Globalization, Liberalization and Privatization of Aviation Industry: Emerging Legal Issues

PROJECT REPORT ON Globalization, Liberalization and Privatization of Aviation Industry: Emerging Legal Issues

Submitted for the Post Graduate Diploma in Aviation Law and Air Transport Management (AL-1)

Submitted by VINAY SHANKAR November 2011 Delhi Centre

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Introduction of aviation History in India

Aviation Industry in India started in 1912 when the first flight took off from Karachi to Delhi. It was initiated by Indian State Air Services in partnership with Imperial Airways UK. But the real initiation for Aviation Industry in India was in 1932 when Mr. JRD Tata started Tata Airline. In 1946 Tata Airlines was renamed as Air India. Since then ever decade some changes keep on happening in the industry but were not substantive in comparison of the world at large. But in 1990s with the economic liberalization policies of the central government India also witnessed a boom in air traffic. The open sky Policies of the industry open the doors for private parties in large in the Aviation industry to come forward and invest in this sector to make it reach at a new level. This resulted in emergence of a number of local players in the domestic aviation sector. This policy of liberalization, changed the whole scenario of air travel in India, and introduced the whole new segment of Low Cost Carriers which gave every common man a chance to fly and experience then new horizons of air. Many ups n downs keep happening in the industry sometimes with regard to inexperience players and with many emerging legal issues. New legal challenges were emerged which created constant amendments in the rules and regulations stipulated regional, national and international level. Montreal, Warsaw and Chicago conventions were the basis for settling most of legal claims. However in the prevailing scenario where everything is so dynamic that it keeps changing the aviation industry also requires more efficient and prevailing commonly accepted law among the nations. In current scenario, even though every country got its own aviation laws to regulate the industry within its limits, the International Aviation Laws were respected and adhered internationally. Even though there are frequent disputes happening which needs to be solved with new emerging and globally accepted laws. There are number of airports working in the hybrid format, a mix of private and public ownership. This is due to the consideration of social obligation of an important transport mechanism, and also considering the safety and security concerns aroused due to the current volatile world scenario.

Expanding Industry
With passenger boardings expected to double by 2025, and aircraft operations expected to triple by the same time, the number of passengers traveling by air is on rise. For the traveling public, price is paramount in choosing a carrier. Due to the Internet and round-the-clock search capability, airfares are fully transparent to the public and travelers are choosing the lowest price option. Air travel is now a commodity business, and legacy carriers will have to adapt further to a low-cost/low-fare environment in order to survive. Even business travelers, who have been less price-sensitive, are resisting fare increases. The only premiums that travelers are willing to pay for are time-of-day and direct flights, not the brand. Capacity is growing without much constraint. Indian carriers are placing orders for new aircraft for delivery in the coming period, without clear plans to retire older planes. They are also adding significant numbers of regional jets. The air taxi fleet is also expanding rapidly. Kingfisher Airlines has already ordered 5 Airbus A380 aircrafts that will operate on international routes. Cost structures will continue to handicap legacy carriers as they compete with newer airlines, as well as with overseas carriers. Low cost carriers are posing great threats to legacy carriers, as a result of which they are restructuring their pricing policies. Apart from this, they are also facing competition from overseas players. Oil prices are not expected to fall. The public sector oil marketing companies have raised the prices of Aviation Turbine Fuel by 3.5 per cent, in line with the rise in international oil prices. This is likely to trigger a marginal increase in airfares. Outsourcing: Private airlines are known to hire foreign pilots, get expatriates or retired personnel from the Air Force or PSU airlines, in senior management positions. Further, they outsource such functions as ground handling, check-in, reservation, aircraft maintenance, catering, training, revenue accounting, IT infrastructure, loyalty and programme management. Airlines are known to take on contract employees such as cabin crew, ticketing and check-in agents.

Economic aspect of airports

In assessing airport competition, the very first necessiacity is to define the relevant market. All relevant and subsequent services comes later which are attached to it. The 3 major points of facilities providing n generating revenue comes from landside, airport and terminal side and most importantly the customers are important who bring a major chunk of revenue for this. Whereas, even the airline traffic charges generates revenue along with the other services which are being provided to and by the airport. Thus for airports the relevant markets would be determined by the degree to which the demand for slots at one airport was affected by the change in airport charges associated with a slot at another airport. If one airport was, for example subsidized by its government, and was able to offer much lower airport charges, an airline might move from another airport to take advantage of these lower charges. Alternatively, the airlines at the lower airport charge airport might experience an increase in passenger traffic at the expense of airlines at the airports, if the reductions were passed on in lower airfares. This would be more likely to happen where two airports have overlapping catchment areas. In practice it would be very difficult to determine if such diversion had taken place, since air traffic would also change through economic and social developments ,changes in other airline costs, changes in frequency or other aspects of service quality, competitive developments in surface transport. It is dangerous to assume that airlines will automatically pass on the charges to their customers. In reality airlines may react to the increased airport charges by passing them to consumers resulting in loss of revenue, absorbing them - resulting in an increase to their costs, absorbing the increase in charges partially and pass on the rest to their customers. The airlines response will depend on a number of factors including passengers demand price elasticity, mix of business and leisure passengers and airline cost structures.

Response of competitors to the changes in airport charges Different categories of air traffic have different degrees of sensitivity to changes in airport charges, the most sensitive being: Traffic carried by low cost carriers Availability of traffic rights Potential traffic and yield at each end of route Existing competition offered by other airlines on route and indirect routings Availability of aircraft Operating costs other than dependant on airport operator The airport operator can influence the decision directly through offering good facilities (parkings, surface access, check in, lounges, shopping, gates, and sometime handling services), and the cost of landing and take offs. Indirectly the airport can influence the cost of services provided by the firms with concessions for providing other services at the airport. If there is another airport serving the same catchment area, the airports offer can rightly be considered to play a part in the airlines decision to introduce the service at all, and to use that airport in particular.

Privatization
Just after independence, India had nine air transport companies transporting both cargo and passenger traffic. In 1953 the Indian government nationalized all the existing airline assets. Indian Airline was set up to cater to the domestic market, while Air India was set up to take care of the International sector. Both Indian Airline and Air India enjoyed monopoly over the Indian skies. Service was poor, flights were often delayed and frequent travelers had to face innumerous hardships. But the scenario changed post liberalization.

Post Liberalization
Post liberalization the Aviation industry has witnessed unprecedented growth for both domestic and foreign passenger sector. The monopoly of Indian Airlines and Air India over the Indian skies came to an end. The substantial growth in the Aviation industry post liberalization was due to: The Entry of private players, increased competition ensuring better service to the customer. The entry of low cost carriers like Deccan, Spice jet, Go Air changed the landscape of the aviation industry. The no off first time fliers in both urban and rural India increased dramatically. The first move towards liberalization was initiated in 1986 when private airlines were given permission to start charter and non scheduled services to all authorized airports under the Air Taxi Scheme. They were also given permission to make their own decisions with respect to fares and schedules. A major step towards liberalization was in 1990 when India initiated an open sky policy for cargo which gave permission for foreign airlines to run cargo flights without restrictions and to charge rate without being controlled by Director General of Civil Aviation.

In 1994 Air Corporation act was passed. With this act private service providers could now operate both scheduled and non scheduled services in the domestic sector without any constraints on the size or type of aircraft. But to guarantee passenger safety, security, and proper growth of air transport services and overcome infrastructural constraints in many airports, the government gave permission for addition to capacity based on increase in air traffic forecast. In 1994-95 the government gave permission to directly import aviation turbine fuel. In 1997-98 to take the process of liberalization one step further, foreign equity participation up to 40 per cent was allowed in the domestic airline segment. But International service providers could not take stakes either directly or indirectly without approval from DGCA.

Liberalization provides benefits for consumers Further airline liberalization can provide significant benefits for consumers. Experience in the other industries shows that liberalization can: Lower Prices. For the EU countries that have liberalized their energy markets, electricity prices are 10-20% lower and gas prices 35% lower than they would have been without liberalization. In Korea and Japan, liberalization of the telecoms industry has also seen the cost of long- distance calls fall by up to 50% as new entrants engage in price competition with incumbents; Increase Output and Choice. Liberalization of TV and radio markets has increased the available output and increased the number and diversity of options, including specialist channels for different consumer tastes (e.g. Indian TV, New Zealand radio); Improve service quality. For example, relaxing ownership restrictions in the US banking sector has increased both service quality and the ease of access to it. Customer service quality has increased, as shown through satisfaction surveys. Service fees have risen to cover the extra costs involved but consumers are willing to pay for higher quality. Liberalization also provides benefits for producers too Full liberalization that provides firms with the full commercial freedoms to respond to increased competition can: Improve capacity utilization towards its optimal level. Increase productivity for both incumbents and new entrants. Firms also look to compete over the longer-term through innovation. Transfer best practice. It helps to transfer managerial and technological knowledge and best practice. Increase investment. It can increase investment in the sector and lower the cost of capital as firms have access to more efficient sources of finance. Improve profitability. It can help firms to lower costs, improve efficiency and to develop economies of scale resulting in improved profitability.

 Increase a firms market value. It allows for a greater potential for takeovers and hence for shareholders of target companies to benefit from the significant share price appreciation that characterizes such activity. Liberalization with a brighter Prospect Lessons from the other industries show that full liberalization is often not a seamless process. Liberalizing markets over different timescales or removing restrictions on operations without removing those on ownership can create distortions and reduce the potential benefits that are available. However, a discussion paper produced by the UK Civil Aviation Authority 1 shows that a clear pathway to full liberalization for the airline industry, that is consistent with optimal safety and security standards, does exist. Full liberalization is required to maximize the potential benefits The benefits of liberalization are maximized where both operational and ownership and control restrictions are removed. The structure of the airline industry means that removing operational restrictions can lower barriers to entry to the industry. But it will not maximize the potential benefits to customers, airlines and the wider economy unless ownership restrictions and the barriers to exit or to adjust capacity are also removed. Further liberalization can provide substantial consumer benefits Further operational and ownership liberalization can protect and enhance the consumer benefits, in terms of greater choice and lower fares, already obtained from liberalization so far in the airline industry. It can also widen and expand these consumer benefits to new regions and routes that currently have highly regulated markets. Therefore, it can continue to provide benefits for airline users, while also providing significant benefits for the wider economy. For example, a recent study by Intervistas 2 found that liberalizing some of the current major restricted country pair routes could increase traffic by 63% and generate an additional $490 billion of GDP. Greater commercial freedom allows airlines to improve productivity and efficiency Liberalization can create the freedom for airlines to operate on a fully commercial basis. This will allow them to allocate capital more efficiently, to respond better to changes in demand
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in markets and to improve productivity. It provides a platform for the airline industry to expand or rationalize capacity and ownership in accordance with customer needs. It can also improve the return on capital invested that is earned by the airline industry as a whole. Liberalization can provide benefits for a flexible and efficient firm In a fully liberalized market, the key for firms is to recognize where its competitive advantage lies and to focus on it. Liberalization provides opportunities for expanding into new markets as well as threats to existing markets. There will be winners and losers from liberalization. However, experience from the other industries has shown that firms who are efficient, flexible and responsive to customer needs regardless of their size are best placed to benefit. A multilateral approach to liberalization is preferable A multilateral approach is likely to have more substantial and positive implications for both consumers and airlines. Bilateral negotiations remain the main forum for discussion and a useful mechanism for reform, but the rationale for more supranational leadership is strong. Globally brokered agreements (e.g. through ICAO) are desirable but face practical difficulties. Therefore, at least for the short- term, co-ordinate bilateral and/or regionally focused negotiations can offer the best way forward

Government Initiative To Promote Aviation Industry

FDI in Air Transport Services has gone up from 40 per cent to 49 per cent. NRI's and Persons Of Indian Origin have been allowed 100 % FDI.

Private Service providers with five years experience in domestic sector and having fleet size of twenty aircraft were given license to operate in International routes. Jet airways and Kingfisher airlines have started operations to International destinations.

The aircraft rules were amended to ensure the Aviation industry keeps pace with international standards and developments.

Air India and Indian Airlines were merged to make them more efficient.

Greenfield airports at Bangalore and Hyderabad were completed and Delhi and Mumbai airports were restructured.

Entry Of Low Cost Carriers (LCC) The LCC growth in India was in the form of Low Price Tags, Apex Fares, Internet Auctions, Bulk Purchases and Last Day Fares. The reason for the growth of LCC is:

Low Entry Barrier Attraction Of Foreign Shores Increased Permitted Foreign Equity Rising Income Levels and Demographic Profile. High load efficiency. Operations to far flung areas. Low cost and Low Frill business model. Staff strength was kept to a minimum. Operations to neighboring countries like Sri Lanka. Successfully penetrated the rising middle class and first time fliers.

Future Trends The Centre For Asia Pacific Aviation has predicted that domestic traffic will increase by 25 to 30 per cent till 2011-12 and International traffic growth by 15 per cent. By 2020 400 million Indian passengers are likely to be flying and Indian airports would be handling more than 100 million passengers. The Aviation industry has to be guarded against foreign carriers especially from the Middle East. The global meltdown and decrease in air travel due to terrorist activity have eroded the profitability of the aircraft operators in India.

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The Risk Factors in Privatization

There are number of fairly specific areas that can be identified as being primary sources of risk to the concessionaire, to a financial institution or to a host government in the process of privatizing an airport. Air Traffic Forecasts The air traffic forecast for an airport is the key risk element for the concessionaire and investor alike. Indirectly, it is also a key risk to the host government. Forecasts of air traffic generated by planners, and economists as a means of estimating the future growth, in air passenger, and cargo traffic reflect the estimated growth in key indicators of the economy, notably gross domestic product (GDP), which tends to be well correlated with air passenger traffic. A good forecaster will adapt more than one approach to generating a forecast, and will also forecast for a range of outcomes a high growth scenario and a low growth scenario. The forecast then usually adopted as official in one that lies in the mid range between these two extremes. Airport Development Proposals Bidders in a privatization normally prepare a physical development proposal to indicate the scope of development they propose for the site. Facilities illustrated on the plan will normally reflect the air traffic forecast, and be limited in scope or phasing by the length of the concession period. Site development proposal submitted by bidders are also a source of risk to the bidder and to the host government, arising essentially from three main areas. Aircraft Safety Airside and Terminal Design, and Capacity and site expandability.

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Air Transport Risks Risks in the area of air transport development can affect the business of the concessionaire. At the outset, in the creation of air traffic forecasts, future change in the air transport environment of the airport is important to gauge correctly. Changes in Aircraft Mix will invariably affect the overall performance of airport system.

Competing Airports The possibility of overlapping air transport markets must also be considered. Such a situation arises only where airports are relatively close together, and while under public ownership were able to establish their own local market service area. Airline Alliances Another area in which risk arises from the actions of the air transport industry is due to the trend of airlines to join into alliances with other carriers. This may have several effects, including Hub creation Change in airline check in and handling arrangements A possible change in terminal used by an airline in a multi terminal airport. Revenue Estimation Revenue estimation is a key element in establishing financial feasibility of a privatization proposal. Two areas of risks surround revenue estimation Reliance on a traffic forecasts creates a direct risk to the bidder and to the investor when those forecasts may be optimistic, or may rely on air transport development activity that is outside the control of the bidder. Overly optimistic traffic forecasts generate overly optimistic revenues to be derived from the users. This can distort the cash flow projection for a project, suggesting a earlier payback and a greater ultimate return of investment. Assumptions used to establish the charges that can be derived from users and tenants may be unrealistic, and if not subjected to sensitivity testing may distort the financial analysis.
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Assumptions regarding the rate at which user charges can be increased over time may also be unrealistic. Capital Cost Estimates Privatization bids are normally characterized by proposal to construct or expand facilities, such as runways, taxiways, aprons, and passenger and cargo terminal buildings. The bidders even tend to emphasize the level of capital investment being proposed, almost as a selling point for the project. Concessionaire Composition and Culture For the host government, the composition of suitable consortium bidding for a privatization project is most important, and can itself be a source of risk. Operation and Management of an airport requires that skills in operations, marketing, retail and commercial operation, and financial management bought together. Review of the composition of the bidding consortium is necessary to ensure that all of the required skills are included either strategic partners, or designated as sub contractors to the consortium, to make sure the work goes seamlessly. Institutional Influences Risk may arise for the concessionaire, and for the investors in a privatization, from the actions of government or from other institutional difficulties. Government policies can change in a way that it can affect the business of concessionaire. Effect of Terms and Reference for Privatization Some of the problems and issues, and indeed some of the risks, arising in airport privatization projects, can be traced back to the original terms of reference issued to bidders by the host government. The more simple and lacking in definition are the terms of reference, the greater will be the difficulty in evaluating bids, and the greater will be the ultimate risk to the government from its selection of the concessionaire.

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The Emergence of International Laws

International Law is considered as one of the most significant concepts, which is gaining momentum at a fast pace in the world community. There has been many occasions, where efforts have been put by mankind throughout the world in order to legitimize the concept of international law in broader perspective, with the sole objective of maintain universal brotherhood and keeping international war and conflicts at bay. Since the formation of world community, especially after the Second World War, inferences of International Law can be found quite frequently. The presence of International Law has increased by leaps and bounds which is quite evident from the fact that almost all the sovereign nations of the world, irrespective of their political, social, economic, religious or geographical background, have voluntarily accepted the authority of International Law. Before Warsaw Convention in 1929, whenever any accident happened on an international air carrier, and any injury/damage is inflicted on a passenger, or any damage, loss or destruction occurring to the passengers baggage or any cargo, there were no proper systematic rules and regulations which would have acted as a touchstone for such incidents. There was no standardized fixation or limitation on the amount of compensation claimed by the affected parties and the decision varied from case to case. The worst problem in this regard was that the air carriers were at the receiving end which was taking a toll over the growth and development of the flourishing aviation industry at the international level. The Chicago Convention, Warsaw Convention, Montreal Agreement, The Hague Protocol, The Carriage by Air Act are the major milestones in the Aviation Laws. With the increase of commercial air transport in 1920s, governments and transport industry alike began to inquire into the ramifications of an aviation accident. The French Government, in response to the concern, convened the first international conference on private air law, in 1925, primarily to consider the creation of a uniform system of aviation law. The second international conference on private air law was held in Warsaw from October 4 to 12, 1929. Its main purpose was to unify the rules on the international transport of persons and property by air, fix the damages for loss or injuries sustained and create a presumption of liability against the carrier on the happening of an injury to or death f a passenger, or damage to or loss of property.

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The Carriage by Air (Amendment) Bill, 2007

In 2007 The Carriage by Air (Amendment) Bill was introduced in the Indian Lok Sabha.

Glimpse of the Bill This bill seeks to amend the Carriage by Air Act, 1972 that governs the rules for international carriage by air. The bill proposes to update Indias legal regime by ratifying the Montreal Convention. It introduces a two-tiered compensation regime for death or injury to passengers. If the accident is the fault of the carrier, then it has an unlimited liability. Otherwise, the carriers liability limited to 10,000 Special Drawing Rights or SDRs (around INR 63 Lakhs at the current conversion rate), which is triple the limit under the earlier convention. The Montreal convention allows the plaintiff the option of jurisdiction in the country of primary residence of the passenger, in addition to the primary location of business of the carrier or the destination of the flight. In case of death or bodily injury of the passenger, the bill provides for advance payment by the carrier to the passenger or passengers family to address immediate economic needs without lengthy litigation. The bill changed the system of compensation of lost or damaged baggage. Under the Warsaw Convention, it was a weight based system. The Montreal Convention changes it to a maximum of SDR 1,000 (about INR 63,000). Issues and Analysis The Bill only applies to international carriage by air. It permits the central government to notify similar provisions to domestic flights too. Under the current act, the compensation levels notified by the government for domestic flights are significantly lower than for international ones. The Montreal Convention covers any journey where the origin and destination are in a signatory county if there is a stop over in another country. This implies, for example, that a

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US India US ticket is covered while an India US one not covered until India ratifies the Convention. Some countries have ratified the Convention with amendments to exclude specific carriers from the rules of Convention. According to the International Civil Aviation Organization, 78 countries have ratified and enforced the Montreal Convention, including the United States, The European Union, Canada, Japan and China.

Emerging Legalities
Currently almost all the activities related to Airport System are reviewed under various legal angles to avoid any road blocks. In the privatized scenario, there are number of suits were involved on above mentioned points on privatization. Apart from the host government disputing with the concessionaire in many cases to sustain the social obligation umbrella cover, a majority of other aspects also boomed out recently. A security breach is one of the most serious problem faced by many airports in the current world scenario, especially those in the sensitive areas. Also, air crash like one happened in Mangalore Airport recently also opened so many different legal suits against the airline. This includes the compensation as well. Since the International Law is a weak law in many angles, creation of new laws or amendment in existing laws were only possible if the Big Five in UN agreed to it. This also will happen over their discretion based on their own personal interests of the State. The negligence of staff also open more skies for formulating new laws to handle the compensation part. This is especially critical, when the negligence lead to a mishap, with fatalities.

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Conclusion
Airline industry in India is plagued with several problems. These include high aviation turbine fuel (ATF) prices, rising labor costs and shortage of skilled labor, rapid fleet expansion, and intense price competition among the players. But one of the major challenges facing Indian aviation industry is infrastructure constraint. Airport infrastructure needs to be upgraded rapidly if Indian aviation industry has to continue its success story. Some steps have been taken in this direction. Two of India's largest airports-Mumbai and New Delhi-were privatized recently. Two Greenfield airports are coming up at Bangalore and Hyderabad in southern India. Investments are pouring into almost all aspects of the industry, including aircraft maintenance, pilot training and air cargo services. The future prospects of Indian aviation sector look bright. Aviation Industry in India is one of the fastest growing aviation industries in the world. With the liberalization of the Indian aviation sector, aviation industry in India has undergone a rapid transformation. From being primarily a government-owned industry, the Indian aviation industry is now dominated by privately owned full service airlines and low cost carriers. Private airlines account for around 75% share of the domestic aviation market. Earlier air travel was a privilege only a few could afford, but today air travel has become much cheaper and can be afforded by a large number of people.

Worlds aviation industry is primarily regulated by rules and laws formulated by the procedure of international treaty and convention. Most of these can be found in the Annexes and Docs of International Civil Aviation Organisation (ICAO). However, all ICAO member states being sovereign nations have the prerogative of making their own laws and rules, which have to be notified by them in ICAOs Aeronautical Information Publication and inform the organisation on the differences so made.

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Aviation Laws Specific to India Aircraft Act 1934 This is an act to make better provisions for the control of the manufacture, possession, use, operation, sale, import and export of aircraft.

Aircraft Rules 1937 Indian Government has made as many as 161 rules covering different aviation aspects including about definitions, appeals, smoking in aircraft, tariff charges and about the aircraft registered in or belonging to foreign state. Civil Aviation Requirements These are the civil aviation rules and laws made mandatory by the Government of India for all those involved in the civil aviation industry in the country. Director General of Civil Aviation is directory responsible to monitor and ensure that these requirements are met with in Indian Territory. These laws have been divided in eight sections -- General, Air Worthiness, Air Transport, Aerodrome Standards and Air Traffic Services, Air Safety, Flight Crew Standards, Training and licensing' and Aircraft Operations.

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Bibliography/References :
Official website of DGCA, ICAO, IATA, ACI. www.icao.int ; www.aci.aero ; www.iata.org; www.centreforaviation.com Report on PRIVATIZATION IN THE PROVISION OF AIRPORTS AND AIR NAVIGATION SERVICES by Tulsi R. Kesharwani, Consultant, ICAO. Airport Economics Manual, Doc 9562, Second Edition 2006, International Civil Aviation Organization. Dr.P.C.K.Ravindran Airport management: World Class and Beyond, first edition,2010,Asia Law House.

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