Insights into Issues: New Civil Aviation Policy

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Civil Aviation Policy 2016

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Objectives:

  • The centre-piece of the policy is to make regional air connectivity a reality.Civil Aviation Policy 2016
  • The policy aims to take flying to the masses by making it affordable and convenient. Vision is to enhance ticketing from 8cr currently to 30cr by 2022 and 50 cr by 2030.
  • Aim is to establish an integrated eco-system which will lead to significant growth of the civil aviation sector  to promote tourism, employment and balanced regional growth
  • Enhance regional connectivity through fiscal support and infrastructure development
  • Enhance ease of doing business through deregulation, simplified procedures and e-governance.

Potential of the Civil Aviation Sector

  • India has the potential to be among the global top three nations in terms of domestic and international passenger traffic. It has an ideal geographical location between the eastern and western hemisphere, a strong middle class of about 30 cr Indians and a rapidly growing economy. Despite these advantages, the Indian aviation sector has not achieved the position it should have and at present it is ranked 10th in the world in terms of number of passengers
  • Development of this sector has a multiplier effect on the economy. As per an International Civil Aviation Organisation (ICAO) study, the output multiplier and employment multiplier are 3.25 and 6.10 respectively.
  • The growth in aviation will create a large multiplier effect in terms of investments, tourism and employment generation, especially for unskilled and semi-skilled worker.
  • It can generate additional revenues for the government through allied activities such as MRO operations (severely underdeveloped), cargo carriage (less polluting and more efficient both cost and time wise than road transport) etc

Salient points in the Policy  

    • 5/20 rule (5 years of operation and a fleet of 20 aircrafts) will be no more applicable for airlines looking to fly abroad. For starting foreign operations, airlines will have to operate 20 flights or 20% of its fleet on domestic routes (whichever is higher, given the moniker 0/20 rule)
    • Maintenance Repair and Overhaul operations – The MRO business of Indian carriers is around Rs 5000 cr, 90% of which is currently spent outside India. In the budget for 2016-17, customs duty has been rationalised and the procedure for clearance of goods simplified. Further incentives proposed in the policy to give a push to this sector
      • Airport royalty, additional charges not to be levied on maintenance service providers for a period of 5 years from the date of approval. This will give a boost to MRO sector which is severely underdeveloped in India
      • MoCA will persuade State Governments to make VAT zero- rated on MRO activities
      • Provision for adequate land for MRO service providers will be made in all future airport/heliport projects where potential for such MRO services exist

 

  • Regional Connectivity Scheme

 

      • Purpose is to boost airlines flying to hitherto underserved/uneconomical/hinterland routes
      • Capping of airfares on the routes under RCS – Rs 2500 for a 1 hour flight and Rs 1200 for half an hour flight
      • Will be implemented by way of
        • Revival of airstrips/airports as No Frill Airport at an indicative cost of Rs 50cr to Rs 100cr
        • Demand driven selection of Airports/Airstrips for revival in consultation with state govt and airlines
        • 2% levy on all airline tickets to fund RCS
        • Viability Gap Funding to airline operators. Centre and state will bear the burden in the ratio of 80:20. For the North Eastern State, this will be in the ratio of 90:10. Govt will taper the VGF based on appropriate load factors achieved by the airlines. Once route becomes sustainable, subsidy removed. Subsidy to be provided based on reverse bidding. 
        • RCS only in those states which reduce VAT on ATF to 1% or less, provide other support services and 20% of VGF
        • Tax incentives in store for all airlines operating on hitherto underserved routes
        • To increase viability of running routes from regional airports, government has abolished airport charge, reduced service tax and excise duty on Aviation Turbine Fuel

 

  • Bilateral Traffic Rights

 

      • GoI will enter into ‘Open Sky’ Agreement on a reciprocal basis with SAARC countries and countries located beyond 5000 km from Delhi
      • For countries within 5000 km radius, where the Indian carriers have not utilised 80% of their capacity entitlements but foreign carriers /countries have utilised their bilateral rights, a method will be recommended by a Committee headed by Cabinet Secretary for the allotment of additional capacity entitlements
      • Whenever designated carriers of India have utilised 80% their capacity entitlements, the same will be renegotiated in the usual manner.

 

  • Development of new Airports either by PPP or by AAI

 

    •  Encourage development of airports by AAI, State  Governments, the private sector or in PPP mode
    • Future tariffs at all airports will be calculated on a ‘hybrid till‘ basis, unless specified otherwise in concession agreements.
    • There are three methods for calculating airport tariff – single till, double till and hybrid till.
      • The airport operator generates revenue by taking into account revenues from aeronautical activities such as parking, housing and landing. It also earns revenues from non aeronautical streams like duty free shops, food and beverage outlets, vehicle parking and advertisements
      • In the single-till model both, aeronautical and non- aeronautical charges of airport operators are taken into account for fixing landing and parking charges.
      • In the double-till model aeronautical charges are calculated taking into account revenues from aeronautical and non-aeronautical charges on the basis of collections from non-aeronautical.
      • In the hybrid till model, the charges are calculated by taking all the aeronautical and 30 per cent of the non-aeronautical revenue into account.
  • Aviation Education and Skill Building – Estimated direct additional employment requirement of the Civil Aviation Sector by 2025 is about 3.3 lakh. All training in non licensed category will conform to National Skill Qualification Framework standards. MoCA will provide full support to the Aviation Sector Skill Council and other similar organisations/agencies for imparting skills for growing aviation industry

Assessment 

Pros:

  • 5/20 rule had irked airlines for a long time now. At a time when most of the airlines are not posting profit and reeling under the burden of high taxes, 5/20 scheme proved to be a major impediment in enabling airlines to boost profits by initiating foreign operations. The guidelines in the present policy regarding foreign operations will ensure that airlines do not neglect domestic operations in pursuit of profit. The move has been criticized by established players like Jet Airways who are wary of increased competition.
  • The initiative in the policy to boost  MRO business is commendable as it leads to substantial loss of revenue for India. The MRO cost of Indian carriers is around Rs 5000 cr, 90% of which is currently spent outside India. Moreover, owing to India’s favourable geographical location India has the potential to become an MRO hub, a status currently occupied by Dubai.
  • Regional Connectivity Scheme has been mooted with an objective of promoting connectivity in Tier 2, Tier 3 cities. Intent is to fast track the sector and harvest its multiplier effect on the economy, spurring investments, tourism and employment. Moreover, of the 35 crore middle class citizens, only 8 cr people fly. Capping of fares, enhancing connectivity will lead to an increase in the number of citizens who can fly and can take some burden off railways
  • Open sky policy will enhance competition leading to better service and cost effectiveness  

Cons: 

 

  • Regional Connectivity Scheme

 

    • Policy doesn’t mention from where VGF for RCS will come from
    • Administration of VGF would require scrutiny of airlines balance sheet which would be a messy process. It has the potential of becoming another hotbed for controversy  
    • Vgf would result in additional subsidy burden at a time when economic survey argued in favour of removing subsidies for the rich 
    • Subsidy based regime would be impacted by the vagaries of price changes in oil prices
    • Capping of fares (1200 for half hour, 2500 for an hour) is criticized as airlines argue that it should be a fn of demand/supply  
    • Critical reform include depoliticization of identifying destinations. Resources ought to be deployed based on economics rather than a populist gesture to entice hinterland voters
    • The success of RCS will depend upon support by the state govt in the form of free land, lower utility rates and tax cuts on airline fuel 
    • The subsidy regime under RCS where the subsidy for flyers on new routes will be financed levy on flyers on high traffic routes is questionable as it would make air travel expensive 
  • Airlines wished for 0/0 rule. However the rationale is that domestic operations should not be ignored. The other side is that scaling up of operations by airlines is not an easy task. Mandating a min requirement of 20 airlines before initiating international operations doesn’t solve the problem for airlines 
  • The Open sky policy with SAARC countries is a good measure. However the one with countries beyond 5000km radius will fail to have much impact as India already has unused flying rights to EU, open sky policy with US and UK 
  • Assessment of Hybrid Till model for deciding on airport charges
    • According to International Air Transport Association (IATA), the approved policy states that “future tariffs at all airports will be calculated on a hybrid-till basis” – which can make air travel more expensive
    • Single Till model is considered to be more effective for airlines as airport charges constitute around 14% of the total operational cost of a passenger carrier.
    • Costlier airport charges will translate into costlier tickets which will interfere with the civil aviation policy objective of tripling passenger traffic by 2022
    • The model has been proposed to entice private operators into investing in building airports on PPP basis by providing them with an effective stream of revenue

 

Assessment of Increasing FDI in Airlines Sector to 100%  

Increasing the FDI limit for airlines (including regional operators for whom FDI of 49 per cent was only allowed last November) to 100 per cent, with automatic approvals for foreign ownership up to 49 per cent, sounds good on the face of it.   

But it will not bring new foreign players in the fray:- 

  • This is because global airline players continue to be hemmed in by the 49 per cent ownership limit set by the United Progressive Alliance government in 2012, following which ventures such as AirAsia India and Vistara took off. This is because depite 100% FDI being allowed, securing a scheduled operator permit still requires an airline’s chairman and at at least two thirds of its directors to be Indian citizens, and substantial ownership and effective control to be vested in Indian nationals. It then begs the question why would a foreign airline invest so much in a JV when it can have very limited management control. 
  • Comparative Data :
    • The U.S. now allows around 25 per cent foreign ownership in airlines
    • South Korea permits 49 per cent
    • Chile a full 100 per cent, even as it has done away with national control and ownership norms. 
  • India can follow the Australia Model 
    • Australia has now scrapped limits on airline ownership for aircraft flying within its airspace — a model that could very well serve India’s aviation policy objectives of tripling passenger traffic by 2022 and developing regional connectivity. To stay at the forefront of FDI reforms in a slowing global economy, India could have proposed a bolder reform in airline ownership norms and dovetailed that with its vision of an open sky policy within the SAARC region and beyond. That would have been a global game changer.