GoAir?s aircraft buy likely to run into regulatory hurdle

GoAir?s plan to place order with Airbus Industrie for 72 jets worth R32,400 crore ($7.2 billion) could run into a regulatory hurdle.

The problem is that the airline has still not received prior in-principle approval from the civil aviation ministry as required by the law. Sources in the ministry said that the airline?s application seeking to place the orders is still pending before it.

In fact, the civil aviation ministry has asked the sector?s regulator, the Directorate General of Civil Aviation (DGCA), to find out as to how the airline placed the order.

?We have written to the DGCA to understand the actual position on the issue. The ministry has so far not accorded its in-principle approval to GoAir for importing aircraft and their application is pending,? an official source told FE.

GoAir had on June 16 announced in the Paris air show its order to buy 72 Airbus 320 Neo aircraft worth R32,400 crore ($7.2 billion). The low-cost airline currently operates 10 aircraft with an average age of two years connecting 18 domestic destinations. The airline is estimated to have clocked a turnover of $300 million in the financial year ending 2010-11.

According to the norms, an airline can enter into an MoU for buying aircraft but before placing the actual orders it must procure the aviation ministry?s in-principle approval. This is required to facilitate financing arrangements with banks and financing agencies. Since the payment happens in foreign currency, it requires the approval of the Reserve Bank of India also.

When airlines sign an MoU with aircraft manufacturers like Airbus and Boein,g they just pay a signing amount (which generally varies from 1-4%) of the total deal value in foreign currency. When contacted a GoAir spokesperson said in an emailed response that contracts with aircraft manufacturers were highly confidential and cannot be disclosed.

GoAir had signed an MoU with Toulouse-based Airbus in March 2011. At Paris air show, the airline signed the final purchase agreement to buy 72 aircraft A320 NEO the delivery of which will start in 2016 and complete in 2020.

?While there is need to follow established rule, at the same time, the government should liberalise the procedure,? Amber Dubey, director (aerospace and defence) at consultancy firm KPMG said.