Home / Market / Mark-to-market /  Will new aviation policy be the wind beneath airlines’ wings?

The cabinet has approved the civil aviation policy, a development that will boost demand for the aviation sector in the long run. But, on some counts, the policy falls short. For instance, the 5/20 rule, which required domestic airlines to serve the local market for five years and operate at least 20 aircraft, has been diluted and not done away with entirely. Now, airlines can start international operations if they deploy 20 aircraft or 20% of total capacity (average number of seats on all departures put together), whichever is higher, for domestic operations. Only, the number of years is done away with. While this move is beneficial for the likes of Vistara and AirAsia, it is going to take them some time to increase their aircraft fleet to 20.

Secondly, the policy remains silent on foreign direct investment (FDI). In an interview to ET Now, Amber Dubey, partner and head (aerospace and defence) at KPMG, said, “There are far more critical sectors like banking and telecom and energy which can actually cause a real threat to national security and there we have almost 74% to 100% FDI." Further, “If you look at airports, cargo, MRO (maintenance, repair and overhaul) and general aviation, most of those have been opened up to 74% to 100% FDI. So why should airlines, which is a one tiny segment of the entire aviation spectrum, be treated as a holy cow?"

The policy also remains silent on issues such as formation of an independent civil aviation authority and the fate of Air India. One of the brighter spots of the policy is enabling Indians to fly at 2,500 per hour under the Regional Connectivity Scheme at unserved airports. As Kuljit Singh, partner at EY, says, “Perhaps, it would have been better if this fare was linked to some cost elements of airlines, for example, the ATF (aviation turbine fuel) prices."

What about scenarios when airlines may not find this viable? For instance, right now, crude oil prices are favourable but what happens when they go to $100 per barrel, asks Singh. More details on this would have been welcome. Some analysts say that the small levy per departure on some domestic routes to fund the Viability Gap Fund does not augur well.

While improving sector infrastructure is the need of the hour and it is encouraging that the policy talks about it, implementation will be key. Meanwhile, the dilution of the 5/20 rule is expected to hurt Jet Airways (India) Ltd, SpiceJet Ltd and InterGlobe Aviation Ltd (IndiGo). This move may increase competition in the global scenario. According to Mayur Milak, research analyst at Anand Rathi Share and Stock Brokers Ltd, Jet Airways may get impacted the most with approximately 55-60% of its capacity deployed on international routes followed by SpiceJet, which has 22-24% of capacity on international routes and then IndiGo, which has approximately 10-12%


Pallavi Pengonda

Pallavi Pengonda is a financial journalist producing cutting edge commentary and analysis on companies, economy and market trends. Over her journalism career spanning more than 14 years, she has covered topics across sectors such as oil & gas, consumer, aviation and new age tech companies. She heads the Mark to Market team and joined Mint in June 2010. She lives in Bengaluru. She is an art enthusiast and likes to paint in her leisure time.
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