Stocks

Many pluses for domestic airlines, some with strings attached

Anand Kalyanaraman | Updated on: Oct 30, 2015

News norms for MRO, ancillary services are positives; some heartburn on 5/20

The 8-9 per cent jump on Friday in the stocks of SpiceJet and Jet Airways suggests that the Draft National Civil Aviation Policy 2015 has many positives for the sector in general, and for the entrenched, incumbent players in particular.

For one, the vintage players in the sector — Jet Airways, SpiceJet, IndiGo and Air India — must be relieved that the government has not yet revealed its hand on the contentious ‘5/20’ rule. Inviting suggestions and effectively kicking the can down the road, the draft policy suggests that the rule could continue, or be abolished, or be replaced, with domestic flying credits.

The older airlines want continuation of this rule that mandates five years of domestic operations and a fleet of 20 aircraft before an airline can start international operations. This is being opposed tooth and nail by new entrants such as AirAsia India and Vistara that want to fly international, without fetters, as soon as possible.

For the time being though, the older airlines will not see threat from the competition on their lucrative international routes.

Ground handling Next, conceding to a long-pending demand by airlines, the draft policy proposes liberalising the ground handling rules to allow airlines carry out the handling themselves or through their subsidiaries or to outsource the same to other airlines or to a ground handling agency.

This will break the monopoly of ground handling service providers and give more operational flexibility to the airlines.

Also, giving airlines the freedom to charge any amount for additional services, as long as they are communicated clearly to passengers, should also give a boost to the high-margin ancillary revenues. These are becoming increasingly important for carriers. IndiGo, for instance, gets 11 per cent of its total revenue from ancillary services.

The many fiscal and operational incentives to encourage the setting up of maintenance, repair and overhaul (MRO) businesses within the country should help domestic carriers cut down on these costs. Currently, the chunk of such spend of domestic carriers happens outside India.

Code-sharing The proposals to have liberal rules regarding bilateral rights, code-share agreements and open skies should also mean more international traffic for Indian carriers.

Also, the significant thrust in the draft policy on improving regional connectivity should mean more domestic growth opportunities for airlines, especially the low cost ones.

But this comes with strings attached. One, airlines are likely to frown upon the proposal to cap fares at ₹2,500 per passenger, indexed to inflation, for a one-hour flight on the regional connectivity scheme routes.

Also, the proposed levy of 2 per cent on domestic and international tickets to finance a portion of the regional connectivity fund may be seen as a case of charging Peter to fly Paul.

Published on January 23, 2018

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