It’s a leap for the skies

The new policy reflects a more liberal regime and a pro-growth approach, seeking to create a level-playing field and promote regional connectivity

THE National Civil Aviation Policy (draft released in October 2015) was cleared by the Cabinet on June 15. The 5/20 rule has been replaced with a new mandate that requires carriers to have a fleet of 20 aircraft or 20% of their total capacity, whichever is higher, deployed in domestic operations before going international. In an effort to push regional connectivity and make flying more affordable to the masses, the policy has capped airfares on un-served regional routes. However, the policy advocates the viability funding mechanism to support airlines on such unviable routes. The policy centred on regional connectivity reflects a more liberal regime and pro-growth approach by creating a level playing field.

Regional connectivity and dilution of 5/20 rule the focal points

With the policy focused on regional connectivity, the key highlights are:

◗ Enhance regional connectivity: Fares capped at all inclusive

R2,500/pax/hour for regional destinations, with some aid in the form of viability gap funding (VGF) for airlines under the regional connectivity scheme (RCS). VGF will be funded by way of a small levy per departure on all domestic flights (except regional), to be decided by the ministry. States and other stakeholders are to offer concessions for being eligible under this scheme—20% of VGF to be funded by states, VAT on ATF to be 1% or less, airport charges waived off, reduced service tax on tickets, and lower excise duty of 2% on ATF.

Replace 5/20 Rule: Now a requirement of 20 aircraft or 20% of capacity, whichever is higher, has to be deployed in domestic operations before an airline goes international.

Rationalise maintenance, repair and overhaul (MRO): Ministry is to persuade state governments for zero VAT on MRO activities, ensure adequate land for providers, and no airport royalty and additional charges on MRO service providers.

Route Dispersal guidelines (RDG): Category I routes rationalised on a more transparent criteria. Percentage of Cat I capacity to be deployed on Cat III revised to 35%.

Bilateral traffic rights: Open sky policy with SAARC and countries located beyond 5000 km from Delhi. Method will be recommended for allotment of additional capacity entitlements to those foreign airlines that have utilised their limits.

Outlook: India to benefit from progressive policy

The new civil aviation policy reflects a more liberal regime and a pro-growth approach that seeks to create a level-playing field and promote regional connectivity. The regional connectivity scheme augers well for players like SpiceJet, though dilution of the 5/20 rule will undoubtedly heighten competitive intensity in the international market over medium to long term for the incumbents.

Regional Connectivity Scheme

The RCS, which will come into effect from Q2FY17 (draft had proposed starting from Q1FY17), will revive some airstrips/airports as no-frills airports at an indicative cost of R500 m-1 bn. Selection of the airports will be demand driven and also in consultation with the respective state gover nments, which need to commit on providing certain concessions/facilities at concessional rates to the airline operators:

VAT on ATF to be 1% or less

20% of the total VGF to be funded (10% in case of NE states)

Provide police and fire services free of cost. Power, water, and other utilities at concessional rates.

A detailed scheme is expected to be in public domain for stakeholders’ consultation regarding implementation of RCS. Some airports, which are operational as per the civil aviation ministry, do not have commercial flights operating from there. The ministry targets to have airports having scheduled commercial flights to increase from 77 in 2016 to 127 by 2019 with the help of this scheme. Our calculations suggest that at a levy of 1% on the domestic routes (other than regional), the regional connectivity fund should be able to fund 89 such regional routes (at VGF of R1,000/seat on a 80-seater aircraft with PLF of 80%).

The 5/20 rule

The new policy has replaced the earlier 5/20 rule with a scheme that provides a level-playing field. All airlines need to deploy 20 aircraft or 20% of total capacity (in terms of average number of seats on all departures put together), whichever is higher, in domestic operations before they are eligible to fly international. As highlighted in our note Aviation— The 5/20 Rule: Industry splinters; sector update dilution of the rule will make way for domestic carriers to deploy capacity on international routes. We envisage this to heighten competition over medium to long term for the incumbents, especially Jet Airways as 60% of its capacity (Q4FY16) is deployed on international routes, followed by SpiceJet (24%) and IndiGo (10%).

Route Dispersal Guidelines

In the policy, category (Cat) I routes are being rationalised based on transparent criteria, i.e., flying distance of more than 700km, average seat factor of 70% and above, and annual traffic of 5 lakh passengers. To that extent the current routes under this category get revised from earlier 12 to 18 (2 go out and 8 get added under the new criteria). Review of these routes will be done by MoCA once every 5 years. While the percentages of Cat I capacity to be deployed on Cat II/IIA remain the same as earlier (10% and 1%), the requirement for Cat III stands revised from earlier 50% to 35%.

All the airlines have sufficient capacity deployed on Cat III routes; however, Jet Airways is on the borderline on Cat II routes which needs to be stepped up given that more routes get added on Cat I.