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Policy To Bring Wings For Common Man

As the Government is expected to bring a new aviation policy before the year-end, Amresh Srivastava scans the finer points of the draft of the new policy

Amresh Srivastava
Publish Date: Dec 29 2015 7:44PM | Updated Date: Mar 10 2016 3:07PM

Policy To Bring Wings For Common Manphoto: Hrishikesh bhatt

Air travel has always been a dream for the common man. But this continues to be a fantasy to this day for most Indians because of the staggeringly costly air tickets. Though the draft of a new aviation policy by the Ministry of Civil Aviation has come like a ray of hope for all to fly but many aviation experts keep their fingers crossed. Quite a few of them feel this to be a half-hearted attempt on the part of the Ministry. And, thus, it is going to remain short of turning aviation into mass transit-and-travel system.   

 

In an effort to step up connectivity by putting more cities on the air map of the country, the Ministry of Civil Aviation is toying with the idea to straightaway give subsidy to airlines so that the cost of the air travel on a few select routes becomes affordable for the common man. The Ministry plans to put a cap of Rs 2,500 per-flying-hour-per-person.  The new civil aviation policy is to be cleared by the Cabinet possibly before the end of this year.

 

Experts view

 

An Indian rating agency Ind Ra has reacted to the draft aviation policy saying, “The policy seeks to provide significant impetus to regional connectivity. But it has failed to address the structural issues, including tax on Air Turbine Fuel (ATF) among other things.” 

 

For the regional connectivity scheme, the Ministry has proposed a two percent direct subsidy to the operating airlines through Viability Gap Funding (VGF). Yet, the draft policy does not explain which class of operators is going to be entitled for the VGF? An expert says that the Government is already giving exemption on ATF under Declared Goods Category to the 70-seaters and aircraft weighing less than 40,000 kilogram. Most Turboprop aircraft come under this category. This policy ensures that Value Added Tax (VAT) would invite a maximum levy on ATF at a uniform rate of four percent throughout the country in case of small aircraft. So whether the two percent subsidy would be additional or not is a question on which the draft policy is silent. Moreover, the regional connectivity scheme calls for clear guidelines regarding airports having upto 5,000 feet long runway, or airstrips, as experts think that this deserves to be a standard for deciding subsidy to the airlines that use such small airports. 

 

A proposed two percent cess on both international and domestic air travelers, except those travelling to destinations coming under the regional connectivity scheme, to offset the cost of VGF will enable the Government to collect Rs 1,500 crore annually. Yet, this move may create problems for domestic sector. In this sector the aviation taxation and cost environment is quite challenging for the operators. The Air Turbine Fuel (ATF) is costliest back home when compared to anywhere else in the world. This is because of a host of taxes like excise, service tax and sales tax. These put together with passenger service tax and user development fee charged by airports adds up to 60 to 70 percent and the passenger ticket becomes many times costlier. Thus, medium haul and long haul domestic flights market becomes highly price sensitive. There has been a slowdown in the aviation market till 2013 due to high price of ATF. Since the advent of the new Government in the 2014 the oil prices have been dipping. This gave a boost to air traffic. Half of the current traffic volume is because of new users who have shifted to this sector from alternate modes of travel. “A little increase in cost of the ticket may shift them back to their previous mode like rail and road. There is a general perception that the one percent increase in ticket price sometime results in two percent decline in passenger traffic,” said Harshvardhan, former chairman and managing director of the erstwhile Vayudoot Airlines.

 

Kingfisher episode

 

Yet, in practical terms this perception may or may not match the reality if the prices are increased in terms of the proposed cess. After the closure of the Kingfisher Airlines in October 2012 the other major operators raised the fares substantially and yet they were able to take their share in the 30 percent passenger volume that Kingfisher had vacated in the domestic sector. It was later that the fare hike had to be withdrawn as passengers started shifting to other modes and air traffic again became lean.

 

Financing aircraft

 

To make regional connectivity scheme successful, small aircraft of 20 seats to 40 seats or Turboprop types are required. The Ministry should formulate the policy for aircraft financing or leasing. This is essential to attract small operators to the scheme. For the financing the big aircraft like Boeing 737 or Airbus the manufactures arrange private finance through big financial companies like GE. But in case of smaller aircraft it is difficult to get the finance. The banking sector has already put aviation companies in the negative list after the Kingfisher fiasco. Earlier too, the Indian Banks had none-too-good experience in recovering their loans from many airlines. Thus, a policy regarding financing of acquisition of small aircraft was expected in the aviation policy. Somehow, the draft put by the Ministry on its website does not have a word about this.

 

The aviation market is a cash-driven industry. The VGF, of which 80 percent would be borne by the Centre and 20 percent by the State Government, should be operator friendly and the reimbursement of funds must be done in stipulated time. There should be smooth single window system so that the operator is not harassed while collecting his VGF from the Government. Provision of a waiver in central excise duty by the Finance Ministry is a new element in the draft policy. This will certainly bring down the fuel cost substantially and pave the way for regional connectivity.

 

There should not be price cap in the regional connectivity scheme, said Harshvardhan, as capping will not allow the operator to find his place in the market. “The price should be market driven,” he argues. He is also of the opinion that the Government should fix its share and stick to it in future because if the Government fails to give upfront subsidy and asks the operator to increase the fare then passengers may shift to other modes. 

 

Optimism in the policy

 

The draft aviation policy has, however, a few redeeming aspects too. If the new Maintenance, Repair and Overhaul (MRO) clause of the policy is implemented, a welcome change can well take place and boost the aviation business. It is expected that more airlines will come to get their aircraft serviced and possibly repaired in the country and this may also attract other airlines from the region to opt for servicing their aircraft here as well.

 

The draft policy has perhaps for the first time tried to address the ground handling issue in a business-like approach. The policy gives an option to airlines to do their own ground handling or select from a minimum of three ground handlers. There is no upper limit for the numbers of ground handlers to enter into the business at a single airport. The more competition, the more choice is certain and the best way forward. But recently a leading agency in the country asked Cochin International Airport Limited (CIAL) through a request to defer its decision to appoint a third handler at the airport. According to them, in case of an airport like Cochin, the revenue earned through the present number of flights using the airport is just enough to reach a break-even if input costs incurred in terms of manpower, machine and infrastructure development are to be taken together.

 

The policy hardly speaks of bilateral traffic rights which capture a larger pie of the international – incoming and outgoing – traffic. The Government should have addressed and elaborated this clearly. It only focuses on allowing foreign airlines to increase their frequency in or via India. Instead of this, the Government is ought to focus on capturing more and more traffic for its airliners. The Ministry needs to have a strategy like IndiGo which tremendously expanded its operations to capture its share in the domestic market. The same is expected from the Air India and Jet Airways so as to make more substantial inroads in the international market.

 

The safety and security clause in the policy has been given a fresh look. The old and archaic rules are done away with and made operator friendly. If the new provisions are fully implemented, the Indian skies and ground services will be safer and more dependable.

 

The Ministry is little vague on 5/20 rules (warranting airlines to operate for five years at a stretch on domestic routes and to keep a fleet of at least 20 aircraft to become entitled for international flight operations). There are different views about this rule. Some experts say that this provision gives a seasoning time to the operator and also to regulatory body to examine the sustainability of airlines. At the same time some argue that this is a stringent clause and will block the entry of small operators under the regional connectivity scheme. The Government is yet to take the call on this. Sources in the Ministry who do not want to be identified, say that the Government is also examining the 1/5 provision to replace 5/20 for regional connectivity.

 

The draft aviation policy does not focus on turning big airports into commercial hubs though this is very common in many countries like Singapore and Dubai. The approach is also not futuristic as most of the metro airports do not have any further capacity left to cater to more flights. With the substantial increase in the passenger traffic, time has actually come to review the ban on building new airports within 150 kilometres radius of an existing one. The policy must be forward looking so as to meet the challenge of growing air traffic. Some say that the policy makers should think ahead in terms of growth in 50 years from now.

 

States response

 

The draft civil aviation policy is admixture of some old and new elements. The regional connectivity is much dependent on the response of the States. The Himachal Pradesh Government has refused to share the burden of VGF on account of being a special category State. Himachal Pradesh has three airports located in Jubbarhatti in Shimla, Bhuntar in Kullu and Gaggalin Kangra. Only four to five flights are operational at Bhuntar and Gaggal. Interestingly, Himachal Pradesh has been demanding from the Centre to initiate steps to improve air connectivity in view of the State’s tourism potential. Several airlines are not willing for operations in the region due to lean passenger levels as this may lead to losses.

 

Yet, Himachal Government has suggested increasing the cess from 2 percent to 2.5 percent to meet the VGF part fully by the Centre. The need of hour is to increase the domestic traffic volume for the Indian operators and it should enforce the connectivity scheme with greater vigour. In the past, the North- East sector was treated as unprofitable but when the Government forced operators to turn to North-East, it turned out to be more profitable than most regular routes.

 

The Government took much time in formulating the draft policy. Yet, the policy should have been objective oriented and not what operators want. Then target of capturing country’s 300 million strong middle class by Indian carriers should become cornerstone of the policy. As of now these carriers cater to 37 percent of international traffic to and from India. The task before the Government is to take this to at least 45 percent. This cannot be achieved without the reforms in Directorate General of Civil Aviation, Air India, Airport Authority of India and Bureau of Civil Aviation Security. Somehow the policy has not touched upon these. The sooner policy-makers pay attention to them, the better.

 

 

 Salient Points of the draft Aviation Policy-2015

 

• To provide wings to the 300million strong middle class of the country.

 

• The focus of the policy is to reduce the cost of the airlines for regional connectivity across the country.

 

• Union Finance Ministry has agreed to announce ‘Tax Break’ for the maintenance, repair and overhaul    service (MRO) for a limited period.

 

• Allow the airlines to bid for the right to operate flights between hundreds of the small towns and cities located within one hour flying distance.

 

• Air fare is to be capped at Rs 2500 per-flying-hour-per-traveler. And the balance will be paid to airlines by the Government by imposing a cess of two percent to all national and international operation except those falling under regional connectivity circuit.

 

• The flight under Regional Connectivity Scheme will be exempted from the service tax, flat rate of upto    four percent VAT will be compensated through the viability gap funding (VGF) .

 

• Under Regional Connectivity Scheme the Government intends to start the regional operations in next  financial year 2016-17.

 

• There is a proposal to abolish the 5/20 eligibility rule that bars Indian carriers from flying overseas until  they complete five years of domestic operations and have the fleet of twenty aircraft at least. 

 

Silver-lining on Nepalese Sky

 

After setting up the National Airport Authority in 1998, Nepalese Government made its rules simplified for domestic and foreign airliners. This helped them to start their operations to augment domestic connectivity as the air travel was only the feasible means to connect the mountainous regions of the country.

 

The aviation policy was made operator friendly. The government gave tax break to establish small terminal building on the existing air strips. Within the period of six months or so, 45 domestic airports became operative across the country. The Airport Authority of Nepal asked the operators to bring the small aircraft (fixed winged and turboprop) with the seating capacity of 20 to 40 seats. The procedure of registering and deregistering was abolished so that if an operator felt that the route is not profitable for him, he could take his aircraft out of the country without any hassles. Nepalese government kept the right to fix the passenger fair and there were 34 airlines that started operating within a year in the country.

 

If domestic air travel in Nepal took a downward trend subsequently, the reasons were other than its aviation policy. Political instability betook the Himalayan nation and aviation too suffered like other businesses in the wake of King’s assassination and Maoist turmoil.