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.

Can Air Costa be Termed as a Failed Regional Air Connectivity Story ?

August 4, 2016.

Air Costa, the regional airliner from Andhra Pradesh, has halted its flight operations.

Air Costa encountered financial issues with its leasing companies.

Growing cash problems facing new airlines exposed. 

South India’s regional air carrier Air Costa had to suspend operations due to payment issues with its plane lessor. It thus became the second regional airline to do so after Air Pegasus which grounded its operations few days ago. Air Costa regularly gets listed as one of the highest number of monthly flight cancellations and delays as per DGCA data. 

Read : Another Casualty: Air Pegasus; Regional Air Connectivity has Few Takers Left

On July 27, Air Pegasus had cancelled all flights indefinitely. Its planes were repossessed by Dublin based lessor Elix Aviation for non-payment of dues. Its operations remain grounded. It hasn’t even started refunding passengers yet.

The twin developments have triggered concerns over the financial viability of regional airlines. The issue assumes importance given the Modi government’s ambitions around the civil aviation sector.

15871975628_2746b61edbAir Costa’s Embraer E190 jets have said to been grounded by the lessor GE Capital Aviation Services because of pending lease rentals. A lessor gives a grounding notice to the airline when it fails to honor its payment schedule. Ignoring the notice leads to repossession of the aircraft by the lessor. The airline is said to have delayed rent payments on its three E-190 planes to leasing company GECAS. Air Costa has not inducted a fourth E-190 plane because of a dispute with the lessor. There was also a dispute over re-delivery of an E-170 aircraft.

Air Costa stats : Jan-June 2016

The airline, promoted by Vijayawada, Andhra Pradesh-based construction firm LEPL Group, had plans to fly to New Delhi, Bhubaneswar, Varanasi and Pune from this summer. It started flying in April 2015. At present, Air Costa carries about 3,000 passengers – 24 daily flights across nine destinations – Jaipur, Ahmedabad, Bangalore, Chennai, Hyderabad, Visakhapatnam, Coimbatore, Tirupati and Vijayawada. Air Costa is now facilitating 100 per cent refund of the fare and re-booking facility for the passengers. 

Kavi Chaurasia, vice president, marketing and communications, Air Costa states in media: “We’ve just halted for a day owing to the financial issues with our leasing firms. We are negotiating with them. There was nothing specific and we want to get rid of the issue as soon as possible so that we can start operations tomorrow. I’m 100 per cent sure that we’ll be resuming operations from Friday. These issues are bound to happen for a start-up airline. There are absolutely no issue regarding salaries in Air Costa.” He, however, did not give further information on the issues and leasing companies.

air costa“There is no comparison with Pegasus. They had different issues altogether. They even applied for de-listing. Whereas, we want to expand for pan-India presence.” By the end of this calendar year, Air Costa intends to add two more aircraft to its current three Embraer 190 aircraft, as per Kavi Chaurasia.

While the airline claimed it will resume flying, past stories of a cash crunch and unpaid salaries along with the overall financial struggles of regional carriers have cast doubts on Air Costa’s survival.

The twin stories of Air Pegasus and Air Costa have emerged barely two months after the government launched its ambitious regional connectivity scheme. Even as the government is optimistic that the new civil aviation policy cleared on 15 July 2016 will boost regional connectivity and take flying to the masses, experts believe that it’s not possible because regional airlines are inherently unprofitable. Any new airline may not be able to make a profit overnight. They need to be initially financially sound and secured, need to create a network and feed for making money from the potential new market.

Rajiv Nayan ChoubeyIt appears that the only way such regional airlines can survive is by means of a viability gap funding by the government. But, even in that scenario, doubts shall remain over the logic of operating such an airline.

The crisis among regional carriers is coming to light as the government is in the final stages of unveiling a regional connectivity scheme. Civil Aviation Secretary Rajiv Nayan Choubey said regional carriers should be able to configure their business model to meet their financial commitments. “They now operate in a market environment. Under the regional connectivity scheme, they will operate in a protected environment,” he added.

GoAir Firms up Plans to Go International: Rs 10,000 Million IPO Coming Up

GoAir is the leading Indian budget Airline
GoAir has a captivating theme, ‘Fly Smart’.
GoAir has now come up with a masterstroke.
International operations set to begin, IPO to be launched
Rs 10,000 million to be raised easily, may surpass IndiGo
72 + 72 A320neos already ordered !!

India’s budget airline GoAir has finally firmed up its well-laid plans to go International. Simultaneously, it is preparing for listing in the 2016-17.

Earlier report : GoAir can now Fly International; May Launch an IPO

Go Air, a Wadia Group company, has sought permission to fly to Phuket, Bangkok, Sharjah, Kuwait, Kunming and Guangzhou from its two hubs in Delhi and Mumbai by April 2017. By October 2017, the airline intends to connect Kochi, Chennai and Hyderabad with Dammam, Kuwait, Muscat and Sharjah.

download (6)GoAir Chief Executive Officer (CEO) Wolfgang Prock-Schauer has already written to the ministry: “We require allocations for proper planning and hence we request approval for designation as an Indian carrier to fly the routes mentioned.” 

A ministry official said the airline would be given seats on almost all routes, provided India had bilateral agreements with those countries.

Another low cost carrier in India, SpiceJet, started international operations in 2010, while the other LCC, IndiGo, in 2011. Both have built their international plans around short-haul routes.

Aviation analysts believe that it is prudent for an Indian airline to fly on shorter routes in the Middle East and Asia Pacific because most of the passenger traffic comes from those routes.

GoAir launched its operations in 2005. In 2016, the airline has major expansion plans like its other rivals. 

With the induction of the new Airbus A320neo in May 2016, GoAir’s fleet size reached the magical figure of 20 making it eligible to fly international. As of now, GoAir normally operate with a passenger load factor of 83.7%. Passengers carried by all domestic airlines in India during Jan-Apr 2016 were 30,935 million of which GoAir carried 2.54 million. GoAir, thus, has a market share of nearly 8.2%.

This, aviation analysts assume, could be a possible trigger for an early listing. GoAir intended to list by October 2016 to raise around Rs 10,000 million and that made a case for it to speed up its international plans. 

Honoured with the Best Airline Award for Efficient & Quality service by PATWA for two consecutive years in a row, GoAir reported a profit of around Rs 1,660 million in 2015-16.

A former CEO of Jet Airways, now an independent analyst, Steve Forte’s views ondownload (13) GoAir are : “If GoAir starts a successful international operation, its value could increase substantially in the event of an initial public offering (IPO), especially if it has a foreign carrier to back it up. It is important to know that the initial strategy of the founder (Wadias) was to create an airline with the ultimate goal of an exit. The IPO could be the beginning of such a strategy. GoAir will be a good investment for a foreign carrier wishing to establish a foothold in India.”

In its preparation for expansion and for the IPO, GoAir had made Prock-Schauer CEO and managing director in April.

Positioned as ‘The Smart People’s Airline’, Go Air has chosen Airbus for its ambitious expansion plans. A320neo being at the core of its plans.

Further, as part of its  expansion, GoAir has placed an order for 72 more Airbus A320neo planes worth around $7.5 billion at list prices. Wolfgang Prock-Schauer responded to queries on A320neo aircraft deal with the airbus: “We had ordered 72 in 2011. These will be delivered till 2020. The 72 planes we ordered in July 2016 will be delivered between 2020 and 2025. So, this order takes care of fleet requirements till 2025.”

Today, an Airbus A320 costs $98 million, while an Airbus A320neo costs $107.30 million. Airbus claims that this new type of aircraft burns 10-15 per cent less fuel than the existing versions. As of now, another budget airline IndiGo is the only operator of A320 neo in India. With the  induction of A320neo planes, Go Air will like to expand its network further and offer fliers better connectivity and continue its growth as one of India’s preferred low-cost airline.

neo“The new A320neo provide us the competitive edge to achieve our growth targets and help us strengthening our presence in the wider region. It also reaffirms Go Air’s commitment to deliver the most modern, comfortable and excellent air travel experience to all customers as well as to strengthen the sustained positive growth and business expansion of the company. The new aircraft will help us in unlocking new domestic routes while providing a springboard for continued international network expansion in the years to come.” said Wolfgang Prock-Schauer.

“Unbeatable operating economics of the A320 Family,” said Airbus Chief Operating Officer Customers, John Leahy, “Go Air is among the three first A320neo operators, and with an order for 144 is one of the leading operators of the type.”

Read : IndiGo Shares Soar on Stock Market Debut

Trade analysts have now reasons to look forward to a another blockbuster IPO offering.

In 2015, the IPO of  IndiGo, was subscribed 6.14 times, A320neo being the chief factor. When IndiGo did not receive the neos by December 2015, its shares nosedived. It recovered partially later when IndiGo took delivery of Asia’s first A320neo aircraft on 10 March from Airbus.

Whether GoAir IPO could raise the bar set by IndiGo earlier in November 2015, remains to be seen.