NCAP, 2016

New policy aims to increase affordability and regional air connectivity

After two drafts and several months of consultations, the government finally unveiled the new National Civil Aviation Policy (NCAP), 2016 in June. The policy is being viewed as progressive by the aviation industry in general and is a marked improvement over the first draft (released in November 2014) which according to experts was more a “statement of intent” than a roadmap for the sector. However, certain components of the policy, including the amendment of the 5/20 rule and the Regional Connectivity Scheme (RCS), are still being termed “disappointing” by sector experts.

Good intentions

Launched with a vision of creating an ecosystem that would enable the selling of 300 million domestic tickets by 2022 and 500 million by 2027, the NCAP, 2016 is the first integrated aviation policy since 1947, and its formulation is a feat in itself.  Covering 22 key aspects of civil aviation, the policy focuses on affordability, connectivity and ease of doing business in India.

Amendments to the 5/20 rule

Under the draft NCAP, 2015, the Ministry of Civil Aviation (MoCA) had proposed the introduction of the concept of domestic flying

credits (DFCs), replacing the 5/20 rule which stipulated that airlines must have a minimum fleet of 20 aircraft and five years of domestic operations before flying internationally. Under the DFC rule, domestic airlines would need to accumulate 300 DFCs before commencing flights to South Asian Association for Regional Cooperation countries and countries with their territory located entirely beyond a 5,000 km radius of New Delhi and 600 DFCs to fly to the rest of the world.

However, under the final policy, the 5/20 rule has been amended, not scrapped completely. Under the new rule (termed 0/20), all airlines can commence international operations provided they deploy 20 aircraft or 20 per cent of the total capacity (in terms of average number of seats on all departures put together), whichever is higher, for domestic operations.

The abolition of the 5/20 rule had been lobbied for especially by the new airlines Vistara and AirAsia India. Older airlines though had argued for its continuation, as its removal would have given an unfair advantage to newcomers. However, the government’s new 0/20 rule is being seen as “playing safe” by sector experts, who feel that it may not have the intended effect.

While Vistara’s chief executive officer (CEO), Phee Teik Yeoh, stated that he would have preferred the complete abolition of the 5/20 rule, AirAsia India’s CEO, Amar Abrol, stated, “Though a 0/0 or 0/10 would have been more welcome, the amendments that have been made to the policy are encouraging.”

According to Kapil Kaul, CEO, India and Middle East, CAPA, the new rule “will not help new carriers like Vistara and Air Asia significantly and India will continue to have a foreign airline-driven international traffic regime”. This is because Vistara and AirAsia India currently have a fleet of 11 and 6 aircraft respectively, and to ramp up capacity to meet the 0/20 norms it is expected will require four-five years (given that the initial capitalisation has been exhausted), by which time they would have adhered to the prior 5/20 norms anyway.

Regional Connectivity Scheme debate

The RCS will come into effect from the second quarter of 2016-17, under which the MoCA will target an all-inclusive airfare not exceeding

Rs 2,500 per passenger, indexed to inflation, for a distance of 500-600 km (equivalent to a one-hour flight). This will be implemented by way of concessions by different stakeholders, revival of underserved airstrips and viability gap funding (VGF) for scheduled airlines. The revival of airstrips as no-frills airports will be done at a cost of between Rs 500 million and Rs 1 billion, mostly by the Airports Authority of India (AAI), for which state governments will provide encumbrance-free land and hinterland connectivity (road, rail, metro, waterways, etc.) as required.

VGF will be shared between the MoCA and the state government in a 80:20 ratio, and for the north-eastern states at a 90:10 ratio. The MoCA’s share of VGF will be provided through a regional connectivity fund (RCF), which will be funded by a levy on all domestic tickets. The rate of this levy will be decided by the MoCA from time to time.

While the intent to improve regional connectivity is good, the mechanism of how the RCS will actually work is still unclear. The argument is that India’s civil aviation sector has been growing exponentially without any direct government interference. In fact, during 2015-16 the country’s domestic passenger traffic grew by 21 per cent, recording the highest growth in the world. This has been due to a fall in aviation turbine fuel (ATF) prices as well as cost cutting by airlines themselves. Thus, it is being suggested that a free market scenario would have allowed the sector to grow at its own pace.

Another issue being raised is that while the VGF plan sounds good on paper, in practical terms it will become a cumbersome process with the central as well as state governments having to go through airlines’ books. Further, in case ATF prices shoot up, the demand for VGF could grow substantially, putting additional pressure on the government. Moreover, the modalities of the VGF are yet to be announced.

From an economic standpoint, an aircraft needs to maximise its flying hours to optimise operational efficiency. Thus to cater to regional airports, it will make economic sense for airlines to serve a cluster of regional towns near each other. However, as seen from past plans, developing small airports in a cluster is not economically viable for airport developers due to the large sunk costs involved and longer break even periods. Further, private participation at such airports seems unlikely, given the previous government’s similar plans that did not have the expected results. Thus, the MoCA’s plans to increase the number of airports with scheduled commercial flights from 77 in 2016 to 127 by 2019 will put a heavy financial strain on AAI, most of whose airports already operate at losses.

For passengers, the “levy” on domestic tickets to fund the RCF remains an unknown as its expected percentage is still uncertain. The draft NCAP, 2015 had stipulated a levy of 2 per cent on each ticket.

cover (Page 1)

Boosting ancillary segments

Despite being criticised on certain aspects, there are clearly several positive elements in the NCAP, 2016. The policy bodes well for the cargo, maintenance, repair and overhaul (MRO) as well as ground handling segments. To ensure fair competition among ground handling agencies (GHAs), the NCAP, 2016 will ensure that there will be at least three GHAs including Air India’s subsidiary/joint venture at an airport. There will be no upper limit to the number of GHAs permitted at an airport. Domestic airlines will be free to carry out self-handling themselves, through their own subsidiaries or to outsource handling to another airline or GHA.

To tap India’s huge MRO potential, the policy stipulates that service tax on output services of MRO companies will be zero-rated aircraft maintenance tools and toolkits will be exempt from customs duty; the process for clearance of MRO parts will be simplified by allowing for self-attestation by MROs; the period for which the spare parts imported by MROs can be stored tax-free will be extended to three years to enable economies of scale; foreign aircraft brought to India for MRO work will be allowed to stay for the entire period of maintenance or up to six months, whichever is less, provided it undertakes no commercial flights during the stay period; and state governments will be persuaded to make value added tax zero-rated on MRO services.

Air cargo will be accorded “infrastructure” status if co-located with an airport. The recently constituted Air Cargo Logistics Promotion Board will submit a detailed action plan to reduce dwell time of air cargo to below 48 hours by December 31, 2016 and to 24 hours by December 31, 2017. In a significant step, in line with the government’s Make in India initiative, the NCAP, 2016 has recognised express delivery services as a separate segment within air cargo owing to its distinctive nature and processes.

Conclusion

Although the policy has not shed light on certain critical aspects, including the formation of an independent civil aviation authority, privatisation of Air India, market listing of AAI, and hiving off of air navigation services from AAI, overall it is being welcomed as a sincere attempt to achieve India’s vision of becoming the third largest aviation market by 2020 and the largest by 2030.

However, as the policy’s lack of structure and implementation plan for managing growth is being questioned by several sector experts, including CAPA, the NCAP, 2016’s true test is still ahead as the sector starts its implementation.

GET ACCESS TO OUR ARTICLES

Enter your email address