Flight Plan

Will foreign airlines fly in?

Anand Kalyanaraman | Updated on January 20, 2018

On hold: The obstacle is the SOEC rule

May be not. Despite the policy push, they may still lack control



First the much-awaited civil aviation policy and then the liberalisation of the FDI norms – Indian aviation has rarely seen such an action-packed fortnight. These changes can drastically change the competitive landscape in the sector.

One, with the 0/20 rule replacing the 5/20 rule, airlines can fly now abroad if they deploy 20 aircraft or 20 per cent of total capacity, whichever is higher, for domestic operations. Next, allowing up to 100 per cent foreign investment in airlines in India can be a game changer, though it comes with a rider - foreign airlines can still hold only up to 49 per cent. So, for instance, while AirAsia Berhad cannot increase its stake in AirAsia India beyond the current 49 per cent, the Malaysian sovereign wealth fund can invest up to 100 per cent in AirAsia India. This throws up interesting tie-up possibilities. Multiple combinations of foreign airlines and foreign investors even from different countries can start domestic operations in India.

Seen together, these two changes – 100 per cent foreign investment in Indian carriers and 0/20 – could throw open the doors for foreign carriers to tap the huge Indian market, both on domestic and international routes, at least in theory. Here’s how.

A foreign carrier, in tie-up with foreign investors, starts a domestic airline in India or buys out an existing one. Given its deep pockets, this alliance may not have much trouble ramping up its fleet size to 20 in quick time, say in two to three years - this will make it eligible to fly international. This could mean a sharp rise in competition in the coming years.

But there could be many a slip between the cup and the lip. The big obstacle is the rule on substantial ownership and effective control (SOEC). It requires most of an airline’s top management to be Indian to be able to get a flying permit. Government officials have sounded out their intent to change this rule. So, domestic airlines controlled by foreign nationals could become a reality sooner than later.

The bilateral question

What though seems set to be caught in red-tape is the permission for such foreign controlled domestic airlines to fly overseas. That’s again because of the SOEC shadow. The bilateral agreement format between countries recommended by International Civil Aviation Organization (ICAO) requires that airlines must be substantially owned and controlled by a country’s nationals to be allowed to fly to the other country. Ergo: a foreign controlled domestic airline in India will not be allowed to fly abroad, since its SOEC would be with foreign nationals.

Countries are free to do away with the SOEC clause in their bilateral agreements. But this is easier said than done. The sons-of- the-soil domestic carriers will fight tooth and nail for status quo, if the no-holds barred, albeit unsuccessful, lobbying to continue with the 5/20 rule gives any indication. Foreign traffic to and from India, it seems, is a pot of gold to be guarded zealously. Even the 0/20 rule is a middle-of- the-path compromise between the ‘retain 5/20’ demand of older airlines such as Jet Airways, IndiGo Airlines and SpiceJet and the ‘go for 0/0’ push by newer carriers such as Vistara and AirAsia India.

Will foreign money flow into Indian aviation just to partake in the domestic skies? That cannot be ruled out – despite a challenging operating environment with high taxes et all, the country is among the fastest growing aviation markets of the world with passenger growth in excess of 20 per cent for many months now. And airlines here are turning in record profits, after years of losses, aided by low fuel cost. As it stands, there is much fortune to be made in the Indian skies, especially if the government’s plans to boost regional connectivity take off. This could hurt the incumbent carriers in the country, but fliers, spoilt for choice will be smiling.

Competition on the international routes will also pick up in the coming years, what with Vistara and AirAsia India planning a quicker increase in their fleet size to 20. But foreign controlled domestic airlines taking flight abroad? That might just be a pie in the sky, unless the government really decides to throw open the skies.

Published on June 28, 2016

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