Civil Aviation in India

By Ravi Nath

Posted: 6th December 2011 09:34

As India celebrates 100 years of Civil Aviation, it has become the 9th largest Aviation market in the world, and in 9 years it will be the 3rd largest.  India’s geography and demographics, along with an increasing GDP has contributed to this growth.  There is increased pressure on airports and other infrastructure.  New airports/ terminals have already come into use in Delhi, and will soon be functional in other principal cities such as Mumbai, Kolkata and Chennai. 

Earlier this year, a basic Customs Duty of 2.5% was imposed for the first time on imports of aircraft by non-scheduled operators.  Other add-ons, such as education cess and secondary higher education cess, take the duty higher.  Aircraft imported by Scheduled airlines continue to be exempt and private imports of the aircraft continue to be subject to various import duties as in the past (i.e., approximately 23.09% of the value).

India’s domestic low cost carrier model which started out to change the growth dynamics of the industry, now appear to be shrinking owing to the rising Aviation Turbine Fuel (ATF) prices, increasing losses, massive cash crunches and intense competition.

Increase in ATF price is of grave concern. Its prices, per kilo litre, have more than doubled in six years. Airlines have long been demanding that Government cut taxes on ATF.  Many states levy sales taxes as high as 30%. The ATF alone accounts for 40% of the airlines' operating expenses in India.  Other dark clouds continue to gather.  All operators but two are in the red.  Assessment of the situation, expectations and rumors are flying fast and loose and there is bound to be further turbulence before things settle down.

As of October 2011(1), Jet Airways continued to be the market leader in India with 24.8% share, followed by IndiGo at 19.6% and Kingfisher with 16.7%, closely followed by Air India with 16.6%, SpiceJet 16.1% and Go Air 6.2%.

One of the larger airlines, Kingfisher has repeatedly defaulted on its obligation to Lessors, fuel suppliers and others.  It has an outstanding debt of US$ 1.5 bn and also owes US$ 83 m in back taxes.

Air India, the Government owned airline, has also been making losses but it regularly receives dollops of grant from the Government, much to the consternation of the tax payer in India. 

Air India has upgraded its fleet, and now has latest fuel efficient Aircraft and is planning to take delivery of Dreamliners as Boeing ramps up is production.  Air India received a setback when its bid to join Star Alliance was rejected. Air India blames Lufthansa for this.  That may well be the reason why Lufthansa has not been permitted to bring in the A380 on the Indian route.

Jet Airways managed to reduce its losses somewhat.  It is widely perceived to be a professionally run organization as also are Indigo, SpiceJet and GoAir.

The Government views civil aviation as a sensitive sector and has regulated foreign investment tightly in view of its strategic importance and the need to encourage domestic entrepreneurs. As stated above, foreign airlines are prohibited from holding equity in Indian carriers.  This restricts foreign carriers from both targeting Indian carriers for acquisition, and also using bilateral air service rights to their advantage.

Currently, foreign direct investment limit is 49% in scheduled domestic passenger airlines and 74% (automatic up to 49%) in non-scheduled domestic passenger airlines. Foreign airlines are not allowed to participate directly or indirectly in the equity of scheduled or non-scheduled airlines.  They can, however, hold equity in companies which provide cargo, helicopter and seaplane services.

It is believed that the Government has not permitted foreign airlines to hold equity due to the pressure of Indian Operators who fear that airlines, such as Singapore, are waiting at the door and will immediately form strong alliances and become formidable competitors.  However, the thinking seems to be changing.  Kingfisher has been trying to get Government help in restructuring its finances and to permit equity holding by foreign airlines. A recent change at Tata House may also impact this.  The 75 year old Mr. Ratan Tata will hand over the reins of the Tata enterprise to the 43 year old Cyrus Mistry next year. Mr. Mistry may not have Mr. Tata’s passion for airlines.  Air India started out as a Tata company in the 1930s which made it into one of the finest airlines in the world and today it is vying for a spot at the other end of the scale!

With growing liberalization of the Indian economy and need for foreign capital and technology, the Government has gradually permitted foreign investment in sensitive sectors, such as defence production, retail trade etc.  As a continuation of this, foreign airlines will soon be permitted to invest in Indian operators. If that happens, we doubt it would be anything more than 24%.     

 

Ravi NATH has 23 years of experience in Aviation related Laws including Aircraft equipment and facility financing, regulatory & litigation. 

He was the Chair of the Aviation Committee of the International Bar Association, and is the Editor/Author of various Books and Papers on Aviation Laws. He regularly advises major Aircraft manufacturers, Banks and Financial Institutions such as Boeing, Airbus, Embraer, Bombardier, Citibank, ABN Amro, Standard Chartered, Deutsche Bank, BNP Paribas, GECAS, ILFC, Aircastle, Airlease and Aercap. His practice includes Government regulations, companies, cross-border financing and securitization. During the last ten years he has advised on transaction in excess of US $14 billion. The Legal 500 stated thus: “Ravi Nath’s esteemed reputation as an aviation expert puts clear blue water between Rajinder Narain &Co. and its rivals…”

He is a frequent speaker at various conferences. He serves on the International Registry’s Advisory Board. 

The Bar Association of India has conferred its highest honour on him.  He was invited along with India’s Finance Minister, Mr. P. Chidambaram and Mr. Nariman, President Bar Association to be a co-author on a book relating to legal aspects of Doing Business in India.

He is a Partner at one of India’s oldest legal firm. Two of firm’s partners were Chief Justices of the Delhi High Court and one a President of The High Court Bar Association.  Mr. Nath was the President of Inter Pacific Bar Association in 2004.

Education: B.Com.(Hons.), LL.B., Intl. & Comp. Laws (King’s College London) PIL (Harvard). Work experience at: Sinclair Roche & Temperley, London.  Personal: Lives in New Delhi along with wife and two children.  Ravi can be contacted on +91 98110 27193 or by email at ravi.nath@rnclegal.com 

 

(1) Source Director General of Civil Aviation (DGCA)

 


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