1. Taxiing for take-off

Taxiing for take-off

The draft aviation policy sets the stage for future investment in the Indian aviation sector

By: | New Delhi | Published: November 11, 2015 12:05 AM

In 1921, the Port Authority of New York and New Jersey, a joint venture between the US states of New York and New Jersey, was established. Today it encompasses four seaports, four airports, one heliport, six tunnels and bridges and bus and rail networks in the New York region. While India has in recent times built a few large private airports, the majority of the airports are still owned by the Central government through the Airports Authority of India (AAI).

The Draft National Civil Aviation Policy 2015 is looking to change that. It aims to build aviation infrastructure to handle 500 million domestic and 200 million international air travellers by 2027. That is a good ten times the 70 million people who travelled on the domestic network during 2014-15. That’s quite an ambitious plan. But, this time round, the focus is not on building huge terminals like T3 at New Delhi’s Indira Gandhi International Airport but on building low-cost, no-frills airports in smaller towns on a stripped down budget of R50 crore each.

The growth of small airports is important, since India which is currently the ninth largest aviation market at $16 billion is estimated to be the third largest by 2020. For that to happen, the civil aviation infrastructure has to expand beyond the big cities.

No frills airports

It is here that state governments come into play. As part of the regional connectivity services (RCS) plan, state governments will provide multi-modal connectivity along with viability gap funding (VGF) for the no-frills airports apart from providing power, water and other utilities at substantially concessional rates.

Since state governments have to fund the project, aviation analysts do not expect more than 3-4 airports to come up in each state. Building three no-frills airports in each of the 29 states at R50 crore each would mean an investment of around R4,350 crore. But the huge advantage is that no-frills airports will not need to acquire land since India already has 476 airfields, aerodromes and runways built across the country over the years. Of that, only 125 are fit to have flights. The 35 big airports have multiple airlines offering scheduled services, while another 40 have at least one airline offering scheduled services. Another 20 have unscheduled flights while the last 30 do not have any flights whatsoever at the moment. The last 50 are quite ripe to be developed as no-frills airports.

While the government expects the no-frills airports to be set up at R50 crore each, aviation consultants point out that this number needs to be doubled to R100 crore for airports to be truly functional. If the Cabinet once approves the R50 crore budget, getting it hiked later to R100 crore would be difficult. It hopes that once the small towns are connected to each other with short flights, there will be more passengers. It is here that the cap of R2,500 for flights less than an hour’s duration comes into play. That may not happen since airlines are quite opposed to the government deciding on what should logically be decided by the market.

Opening the door for MRO

The Draft Policy has also opened the door to setting up Maintenance, Repair and Overhaul (MRO) services. Currently, Indian carriers spend R5,000 crore annually on MRO, of which 90% is spent in countries such as Singapore, Malaysia and the UAE. To attract MRO services, the policy has focused on taxation issues. It has taken out the service tax element, made imports duty free and parts imported by MROs can be stored tax-free for three years as opposed to one year now. Also foreign aircraft brought to India for MRO work can be here for six months against the earlier limit of 15 days. As a consultant points out, at most an aircraft stays with an MRO for just two months. Says Kapil Kaul, CEO, South Asia, CAPA: “We believe that this is a very positive development which will support the development of skilled jobs in the country, while reducing the costs of Indian carriers.”

It is still early days. Once the policy is formally notified, expect investment to start flowing into the country to set up MROs. According to a Ficci-KPMG report, the Indian MRO industry is a $700 million industry. Setting up MROs in India makes business sense since by 2020, airlines operating out of India would have close to 800 aircraft. On a conservative estimate an MRO would require an investment of around $ 100 million. GMR already has an MRO at Hyderabad airport, while Airbus is reportedly in talks with Indigo to set up an MRO in the country. With enough aeronautical engineers in the country, India could over the years emerge as a hub for global MRO activity.

The policy has also provided infrastructure status to MRO services, ground handling, cargo and ATF infrastructure. That should provide an impetus to invest as it offers a 10-year tax holiday. Kaul says: “The tax concessions available under infrastructure status will attract increased investment and reduce costs.” The policy has set the stage for future investment in the Indian aviation sector. It remains to be seen how much actually happens.

Regional Connectivity

(a) Regional Connectivity Scheme will come into effect on 1 April 2016. (b) An all-inclusive airfare not exceeding R2,500 per passenger for a one-hour flight on RCS routes. (c) This will be implemented by:( i) Revival of un-served or under-served airports.
(ii) A levy of 2% on all tickets from 1st January 2016.

5/20 Rule

Three options  on the table : (i) 5/20 Rule may continue as it is, OR (ii) 5/20 Rule is abolished, OR (iii) Domestic airlines will need to accumulate 300 Domestic Flying Credits (DFC) before starting flights to SAARC countries and countries beyond a 5000 km radius from New Delhi (600 DFC for other parts of the world).

Bilateral traffic rights
India has Air Service Agreements (ASA) with 109 countries. In this regard, the policy will be: (a) The govt plans to liberalise the regime of bilateral rights leading to greater ease of doing business and wider choice to passengers. (b) The govt will enter into an ‘Open sky’ ASA on a reciprocal basis with SAARC countries and countries beyond a 5000 km radius from New Delhi.

Maintenance, Repair and Overhaul (MRO)
To develop India as an MRO hub in Asia: (a) Service Tax on output services of MRO will be zero-rated. (b) Aircraft maintenance tools and tool-kits will be exempt from Customs duty (c) The process for the clearance of parts shall be simplified.
(d) The period for which imported spare parts can be stored tax-free shall be extended to 3 years.

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