WHAT IS AILING THE INDIAN AVIATION SECTOR ? PROBLEMS AND REMEDIES
Updated: Nov 8, 2019
This piece has been authored by Mr. Syed Tamjeed Ahmad, Associate and Aerospace Lawyer at Sarin & Co.
India has been continuously ranked as the world’s fastest growing domestic aviation market.[i] In the recent years, the government has added 35 more airports, thereby, providing more avenues to Indian carriers. Further, it is expected that as more and more people from the lower strata of society join the middle class, it will create more demand for air travel. Thus, it is predicted that India will become world’s third largest aviation market (by passenger numbers) by 2024. In spite of the growing traffic and the magical numbers, Indian aviation still continues to be in a bad shape. Every 3-4 years, India sees a prominent air carrier, either shutting down or being put on the ventilator. This raises some serious apprehensions over the long term viability of the sector.
There are reasons that can be solely attributed to the individual airline. But in general, there are multiple issues that continue to plague India’s aviation sector. Some of them are explained below:
2.1 Fluctuating USD to INR rate
A weaker rupee puts immense pressure on the economy at large, and aviation is no exception to this calamity. There are various reasons why a weak rupee hits aviation industry the hardest. Firstly, most of the aircrafts, deployed by Indian airlines, are on lease. The lease rentals have to be paid in USD to the lessor, so there are scenarios where the lease rental does not increase, but due to the change in exchange rate, the effective cost for the airline goes up considerably. Secondly, there are some airlines which import their jet fuel. All these international payments are made in USD. Thus, if the rupee plunges, it is often followed by a financial turbulence for the airlines.
2.2 Complicated regulatory structure
Regulations that are industry-oriented can provide a support ecosystem for pushing the industry to greater heights. On the other hand, if the regulations are complicated and more bureaucratic in nature, they can be fatal for the industry. In India, there is a web of regulations that regulate various aspects of the aviation industry. For example, as already stated, India is the world’s fastest growing domestic aviation market. Therefore, it is expected that Indian carriers will need many new aircrafts, India is therefore seen as an attractive market for aircraft manufacturers, financiers, and lessors. However, in the international aviation finance and lease practice, there exists uncertainty regarding the possibility to repossess, deregister, and export an aircraft in the case of default of an Indian airline or other operator. The Kingfisher episode reiterated this perception and sent a shockwave across the global finance and lease practice, bringing many negative reviews for India. This forced the financial world to take a more cautious approach towards Indian carriers. This has resulted in Indian airlines/operators being charged higher lease rentals/security deposits to make up for this transaction risk. Although the manner in which the shutting down of Jet Airways has been managed by the government is commendable, there is still much work that needs to be done.
2.3 Cut Throat Competition
Indian domestic aviation market is known as one of the most competitive and price sensitive markets. Indeed, it was recently pointed out by CAPA India that the competition dynamics of the Indian aviation market are not in line for long term viability of the sector.[ii] It is predicted by CAPA that India may witness consolidation of various domestic airlines into 2-3 groups or cartels, which may then come with its own legal complications from an anti-trust perspective.[iii]
This part of the blog provides a basic overview of reforms from a policy perspective, which can be implemented in the sector to ensure long term viability.
3.1 Simplifying the regulatory structure
The law governing regulation of aviation industry in India is intertwined between the legislative and executive orders on one hand and judicial rulings on the other. Firstly, India being a ‘common law’ jurisdiction, the decisions of Constitutional Courts, by virtue of the doctrine of stare decisis, take precedence over the legislative and executive orders. This sometimes leads to regulatory uncertainty. It is therefore imperative that, various laws governing aviation be brought under one umbrella code that should have a non obstante clause, ensuring primacy of the specialized aviation code over other laws of the land.
Secondly, aviation industry in India is controlled and regulated by various regulators. For example, the Director General of Civil Aviation, the Airports Economic Regulatory Authority, Airports Authority of India, and the Bureau of Civil Aviation Security just for regulating one sector i.e. Aviation. The need of the hour is to amalgamate and merge all these regulators into one Civil Aviation Authority, which shall have the overall regulatory and superintendence oversight over the aviation industry. This will not only reduce the regulatory fatigue, which is often experienced by the industry, but shall also serve as a single window clearance authority, thereby reducing the operational costs for the industry.
3.2 Making Repossession and Export Predictable and Easy
When an airline or any other operator defaults on its lease terms, the lessor’s remedies include de-registration of the aircraft from the Indian register and then proceeding with the export of aircraft from India. The basic operation of aircraft registration, de-registration, and export in India is governed by the Aircraft Rules, 1937.[iv] These have been amended various times to be brought in line with the international regulations, for instance, the Cape Town Convention 2001[v] and the Aircraft Protocol[vi]). Although in theory it appears that India has implemented the various provisions of the Cape Town Convention and the Aircraft Protocol in its domestic legislation. However, in practice, although the process of de-registration has been streamlined and made predictable to a large extent, export of an aircraft after de-registration, which is the ultimate remedy, still remains unpredictable and murky, specifically in cases where the lessee is not cooperating. This is because, for the purpose of import, it is the lessee (the operator) who is the importer and in a usual scenario, the importer should be the exporter, but in cases of default, lessees often turn hostile and do not cooperate. In such cases the lessor or his legal representative has to be the exporter and this is where it gets chaotic. The Jet Airways crisis has further highlighted this grey area. Thus, there is an urgent need that export procedure for aircrafts (in case of default by lessee) be made more predictable and less cumbersome.
3.3 Bringing Aviation Turbine Fuel (ATF) under GST
Aviation Turbine Fuel or ATF constitutes forty percent of the operating cost of an airline, and indeed is one of the deciding factors for an airline’s balance sheet. There has been tremendous lobbying from the industry that the ATF should be brought within the ambit of the GST regime, but since GST council works on consensus, it can only be done when all states are onboard for this. As of today, ATF attracts an eleven percent excise duty in addition to the levies by the Union and State governments, which brings the total tax to around thirty percent. Moreover, recently, the Ministry of Civil Aviation had requested the Finance Ministry to include ATF under the GST regime. The suggested slab for aircraft deployed by airlines was 18%. The industry is hopeful that the new government will take measures to include ATF within the GST regime, which obviously would be beneficial for the industry at large.
As Indian economy grows and market expands, there will be a demand for more and more air travel. In fact, the UDAN scheme (regional connectivity scheme of Government of India) has made sure that aviation in India does not becomes metro- centric and tier 2 and tier 3 cities are also included in this march of aviation. However, in the absence of an ecosystem that is viable for long term, the aviation industry will not be able to reap full benefits of new India.
[i] PTI, India's air connectivity grew fastest in five years, says IATA, Economic Times, Dec. 12, 2018, https://m.economictimes.com/industry/transportation/airlines-/-aviation/indias-air-connectivity-grew-fastest-in-five-years-says-iata/articleshow/67061841.cms.
[ii] PTI, Current competition in Indian aviation industry not in line with profitability: CAPA, Economic Times, Feb. 12, 2019, https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/current-competition-in-indian-aviation-industry-not-in-line-with-profitability-capa/articleshow/67959148.cms.
[iv] Aircraft Rules (India), 1937.
[v] Cape Town Convention on International Interests in Mobile Equipment, 2307 U.N.T.S. 285, Nov. 16, 2001.
[vi] Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, Nov. 16, 2001.