How the 5/20 rule has survived so long defies logic
Given the tremendous potential of the aviation sector, to both grow GDP as well as provide high-quality employment, it is difficult to explain why the government has been so slow in reforming the sector and opening it up to genuine competition. With domestic passengers rising from 16.1 million in FY04 to 70.1 million in FY15 and international ones from 16.6 million to 50.8 million, the growth in the last decade has been three times that in the previous five decades—but at a huge cost, with Indian airlines accumulating $10 billion in losses since 2009. Yet, a report by the Centre for Asia Pacific Aviation (CAPA) India—it was commissioned by airline Vistara—estimates the number of domestic passengers can rise to 218 million by FY25 and international ones to 120 million, with employment rising from 199,000 to 521,000; by this time, the aviation industry will contribute $250 billion to GDP as against $23 billion right now. Despite this, however, in the last 16 months that the government has been in power it has been able to do precious little to fix the bottlenecks that prevent this growth.
While some CAPA suggestions are targeted primarily for Vistara, others are targeted at an industry audience. Vistara, launched in January, recorded not just the lowest market share—1.5% in August—but also the lowest passenger load factor (62.9%) in the industry. The report has rightly sought scrapping of the 5/20 rule for international flights—this rule, explicitly targeted at preventing new airlines from flying overseas, requires an airline be in business for 5 years before it can do so and have a minimum of 20 planes. CAPA argues that no country has a similar rule. Instead, there needs to be a rule-based and transparent award and allocation of bilateral rights so that India can enhance trade and investment ties with strategic markets globally—contrary to conventional belief, the aviation think-tank says Indian carriers have seen their international market shares rise after more bilaterals were given out. Scrapping that rule makes sense, but is sure to be opposed by incumbents. The other rule that needs to change is the route dispersal guidelines that force airlines to fly uneconomic routes—ideally, route selection and capacity deployment has to be left to market forces, with no floor or ceiling on airfares. If the government wants flights on certain routes, it must pay for this through a subsidy. CAPA rightly points out that while ATF accounted for 45-50% of the operating cost of Indian airlines in FY15, the global average was 32.3%. Against a domestic price of 52 cents for a litre of ATF in New York, it is priced at 77 cents in Delhi. The other area of concern is the high aeronautical charges at domestic airports—higher than the hubs at Singapore and Dubai. If the government is serious about getting the multiplier benefits that a vibrant aviation sector provides, it has to get its act together quickly.