Column: Aviation policy scoring self-goals

By: |
Updated: March 25, 2015 1:13:07 PM

The proposed marriage between the 5/20 Rule and the Route Dispersal Guidelines is a bad idea

aviation news, aviation news India, aviation policy, aviation policy India, 5/20 rule, 5/20 rule in India, 5/20 rule in aviationThe proposed marriage between the 5/20 Rule and the Route Dispersal Guidelines is a bad idea. (Reuters)

The 5/20 Rule prevents an Indian airline from flying abroad till it completes five years of operations and has a fleet of 20 aircraft. This rule was put in place over a decade back, perhaps to protect the interest of the incumbent airlines. No leading country has such a ridiculous, self-defeating, anti-competition rule.

After repeated hints over the last ten months that the rule will be junked, the aviation ministry came up with a googly. It now proposes to merge it with an equally bad regulation—the Route Dispersal Guidelines (RDG)—perhaps as a compromise. RDG stipulates the fraction of an airline’s capacity that needs to be deployed in J&K, North East and the island territories, irrespective of the commercial viability.

New Indian carriers may be allowed to operate long-haul international flights once they earn 300 Domestic Flying Credits (DFC) and short-haul ones once they earn 600 DFCs. A new airline with five aircraft may have to wait around two years to fly long-haul, and about four to fly short-haul.

Here are twelve reasons why the aviation ministry should do a serious rethink.

* It is not the role of the aviation ministry to be dictating routes. Routes are best left to market forces. Further, such rules have no global precedent. A one-day old airline from US, EU or neighbouring Bangladesh, with a one-aircraft fleet can fly into India. Why discriminate against our own airlines?

* Why create an artificial distinction between short-haul and long-haul routes? Interestingly, this means that Air India will face competition from new airlines earlier than other private carriers do. And one thought Air India was the ministry’s favourite airline!

* If the ministry has indeed decided on denying global flying rights for two years, it may simply call it a ‘2/5 Rule’, that is, wait for two years and get five aircraft. Why bring in complex mathematics, comprising route-wise capacity, flight distance, actual passengers, remote area credit multipliers, etc? Let’s make doing business in India easy and fun.

* For flying on remote routes, airlines will be given credits based on actual passengers flown and not the deployed capacity! So, if 10 passengers board a 180-seater Guwahati-Agartala flight, the airline would earn credits for only 10 seats, inflated by the applicable multiplier. Isn’t that unfair?

* RDG is hidden taxation. According to industry, less than 20 remote airports in India can handle a 180-seater aircraft. Many of these airports require airlines to keep certain seats vacant due to runway restrictions. If every airline flies to these few destinations, there will be a glut and more losses. They can, of course, buy credits from small air-taxi operators, but they may take years to establish.

* The Naresh Chandra Committee, appointed by the previous NDA government, recommended creation of an Essential Air Services Fund (EASF) to private direct subsidy for remote routes, through competitive bidding. The US, Canada, Australia and EU follow this approach. EASF doesn’t really cost the exchequer—a 2% cess on all tickets sold in India can generate a R1,000 crore corpus every year. Forcing loss-making airlines to fly to non-remunerative routes without any viability gap funding is an unfair use of the ministry’s unlimited powers.

* It is a fallacy that global flying rights mean ‘easy money’, and hence need to be handed out grudgingly. Competition, especially from state-supported Gulf carriers, is cut-throat and profit margins are small. Many Indian carriers have reduced their global footprint after burning their fingers. Success in the Indian and global markets is not interconnected and automatic. Each Indian airline has its unique competitive advantage. Let each find its own niche. Ultimately, India will gain.

* There is an emotive argument that since incumbent airlines have waited for five years, others should too. By that logic, no bad law can
ever be abolished, since, technically, it would benefit newcomers. Sooner or later, newcomers will qualify for global flying. Why not take them head-on, instead of blocking them. New airlines have their own challenges—they will take years to grow their fleet, slots, staff and infrastructure.

* Seven decades of protectionism have hurt both Indian aviation and tourism. The best Gulf and Aspac carriers provide connections to over 140 global destinations. Leading Indian carriers fly to less than 35 global destinations. Many foreign tourists skip India due to India’s poor and costly air connectivity with the rest of the world. Visa problems and crimes against tourists compound that. Foreign tourist arrivals in India are an abysmal 7 million per annum, as compared to Singapore (14 million), Malaysia (26 million), Thailand (27 million) and China (56 million). A foreign tourist typically spends around $500-800 per visit, excluding airfare. For every 10 million tourists that India misses out on, the potential loss of GDP is around 5-8 billion. That translates to the loss of a million jobs, at the very least.

* We welcome foreign ownership in the entire aviation value chain—airports, aircraft manufacturing and maintenance; air-cargo, helicopter services and training. Why then treat the airline sector as a ‘holy cow’ and find ways to restrict the growth of carriers with foreign shareholding?

* Misplaced ‘nationalism’ in aviation is gradually ending. The US and EU, the originators of bilateral seat quotas under the Chicago Convention 1944, signed an Open Skies Agreement (OSA) in 2007. India and the US too have mutual open skies since 2005, and, interestingly, the share of Indian carriers in the Indo-US traffic is actually more than that of US carriers.

* Indian aviation is struggling today due to restrictive government policies, excessive taxation and poor infrastructure. The union budget was a disappointment. The aviation ministry may decide to focus on lowering taxes on aviation fuel and aircraft maintenance; promoting low cost airports and facilitating Make-in-India aerospace. Protecting one airline from another is not really a national priority.

The Indian aviation industry has the potential to be number 1 by 2030, provided bold, disruptive policy reforms are undertaken by the Modi government. Declaring open skies in India for an experimental five years would be a good step to begin with.

Assisted by Ashwin Noronha, associate director (aerospace and defence), KPMG in India

The author is partner and India-head (aerospace and defence), KPMG. Views are personal

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition