The New Civil Aviation Policy Falls Short Of Being Transformative

The Union Cabinet approved the National Civil Aviation Policy yesterday (15 June). Though the ministry had released the draft policy on 30 October 2015, it took seven months to present to the Cabinet. The draft policy generated a lot of controversy in the media. The proposed auction of unused bilateral rights and the necessity of the 5/20 rule were main areas of contention.

The controversial proposal to auction unused bilateral rights has not been adopted in the new policy. Bilateral rights are the agreements between two nations to allow airlines to launch flights into each other’s territories. It is important to note that the International Air Transport Association director general Tony Tyler had criticised the proposal as anti-competitive.

This method of allocation of such rights is not used anywhere in the world. It might be better than the present non-transparent allocation but an open sky policy is better than both.

The new policy takes a right step in that direction by allowing ‘Open Sky’ arrangements on a reciprocal basis to countries outside a 5000 km radius.  The auction was also supposed to go into partially funding the Regional Connectivity Scheme (RCS).

The 5/20 policy will be replaced by 0/20 policy. Airlines with at least 20 aircraft or those which deploy at least 20 percent of their planes on domestic routes will be allowed to start overseas operations. The government has made a compromise here by keeping the ‘20’ part of the rule, probably to placate the existing players which it should not have done when its own minister for civil aviation has termed the rule as defunct.

The RCS mentioned in the draft policy will come into effect in the second quarter of 2016-17. The airfare on routes operated under this scheme has been capped at Rs. 2,500 for one-hour flights. This will be enabled by Viability Gap Funding (VGF). In his Press conference, Minister of State Mahesh Sharma added that the ‘one hour’ part of the cap will be converted to miles flown. As explained in my analysis of the draft proposal, the above-mentioned subsidy scheme will be combined with a number of sensible measures like no-frills airports, simplified security solutions to be provided by the state government free of cost and reductions in service tax on the sale of tickets.

The current range of taxes on Aviation Turbine Fuel (ATF) in states is between four to 25 percent. Only those states that reduce the tax on ATF to less than one percent will be allowed to participate in the scheme. In addition to reducing taxes on ATF, states need to contribute 20 percent of the VGF in their state’s RCS routes. States from the North East will only have to contribute 10 percent of the VGF.

It is important to note that in the draft, this subsidy scheme was proposed to be funded through a two percent levy on non RCS routes. It seems that the details have changed. Rajiv Narain Choubey, Secretary in Ministry of Civil Aviation, has promised more details on the funding of this scheme in the next ten days.

One thing is certain, normal passengers should be prepared to take a hit due to increased fares. In the Press conference, Sharma also remarked that 50-80 airports have already been identified for RCS. A few minutes later, he contradicted himself by adding that this process will be driven by demand from states. It is also possible that many operators will fly into states that put in place those tax incentives in airports not included in the centre operated RCS scheme.

Secretary Choubey also claimed that a few entrepreneurs have met him and said that they would fly on many routes on the basis of tax incentives alone and wouldn’t need the VGF. If that is the case, one wonders if it would not be sensible to try out a scheme which involves only tax incentives. What is the pressing need to create a new subsidy scheme?

Another huge disappointment was the fact that the unnecessary Route Dispersal Guidelines (RDG) haven’t been scrapped. As I had shown in my analysis of the draft, capacity deployed by airlines in Category II and Category III (low-profit and non-metro) routes exceeded requirements. Some airlines like Air Asia have met nearly seven times the required flights target. What was the need to retain the RDG which reduces efficiency?

Some of the positives include the step to allow airlines the choice to do ground handling at airports on their own although there is the condition that contract workers are not to be used for this purpose.

Other important and positive step taken is new airport development. The Civil Aviation Ministry has created a sensible policy to eliminate the effect government signed contracts with airport operators regarding non-development of new airports within 150 km of old airport has on air fares. This will be important for the long-term development of airport infrastructure in India.

A few other positives include relaxed regulations for flying helicopters enabling helicopter ambulances, process rationalisation with airports allowing passengers to save time which is presently wasted due to waiting times in security and immigration checks and rationalisations of customs duty for Maintenance, Repair and Overhaul (MRO) operations.

Additionally, there is a five-year relaxation of airport royalty and additional charges for MRO operations. This may help bring back MRO business of Indian airlines lost to Qatar back into India.

To sum up, this new policy is a missed opportunity. What could have been a potentially transformative civil aviation policy has been reduced to a subsidy-filled dud which can at best be described as ‘better than UPA’.

The markets seemed to agree with this view when airline stocks soared on intraday trading before landing flat yesterday.