India’s revamped Civil Aviation Policy

Big news from New Delhi; with an amended civil aviation policy as demonstrated below (From CH-AVIATION);

Narendra Modi’s government, through the Ministry of Civil Aviation, has finalized India’s first integrated Civil Aviation Policy following a year-long consultative process.
Among the more significant alterations are the partial scrapping of the country’s controversial 5/20 rule. Formulated in 2004 during the Manmohan Singh administration, the rule required all carriers seeking to start international flights to have been operational for at least five years and to have at least twenty aircraft in their fleet.
Introduced to ensure adequate attention was paid to India’s domestic market, the requirement was, however, seen as a major impediment to the growth and establishment of new carriers.
As such, the revised rule now states that any airline can commence international operations provided they allocate twenty aircraft or 20% of their total capacity (in terms of the average number of seats on all combined departures), whichever is higher, for domestic operations. The rule assumes one aircraft undertakes six departures in a day and will be enforced through the monitoring of airline schedules.

The Policy also produces the Viability Gap Funding (VGF) will be funded by a small levy per departure on all domestic routes other than Cat II/ Cat IIA routes, RCS routes and small aircraft at a rate as decided by the Ministry from time to time. A detailed scheme will be put up in the Public domain for stakeholders consultations. The Regional Connectivity Fund caps airfares at Rs 2,500 for one hour flights on unserved and under-served routes, which is leveraged at a “small levy” on domestic trunk-routes air tickets (known as catagory 1 services) to fund the regional connectivity.

Another key area covered is the liberalization of bilateral traffic rights and codeshare agreements. The move is aimed at improving the ease of doing business in India and to increase local consumer choice.
India says it will pursue a policy of Open Skies, on a reciprocal basis, with members of the South Asian Association for Regional Cooperation (SAARC) – Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka – as well as countries over 5,000 kilometres from Delhi.
Here, unlimited frequencies, above those already specified under existing Air Service Agreements (ASA), will be allowed directly to and from major Indian international airports as notified by the Ministry of Civil Aviation. Service to other airports will continue to be governed by existing ASAs until such time they are renegotiated.

In a bid to increase India’s international freight connectivity, Delhi says it will negotiate with other countries to amend their respective ASAs so as to allow Indian cargo carriers, whose foreign ownership stands at 74%, to start foreign services. At present, ‘Substantial Ownership and Effective Control (SOEC)’ clauses in India’s ASAs prevent such carriers from applying for international rights.

In terms of codeshares, India will liberalize its specified Domestic Codeshare Points thereby allowing local airlines to freely enter into domestic code-share agreements with foreign carriers to any point in India available under their respective ASAs. Local carriers will also no longer have to seek Ministry of Civil Aviation approval to codeshare with foreign carriers with a thirty-day notification period to now suffice.

Other factors include;

  1. Necessary administrative and financial flexibility will be provided to Director General of Civil Aviation (DGCA) for an effective aviation safety oversight system and for creating a transparent single-window system for all aviation safety related issues.
  2. The Route Dispersal Guidelines (RDG) have been rationalist by making the criteria for declaring a route as Category I (trunk route) more transparent, while the traffic to be deployed on Cat II and IIA expressed in terms of a percentage of CAT I traffic remains the same. The criteria proposed for a Cat I route are a flying distance of more than 700 km, average seat factor of more than 70% and annual traffic of 5 lakh passengers. The percentage for CAT III will be reduced in view of the Regional Connectivity Scheme coming into operation. Uttarakhand and Himachal Pradesh have been included as part of category II routes.
  3. The SAARC Open Skies methodology for bilateral liberalizations will be recommended by a Committee headed by the Cabinet Secretary for the allotment of additional capacity entitlements wherever designated Indian carriers have not utilised 80% of their bilateral rights but the foreign airlines/countries have utilize their part and are pressing for increase in the capacity.
  4. The Ministry will continue to encourage development of airports by the State Government or the private sector or in PPP mode and endeavor to provide regulatory certainty. Future greenfield and brownfield airports will have cost efficient functionality with no compromise on safety and security.
  5. Airport Authority of India (AAI) will continue to develop and modernize its airports and upgrade quality of services. AAI will be suitably compensated in case a new greenfield airport is approved in future within 150 km radius of an existing operational AAI airport which is not yet saturated.
  6. Upgrading and modernization of Air Navigation Services will continue in line with global trends. AAI will provide a fully harmonized Air Navigation System considering International Civil Aviation Organisation (ICAO) Global Air Navigation Plan, Aviation system Block Upgrade and modern performance based technologies and procedures.
  7. The Government will promote helicopter usage by issuing separate regulations for helicopters and development of four heli-hubs initially. Ministry of Civil Aviation will also coordinate with all the agencies and stakeholders concerned to facilitate Helicopter Emergency Medical Services.
  8. In the budget for 2016-17, the customs duty for MRO’s has been rationalised and the procedure for clearance of goods simplified, in particular duty on tools and tool kits. Further incentives have been proposed in the policy to give a push to this sector :-
    1. MoCA will persuade State Governments to make VAT zero-rated on MRO activities
    2. Provision for adequate land for MRO service providers will be made in all future airport/heliport projects where potential for such MRO services exists.
    3. Airport royalty and additional charges will not be levied on MRO service providers for a period of five years from the date of approval of the policy.

The policies aim at becoming the 3rd largest civil aviation market. This will be done through points raised, such as;

  • Domestic ticketing to grow from 8 crore in 2015 to 30 crore by 2022
  • Airports having scheduled commercial flights to increase from 77 in 2016 to 127 by 2019
  • Cargo volumes to increase by 4 times to 10 million tonnes by 2027
  • Taking flying to masses – Enabling Indians to fly at Rs. 2,500 per hour under Regional Connectivity Scheme at unserved airports
  • Requirement of 5 years of domestic flying for starting international operations removed
  • Flexible and liberalized ‘open skies’ and ‘code share’ agreements
  • Incentives to MRO sector to develop as hub for South Asia
  • Ensuring availability of quality certified 3.3 lakh skilled personnel by 2025
  • Development of green-field airports and heliports
  • Enhancing ease of doing business through deregulation, simplified procedures and e-governance
  • Promoting ‘Make In India’ in Civil Aviation Sector

 

From face-value, the most significant beneficiaries include AirAsia India and Vistara. Despite both parties welcoming the liberalization, they will resume to work to further reduce regulatory parameters. CAPA went a step further to dictate that this was a clear “missed opportunity” and is a significant “disappointment” given the civil aviation ministry spent almost nearly two years in drafting the new policy.

It’s all very true; the new policy is heavy on ideas, but light on implementation. The ideas do demonstrate that Modi’s government is listening to the industry calling for these paper changes, yet fail to manage the holistic and accommodating nature required for these new policies. These tentative concerns include;

  1.  The “paper liberalization of policy” is not backed with an infrastructure capability facilitating for the further-enhanced growth trajectory the industry will grow within India (assuming current financial, resource and passenger-demand trends).
  2. This can be further denoted in currently under-capable airport capacity, low service reliability, and poor facilities to accommodate this boom (let alone facilitate those valuable regional passengers). One element which can elaborate on the above is to display the poor OTP levels of airlines at major airports. Mumbai, Delhi, Hyderabad and Bangalore sports one of the lowest OTP levels for civil operations, with OTP in BOM and DEL struggling to pass over 50% (http://dgca.nic.in/reports/Traffic_reports/Traffic_Rep0115.pdf)
  3. Poor infrastructure also expands to airports with demand, not being able to cater aircraft demanded based on runway, taxiway/apron and gates/aerobridges (which aren’t capable of accommodating aircraft size or weight). This limits operations that LCCs and FSCs can undertake with 737/A320 sized aircraft (similar to European and North American LCCs that operate low frequency networks).
  4. Along with above, is how privatization of airports is impacting capability to spend and well-manage infrastructure development (which includes considering constraining corruption, and allowing government powers to urge development).
  5. Clarity on how funding structures and cost-sharing measures for these Regional Accessibility Programs be granted. This also requires rigorous conversation with airlines being charged and receiving this money.
  6. Development of airspace is taking a leap, by require further understandings and implementation (especially in TCU and Tower Control capacity management) as follows (http://centreforaviation.com/about-capa/updates/india-air-traffic-management-unique-capa-report-the-atm-system-and-aais-plans-for-integration-217602). It is also noteworthy that developing regional Indian accessibility by reducing average aircraft size impacts capacity which can be delivered to airports it connects to.
  7. Regional services are bleeding money in Indian FSCs, and require airlines to get hands on efficient operations of the regional fleet. A finding from a Minister appointed consultancy firm examining issues in-depth and recommend measures to improve regional connectivity suggested the purchasing of even smaller jets by FSCs (namely AI and 9W) to tap regular high-frequency and expansive networks from regional centres. Little is recognized that smaller aircraft and subfleets stacks up costs quickly, and is less economical to operate than low-frequency operations of simplified fleets. Most airlines in India (especially with diverse operations and regional arms, and contrasted to notable standouts), are to date still incredibly unprofitable.
  8. The Open Skies with 5000km range from DEL, misses key market such as all of Western Europe, Japan, Australia and major centers around Indonesia.
  9. With 72% of India’s air traffic limited to 10 domestic airports; it is crucial airlines consider upgauging aircraft size (in an efficient manner) from high-frequency narrowbodies to free up space or allow higher capacities to move at major airports.
  10. Privatization of Air India which, being the national carrier, may opt to shed costly operations which may facilitate accessibility to regional centers. Air India Regional is among the lowest performing airlines/subsidiaries in India at the moment.
  11. The current high sales tax on aviation fuel is a huge concern for running costs of airlines (especially regional services where fuel scarcity drive stronger pricing powers and hence costs).
  12. Indian airlines need to begin recognizing that operating a large hub-spoke model in choke-point airports is an ineffective way to deliver premium capacity with any form of satisfaction. Rather, having strong proximate partners and multiple bases and focus cities is crucial. An example here is utilizing the codeshare freedoms and frequency cap removals to promote international accessibility of low-access destination niches to an international partner airline gateway or focus cities (eg; 9W will continue to diversify and grow their fleet allocations at many new and regional bases underserved and developing; as oppose to DEL, BOM, HYD and BLR alone. These are to allow flights to hubs like AUH and AMS, and focus cities such as DXB, HKG, SIN etc.).
  13. Indian airlines need to re-strategize and re-conceptualize efficiency beyond handsome growth of new aircraft (especially when these respective carriers aren’t necessarily making money from core operations). These airlines must learn from the lessons of the EU, North America and Asia to rethink their businesses ground up, and undertake consolidating measures, remove costs and unprofitable activities, and behaved capacity and profit-oriented discipline.
  14. Poor collaborative structures between regulatory bodies and airlines/airports have been a critical issue of concern, with compliance and regulatory-violation issues being noted in the recent few years.
  15. Current downturns in cargo require airlines to, once again, discipline growth and costs in this sector.
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