The Contents and Discontents of the National Civil Aviation Policy

[Guest post by Pratiek Sparsh Samantara, who is a 5th
year BA, LLB (Hons) student at NALSAR Hyderabad]
The National Civil Aviation Policy (NCAP) was released on 15 of June
2016 with a view to making travel by air more accessible, and the related
infrastructure more efficient. This is the first time an integrated aviation
policy has ever been released, and it was long overdue. It has been forecast
that India has the potential to be among the top three nations in terms of
domestic and international passenger traffic: “It has an ideal geographical location between the eastern and western
hemisphere, a strong middle class of about 30 crore Indians and a rapidly
growing economy
”.[i]
However, it is currently languishing at the 10th position in terms
of total traffic, and the domestic market has become volatile. Many regional
airlines have failed
in the last decade. These include Paramount Airways, Air Mantra, Air Cost and
MDLR Airlines.[ii]
In such a scenario, it has become extremely important to address some
long-existing concerns in the industry – entry-barriers and outdated pricing or
financial strategies. The government has introduced some key changes in this
regard, first, by allowing 100% foreign direct investment (FDI) in scheduled
commercial airlines under the automatic route,
and second, through policies set in the NCAP.
This post aims to critically appraise three of the most important
policy changes introduced, which have majorly impacted three distinct
categories of stakeholders. First,
the Regional Connectivity Scheme, which affects the consumers, is analyzed for
its long-term feasibility. Second,
the partial scrapping of the 5/20 rule, which affects the airlines, is weighed
against opposing considerations. 
Finally, the third section
critiques the establishment of the ‘hybrid till model’ for affixing the
revenues earned by private airport operators. The author aims to evaluate the
viability of all three policies, and comment on changes required to satisfy the
aims of the NCAP.
1
The Regional Air Connectivity Scheme
One of the most ambitious and imperative goals of the policy is to
ensure better domestic connectivity by air at affordable rates. The Regional
Air Connectivity Scheme, or UDAN (“Ude Desh Ka Aam Naagrik”) attempts to reduce the financial burden
on operators by (a) having central or state bodies grant concessions in taxes
and tariffs, and (b) introducing a Viability Gap Funding (VGF) corpus to bridge
the gap between expenditure and revenue. A list of 398 ‘under-served’ cities
and towns has been drawn up in the scheme, the routes between which would be
allotted to operators on a demand-driven, reverse-bidding process.
The concessions that would be provided include a complete waiver of
costs for police and fire services. Utilities would be provided at highly
subsidized rates, while no airport charges would be levied for operations in
any of the aforementioned airports. However, the most attractive segment of the
policy for operators seeking an entry into the market is the VGF scheme,
whereby State Governments would be required to reimburse an applicable portion
of costs[iii] to
the operators. The tenure for the VGF scheme remains capped at 3 years from the
date of commencement of operations, while the overall RCS would be applicable
for 10 years, subject to periodic review.
As of 6 March 2017, bids have been received for more than 50
‘under-served’ airports, and the Union government has cleared a stimulus
package of Rs. 4,500 crores for reviving routes between them. Some of the
airports include smaller cities such as Kadapa in Andhra Pradesh, Jeypore and
Jharsuguda in Odisha and Agra in Uttar Pradesh. As per a recent press release,
the government plans to revive the designated airports in 3 phases
15 in 2017-18 and  2018-19 each, and 20
in 2019-20.
From the consumers’ point of view, airfare would also be capped at
certain rates. Concrete rates have not been provided as they are volatile, and
subject to a number of variables such as ATF prices and inflation. Instead, a
formula would be used to index rates as per these variables.[iv] As
things stand, the fare for a one-hour journey on a fixed-wing airplane, for 500
km, would be fixed at Rs. 2,500. Clearly, the charging of such rates demands a
degree of subsidization by the airlines.
In order to facilitate this and to ensure that no carrier is
inordinately disadvantaged by the loss in revenue, the government has directed
a ‘levy
ranging from Rs. 7,500-8,500 per flight operated by all Indian airlines. Early
in December 2016, this move was challenged before the Delhi High Court in the
case of Amit Sahni v. Union of India
through Ministry of Civil Aviation and Another
(2016) [W.P. (Civil) No.
XX/2016]. The argument forwarded by the petitioners, i.e., the Federation of
Indian Airlines (FIA)[v] was
that the levy is in the nature of a tax, and not a fee, and would therefore
require statutory sanction to be valid. The levy currently finds its basis in
the notification, which was made under Rule 133 A of the Aircraft Rules, 1937.
The issue is sub-judice, with the High Court bench having issued a notice to
the Director General of Civil Aviation (DGCA) to explain how the levy does not
place a severe burden on the airlines, and run contrary (indirectly) to the
UDAN scheme itself. It could also prove to be a severe dent in the business
model of ‘low cost carriers’, as they would be forced to pass on the levy to
passengers, thereby increasing ticket prices. Thus, the feasibility of this
scheme in the long-term, and its utility to the consumers, is questionable.
2
Scrapping of the 5/20 Rule
The 5/20 rule has been in operation since 2004, and critics point
out that it has inhibited entry into the aviation market. It proposes that national
carriers have a minimum of 5 years of commercial flight experience and a fleet
of 20 aircraft to qualify for overseas services. It is a rule unique to India,
and has been the cause for much consternation among members and aspiring
entrants in the aviation industry. Specifically, Vistara and Air Asia India had
petitioned
the government to scrap this rule and allow them to start overseas services
irrespective of experience.
The reason behind this is economics. The state of the domestic aviation
market is very competitive and routes are price-sensitive, which makes
short-term feasibility difficult for newer entrants. In such a case, the more
lucrative option of international routes would act as a protective cushion; but
the government’s rationale has been that the 5/20 rule is a necessity for
better domestic coverage. Other reasons are nebulous – back in 2004, the
Minister for Civil Aviation Mr. Praful Patel had stated that the rule was
necessary to ensure domestic airlines conform to extensive safety guidelines
before taking on international routes. This begged the question as to just how
much Indian safety standards deviated from those standardized by the
International Air Transport Association (IATA). The other reason stems from a rumour
that the 5/20 rule was brought in specifically to help Jet Airways break the
monopoly that Indian Airlines and Air India had over international routes. This
may not be substantiated with hard evidence, but it is true that the biggest
beneficiary of the rule was Jet Airways at the time, and it also helped the
company ward off competition from newcomers such as SpiceJet and Kingfisher.
The NCAP has partially relaxed this rule. An airline will now have
to allocate 20 aircraft or 20% of their total fleet of aircraft, whichever is
higher, to the domestic sector if they wish to fly overseas. This
effectively means a carrier must have a minimum of 20 aircraft in its domestic
fleet. The Ministry’s explanation for this hinges on the aforementioned need
for airlines to prioritize serving domestic avenues in India. This new plan has
also met with resistance from seasoned carriers such as IndiGo, Jet and GoAir,
who have argued that this unfairly advantages newer entrants and will create an
unequal playing field. This argument was rebuffed by the
aviation secretary Rajiv Nayan Choubey. Tata Group’s Chairman-Emeritus
Ratan Tata remarked that the 5/20 rule should be done away with completely,
and is “reminiscent of the protectionist
and monopolistic pressures practised by vested interests in other sectors
.”[vi]
Thus, even those looking to do away with the 5/20 rule are
unsatisfied with the partial scrapping. Effectively, it would take any new
airline 3-4 years to ramp up operations to 20 aircraft, and procure the
requisite number of experienced flight commanders, of which there is a
shortage.[vii]
Hence, the new policy may well be called as the ‘3/20 rule’. The presence of
such a rule makes even less financial sense than it did in 2004, as
international routes have become even more competitive and some domestic
airlines like Vistara and Air Asia have their primary investors abroad, and
thus see a ready market that has been obstructed. On the flip side, foreign
players have been allowed to operate in India since 1992 without fulfilling any
of these conditions. Given India’s enormous untapped domestic potential, this
does disadvantage local players. Hence, the new policy has left both sides with
a sour taste.
3
The Hybrid Till model
Airports in India are constructed in any of three methods, with
varying degrees of state participation – by the Airports Authority of India
(100% state ownership), privately, or through a public-private-partnership (PPP
method, with the proportion of contribution contingent on the concession
agreement). In the latter instance, the private party earns revenue through an initial
rate of return (IRR) – the calculation of which is contingent on the till model
used. A ‘single till model’ would have both aeronautical charges (flight
landing, parking and related ground handling charges etc.) and non-aeronautical
charges (restaurant, duty free and shopping mall charges etc.) being pooled
into a common ‘till’, a percentage of which is designated as the IRR. In the
‘dual till model’, only aeronautical charges are taken into consideration for
calculating the IRR. In the proposed ‘hybrid till model’, the entirety of
aeronautical charges, and 30% of non-aeronautical charges, would be used.
In an order
released on 23 January 2017, the Airports Economic Regulatory Authority (AERA)
has mandated the adoption of the ‘hybrid till model’ across all airports where
a PPP-model is prevalent. It argues that this model is used in most such
airports internationally, and it is legally permissible under the AERA Act, as
well as in the interests of both consumers and airports. However, some of the
obvious repercussions of the adoption of such a model make one question if that
really is the case. It is a given that if only 30% of non-aeronautical revenue
is used to calculate the IRR, the airport operator walks away with a sizeable
surplus earned from the remaining amount. However, the amount of IRR will
necessarily be lowered. As a consequence of this, airport operators will start
charging a higher User Development Fee (UDF) from consumers, driving up ticket
prices and contradicting the stated aims of the Civil Aviation Policy. Such a
scenario has precedence too. In 2014, the AERA had directed the Shamshabad
Airport operated by GMR in Hyderabad to adopt the ‘single till model’ so as to
make the UDF zero. But the company had petitioned
before the High Court against this, arguing that it violated the terms of the
concession agreement, was detrimental to its economic interests, and was
unenforceable under the AERA Act. After the High Court accepted the petition,
GMR raised
the UDF by almost 30%, charging Rs. 1,938 from international passengers and Rs.
491 from domestic passengers. Airfare increased correspondingly.
The Ministry argues that such a model would attract more private
investment in airports both from India and abroad. The construction of more
airports per se, and of ‘no frills’
airports specifically, is also one of the stated aims of the aviation policy
apart from cheaper airfare. The AERA is trying to adopt a balancing act, but a significant
increase in the UDF might tip the scales against the favour of passengers and
airlines.
Conclusion
While the NCAP does try to comprehensively address many of the
systemic problems plaguing the aviation industry in India, it has many lacunae
that have left stakeholders unimpressed. Chief among these is the pressure that
a VGF scheme would put on state financial resources, the perpetuation of the
inhibitive 20-aircraft rule for international services and the possible rise in
prices as a consequence of the ‘hybrid till model’. Additionally, the policy
does not address some issues that would have helped achieve its overall aims.
For example, the rule that no airports shall be allowed within an aerial
distance of 150 km from existing airports has rendered many smaller bases like
that in Begumpet unable to service passengers. Rather, it could be used to
cater to smaller cities like Vijayawada, Warangal and Tirupati – keeping in
line with the aim of enhancing access to ‘under-served’ cities. The policy also
does not address the failings of the loss-making Air India.
Regardless of these lost opportunities, the intent of the government
in introducing key changes through the NCAP looks positive, and can only
buttress the phenomenal growth rates that India is witnessing. Domestic air
traffic grew by 28.1% in 2015, and initial forecasts place the number at 15%
for 2016, which is three times higher than China (the nearest competitor). If
some of the very valid concerns raised by the stakeholders, including the
airport operators, the airline lobbies and passengers can be incorporated into
the implementation of the policy, then the growth rates can only increase. The
biggest takeaway from the NCAP is the shifting attitudes of the policymakers
towards aviation. While it was once viewed as a luxury, the fact that the
government is making a huge investment in making air-travel affordable, and
accessible to even remote areas, demonstrates its interest in making aviation
more inclusive.
– Pratiek Sparsh Samantara



[i]        Reddy, Balakista (2007): Emerging
Trends In Air And Space Law
, New Delhi: ABE Books.

[ii]       Tarun Shukla, Govt Clears Rs4,500 Crore For
50 Regional Airports Under UDAN Scheme
, Live Mint e-Paper, http://www.livemint.com/Politics/FHm9tEhJ8341miVfdRi2GP/Govt-clears-Rs4500-crore-for-50-regional-airports-under-Uda.html,
(March 6, 2017).

[iii]      The applicable percentage stands at 20%
for states other than for North-Eastern States and Union Territories of India,
where the ratio will be 10%.

[iv]      The variable amount, per annum, is designated by a change in Consumer
Price Index, or
∆CPI.

[v]       FIA is the lobby group
constituting major airlines like IndiGo, SpiceJet, Jet Airways and GoAir.

[vi]      Hindu BusinessLine News Bureau, Ratan Tata, Ajay Singh Spar Over 5/20 Rule
For Airlines
, The Hindu BusinessLine, http://www.thehindubusinessline.com/news/ratan-tata-ajay-singh-spar-over-520-rule-for-airlines/article8264509.ece,
(February 21, 2017).

[vii]     Anirban Chowdhury, Civil Aviation
Policy: Airasia, Vistara Biggest Beneficiaries Of 5/20 Rule Change
, The
Economic Times, June 16, 2016.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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