Both 5/20 and route dispersal guidelines must go
Though the open warfare between the newer and the older airlines—represented, respectively, by Ratan Tata of AirAsia India and Vistara and Ajay Singh of SpiceJet—has grabbed the headlines, the real issue is the ridiculous rules that govern what routes airlines are to fly in India as well as overseas. In the bad old days, governments licensed flying abroad—a 5/20 rule required airlines to be at least 5 years old and have 20 aircraft—and, in return, forced airlines to fly a certain proportion of their planes to smaller towns; this was called the Route Dispersal Guidelines (RDG). When airlines like IndiGo and SpiceJet were starting off, they too were opposed to the 5/20 rule, but now that they are past the hump, they see virtue in it—AirAsia and Vistara, not surprisingly, want 5/20 scrapped since flying overseas is more lucrative and international fuel costs are much lower than those locally thanks to huge sales taxes. A decision appears to have been taken, as FE has reported today, and airlines with 20 aircraft will be allowed to fly overseas—the 20-aircraft restriction, it appears, is to ensure airlines have enough planes to service local routes as well. In which case, it won’t be long before the newer airlines can fly overseas—AirAsia India has 9 aircraft and Vistara has 10.
The older airlines, however, have a point when they argue that, were 5/20 to go without scrapping the RDG, they will have to fly more loss-making routes as compared to the newer airlines which have less planes and therefore fly less to smaller cities/towns. If the government scraps the RDG, airlines will fly to cities/towns which are lucrative, and increasingly, more cities/towns are coming under this category—that is why, in the case of telecom for instance, the top private telecom players have more phones in rural areas than the public sector BSNL; and their phone connections are far in excess of their obligations under the law. In the case of aviation, if state governments follow through, as they should, by reducing the huge sales taxes they levy on aviation fuel, many other routes will also become viable. The question is whether the government is willing to trust markets or whether it will continue to try and dictate their direction.