National Civil Aviation Policy – 2016

In June 2016, Union Cabinet has approved the National Civil Aviation Policy (NCAP 2016). The policy will come into effect form the second quarter of 2016-17. Since independence, this is the first time an Integrated Civil Aviation policy has been brought out by the government.

Vision

The cornerstones of the new policy are competition, consumers, connectivity and investment (both domestic and foreign). Its vision is to make flying affordable and convenient and pave for significant growth in the civil aviation sector. Further stated aims are as follows:

• To improve ease of doing business through simplified procedures, deregulation and e-governance.
• To achieve 30 crore domestic ticketing by 2022 and 50 crore by 2027. Similarly, to increase the international ticketing to 20 crore by 2027 and cargo volumes to 10 million tonnes (MT) by 2027.
• To increase the domestic passenger traffic by four-fold to 300 million by 2022.

Salient Features

5/20 rule scrapped

The government has scrapped the 5/20 rule. The 5/20 rule was introduced during the UPA regime. According to the rule, only local airlines having a fleet of minimum 20 aircrafts with at least five years of operational experience are allowed to fly overseas. This rule has now been replaced with a new rule that offers a level playing field. Now, the airlines can fly overseas if they have a fleet size of 20 aircrafts or 20% of the total seat capacity in term of average number of seats on all departures put together, whichever is higher for domestic operations.

Regional connectivity scheme (RCS)

The scheme seeks to connect unconnected towns with the help of Viability gap funding (VGF). The scheme proposes to offer concessions to the airlines to encourage them to fly on regional routes. The central government will fund 80% of the losses incurred by the airlines by flying on regional routes. The rest of the loss will be covered by the states. The states will also incentivize the airlines in the form of lower excise duty at 2% and VAT at 1% on aviation turbine fuel at RCS airports. RCS will be implemented only in those states which reduce VAT on ATF to 1% or less and offer other  support services and 20% of VGF.

• The VGF will be funded by charging a cess per departure on domestic flights at a rate decided by the aviation ministry from time to time. The VGF will be shared between the aviation ministry and the states in the ratio of 80:20. In case of the North Eastern States the ratio will be 90:10.
• The government has proposed a cap of Rs 2500 for an hour’s flight on regional routes to Tier 2 and Tier 3 cities.
• The government also proposes to exempt airlines from all landing, parking and other charges on the RCS airports.

Single Window clearance

The DGCA will create a single window for all aviation related transactions, complaints, queries etc.

Safety

DGCA proposes to ensure real-time tracking and immediate incident reporting.

Route Dispersal Guidelines (RDG)

The new policy contains measures to rationalize RDG. Also, the Ministry of civil aviation will review routes under different categories once every 5 years after its first revision in 2016. RDG was introduced in 1994 to provide air connectivity to Jammu and Kashmir, North East Region, Andaman& Nicobar Islands, Lakshadweep,Tier-2 and Tier-3 cities, by way of internal cross-subsidy by airlines using their revenues on the Trunk Routes (12 in number). RDG has succeeded in creating connectivity to remote locations.

Bilateral Traffic rights

The government has plans to liberalize bilateral rights. This will lead to greater ease of doing business and will offer wider choice to passengers. The policy provides for ‘Open Sky’ air service agreements (ASA) on a reciprocal basis with SAARC countries and those countries located beyond 5000 km from Delhi. Open Sky agreements allows airlines from two countries to operate an unlimited number of flights to each other.

^^What are bilateral air service agreements (ASA)?

Under ASAs, two contracting countries allow their respective to fly in to each other’s territory. The two nations fix equal number of seats or air capacity. The countries then distribute these rights to their airlines. India has signed ASAs with 109 countries.^^

Code sharing agreements

Under the new policy, the Indian carriers would be free to enter into code sharing agreements with foreign carriers for the destinations within India on a reciprocal basis. Similarly, International code sharing agreements will also be liberalized.

^^What are code share agreements?

When two or more airlines enter into code share agreements, then they will be able to share the same flight. Simply put, an airline can purchase seats on a flight actually operated by another airline under a different flight number or code.^^

Ground Handling Policy

The Ground Handling policy will be replaced by a new framework. All domestic scheduled Indian carriers as well as helicopter operators will be allowed to deploy their employs for self handling at all airports.

Airports/ PPP

The new policy aims to encourage the development of airports by state governments, AAI, private sector through PPP mode. For future airports, tariffs will be calculated on a ‘hybrid till’ basis. Under this model, airport charges will be levied based on an airline’s aeronautical revenue and part of its non-aeronautical revenue.

Aviation security, Immigration and customs

‘Service delivery modules’ will be developed for aviation security, Immigration, Customs in consultation with the concerned ministries. Use of private security agencies will be encouraged at airports for non-core security operations in consultation with home ministry.

Helicopters

Separate regulations for helicopters will be notified by the Director General of Civil Aviation (DGCA). Helicopters will be allowed to fly freely without prior ATC clearance below 5000 feet as well as in airspaces which are not controlled/prohibited/restricted. Also, the airport charges for the helicopters will be rationalized.

Maintenance, Repair and Overhaul (MRO)

The new policy aims to give a push to this sector. The MRO business of the Indian carriers is estimated to be around Rs 5000 crore. But 90% is currently spent outside India. The government will make provisions for suitable incentives for MRO activities and service providers. The budget 2016-17 has also rationalized custom duty and simplified the procedure for clearance of goods.

Education and skill building

To make some 8,000 unemployed pilots holding commercial pilots (CPL), the Ministry of Civil Aviation will develop a scheme for Type-rating (training on specific type of aircraft) along with budgetary support on planes like Airbus A320s and Boeing 737s. The ministry will also give full support to the Aviation Sector Skill Council and other agencies for imparting skills. It is estimated that the direct additional employment requirement of the Civil Aviation Sector will be 3.3 lakh by 2025.

Scheduled Commuter Airlines (SCA)

The new policy has also proposed to promote a new category of airlines to boost remote connectivity called the Scheduled Commuter Airlines (SCA. These are essentially lower capacity carriers connecting remote locations. These are also expected to be low cost carriers as they would benefit from probable relaxed guidelines, fiscal support and subsidy support. The eligibility criteria for SCAs are:

• Paid-up capital will be Rs 2 crore.
• Aircraft should have a capacity of 100 seats or less.
• No restrictions on number of aircrafts
• SCAs need to operate a minimum prescribed number of movements per week to RCS destinations.
• SCAs can enter into code shares with other airlines.

Questions and Answers

• What is the Hybrid Till Model?
• What are the key positive elements of NCAP-2016?
• Make a critical assessment of the policy

What is the Hybrid Till Model?

There are three models for determining the airport charges viz. Single till, double till and hybrid model. In all cases, airport operator gets a predetermined internal rate of return (IRR) as per the concession agreement. Under single-till mechanism, revenues from both aeronautical (landing, parking and ground handling) and non-aeronautical (duty-free shops, hotels, restaurants and airport infrastructure) segments are taken into account to determine the IRR. However, under the hybrid till method, which is currently being used by joint venture airports, only 30 per cent of non-aeronautical revenue is taken towards IRR, allowing the operator to pocket 70 per cent of the non-aeronautical revenue. The idea is to encourage the operators to expand airport infrastructure. But the lower revenue base compared to single-till method practically prompts the operators to levy higher charges (UDF) on passengers and airlines. The model will be good for operators, but the passengers will have to fork out more as user development fees (UDF). Due to this, some have expressed concerns on financial viability of this model.

What are the key positive elements of NCAP-2016?

Some of the positive elements in the policy are as follows:

Airlines

• Government support for flying on regional routes.
• Improved and better infrastructure.
• International flying norms made easier for new airlines.
• Lower airport and other charges. The new policy has allowed the airlines to handle ground operations themselves. Earlier, airlines approached courts against orders that required them to outsource their ground handling operations.

Passengers

• Higher safety standards.
• More options for international flying.
• Improved regional connectivity. A target fare of Rs. 2500 for one hour flight would help middle class passengers.

Others

• RCS scheme to boost the performance of many airports.
• Ease of doing business. For investors, policy clearly shows the future roadmap.
• Enhanced ground handling services. The fiscal incentives provided for the Manufacture, Repair and Overhaul (MRO) sector is a big positive.
• Adopting hybrid till model for developing airports may end uncertainty and promote investment.

Make a critical assessment of the policy

The Centre for Asia Pacific Aviation (CAPA), Sydney-based aviation think-tank has lamented that the new policy did not provide the sector with the institutional infrastructure required for the long-term growth of the industry. It has labeled the policy as a significant “disappointment “.

Safety and security

There are no improvements made in the policy in improving regulatory and policy-making competence. The policy is silent on professionalizing the crucial entities that govern aviation safety and security in the country like the Directorate General of Civil Aviation (DGCA) and Bureau of Civil Aviation Security (BCAS). Though it aims to strengthen these entities, it has not laid down any framework to make these organizations capable of meeting modern-day challenges and to be process-driven to deliver world-class service. With ever increasing growth in the number of passengers, the country needs strong air safety and security regulators.

AAI and infrastructure plan

The new policy is also silent on the need for complete transformation of the Airports Authority of India (AAI). India’s ambitious airport infrastructure development plan requires a strong organization to carry out the implementation. But there is little clarity in the fate of AAI or about its listing in the stock exchanges. Experts opine that AAI focuses heavily on capital expenses. Moreover, without a clear infrastructure plan, the expected job creation is not likely to happen. Adding to the woes, the expected rise in helicopter operations, private flying and regional airlines is likely to add to the pressure.

Helicopter

Structural changes proposed for the helicopter industry is likely to revive it, but its success is dependent more or less entirely on DGCA, BCAS and infrastructure development.

Dispute Redressal

The policy is not clear on dispute redressal mechanism for conflicts between AAI and private players.

Airlines

• The policy is also silent on the future roadmap for the state run Air India and the way forward for that airline.
• There is no word about removing the sales tax on ATF and other taxation measures levied on Indian carriers.
• The regional aviation policy is well-intentioned, but expecting private capital to flow to loss-making projects remains elusive. The regional aviation policy unveiled by the previous government with incentives like 4% sales tax on ATF and no landing/ parking charges could not achieve the expected progress. Experts feel that the policy is too difficult to implement.
• Although, the government has moved to 0/20 from the 5/20 rule in international flying, the new flying criteria is not likely to help new airlines like Vistara and AirAsia India, as these carriers are not in a position to fast track expansion owing to a resource crunch. They have already exhausted the initial capitalization and may take around three to four years to build a capacity of 20 aircraft.

What is the way forward?

Aviation experts want the government to separate Air Navigation Services from the AAI and establish it as an independent, professional body. They also feel the policy has lots of ifs and buts involved. They want the policy to be coherent, fair, equitable and implementable. In addition, the industry stakeholders have to actively engage with the policy makers to implement the rational decisions to boost the growth of civil aviation sector.

Even with 40% upwardly mobile middle class, India’s aviation industry remains largely untapped with promising potential. Air transport is still expensive for the majority of country’s population. Framing right policies with special focus on quality, cost and passenger interest can make India to achieve its vision of becoming the third largest civil aviation market by 2020 and largest by 2030.