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Economy

New Aviation Policy Wants 50 More Airports, Creates Open Sky Policy

Indian-Aviation-Policy.png

There’s a new aviation policy that the cabinet has cleared. 

Why?

  • The Indian aviation sector has not achieved the position it should have and at present it is ranked 10th in the world in terms of number of passengers.
  • It’s a big employment generator, and a better policy will help future job prospects. 
  • If every Indian in middle class income bracket takes just one flight in a year, it would result in a sale of 35 crore tickets, a big jump from 7 crore domestic tickets sold in 2014-15. This will be possible if the air fares, especially on the regional routes, are brought down to an affordable level.

Policy aims:

  • India to become 3rd largest civil aviation market by 2022 from 9th
  • Domestic ticketing to grow from 8 crore in 2015 to 30 crore by 2022
  • 50 new civil airports in three years: increase from 77 in 2016 to 127 by 2019 
  • Cargo volumes to increase by 4 times to 10 million tonnes by 2027

Policy Changes:

5/20 Requirement: In October 2004, the Union Cabinet stipulated that for Indian carriers to fly abroad, they must fly on domestic routes for 5 years and have a fleet of 20 aircraft. This has been replaced with a scheme providing a level playing field i.e. all airlines can now commence international operations provided that they deploy 20 aircraft or 20% of total capacity (in term of average number of seats on all departures put together), whichever is higher for domestic operations. 

This is positive for companies like Vistara and Air Asia. They are new so they wouldn’t make the 5 year grade – but they still need at least 21 aircraft before they can fly abroad. Flying international has much more margin than flying domestic, which is why air carriers want a mix of both.

Bilateral Traffic Rights:  Government of India will enter into ‘Open Sky’ agreement on a reciprocal basis with SAARC countries (Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka) and countries located beyond 5000 km from Delhi (a bonanza for European carriers such as Air France, KLM, Lufthansa, Swiss, British Airways and Virgin Atlantic and also open up the market for airlines from Australia, Africa and South America) 

This means if the other country has an open sky policy, we will too. That also means air carriers of that nation can get as many landing slots as they want, and we will do so too. Currently, it’s a bilaterally negotiated deal – two governments need to sit down and figure out how many flights of either country can land where. 

Open Sky effectively means that if India decides to follow an open sky with the UK, India and the UK will decide on how many cities each country will allow its airlines to operate to after which the designated airlines will be allowed to operate as many flights as they like.

Technically this could mean we’ll do open skies with America (which has an open sky policy) and with the Netherlands, and other such countries in Europe (which are more than 5000 km. from Delhi)

What if a country is within 5000 km radius from Delhi? If, in the bilateral agreement with the country, the Indian carriers have not utilised 80% of their capacity entitlements but foreign carriers /countries have utilised their bilateral rights, the foreign carrier will be given more slots. This means that if they want more slots but we haven’t used our capacity with their country, then we should give them more slots. Whenever the Indian carriers have utilised 80% their capacity entitlements, the same will be renegotiated.

Indian Aviation Policy

Regional Connectivity Scheme effective from the 1-Jul-16, for a one-hour flight the airfare will be targeted at Rs. 2,500/- per passenger for a distance of 500kms to 600kms on certain routes. 

Extra charges! A small levy per departure will be applied on all Category I domestic routes to fund the Viability Gap Funding (VGF) through Regional Connectivity fund. Meaning, if you’re flying from the metros, you’ll pay a little more.

Airport PPP/AAI – this would be to encourage development of airports by AAI, State Governments, the private sector or in PPP mode. AAI will be compensated in case a new Greenfield airport is approved in future within a 150 km radius of an existing unsaturated operational AAI airport.

Ground Handling: There’s no competition in ground handling crews – you have to build your own, currently, or use the incumbent player (AI). This will change – there will be other players that carriers can contract, apart from the AI crew.  

Our View

This policy doesn’t do anything special for aviation in India. The 0/20 rule will take time for Air Vistara or Air Asia to benefit (they need to get to 21 aircraft) and will not benefit the likes of Indigo or Jet.

The new airports – this is much required, but it’s not easy to get funds for these new airports unless considerable long term concessions are given. None of these concessions are discussed (other than a service tax lowered rate which will anyhow dissolve with GST). 

The open sky policy will have to be first negotiated with each country but it is a positive development; however, the first to take advantage will be the likes of Lufthansa or KLM-Northwest or such. Our carriers will take time to build their capacities to the level that they can fully use their landing rights abroad.

Finally, the extra fee per departure (to pay for VGF) is another charge that will hurt passengers. We don’t know how much that is but that’s an additional dampener. 

Overall, a policy that is largely incremental in nature and will require much more action to be a big differentiator. 

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Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.