UDAN Faces Legal Hiccups

The government had in June this year announced its civil aviation policy. Its fallout has been – Airlines will have to pay Rs 7,500 for every flight up to 1,000 km, Rs 8,000 for those between 1,000 and 1,500 km and Rs 8,500 above 1,500 km.

As per the Union civil aviation minister Jayant Sinha, the national civil aviation policy, including the Regional Air Connectivity Scheme (RCS), is expected to increase the number of functional airports in the country to 150-200 in the next few years; there is going to be a massive increase in airport capacity in the country with an expected investment of Rs 1,50,000 – 1,70,000 million by the AAI in the up gradation and modernization of its airdromes.

According to data twitted by the Minister, the aviation sector served 8.67 million people in October 2016. In contrast, the sector had provided services to 7.03 million people in October 2015. The total number of air travelers between January and October 2016 increased to 81.37 million, from little over 66.06 million during the same time period in 2015.

Noting that the aviation sector in India is changing very dramatically, Sinha added, “There is going to be a massive increase in airports capacity in the country.”

At present there are 75 functional airports in the country. The RCS is now being envisaged with a view to connect smaller cities with the metros which will result in more number of airports coming up.

The Directorate General of Civil Aviation (DGCA) has notified a new cess applicable on domestic flights in order to create a corpus for UDAN under RCS. It has been marked to all airlines and posted on the DGCA’s website.

This move has, however, been challenged in court by the airlines despite apparently knowing that their plea may not be entertained. The group Federation of Indian Airlines (FIA) comprising IndiGo, Jet Airways, SpiceJet and GoAir has filed a petition challenging the cess in the Delhi high court. 

The notification reads –
Airlines will pay
– Rs 7,500 for every flight up to 1,000 km,
– Rs 8,000 for flights between 1,000 and 1,500 km and
– Rs 8,500 for flights over 1,500 km.

The airlines are naturally expected to pass on the cost of the new UDAN charge to their passengers, but they are not sure whether they can do so under the law. If passed on, the cess would come to about Rs 50 per passenger on a 180-seater Airbus A320 plane —flown by most of these budget airlines.

“The central government has decided to impose a levy on the following scheduled flights being operated within India at the rates indicated against them to fund regional air connectivity fund created under powers conferred under Rule 88-B of the Aircraft Rules 1937,” DGCA Director General B.S. Bhullar said.

The current rules already mandate that airlines should mark a certain percentage of their total flights for under served areas. Bhullar said those flights would be exempted from the new levy.

Operators of smaller planes such as ATRs, (operated by Air India and Jet Airways) and Bombardier Q400s (operated by SpiceJet) which are below the take-off mass of 40,000 kg, need not pay this levy. These planes mostly fly short-haul routes.

Flights started by operators in future using funds from the UDAN cess will also be exempted from these charges.

The Airports Authority of India has been designated as the nodal agency to monitor the collection of funds from airline operators.

The funds will also be open to audit by the Comptroller and Auditor General of India (CAG)

The ministry expects an estimated Rs 4,000 million to be collected annually as a result of this scheme. The fare for a one-hour journey of about 500 km on a fixed-wing aircraft or a 30-minute journey on a helicopter has been capped at Rs 2,500, with proportionate pricing for routes of different lengths and duration.

The court, however, has declined to stay the imposition of the levy.

The ministry hopes that, if all goes well, a sum of Rs 4,000 million a year or so can be raised to feed the RCS. However, aviation analysts believe that if the ministry had properly conceptualized the non-aeronautical revenue arising out of over 150-200 new and revamped airports, more than Rs 14,000 million a year could have been raised. That would not have inconvenienced anybody; the air fares would have dropped further; and above all, the whole scheme could have been made self – reliant. There would have been no need of any sort of subsidised relief. 

FIA contends that the cess will be a huge burden on the financials of the airlines. As per FIA, the ministry of civil aviation did not have the authority to introduce the levy in this manner. It said the levy made up for the government’s share of the Regional Connectivity Fund (RCF) towards the public purpose of enhancing regional connectivity.

Thus, the Government’s ambitious much hyped Regional Air Connectivity Scheme is going to run on crutches which might not survive in the long run. This attitude of the government proves that the government knows very well that the scheme does not have any attractive inherent financial feasibility which may excite an entrepreneur. If one takes away the various sops and concessions given to RCS, apart from this levy, then one is left with only losses. Against this backdrop, several practical questions are being raised over the economical operation of the scheme. 

The next hearing is slated for 21 December.

Curious Case of Placing 1850 New Airplanes

In 2015, one of the biggest plane makers in the world, Boeing, had predicted for India a demand for 1,740 new airplanes valued at USD 240 billion over the next 20 years.

In 2016, it is saying that the country will need 1,850 new airplanes worth USD 265 billion over the next 20 years.

This increasing demand will be driven by single-aisle planes such as the 737 Max and Next-Generation 737s from Boeing and A320 Neos from its arch rival Airbus.

Boeing Corporation and others appear bullish about the Indian aviation sector, the fastest-growing market in the world in terms of passenger traffic as per the latest IATA numbers. Dinesh Keskar, Senior Vice-President for Asia Pacific and India, Boeing Commercial Airplanes interacted with media while releasing Boeing’s ‘Current market outlook for India’ report. 

Keskar elaborated on India’s need of more airplanes:

Type of Planes

Seats

Aircraft Nos.

Value USD (billion)

Single-aisle

90-230

1560

180

Wide-body

200+

280

85

Regional Jets

10

90

1

This will make India contributing to over 4.6 per cent of the global demand for 39,620 airplanes by 2035, and 4.5 per cent of world demand in terms of value,” Keskar said.

Attributing the bullish outlook to the new civil aviation policy, favorable demographics and low fuel prices, Keskar said, “India continues to have a strong commercial aerospace market and the highest domestic traffic growth in the world.”

Keskar commented on the government’s regional connectivity push, saying even as it has capped prices, the promise of refunding 80 per cent of losses, if any, will help the airlines drive the business. The government revamped rules governing the aviation industry, liberalising norms for domestic carriers to fly overseas and spreading the country’s air travel boom to smaller cities. “With the new aviation policies in place, we even see greater opportunities, and remain confident in the market and airlines sector in India,” Keskar said. Boeing

The potential for further growth is encouraging operators to scale up their fleets. At least 709 planes are on order for the next 5 years. Domestic carriers are shopping for airplanes one after another in the hope that demand will stay strong and India will eventually become the third-largest civil aviation market in the world after China and the US by 2026.

  • Jet Airways ordered 75 Boeing 737 Max in November 2015.
  • India’s largest player IndiGo, has ordered 430 Airbus narrow-body jets on top of the 108 it already flies. It is the largest order in aviation history from Airbus.
  • GoAir ordered 72 new A320neo planes from Airbus. It is planning an IPO while simultaneously it may begin International services.IndiGo adds more aircraft
  • SpiceJet intends to increase its fleet size to 150.
  • New entrants Air Asia India and full-service airline Vistara, a joint venture between the Tatas and Singapore Airlines, are accelerating their fleet expansion plans.
  • Vistara has said it will have a fleet of 13 aircraft and fly up to 20 destinations by the end of 2016. The carrier has now 11 planes.
  • Vistara is also considering branching into the regional commuter carrier business using 70-seater aircraft. A subsidiary tentatively named Vistara Express.

Big challenge : To find landing and parking spaces for new planes.

Vistara Chief Strategy and Commercial Officer, Sanjiv Kapoor said recently in a Twitter post, “Yet hundreds of A320s on order. Where will they all fly, am really curious!”

Even as Boeing predicts that India will have 1850 aircraft over the next two decades, several Indian carriers struggle today to operate their aircraft. Reason : Inadequate airport infrastructure. The airlines are just able to manage 2,000 flights a day, and only a few of them could touch the 90 percent on-time performance mark. As air travel heats up in India, the world’s fastest-growing major aviation market,  aviation infrastructure has miserably failed to keep pace with air traffic growth which has been phenomenal in recent past .

The average time an aircraft spends circling before it can land in Mumbai during peak hours is about 45 minutes to an hour, versus 25 minutes for Singapore and zero for Qatar, according to Dubai-based Martin Consulting LLC.

India plans to invest $5 billion to improve airport infrastructure, which is “inadequate” compared with China’s proposal for $130 billion in 15 years, a June research paper by KPMG and the Associated Chambers of Commerce of India said. A proposal for a new airport in the outskirts of Mumbai has languished on the drawing board since 1997. 

As much as $40 billion in investment is needed in the next 15 years to improve India’s airport infrastructure, according to estimates by Sydney-based CAPA Centre for Aviation.

“Infrastructure has to catch up as dynamics of aviation have changed,” said Mark D. Martin, founder Martin Consulting. “Countries must make sure that airports are built not just for bigger jets, but also for smaller, 5-10 seater planes to connect its people.”

The problem is not just limited to India. There has often been a gap between Mumbai Airportintention and infrastructure delivery for Asian airport, according to a 2015 research paper by OAG Aviation Worldwide.

It isn’t the case that India hasn’t done much in the past 10 years to develop airport infrastructure. It spent $2.7 billion to upgrade the airport in New Delhi and added a new terminal in 2010, while it spent another $885 million to modernize the Mumbai airport in 2014. 

Still there have been other airports which were not so lucky. There are 394 other unserved and 16 under-served airports in the country. Out of the nation’s 450 airstrips and airports, only 75 handle commercial airlines, with the rest remaining idle or rarely used because of weak demand, according to the government. “No aircraft movement takes place at 32 airports out of 125 airports, including civil enclaves belonging to Airports Authority of India (AAI),”Minister of State for Civil Aviation Jayant Sinha has said in a written reply to the Parliament.

Prime Minister Narendra Modi is trying to revive many of such unserved and under-served airports and airstrips to enhance regional connectivity. This has been a key highlight of the New Civil Aviation Policy. Weak demand have made many of these airports unviable even for commercial single-aisle jets. Moreover, in an effort to attract capital, Prime Minister Narendra Modi in June 2016 liberalised norms for foreigners, who can now fully own existing airports without government approvals.

jayant-sinha“In order to implement the scheme, a proposal has been submitted to the Ministry of Finance for making a budgetary provision of Rs 46,500 million to revive a total of 50 such airports/airstrips,” Sinha said in a written reply to the Rajya Sabha. “The scheme is to be implemented over a period of three years.”

Development and upgradation of airports is a continuous process and is undertaken by AAI depending on traffic demand, commercial viability and socio-economic considerations, among other factors.432526-sanjiv-kapoor-zeenews

“We need to move fast,” Sanjiv Kapoor said in an interview. “That’s a huge issue. You cannot have a commercial capital and a political capital that do not have slots available for growth,” he said, referring to Mumbai and New Delhi.

India finds itself hard-pressed to find parking slots for new airplanes. The lack of infrastructural facilities may even force carriers to defer deliveries. This will eventually immensely hurt plane makers like Boeing and Airbus Group SE.

Government Liberalizes FDI in Civil Aviation, Industry Welcomes Decision

The new civil aviation policy cleared by the Indian cabinet in June 2016 is targeting one objective – ‘Take flying to the masses.’ If successfully implemented, this could well be the game changer in the context of Indian economy in general and India’s civil aviation in particular. The civil aviation ministry has announced several steps to revive the Indian Civil Aviation. It has mooted the scheme of thRegional Connectivity System in the policy that seeks to connect unconnected small towns with the help of Viability Gap Funding (VGF). This is to be done by capping fares at about Rs.2,500 for those routes and helping airlines to recover some of their losses. The funds will be generated by charging a cess on other domestic flights.

Besides, airlines flying to tier II and tier III cities will be exempted from landing charges, parking charges and navigation charges to boost RCS. Airlines are also given incentives to fly to tier II and tier III airports with sales tax levied at 4% for jet fuel at these facilities. They need to pay 4-25% elsewhere. The whole idea is in sync with the PM Narendra Modi’s vision – “Civil aviation will take flying to masses. Bring the remote areas of the country closer to the mainstream.”

However, the draft civil aviation policy did not mention anything about the FDI limits in domestic airlines. Less than one week later, the government declared that it will relax FDI norms in civil aviation. This included a decision – “100% FDI for scheduled carriers. “

As per an official release:

– 100% foreign investment will be allowed in “scheduled air transport service/domestic scheduled passenger airline and regional air transport service”,
– Only non-airline players will be allowed to bring in 100% FDI in local carriers.
– Foreign airlines would continue to be allowed to invest in capital of Indian companies operating scheduled and non-scheduled air-transport services up to the limit of 49 percent of their paid-up capital and subject to the laid-down conditions in the existing policy.
– For NRIs, 100 percent FDI will continue to be allowed under the automatic route
– 100% FDI permitted under automatic route in brownfield airport projects

Under the new set-up, 49 percent will be through the automatic route and for anything beyond, government nod will be required. At present, up to 49 percent FDI is permitted in scheduled airlines.

The PMO tweeted, “Key reform decisions were taken at a high level meeting chaired by the PM, which makes India the most open economy in the world for FDI.”

The whole industry welcomed this landmark announcement. Sharp rally in shares of the listed air carriers – SpiceJet, Jet Airways and InterGlobe Aviation – was observed. The stocks gained over 5%.

nirmalaBriefing media, Commerce Minister Nirmala Sitharaman said the decisions would help in attracting more investments, creating jobs and making India the global manufacturing hub.

Will new aviation policy make regional flying feasible ?

Will such announcements help new airlines and regional airlines make profit ?

Will the government aim of realizing its target of growing domestic passenger traffic nearly four-fold to 300 million by 2022 be attained ?

May be not. But sure, the overall market size can explode, experts feel.

G.R. Gopinath, who founded India’s first low-fare carrier Air Deccan, said that the intention of ‘Viability Gap Funding’ is good but not practical to implement as state governments are involved and it is difficult to determine losses of regional airlines.Gopinath

“The cost of a 1 hour flight at 75% occupancy is Rs.3,500 to Rs.3,800. The government wants airlines to charge not more than Rs.2,500 and losses will be reimbursed! And state government is involved. How do you determine the loss of the airline? Difficult to implement. Messy,” Gopinath said.

“New airlines may not be able to make profit overnight as they will need to create a network and feed for making money from the potential new market,” said K.G. Vishwanath, a partner at consulting firm Trinity Aviation Consultants Pte. Ltd of Singapore. Existing ATF prices, and local market conditions at most imply a break-even seat occupancy requirement of over 85% which is very difficult to achieve in the initial years,” Vishwanath calculated.

Even then, Vishwanath mentioned that it is incrementally positive for existing pan-India airlines -IndiGo, SpiceJet, Jet Airways, Air India, and GoAir- since new customers will now enter the market from tier II markets.

However, he said that the existing regional airlines or newer airlines such as Vistara (run by Tata SIA Airlines Ltd) and AirAsia India presently don’t have the size to tap this golden opportunity profitably.

Vistara and AirAsia India are pan-India airlines while Air Costa Aviation Pvt. Ltd, Air Pegasus (Decor Aviation Pvt. Ltd) and TrueJet (Turbo Megha Airways Pvt. Ltd) are regional airlines in India. Regional airlines are required to operate in small towns within one of the designated regions—north, south, west, east and the north-east. But they are not allowed to connect to more than one major city, except those licensed to fly in the southern region.

“Outlining the RCS intent without airport infrastructure in place resulting in huge shortage of slots at major airports like Mumbai and Delhi and without state’s buy-in will be of no use neither for the existing airlines nor for any potential start-up airline,” feel aviation analysts. This apparently influenced the government’s decision on airports – “100% FDI permitted under automatic route in brownfield airport projects.”

“If the government gets its act right, one thing is for sure. The overall market size can explode,” Vishwanath of Trinity added.

The government’s move to relax FDI norms in sectors, including civil aviation, single-brand retail, defence and pharma, will help attract big investments and boost job creation, India Inc said.

“Liberalisation of the FDI regulations reflects the government’s commitment to reforms and openness, and reassures investors that ease of doing business remains a high priority,” Chandrajit Banerjee CII Director General said, “Taken together, the FDI rules announced today will attract big new investments across key sectors such as food processing, defence production, pharmaceuticals and civil aviation, among others, thereby adding to growth and employment.”