The much-awaited draft aviation policy unveiled by the government on Friday, plans to levy a 2% cess on most of the domestic and international routes to raise funds to improve regional air connectivity to popularise flying among the middle classes. Civil aviation secretary RN Choubey said through the cess the government would be able to raise around Rs 1,500 crore annually, which would go towards re-opening hundreds of airstrips which are not in use for long, building “no-frills airports” and providing viability gap funding to airlines to help keep prices on regional routes at Rs 2,500 rupees per hour of travel.
The aim Choubey said is to enable the 300-million strong middle class to travel, at least once by air. According to him, if every Indian in middle class bracket takes just one flight per annum, it would result in sale of 300 million tickets from the current 70 million.
On the contentious issue of the 5/20 rule (which requires an Indian airline to have a fleet of 20 aircraft and operational experience of five years to commence international operations), the policy has not taken a clear stand but only given alternatives to seek comments from the public and other stakeholders before it finalises its stand. The options are either let it stay as it is or an unconditional abolition. The third option is a reworked domestic flying credits (DFC) formula requiring Indian airlines to earn and maintain 300 DFCs annually to start flights to Saarc nations and countries beyond 5,000 km radius of New Delhi.
The policy has also proposed waiver of service tax on maintenance, repair and overhaul (MRO) expenses incurred by airline companies, which has the potential to make India a hub for such services. Among other positives for the industry are that no government approval would be required for code share between airlines, permitting airlines to do ground handling at airports, and removing Central Industrial Security Force (CISF) from non-aero operations at airports.
What may particularly pain the airlines, though is the tinkering in the route dispersal guidelines on which will depend the accrual of DFCs. The draft policy has increased the number of routes in the category I sector. Since the percentage of routes airlines need to fly in category II and III sectors remain unchanged, they will have to develop new routes in the category I sector.
The policy will be put up for public consultations for a period of three weeks. A draft Cabinet note would be framed thereafter and sent for inter-ministerial consultations.
Broadly, the aviation industry welcomed the direction of the draft policy but said implementation is the key. There were some disappointment on the absence of unconditional abolition of the 5/20 rules by some of the new carriers. AirAsia CEO & MD Mittu Chandilya said, “Removal of this rule would have sent a clear message on a progressive aviation policy”.
Though the levy of 2% cess could raise ticket prices on most of the domestic and international routes, industry veterans played it down stating that if benefits accrue such issues would get squared. For instance, SpiceJet CMD Ajay Singh said that imposition of cess would not be making a “big difference” in airfares as it would help in improving regional connectivity. Similarly, IndiGo president Aditya Ghosh said that if the proposal to charge 2% levy is seen in isolation, then air fares would rise. “At the same time, if the money collected from cess is invested back in the airport infrastructure like air traffic
management and ground handling, then we will definitely see fares coming down,” he added.
The viablity gap funding to the airlines for regional connectivity would be indexed to aviation turbine fuel price, which forms a major chunk of airlines’ expenses and would be shared by the Centre and the states in the ratio of 80:20.
The draft policy also proposes a model to auction bilateral air traffic rights to countries that are at a distance of less than 5,000 km. “For countries within 5,000 km where domestic airlines have not fully utilised their quota, additional seats above existing rights would be allotted by bidding for a three year period. The proceeds of the auction will also be used to fund regional flying in the country,” Choubey said. It proposes open skies with Saarc nations and countries that are beyond 5,000 km flying distance on a reciprocal basis.
In a significant move, Choubey also said increase in FDI in airlines from 49% to above 50% would be examined if the government decides to go in for open skies.
The proposed subsidies for enhancing air connectivity would, however, be only offered in states which reduce VAT on ATF to 1% or less at regional connectivity airports. “States are currently not collecting any tax at RCS airports because there are no flights to these destinations. If they reduce VAT on ATF at these airports, they would be earning to the extent connectivity improves to that location,” Choubey said.
The no-frills airports at around 400 unused airstrips across the country would be developed at an estimated cost of around Rs 50 crore each.