BIBLIOGRAPHY

http://business.mapsofindia.com/india-gdp/industries/aviation.html

http://www.business-standard.com/article/companies/how-fixing-air-india-canhelp-india-115091900225_1.html
https://www.iata.org/policy/Documents/Benefits-of-Aviation-India-2011.pdf
www.ibef.org

On June 15, 2016, the Union Cabinet unveiled the much-awaited final civil aviation policy, announcing
relaxation of overseas flying norms and thrust on boosting regional connectivity. The long-pending
issue on the 5/20 rule has been resolved, it has been replaced with 0/20 rule which would enable level
playing field on foreign routes. Additional seat allotments to foreign carriers under bilateral rights on
short haul routes would intensify competition from foreign carriers. Other highlights include a capped
price system to boost regional connectivity and tax incentives for maintenance, repair and overhaul
(MRO) companies. On the flipside, the policy also does not dwell on the long-pending structural issue
of high sales tax on aviation turbine fuel (ATF), which diminishes the attractiveness of the sector.

5/20 rule replaced with 0/20, enables level-playing field on foreign routes
In October 2004, the Union Cabinet stipulated that for Indian carriers to fly abroad, they must service
domestic routes for 5 years and have a fleet of 20 aircraft. The draft policy released in October 2015
had kept all options open on this count. The final policy replaced 5/20 rule with 0/20 which implies that
airlines can commence international operations provided they deploy 20 aircrafts or 20% of total
capacity; whichever is higher, for domestic operations. With this, new entrants such as Vistara and
AirAsia India can fly overseas once they have 20 aircrafts. As on date, Vistara and AirAsia India
operated 10 and 6 A320 fleets respectively. This would enable level-playing field on overseas routes
among the existing airlines such as Indigo, Jet Airways, SpiceJet, Go Air and the new entrants such
as Vistara and AirAsia India.

Thrust on boosting regional connectivity in a price-capped system

Regional connectivity scheme (RCS), effective Q2 2016-17, would be designed such that fares for a
one-hour flight will be capped at Rs 2,500 - applicable only in states which reduce value-added tax on
ATF at RCS airports to 1% or less. The government is aiming to implement this by reviving un-served
or under-served airports.
This scheme will be implemented via viability gap funding (VGF) for airlines. While the Ministry of Civil
Aviation will provide viability gap funding on air tickets from 80% of the regional connectivity fund
(RCF), the rest will come from the state. The RCF will be funded by a levy charged on domestic flights
operating other than Category II/IIA (as defined by civil aviation) and RCS routes. The government is

also offering a host of incentives (to operators) such as lower excise duty at 2% on ATF drawn from
RCS airports (compared to 14% currently), nil airport charges, etc.
CRISIL Research believes this move would cap the prices on regional routes, which is a negative for
airline companies given the government intervention and price control. The final policy still needs
clarity in terms of whether a fare of Rs 2,500 per hour will be capped even for a last-minute booking
under RCS, identification of specific routes and associated regional impact, if any, and specific
modalities and procedures to be adopted in administering this scheme, etc. The levy proposed to be
charged on air tickets for RCF would marginally add to overall ticket cost. However, we expect air
fares to marginally decline y-o-y in 2016-17 owing to an expected reduction in fuel prices.

Additional seat allotment to foreign carriers under bilateral rights to invite competition
For countries within 5,000 km radius, where Indian carriers havent utilised their 80% of capacity
entitlements but foreign carriers have utilised their bilateral rights, a method will be devised for
allotment of additional capacity entitlement. Given that Indian carriers are currently way below the
allotted entitlements under bilateral agreements, it could invite intense competition from foreign
carriers.

Lays out tax incentives for development of MRO in India - a positive move
To provide a fillip to maintenance, repair and overhaul (MRO) industry, Union Budget 2016-17
announced exemptions of excise duty, custom duty, countervailing duty for certain inputs procured by
MRO. Additionally, the final civil aviation policy indicated they would persuade state government to
make VAT zero on MRO services.
If this results in MRO activity picking up, there will be some foreign exchange savings as currently
90% of the MRO work for Indian airlines is been carried out in Sri Lanka, Dubai and Hong Kong. The
tax regime in India has been a key dampener for MRO activity in India. Abolition of taxes may
encourage Indian airlines to get MRO work done domestically. Besides, with the fleet size of domestic
carriers expected to grow over the long term, the local MRO industry becomes critical because
maintenance expense constitutes 10-15% of the total operating cost of an airline. This would be a
potential revenue boost for airport operators, while simultaneously reducing cost for airlines.

Silent on structural issue of sales tax on ATF

High sales tax on fuel in India is a key structural challenge that diminishes the attractiveness of the
sector. ATF cost, which constitutes about 30% of the operating cost of an airline, is an important
determinant of operating margin. In India, sales tax on ATF (which varies from 4% to 30%) is an
additional burden for domestic carriers. This tax structure makes ATF prices in India 30-35% higher
than in most countries. Though domestic airlines were permitted to directly import ATF from February
2012, they are yet to do so for want of infrastructure (landing, warehousing and transportation facilities
for fuel). Clarity on this structural aspect can significantly improve growth prospects in Indian aviation.
However, implementation of GST on ATF will be a monitorable.

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