5/20 rule, which allows Indian carriers to fly abroad after five years of domestic operations and having a fleet of 20 aircraft, the NCAP 2015 has made three recommendations. Besides proposing to abolish the rule, it also proposes to introduce a concept of Domestic Flying Credits based on which Indian carriers will be allowed to fly overseas. Further, the new draft policy also considers an Open Sky aviation policy with SAARC countries and those countries beyond a radius of 5,000 kilometres from the national capital. A footnote in this section states that foreign direct investment in airlines would increase from 49 per cent to above 50 per cent, “if the government decides to go in for open skies for countries lying within 5,000 km radius”.

The business of maintenance, repair and overhaul (MRO) is another area that would get a boost if the policy is brought into action. It may be noted that Indian carriers spend nearly Rs 5,000 crore in MRO activities of which 90 per cent is spent outside the country in Sri Lanka, Singapore, Malaysia, and the UAE. Given our technology base, the government is keen to develop India as an MRO hub in Asia, attracting business from foreign airlines. In order to encourage this, MRO facilities will be relieved from service tax, states the draft policy.

The development of this sector has a multiplier effect on the economy. As per a study conducted by International Civil Aviation Organisation (ICAO), the output multiplier and employment multiplier are 3.25 and 6.10 respectively. The aim of the government is to provide an eco-system and a level playing field to various aviation sub-sectors, i.e. airlines, airports, cargo, MRO services, general aviation, aerospace manufacturing, skill development, etc. but for that, the systems and processes which affect this sector will need to be simplified and made more transparent with greater use of technology without compromising on safety and security. The growth in aviation will create a larger multiplier effect in terms of investments, tourism and employment generation, especially for unskilled and semi-skilled worker.

Even though private airlines have sought more time to state their views because the proposals may have far reaching ramifications on the sector, the draft civil aviation policy received mixed response from the industry with most of the airlines describing it as “progressive” even as lack of clarity on the fate of 5/20 norm has come under criticism from some quarters. According to SpiceJet CMD Ajay Singh, the draft policy has covered a lot of ground and an attempt is being made to reduce taxes. IndiGo president Aditya Ghosh feels the policy is broadly progressive and setting of low cost airports would help bring more cost efficiency in the aviation sector. AirAsia India CEO and managing director Mittu Chandilya, on the other hand, finds it surprising to see the lack of clarity and progress on 5/20 norm. However, he believes regional connectivity and small town airports would help airlines to geographically increase the footprint. Federation of Indian Airlines supports the continuation of 5/20 norm and says route dispersal guidelines should not be fixed as they are based on market dynamics.

Centre for Asia Pacific Aviation, a think tank, is of the view that the draft policy signals a positive intent to provide a direction and structural lift to the sector. “The draft policy reflects that the government is serious about delivering genuine change and meaningful outcomes,” says CAPA India head Kapil Kaul, but he also added that the draft does not mention about the future of Air India. “The government’s ownership of the national carrier negatively influences policy decisions and has cost the Indian tax payer billions of dollars. Clarity on what the government plans to do has a massive bearing in the industry,” he states. As per Kaul, there should have been more emphasis on addressing the negative fiscal environment which airlines face such as sales tax on ATF, service tax on fares, airports charges and withholding tax on aircraft leases.

Business Aircraft Operators Association, an industry federation working for business aircraft operators in India has a divergent opinion in this regard. According to BAOA president Jayant Nadkarni, it is disappointing to see that the policy has completely ignored the interests of business and general aviation in India, which forms an important part of the industry. The policy, as per Nadkarni, has also overlooked the exorbitant and irrational taxation on import of small aircraft, which has been one of the major reasons for the delay of growth of this sector.

Industry body Ficci has welcomed the draft policy, saying it has laid down the long-term roadmap for developing India as the third largest aviation market. As per Ficci, “It is encouraging that the government is planning to coordinate with all the stakeholders to provide greater regulatory certainty under the PPP mode. Also commendable is the proposal for exempting MRO, cargo, ground handling players from all charges, other than a reasonable lease rental at all the future airport projects in the country. These are critical to the growth of the Indian aviation sector.” The industry grouping noted that regional connectivity scheme would contribute to the growth of remote areas and in turn have positive implications for overall growth of the economy.

CII and Assocham, the two other prominent industry associations share the same sort of view. While CII says the draft policy has rightly addressed the key policy challenges in the sector with rationalisation of jet fuel cost, thrust on regional connectivity, liberalisation in open skies regime, promotion of air cargo, maintenance, repair and operations (MRO) through fiscal and regulatory concessions, Assocham believes proposals in the draft civil aviation policy would surely help in expansion of the sector. Noting that sincere efforts must be made to build a consensus among the Centre and the states on fiscal incentives being proposed in the policy, Assocham says VAT concession being proposed should be in sync with the GST regime.

Although the new draft policy offers a mixed bag of opportunities for the airlines, the consumer will hugely gain if the new commuter airlines takes off and connect the smaller cities and open sky policies bring in new competition from abroad.

This draft, as per experts, is a major improvement on the previous drafts and has a comprehensive coverage. But how much of it will be converted into final policy and then implemented is anyone’s guess.

Key highlights of NCAP 2015

Vision: To create an eco-system to enable 30 crore domestic ticketing by 2022 and 50 crore by 2027. Similarly, international ticketing to increase to 20 crore by 2027.

Mission: Provide safe, secure, affordable and sustainable air travel with access to various parts of India and the world.

Objectives:

  • Ensure safe, secure and sustainable aviation industry    through use of technology and effective monitoring
  • Enhance regional connectivity through fiscal support and infrastructure development
  • Enhance ease of doing business through deregulation, simplified procedures and e-governance
  • Promote the entire aviation sector chain: cargo, MRO, general aviation, aerospace manufacturing and skill development.