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Open skies get a push in draft aviation policy

... Business Standard:

The civil aviation ministry released its draft policy on Friday, seeking to offer more choice to passengers flying abroad by liberalising bilateral rights. The open sky proposal will allow India to enter reciprocal agreements with South Asian neighbours and countries beyond 5,000 km. This will result in unlimited flights to and from Europe and the Saarc (South Asian Association for Regional Cooperation).

While proposing to liberalise rules that allow foreign airlines to enter India, the draft has kept options open on the controversial 5/20 policy. Fledgling airlines like Vistara and AirAsia have been seeking abolition of this rule, which prevents domestic airlines from flying abroad before they have completed five years of operations and own 20 aircraft.

"The 5/20 policy has to be abolished without condition, as it is detrimental to the interests of Indian carriers. India is the only country that penalises its own carriers. Dubai airport alone handles 150 airlines. Dubai's gain is India's loss," said Vistara chief executive Phee Teik Yeoh in Mumbai.

India's aviation sector has seen high growth over 10 years, during which domestic passenger traffic grew 4.4 times and domestic cargo traffic was up 2.6 times.The proposals seek to improve regional connectivity, bring down fares for short-haul flights and facilitate higher foreign investment. The government has also drawn up plans to boost air cargo, maintenance, repair and overhaul activities through tax incentives and favourable policies.

There are issues on which the policy is silent, like the future of Air India. "We would have liked to have seen more emphasis on addressing the negative fiscal environment airlines face, like sales tax on jet fuel, service tax on fares, airport charges, and withholding tax on aircraft leases. There is no reference to the future of Air India. The government's ownership of the national carrier negatively influences policy decisions and has cost Indian taxpayers billions of dollars," said Kapil Kaul, chief executive officer, South Asia, Centre for Asia Pacific Aviation.

A two per cent cess has been proposed on all domestic and international tickets to fund a new regional connectivity scheme, which seeks to create a pool for the purpose of viability gap funding (VGF).

The government plans to revive 476 airstrips/airports in the country, of which 75 are in use. No-frills airports would be built at a cost of Rs 50 crore, depending on the demand in the sector. Scheduled commuter airlines would get viability gap funding (VGF), which would be indexed to jet fuel prices and inflation. The VGF would be shared by the centre and states in 80:20 ratios. Sectoral experts believe capping air fares at Rs 2,500 may not be viable as the cost of setting up regional airlines (operating aircraft with 50-100 capacity) would be Rs 150-200 crore.
 


However, domestic airlines are disappointed as the government has increased the number of routes in Category I (metro and large cities), but the policy still requires these airlines to deploy a percentage of Category I capacity on routes like Jammu and Kashmir and the Northeast.

The effort to open up Indian skies to foreign airlines is perhaps the most ambitious measure in the draft policy. The government seems keen to adopt an open sky policy with all countries in the world from April 2020. The civil aviation ministry said it would examine increasing the foreign direct investment cap from 49 per cent if it decided to implement open sky with all countries, including those within 5,000 km range.

To begin with, the policy proposes to liberalise air traffic rights with Saarc and countries beyond 5,000 km on a reciprocal basis. This would include countries in Europe, Africa, Australia and the Americas. Commenting on the policy, AirAsia India chief executive officer Mittu Chandilya said, "The suggestions made in the policy look positive for passengers and the aviation sector as a whole."

The ministry has also proposed auction of additional rights beyond the existing rights to countries within 5,000 km. Bidding will be introduced if domestic airlines have not fully utilised their quota.

At present, India has an open sky agreement with the US and a nearly open sky deal with the UK. The proposal will enable European airlines to have unlimited flights to major airports in India, countering the challenge posed to them by Gulf carriers.

India's open sky policy with South Asian countries will also enable European airlines to launch flights to other countries in South Asia over Delhi or Mumbai. Sources, however, said European airlines may not be keen to launch onward flights like Frankfurt-Delhi-Colombo, and would rather carry traffic directly to their hubs in Europe.

"The civil aviation ministry is encouraging airline code shares and no prior permission from the ministry will be required. On the flip side, the ministry has proposed amending the route dispersal guidelines, increasing the Category I routes. Since CAT I routes will increase, the absolute flying requirements to honour CAT II and CAT IIA and CAT III routes will increase," said aviation expert Anurag Jain.

CAT II covers flights from metros to Jammu and Kashmir and the Northeast. CAT IIA covers flights within Jammu and Kashmir and the Northeast. CAT III covers all other routes not included in these three categories.

Airlines are required to deploy a particular capacity flown on CAT I routes on CAT II, IIA and III routes and the ministry has said this would remain unchanged. In its policy draft the ministry, however, said it would try to ensure that the rationalisation of CAT I routes did not impose undue financial and operational burden on airlines.

WINDOW OF OPPORTUNITIES

BILATERAL TRAFFIC RIGHTS

  • Open sky for countries beyond 5,000 km radius from New Delhi

    IMPACT: To benefit airlines from Europe, Australia, South America, among others, to operate to and from India without restriction on of flights, seats
     
  • Auction seats for those in 5,000 km

    IMPACT: India will earn from auction proceeds; airlines from Gulf, West Asia and South East Asia will be able to increase frequency to and from India
     
  • Increase in FDI cap from 49% to above 50% to be considered in 2020

    IMPACT: Would open doors for participation of more foreign carriers in Indian aviation sector

5/20 RULE

  • Uncertainty remains as three ways considered: keep it, scrap it or replace it with credit-based system

    IMPACT: New domestic airlines Vistara and AirAsia would have to wait longer to fly abroad due to lack of clarity on 5/20

AIRPORTS

  • To encourage development of airports through PPP mode

    IMPACT: Would help in modernisation of airports

REGIONAL CONNECTIVITY SCHEME

  • Fares to be capped at Rs 2,500 per hour flying on regional airports; Proposal to levy 2% cess on tickets and use collection to fund airlines' losses if they fly to remote areas; 80% funds to flow from Centre, rest from states

    IMPACT: Move would incentivise development of low-cost airports, domestic, international fares would go up; 2% levy likely to bring in Rs 1,500 cr a year

ROUTE DISPERSAL GUIDELINES

  • Policy to continue; additional routes to be added to Category-I (metro) routes

    IMPACT: Airlines would have to deploy a share of traffic to non-metro regions; won't be able to withdraw from there

GROUND HANDLING

  • Airlines can handle operations related to flight on their own through contract workers

    IMPACT: Help airlines reduce cost of operations
 
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