Draft aviation policy makes few moves forward
The fact that the government has not been able to come out with a clear aviation policy statement after being in power for 17 months now speaks volumes for how the sector has been run, and how vested interests continue to block its opening up. Among the most detrimental policies has been the 5/20 rule—an airline must have flown for 5 years and must have a minimum of 20 aircraft before it can fly overseas—that stymies global operations of newer airlines. Such a regulation should never have been enforced because it was there only to give older players an advantage over new entrants. The government now proposes to re-write the rule, or maybe not. While the draft civil aviation policy, announced on Friday, lists the options of retaining or withdrawing the rule, in all probability it is the third option which will be exercised—this allows airlines to fly overseas subject to them accumulating some minimum Domestic Flying Credits (DFC). The DFCs are an improvement from the current 5/20 rule, but there is no real reason to have them at all except to delay newcomers like Vistara and Air Asia’s overseas foray, to lower the competitive intensity for older players like IndiGo and SpiceJet.
It is equally unfortunate that little has been done to fix the regressive Route Dispersal Guidelines (RDGs) which force airlines to fly to locations that are not remunerative. While the government may have its own reasons for ensuring there is air connectivity in certain parts of the country, such as the North East, there is a case for compensating airlines for flying loss-making routes. In fact, the draft aviation policy suggesting a 2% cess be levied on domestic and international routes to fund regional airlines is recognition of the principle that airlines need to be compensated for flying certain routes. Having a 2% cess on top of the RDG is, in effect, penalising airlines twice over. Nor is it clear why such an elaborate plan has been drawn up—including using unused airstrips—to get small-town India to fly at subsidised rates when, in fact, using the cess to incentivise airlines to fly would do the job more efficiently.
The policy has, though, done a good job in the MRO—maintenance, repair and overhaul—space where tax breaks have been given, including zero-rating the service tax and exempting maintenance tool kits from customs duty. Right now, Indian carriers find it cheaper to send their aircraft to Singapore or Sri Lanka for such work and spend upwards of R5,000 crore annually on this. After burning precious fuel by circling for 17 months, hopefully, the policy will move in the correct direction after the consultation phase.