From 5/20 to 0/20, a big win for Vistara, AirAsia India

Anand Kalyanaraman BL Research Bureau | Updated on January 20, 2018

The lobbying by AirAsia India and Vistara fro the scrapping of 5/20 policy has paid off

But older airlines also have reasons to cheer

If Vistara and AirAsia India had been listed, they would have zoomed on the bourses on Wednesday.

The much awaited Civil Aviation Policy has handed these airlines a big win against incumbents IndiGo Airlines, Jet Airways, SpiceJet, GoAir and Air India. The 5/20 rule, on which the government was ambivalent in the draft policy of October 2015, has now been replaced by 0/20.

This is the culmination of no-holds barred lobbying by the newer airlines that wanted 5/20 scrapped and by the older airlines that pressed for its continuation. So, no more compulsory five years of domestic operations and a fleet of 20 aircraft before an airline can start international operations. Now, airlines can fly abroad if they deploy 20 aircraft or 20 per cent of total capacity, whichever is higher, for domestic operations.

Sure, it’s not complete victory for Vistara and AirAsia India that were pitching for 0/0. Still, 0/20 is a major step forward for these airlines that will be eyeing the huge traffic potential on the India-South East Asia and the India-West Asia routes. Rapid fleet expansion by the deep-pocketed Vistara and AirAsia India can be expected.

Says Amar Abrol, CEO, AirAsia India, “We will now focus on aggressively investing in India and increasing the fleet size from six at present and achieving the target of 20 aircraft.” Vistara currently has 10 aircraft in its fleet and plans to induct the 11th one soon.

Despite the setback, the stocks of IndiGo Airlines, SpiceJet and Jet Airways too rallied sharply (up to 5 per cent) before ceding most of the gains. Relief that the suspense is over seems to have helped.

Also, there are several positives for the sector in line with what was envisioned in the draft policy. The route dispersal guidelines have been rationalised, ground handling rules have been liberalised and there are incentives to encourage the maintenance, repair and overhaul (MRO) business in the country. Besides, the significant thrust to improve regional connectivity and developing and upgrading airports should translate into big growth opportunities for airlines. A conspicuous absence though from the draft policy is the provision to give airlines the freedom to charge any amount for additional services, as long as they are communicated clearly to passengers. But this is not surprising, given the proposals last week that aimed at reining in many of the ancillary revenue streams of airlines including extra baggage charges and cancellation fees.

Keeping the passengers’ interests in mind, the government seems to have second thoughts on giving airlines a free hand.

From July though, passengers on the domestic trunk routes will have to pay an extra levy, to be decided from time to time. This will help finance the the viability gap funding to implement the regional connectivity scheme.

The scheme envisages a fare cap of ₹2,500 per passenger for flights up to one hour on the scheme routes. The extra levy may not go down well with passengers who will have to pay more and also with airlines that cater to such traffic.

Besides, calculation of future tariffs at airports on a 'hybrid till' basis, unless specified otherwise in concession agreements, could increase airlines costs, and result in higher air fares.

Published on June 15, 2016

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