Professional Documents
Culture Documents
Contacts:
“Flying to tier-II cities to get affordable, subject to implementation hurdles; Subrata Ray
+91 22 6114 3408
New airlines to gain a space in international skies faster” subrata@icraindia.com
Kinjal Shah
+91 22 6114 3442
kinjal.shah@icraindia.com
Anand Kulkarni
+91 20 2556 1194
anand.kulkarni@icraindia.com
What’s Inside
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Glossary & Definitions
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NATIONAL CIVIL AVIATION POLICY
Regional connectivity is the key focus; new airlines to fly international earlier than anticipated
The Policy
The Ministry of Civil Aviation (MoCA) released the National Civil Aviation Policy (NCAP) on June 15, 2016, after incorporating feedback from the various
stakeholders on the Draft policy which was released on October 30, 2015. The NCAP is aimed at providing a favourable eco-system and a level playing field
to various stakeholders like Airlines Airports, Cargo, Maintenance Repairs and Overhaul (MRO) services, and to make flying affordable for the masses.
Airlines Passengers
Positives Positives
Easier international flying norms for new airlines Strong regional connectivity at affordable prices –
Fiscal support for flying on regional routes target fare of Rs. 2500 for one hour flight
Better infrastructure Improved options for international flying
Lower airport and other related charges Higher safety standards
Negatives Negatives
Increased competition for international routes Levy on Cat-I and Cat-III routes to increase fares;
Changes in RDG1 – marginally higher capacity however, would not materially impact demand
requirement on Cat II/ IIA routes
National Civil
Airports Aviation Policy - Support Services
Who is gaining?
Positives Positives
Regulatory clarity with hybrid-till to be adopted Policy level support and ease of doing business for
uniformly for tariff Challenges MROs
Fiscal support for strategic airports Speedy no-frills airport Improved ground handling services
Regional connectivity to boost performance of development
Policy level support for cargo operations
more number of airports Participation of states in
RCS Negatives
Negatives Timely receipt of fiscal Impact on profitability of GHAs with increased
Viability of airports in the context of hybrid-till funding support for RCS competition and no rationalisation of royalties and
model and lower airport charges Financial viability of other charges levied
airports
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Route Dispersal Guidelines (RDG), current clauses, proposed changes and their impacts are explained in subsequent sections
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Regional Connectivity: Affordable regional flying through fiscal support to airlines and development of no-frills airports
One of the prime focus areas of the NCAP is improving regional connectivity. The MoCA proposes a Regional
Connectivity Scheme (RCS) to be implemented from Q2 FY2017 in order to boost penetration into remote places.
•Viability gap funding (VGF) indexed to ATF prices and inflation based on competitive
bidding and necessity of the route - shared between MoCA and State Governments in
Central 80:20 ratio (90:10 for north eastern states)
Government •Regional connectivity fund (RCF) will be created to provide VGF, to be funded by a levy on
domestic routes except Cat II, IIA and RCS routes and aircraft below 80 seats
•Service tax on 10% of the taxable amount, excise duty on ATF at 2% for three years
•No airport charges; no landing, parking and terminal navigation landing charges for 10 years
Stakeholders •Nominal route navigation facilitation charges for 10 years
Impact:
Proposed policy level support is a positive for enhancing the reach
Development of existing air strips into no-frills airports will play a crucial role in success of the scheme
Levy on other domestic routes is expected to be minimal and would not materially pricing of other routes
Challenges:
? Requirements from states for lower taxes, free land and VGF support might hinder the broad based
acceptance of the scheme by States. Also, lack of unanimity amongst contiguous States, especially in regions
like North East, may impact implementation
? Success of the scheme hinges on timely implementation of no-frills airports development
? Enthusiasm from the airlines to participate considering the low target fares and timely implementation of
mechanism to achieve the target fare
? Dependence of airlines on government support and possible impact on liquidity position due to delayed
receipt of funding
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Scheduled Commuter Airlines: New category of airlines to boost remote connectivity
The MoCA has proposed a new category of airlines which are essentially lower capacity carriers connecting remote
locations. The airlines are expected to be low cost carriers given that they would benefit from relaxed guidelines, fiscal
support and probable subsidy support. Key requirements and incentives for the SCAs are given below.
Shall have aircraft having maximum All Up Weight (AUW) not exceeding 40 tons
The minimum equity capital requirements would be on the basis of number and size of aircraft in the fleet
There would be a prescribed minimum number of aircraft to maintain regularity of operations
Gainers: The operators may additionally carry out domestic charter operations
Regional Passengers Permitted to have code share with other domestic and international airlines
Impact:
Expected low paid-up capital requirement may increase interest of participants
Improved commercially viable operations due to potentially higher capacity utilization levels with small sized
aircrafts
To improve remote connectivity in the country
Challenges:
? Adherence to safety guidelines by comparatively smaller airlines
? Nuances of the policy (primarily about route dispersal guidelines, RDG2) will have to be understood before
private players start investing
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Taking into account the need for connectivity to remote regions in the country, the MoCA has laid down Route Dispersal Guidelines. According to these guidelines, all
scheduled operators are required to deploy in the North Eastern region, Jammu & Kashmir, Andaman & Nicobar Islands and Lakshadweep (Category-II routes) at least
10% of their deployed capacity on trunk routes (Category-I routes, explained in subsequent sections). Further, at least 10% of the capacity on Category-II routes is
required to be deployed for connectivity exclusively within these regions. 50% of the capacity deployed on Category-I routes is to be deployed on routes other than
Category-I and Category-II routes i.e. Category-III routes.
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The 5/20 Rule: New airlines can fly international earlier than previously anticipated timeline
The NCAP has modified the 5/20 rule3 with a new one i.e. 0/20. Details of the new rule are given below.
All airlines can commence international operations provided that they deploy 20 aircraft or 20% of total
Gainers: capacity, whichever is higher, for domestic operations. No restriction on number of years of operations
New Airlines The capacity will be calculated in terms of average number of seats on all departures put together
Schedule of airlines will be the basis for monitoring, assuming six departures per day for an aircraft
Impact:
A positive for new airlines as they can commence international operations earlier than five years, provided
they can ramp up the fleet rapidly; expected to take atleast two to three years
Earlier rule required airlines to have a fleet of 20 aircraft to fly international routes, without any riders on
deployment of fleet for domestic operations. The new rule has requirement of deploying minimum 20 aircraft
on domestic routes; hence, the carriers can start meaningful international operations only after achieving
sizeable fleet over and above 20 aircraft.
3
The 5/20 rule required domestic airlines to complete five years of domestic flying and have a fleet of 20 aircraft before they can operate on international routes
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Route Dispersal Guidelines: Balanced remote connectivity plans of the government to impact profitability of airlines
Taking a note of increased traffic on major routes, the policy suggests addition of more routes in Cat-I4, which in turn
will increase the capacity deployed on remote locations i.e. Cat-II and IA routes. The details of changed clauses are
given below.
Impact:
Increase in Cat-I routes will adversely impact airlines’ performance as there would be proportionately
increased requirements for flying on less profitable (Cat-II & IIA routes) category routes
Reduced requirement for Cat-III routes will be beneficial for the airlines as they can discontinue operations on
some of the loss-making routes in Cat-III (provided the reduction in percentage requirement is irrespective of
the airline’s participation in RCS)
Overall, these proposed changes in RDG would be marginally negative for the airlines – with capacity
deployment on loss-making/ less profitable Cat-II & IIA routes increasing from current 6.8% to 7.5%
4
Category I routes earlier covered 12 city pairs connecting metropolitan cities (Mumbai-Bengaluru, Mumbai-Kolkata, Mumbai-Delhi, Mumbai-Hyderabad, Mumbai-Chennai,
Mumbai-Thiruvanathapuram, Kolkata-Delhi, Kolkata-Bengaluru, Kolkata-Chennai, Delhi-Bengaluru, Delhi-Hyderabad and Delhi-Chennai); Category II routes earlier covered
routes connecting the North-Eastern Region, Jammu and Kashmir, Andaman and Nicobar Islands and Lakshadweep with cities in Category I and Category III routes; Category
IIA routes earlier covered city pairs within the North-Eastern Region, Jammu and Kashmir, Andaman and Nicobar Islands, Lakshadweep, and Cochin-Agatti-Cochin; and
Category III routes cover any city pair that does not fall in Categories I, II and IIA.
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Airports: Positive intentions about policy level support
The MoCA has articulated the need to reduce airport charges in order to make aviation industry viable. Key provisions
regarding airport policies are mentioned below.
MoCA will coordinate with stakeholders to identify ways to bring down airport charges, while abiding by
existing agreements; it will endeavour to achieve cost efficiency of future airport projects
Tariff determination on hybrid-till model5, cross subsidization of aeronautical revenue with 30% of non-
Gainers: aeronautical revenue
Airlines If tariff comes out to be excessive, then ways to keep the tariff reasonable and spread the excess amount over
a longer period in the future will be explored
Explore ways to unlock the potential of airport land by liberalizing end use restrictions
MoCA will coordinate with ministries and state governments to provide multi-modal connectivity
Minimum level and standard of cargo facility to be ensured in future airport developments
AAI will take up new airport projects subject to:
Non-zero IRR for non-RCS projects
State/central government providing VGF for strategically important projects
Free land from state government without equity treatment
Availability of sufficient land for commercial use
AAI may be suitably compensated by the Central government and/or State governments or the private airport
operator in case a new greenfield airport is approved in future within a 150 km radius of an existing AAI
airport, provided the AAI airport is not reaching the saturation point
AAI may be given the right of refusal or equity participation (26% to 49%) in the new airport or AAI may be
allowed to form a JV with the respective State government
Impact:
Reduced regulatory uncertainty with uniform adoption of hybrid-till and policy level support The policy shows
intention of reducing charges and fees at airports, thereby benefitting the airlines
Hybrid-till model of tariff determination for new airports to help balance the interests of airport operators as
well as passengers
Challenges:
? Clarity on whether the hybrid-till model, coupled with lower airport charges would make the airport
operations viable, or whether the same would be subsidized by the State/ Central Governments
? No clarity on dispute redressal mechanism for conflicts between AAI and private players
5
Under the hybrid till model, the airport operator adds a part of the non-aeronautical (duty-free shops, hotel, restaurant, among others) revenue and the total revenue
from the aeronautical (landing, parking and ground handling charges) side to compile total earnings.
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Maintenance, Repair and Overhaul: A high potential industry to get a boost from policy reforms
The MRO business of Indian carriers is estimated to be around Rs. 5000 crore, 90% of which is currently spent outside
India – in Sri Lanka, Singapore, Malaysia, UAE etc. Thus, with a view to develop India as an MRO hub in Asia, attracting
business from foreign airlines, the following steps are proposed.
No VAT on MRO services
No Customs Duty on aircraft tools and tool-kits
Storage of duty-free spare parts imported by MROs extended to three years from the current one year
Advance exports of serviceable parts enabled for providing exchange/ advance exchange of imported
unserviceable parts
Prompt visas to be provided to foreign MRO experts, especially in cases of an Aircraft on Ground (AOG)
situation where temporary landing permits shall be issued
Provision for adequate land for MRO service providers to be made in all future airport/ heliport projects
having potential for MRO services
No levy of airport royalties and additional charges on MRO service providers for a period of five years from
June 15, 2016
Impact:
Elimination of various taxes and duties would facilitate developing India as an MRO hub, not only servicing
Indian airlines, but also foreign airlines
Simplification of approval process will help fast track the services
Growth in the domestic MRO industry will have the dual effect of augmentation of revenues of airport
operators as well as reduction in costs for the airlines
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Code-share agreements: Enabling seamless connectivity for passengers, without making investments in operating own aircraft
Impact:
The airlines will be able to expand their offerings in terms of number of destinations, and in some cases, the
flight timings that they can offer potential customers, without having to operate their own aircraft
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Other key policies: Air Cargo and Ground Handling
Air Cargo
Given its importance from a ‘Make in India’, e-Commerce and exports perspective and the high employment potential
of the segment, the policy aims at promotion of both domestic and international Air Cargo.
Air Cargo co-located with an airport will be accorded ‘infrastructure’ status
Dwell time of domestic air cargo to be reduced to 48 hours by December 31, 2016 and 24 hours by December
31, 2017; dwell time for exports to be reduced to 12 hours and 8 hours by December 31, 2016 and December
31, 2017, respectively
Paper-less processing of air cargo; customs procedures to be simplified
Endeavour to have all relevant Central Government authorities under one roof, at the cargo terminals; single
window clearance system at cargo terminals for prompt clearances
Low user charges to be levied on cargo facility so that it does not become an entry barrier
Airport operators to be encouraged to provide space on 10-year lease to operators of express cargo and
freighters who may then develop dedicated infrastructure
Impact:
According infrastructure status will help speedy movement of cargo on the back of single-window clearance
Increased revenues from air cargo will help airlines subsidize the cost of passenger tickets and thus take flying
to masses
Ground Handling
All major airports to have atleast three Ground Handling Agencies (GHAs), including Air India’s subsidiary/ JV
at an airport to ensure fair competition
Air India’s subsidiary/ JV to match the lowest royalty/ revenue share offered by other third-party GHAs
Gainers:
Domestic airlines and helicopter operators will be free to carry out self-handling themselves or through their
Airlines own subsidiaries
Hiring of equipment from outside agencies permitted; hiring of employees through manpower suppliers not
Losers:
allowed
Ground Handling Agencies
Airport Operators Impact:
While the airlines will benefit from increased competition, it will have a negative impact on the revenues of
GHAs as also the airport operators
With no rationalisation of royalties and other charges levied on GHAs, the profitability of GHAs will be
impacted
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Other key policies: Helicopters and Aviation Security, immigration and Customs, Bilateral traffic rights
Helicopters
Development of atleast four heli-hubs across the country
Helicopters under Helicopter Emergency Medical Services (HEMS) operations to not require any operational
clearance, including landing at accident and emergency sites; no landing and Route Navigation and Facilitation
Charges (RNFC) will be levied for HEMS operations
Liberalised flying of helicopters below 5000 feet – no prior ATC clearance required
Airport charges for helicopter operations will be suitably rationalised
Impact:
Infrastructure development and rationalisation of airport charges for helicopter operations will promote
helicopter usage, which will in turn enhance remote area connectivity, tourism, disaster relief and emergency
medical evacuation operations
Impact:
Implementation of global best practices will ensure faster turnaround of passengers at the airports, thereby
benefiting everyone in the chain of operations
Impact:
Liberalisation of bilateral rights will facilitate greater ease of doing business and wider choice to passengers
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Other key policies
Sustainable Aviation
Roll-out of Airport Collaborative Decision Making (CDM) to reduce on-ground and aerial congestion
All equipment operating within the airport environment to be in compliance with latest emission norms by
April 01, 2017
Ground handling vehicles to use alternate fuels, including LPG/ CNG vehicles, low emissions vehicles, hydrogen
vehicles and electric vehicles to provide significant local air quality (LAQ) emission benefits
Impact:
Above listed energy efficiency and conservation plans are aimed at creating an eco-system for developing a
sustainable Indian aviation industry
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ICRA Contact Details
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