Introduction: The passenger traffic in the country has been steadily growing at an average rate of more than 8% in the last five years, except in 2012-13. In this period, India has registered the fourth fastest growth in passenger traffic after Japan, Brazil, and China. As per data available with the Ministry of Civil Aviation (“MCA”), the domestic passenger traffic has grown from 53.8 million in 2010-11 to 68.4 million in 2014-15, a growth of more than 27%. Except for the dip in 2012-13, the domestic passenger traffic has continuously increased year after year. The international passenger traffic, on the other hand, has grown from 35.1 million in 2010-11 to 45.6 million in 2014-15, a growth of more than 42%.

History of the aviation sector in India: The Indian aviation sector prior to its liberalization had always been viewed as an elite activity and one in which governments, could not be seen to allocate resources. Between 1993 and 2003, the industry fell into dormancy, after the failure of the deregulation experiment.

Need for a change in policy: With the growing needs of the ever-increasing demand in India’s aviation sector, it was felt by many players in the industry that the law prior to introduction of the Policy, was a cause for concern and often, was described to be a major hindrance to the growth of the sector at large. The government, having recognized this need, led to major reforms by way of introduction of the Policy, which aimed to meet the ever growing demands and needs of the constantly evolving Indian aviation sector.

Aims of the policy:

  • To provide and create, a conducive framework for creating a conducive framework for harmonized growth of various aviation sub – sectors including, development and modernization of airports by State Governments, private players and under the Public Private Partnership (“PPP”) model.
  • To create an affordable model, which can take flying to the masses, to increase the connectivity between cities and also to enhance the ease of doing business in India.
  • The basis of the introduction of this policy, the Government expects India to become the third largest aviation market by 2020 and the largest by 2030.

Key features of the Policy:

The policy is very comprehensive, covering 22 areas of the Civil Aviation sector. Some of the important areas include:

  1. Regional Connectivity Scheme (RCS)/Ude Desh Ka Aam Nagarik (UDAN):

What it is: The UDAN Scheme is a key component of the National Civil Aviation Policy (NCAP). One of the key objectives of NCAP-2016 is to “establish an integrated eco-system which will lead to significant growth of civil aviation sector, which in turn would promote tourism, increase employment and lead to a balanced regional growth”.

Objectives of the scheme:

  • To facilitate regional air connectivity by making it affordable.
  • To ensure affordability, connectivity, growth, and development. It would provide a win-win situation for all stakeholders –
  • Citizens would get the benefit of affordability, connectivity, and more jobs.
  • The Centre would be able to expand the regional air connectivity and market.
  • The state governments would reap the benefit of the development of remote areas, enhance trade and commerce and more tourism expansion.
  • For incumbent airlines, there was the promise of new routes and more passengers while for and start-up airlines there is the opportunity of new, scalable business.
  • Airport operators will also see their business expanding as would original equipment manufacturers.
  • Providing connectivity to un-served and under-served airports of the country through the revival of existing airstrips and airports.

Salient features of the scheme:

  • Airfare is of about Rs. 2500 per passenger for a one-hour flight.
  • About 80% of the subsidy will be collected by charging a levy of up to Rs. 8,500 on each departing flight of domestic airlines and the rest 20% will come from the respective state governments.
  • The revival of airstrips/airports as No-Frills Airports at an indicative cost of Rs.50 crore to Rs.100 crore.
  • Demand driven selection of Airports/airstrips for revival in consultation with State Govts and airlines.
  • Viability Gap Funding (VGF) to airline operators.
  • RCS only in those states which reduce VAT on ATF to 1% or less, provide other support services and 20% of VGF.
  • Concessions by Stakeholders.
  • There will be no airport charges.
  • Reduced Service tax on tickets (on 10% of the taxable value) for 1 year initially.
  • Reduced Excise duty at 2% on ATF picked at RCS airports.
  • The state government will provide police and fire services free of cost.  Power, water and   other utilities at concessional rates.
  • Creation of Regional Connectivity fund for VGF through a small levy per departure on all domestic flights other than Cat II/ Cat IIA routes, RCS routes and small aircraft below 80 seats at a rate as decided by the Ministry from time to time.
  • VGF to be shared between MoCA and State Governments in the ratio of 80:20. For the North-Eastern States, the ratio is 90:10.

Bidding Process: Interested airline and helicopter operators can start operations on hitherto un-connected routes by submitting proposals to the Implementing Agency. All such route proposals would then be offered for competitive bidding through a reverse bidding mechanism and the route would be awarded to the participant quoting the lowest VGF per Seat.

Rights of the successful bidder:

  • The operators could seek a Viability Gap Funding (VGF) apart from getting various concessions.
  • The operator submitting the original proposal would have the Right of First Refusal on matching the lowest bid in case his original bid is within 10% of the lowest bid.
  • Have exclusive rights to operate the route for a period of three years. Such support would be withdrawn after a three year period, as by that time, the route is expected to become self-sustainable.
  • The selected airline operator would have to provide a minimum of 9 and a maximum of 40 UDAN Seats ( subsidized rates )on the UDAN Flights for operations through fixed wing aircraft and a minimum of 5 and a maximum of 13 Seats on the Flights for operations through helicopters. On each such route, the minimum frequency would be three and maximum of seven departures per week.
  1. 5/20 Requirement (5-year experience/20 aircraft capacity): Now it is replaced with a scheme which provides a level playing field, by 0/20. All airlines can now commence international operations provided that they deploy 20 aircraft or 20% of total capacity (in term of an average number of seats on all departures put together), whichever is higher, for domestic operations.
  2. Bilateral Traffic Rights: GoI will enter into ‘Open Sky’ ASA on a reciprocal basis with SAARC countries and countries located beyond 5000 km from Delhi.

For countries within 5000 km radius, where the Indian carriers have not utilized 80% of their capacity entitlements but foreign carriers /countries have utilized their bilateral rights, a method will be recommended by a Committee headed by Cabinet Secretary for the allotment of additional capacity entitlements.

What is “open sky” policy: Unlimited flights above the existing bilateral rights will be allowed directly to and from major airports within the country as notified by the Government time to time.

  1. Airport PPP/AAI: Encourage development of airports by Airport Authority of India (AAI), State Governments, private sector or in Public Private Partnership (PPP) mode.

Future tariffs at all airports will be calculated on a ‘hybrid till’ basis unless specified otherwise in concession agreements. 30% of non-aeronautical revenue will be used to cross- subsidize aeronautical charges.

AAI to be compensated in case a new greenfield airport is approved in future within a 150-km radius of an existing unsaturated operational AAI airport.

What is “Hybrid Till” method: The hybrid-till model, under which 30 per cent of airport operator’s non-aeronautical revenues would be used to subsidize airport costs.

  1. Maintenance, Repair, and Overhaul (MRO): The MRO business of Indian carriers is around Rs 5000 crore, 90% of which is currently spent outside India. In the budget for 2016-17, customs duty has been rationalized and the procedure for clearance of goods simplified.

The Directorate General of Civil Aviation (DGCA): It is the regulatory body in the field of Civil Aviation, primarily dealing with safety issues. It is responsible for regulation of air transport services to/from/within India and for enforcement of civil air regulations, air safety, and airworthiness standards. The DGCA also coordinates all regulatory functions with the International Civil Aviation Organisation (ICAO).

Airport Authority of India (AAI): Airports Authority of India (AAI) was constituted by an Act of Parliament and came into being on 1st April 1995 by merging erstwhile National Airports Authority and International Airports Authority of India. The merger brought into existence a single Organization entrusted with the responsibility of creating, upgrading, maintaining and managing civil aviation infrastructure both on the ground and air space in the country.

AAI manages 125 airports, which include 18 International Airport, 07 Customs Airports, 78 Domestic Airports and 26 Civil Enclaves at Defense airfields. 

Its functions: The main functions of AAI inter-alia include construction, modification & management of passenger terminals, development & management of cargo terminals, development & maintenance of apron infrastructure including runways, parallel taxiways, apron etc., Provision of Communication, Navigation and Surveillance which includes provision of DVOR / DME, ILS, ATC radars, visual aids etc., provision of air traffic services, provision of passenger facilities and related amenities at its terminals thereby ensuring safe and secure operations of aircraft, passenger and cargo in the country.

Viability Gap Funding (VGF): Viability Gap Finance means a grant to support projects that are economically justified but not financially viable.

Such a grant under VGF is provided as a capital subsidy to attract the private sector players to participate in PPP projects that are otherwise financially unviable. Projects may not be commercially viable because of long gestation period and small revenue flows in future.

VGF grants will be available only for infrastructure projects where private sector sponsors are selected through a process of competitive bidding. The VGF grant will be disbursed at the construction stage itself but only after the private sector developer makes the equity contribution required for the project.

The usual grant amount is up to 20% of the total capital cost of the project. Funds for VGF will be provided from the government’s budgetary allocation. Sometimes it is also provided by the statutory authority who owns the project asset.

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