CAPA: Long-term vision and enabling policy environment critical for India’s aviation sector

India's Ministry of Civil Aviation is proposing to develop a new and long-awaited civil aviation policy for India. CAPA has been advocating for the last nine years the need to create a long-term sectoral policy and one that should be viewed as a Government of India policy not just a MOCA policy. That is, to recognise that many issues that affect aviation are in fact beyond the purview of MOCA alone as they touch upon the Ministries of Finance and Commerce, the Planning Commission, state agencies such as immigration, customs and excise, and state governments.

In order to develop an effective policy MOCA must therefore seek and coordinate inputs from across this diverse group. Broad-based agreement is necessary to break the ad hoc decision-making that has increased the structural challenges in the industry, in order to attract the necessary investment in the aviation sector.

There should be a consistency of vision that extends out a generation or more rather than simply the tenure of the current administration. In recent years we have seen ad hoc developments that prevent the industry from being able to plan ahead. In such an environment, it is very difficult to attract private sector funding.

Ultimate objective must be a policy that promotes industry viability, safety and sustainability

Combined with an open and competitive framework, such an aviation industry will play a key role in supporting national economic development and will benefit the consumer. If India is to achieve its target of double-digit GDP growth, a vibrant aviation sector will be essential.

New policy must be practical and implementable, with agreed milestones

However, a new policy must be practical and implementable, with agreed milestones towards achieving a viable industry. There are so many dysfunctionalities in Indian aviation today that moving directly to this new order is not feasible. CAPA has therefore proposed a staged approach with an initial period during which the industry must be set in order, followed by the introduction of a new liberal policy from 2015/16 providing all stakeholders - including government - with three years to prepare for a new open environment.

• Stage 1: Between now and 2015/16, this stage marks a period during which the Government removes the distortions in the sector to create a level playing field, by establishing new regulatory, legal and fiscal frameworks, and strengthening institutional capacity by creating competencies at the government level;
• Stage 2: Post 2015/16, this stage will be characterised by an open, efficient and liberal aviation sector, which is supported by a clear, formalised long-term plan, is professionally regulated and where competitive dynamics will determine market outcomes.

There should be separation of regulatory and policy functions

CAPA believes that in order to meet the requirements of a large and modern aviation industry, there must be a clear separation of the regulatory and policy functions, which should be independent of each other. A separate accident and safety board should also be established. All of this must be concluded during Stage 1. Moves are already underway to establish the Indian Civil Aviation Authority (CAA) along the lines of the UK CAA, however, it is critical that such a development goes far deeper than simply changing the name of the Directorate General of Civil Aviation (DGCA) to the Indian CAA.

The DGCA's technical regulatory functions (such as airworthiness, safety and licensing) will form only one part of the CAA, which will also need divisions responsible for issues such as airspace, competition, consumer protection and the environment. The DGCA is already under-resourced and cannot take on additional responsibilities. This is an issue that cannot be ignored. Indian aviation came perilously close in 2009 to being downgraded by the US FAA and recent upheavals in the industry and government institutions will not have been overlooked by US officials.

Transformational growth ahead brings massive challenges: Four key steps

Indian aviation could witness transformational growth over the next decade. CAPA projects that total airport passenger traffic could increase from approximately 160 million in 2011 to 450 million by 2020, making India the third largest aviation market in the world behind the US and China. But if this is to occur, and occur safely, the establishment of a strong and independent regulator is an essential foundation.

• First of all, the ambit of the DGCA should be redefined to focus solely on safety; it should be unburdened from the current broad range of responsibilities that also encompass commercial matters which distract from the core mission;
• Secondly safety is a matter in which politics has no place. If India is to achieve its safety objectives, technical regulation of the aviation sector must be independent, transparent and skilled. There must be a common purpose between the Ministry and the DGCA which has not always been the case, creating an environment which facilitates collaboration with industry;
• Thirdly, significant investment is required in personnel, training and skills development to ensure strong domain expertise. This professionalism must extend to the very top. Institutions must be run professionally by experts in their field, in a manner that is scalable to support the expected growth in passenger and cargo traffic, which will be transformational in terms of size, investment, technology and regulation;
• Fourthly, the position of Director General should be held by a technocrat and not a bureaucrat. Tenures of 3-5 years will provide greater stability, rather than the more frequent turnover that we have seen in recent times. In several instances, including EK Bharat Bhushan, the Director General held the position as an additional charge, limiting the attention which they could provide to the role.

But a concerted effort to restructure the DGCA now appears to be on hold pending the establishment of a new unified and independent regulator in the form of an Indian Civil Aviation Authority. However, these plans are moving slowly and it could take another 12-18 months before the authority is functioning. Addressing the skills deficit at the DGCA cannot wait until then and urgent measures need to be taken in the interim. The growth of the entire sector (and India's aviation reputation) is at stake.

MOCA should be restructured to allow it to lead, develop, implement and manage new thinking

Relieved of its regulatory responsibilities, MOCA's focus should remain on macro-issues, namely long-term planning towards achieving a stated vision for how aviation can provide connectivity, choice and support national economic development. During Stage 1, the CAA will need to focus on building competencies so that it can manage the significant internal and external challenges that it will face. In due course, post 2015/16 when its expertise is sufficiently developed, the CAA will become the adviser to the Government on aviation issues.

An interim council of full-time aviation experts should be appointed to support Joint Secretaries

CAPA proposes that during this period an interim council of aviation experts should be appointed to support the Joint Secretaries with policy formulation and execution. This is not an Advisory Committee; these Council members would be engaged on full-time, three-year contracts on regular commercial terms and empowered appropriately. These steps are necessary to enhance MOCA's capabilities prior to embarking upon any major changes.

The other vital task for the Government is to clarify the future role of the public sector entities, namely Air India and the Airports Authority of India (AAI). With strong private sector interest in aviation, there is no reason for the Government to continue to operate an airline and airports, particularly when they are a huge drain on government funds. Furthermore, government participation in the industry has influenced policy in a manner that has been negative for the entire sector. In the case of Air India, an untenable situation has arisen where public funds are being used to support predatory pricing that is contributing to financial weakness at private carriers.

Air India and AAI should be restructured with clear and immutable milestones

Air India should be privatised over a period of 3-4 years - with clear and immutable milestones along the way. If the status quo continues, the airline will drain up to USD1 billion p/a from the public exchequer over the next decade, an unsustainable and unacceptable scenario. If it is restructured and recapitalised, with its working capital debts written off, there exists the potential to create some value in Air India at which point it should be privatised, with the Government retaining a 26% stake. As the airline has no chance of a viable commercial future alone, it should be given the freedom to seek a viable airline partner as part of the privatisation.

In the case of the AAI, the first step should be to separate the two distinct functions, airport operations and air navigation services. Both functions should initially be corporatised, i.e. remain under state ownership but managed independently of the Ministry, along commercial principles.

The airport operations division currently has no clear commercial goal and is involved in a multiplicity of projects, many of them economically unviable. The unwieldy business needs to be broken down into smaller business units. For example, airport construction should be separated from airport management, and these operations could further be divided into regions. Budget accountability - which is only possible by creating these more manageable units - is essential if the AAI is to avoid becoming another Air India.

The AAI should focus on enhancing the business models of its prime assets, e.g. Kolkata, Chennai, Ahmedabad etc, maximising their value, privatising them and then using the proceeds to develop new airports and continuing the cycle.

These new airports should be constructed in joint ventures with state governments in order to trigger their participation in the sector. However, new projects should be subject to review by an Airport Approval Committee that assesses viability before capital is committed. As a result of rolling privatisation over many years, the Government will likely be left with responsibility 1) for unviable airports which are required for national objectives, and 2) for air navigation services, which are expected to remain a sovereign function of the Government, although operating with a separate balance sheet on commercial lines.

Objectives by 2015/16:

• A new liberal Civil Aviation Policy should come into force, based on wide consultation with stakeholders and with inter-ministerial support. The new policy should envision a plan that is achievable;
• Aviation policy-making and regulatory functions should be separated, and a unified and professional regulator should be established in the form of the Indian Civil Aviation Authority;
• Both MOCA and the CAA (within which the DGCA should be responsible for only the technical regulatory aspects) should be subject to institutional strengthening with a particular focus on the development of skills and expertise, and a separate accident and safety board should be established;
• The negative fiscal framework (e.g. excessive taxation on aviation turbine fuel, and unhelpful tax on third party maintenance and aircraft lease payments) together with regulatory distortions which act as a barrier to efficient operations (e.g. five-year/20 aircraft rule for international services; route dispersal guidelines, restrictions on commercial decisions) should be dismantled;
• MOCA and the Central Government should engage with the states to demonstrate the benefits that could be generated by categorising aviation turbine fuel as a declared good with a flat sales tax rate of 4% (compared with an average of 24% today). The decision earlier this year to permit airlines to directly import fuel signals a positive intention to assist the industry but on a practical basis the savings may be negligible due to various transportation, storage and financing issues;
• A new regional airline policy should be established which better supports the desirable objective of enhancing connectivity to Tier 2 and Tier 3 cities;
• Foreign airline investment of up to 49% in Indian carriers should be permitted and on this front the positive indications are that this will happen in Aug-2012;
• Bilateral rights should be allocated equitably amongst Indian carriers and not reserved for Air India. A use-it-or-lose-it policy should apply;
• Air navigation services should be established as a separate entity from the AAI, remaining as a government responsibility but managed independently along commercial principles;
• AAI's airport operations divisions should pursue a clear commercial objective and establish a cycle of developing value in its airport assets, privatising them to raise capital and then reinvesting in new projects. However, all capital expenditure should be within the framework of a defined business plan which is based on developing and operating viable airports and which has been cleared by CAPA's proposed Airports Approval Commission. State governments should be involved to provide viability gap funding where required;
• AAI and Air India must be managed independently from MOCA with a profit objective and be prepared for privatisation over 3-4 years;
• An Aviation Finance Corporation should be established to provide dedicated capital for the industry;
• By 2015, a long-term, 20-year plan should be in place for the aviation sector which is realistic and which has been developed in the context of an overall national transport plan;
• The Bureau of Civil Aviation Security must be recast with a new focus on upgrading management, technology, training and intelligence, conforming to international standards;
• A new legal framework should be established to replace the archaic Aircraft Acts which date from the 1930s and are increasingly unsuited to a modern aviation system.

Post 2015/16

Achieving the above will provide India with and open and liberal aviation environment which supports an industry that is safe, competitive and sustainable. In the domestic arena, transparent licensing criteria should be used to determine new applications, while in the international arena an open skies policy would maximise India's hub potential, with bilateral entitlement allocated on an equitable basis. Freight should be allowed to flow to, from and within India, seamlessly integrated with global supply chain networks. If this can be achieved, CAPA estimates that aviation will contribute directly and indirectly USD100-165 billion to the Indian economy.

Airports and airspace objectives

Encouraging investment: World class cities require world class airports and the development of such infrastructure can only be achieved by embracing private capital. Significant steps have already been taken in this direction, but there have been some lessons to learn along the way. Critically amongst these is the fact that the award of concessions at Delhi and Mumbai in the absence of a defined economic regulatory framework is responsible for the ongoing debate between the airport operators and AERA on the appropriate level of charges. The permissible structure for charges should have been made known at the time of the tender so that consortia could have bid accordingly and the appropriate level of investment could have been expended on the airport development. In order to attract investors to make the large scale investments that are required, there must be a predictable environment with respect to potential revenue streams.

Airport viability: Developing airports is an important objective, but this should be carried out within the framework of a national Master Plan which identifies clear economic reasons for building a new airport. At present it appears that new projects are announced with overlapping or insufficient catchment areas and without regard for airspace issues or the potential for airlines to operate there. In certain cases, airport plans appear to be exercises in securing land for non-aeronautical activity, but ultimately a series of unviable airports will deter future investment in viable ones. CAPA proposes the establishment of an Airports Approval Commission within MOCA to review the business plans of proposed airports prior to granting clearance. At present the thresholds for clearance are largely technical in nature and do not take viability into consideration. Approved airports could then be referred to the Aviation Finance Corporation if additional funding is required by the promoters.

Land use and planning: There must be greater transparency on the use of non-aero land at airports. It is counterproductive to develop residential and commercial communities on land adjacent to airports and to then see activism from residents seeking to curtail airport operations because of noise pollution. There must be careful masterplanning to ensure that different land uses can co-exist. Furthermore, a long-term perspective must be taken with respect to land requirements for airport infrastructure. The projected rate of growth of aviation will require metro cities to develop second, and in some cases third, airports within the next 20 years. Land scarcity in India means that there is likely to be significant politics around this issue and it is necessary to take a very long-term view, looking ahead 30-40 years to plan for land requirements for future airports from now.

State governments: State governments must also play a much more active role in the airport sector since aviation is a key enabler of local economic development. Indeed the Centre should gradually withdraw from airport operations. However, this requires a process of education to make state governments understand the impact of airports on local economies. At present states are clinging on to sales tax revenue on fuel of around USD700-800 million p/a which is stifling the airline industry. The potential economic contribution of a viable aviation sector is manifold greater in a USD1.8 trillion economy, however, state governments are jeopardising much greater returns due to a misplaced focus on revenue at hand. Economic growth is being held hostage to short term thinking because of a failure to understand the repercussions. MOCA needs to take a leadership role in educating the States on the potential benefits of establishing a more conducive fiscal environment for the aviation sector.

Airports Authority of India: The AAI's complex business model which includes managing the largest portfolio of airports in the world under a single operator, investing huge capex in airports which are largely loss-making and the provision of air navigation services, will come under increasing pressure. There is a need for a clear structural and commercial reorientation of the authority.

The airport operations division currently has no clear commercial goal and is involved in a multiplicity of projects, many of them economically unviable. The unwieldy business needs to be broken down into smaller business units. For example, airport construction should be separated from airport management, and these operations could further be divided into regions. Budget accountability - which is only possible by creating these more manageable units - is essential if the AAI is to avoid becoming another Air India. As value is created in the AAI's assets, a rolling programme of privatisation would see airports transferred out over time.

Efficiency: Low productivity of India's strategic infrastructure assets such as runways and airspace has a major impact on airline efficiency. Mumbai Airport is only able to achieve 32 movements per hour, compared to London Gatwick's 60 movements from a single runway operation. Delhi can only support 55 movements from three runways. Meanwhile, airports such as Mumbai and Pune are approaching their capacities and will be virtually choked and unable to handle additional services for several years before new airports are opened. The fact that the Mumbai Metropolitan Region, the commercial and financial capital of the country is expected to face a period (from approximately 2014-2017) during which air connectivity to the city will quite literally be saturated has severe economic repercussions which state and central governments do not appear to have acknowledged.

Congestion, holding patterns and extended turnaround times all serve to increase costs. In addition, low efficiency of infrastructure means that available capacity is exhausted early, capex needs to be invested in building new airports earlier than should otherwise be the case and these costs will ultimately be passed on to the airlines. Significant investment is therefore required to enhance the efficiencies not only of Indian airports but also critically of airspace.

Airspace coordination: There is a need for greater coordination between civil and defence entities with respect to the flexible use of airspace as occurs in most markets. Even historically restrictive airspace such as China is gradually opening up to support the needs of civil and general aviation.

Slot allocation: Slot allocation at airports must also be conducted transparently by an independent slot coordination committee with clearly defined and published criteria for allocating slots, otherwise distortions are created that impact competition between airlines.

Airports Objective 2015: India needs to develop a 30-year Master Plan for airports, with national and regional perspectives. It is imperative that airports be considered within a multi-modal context which requires a national transport plan. This would also allow us to develop a system that most appropriately meets the nation's requirements. Investments in new airports must be carefully considered based on viability principles and with greater goal orientation than in the past. Private and public-private partnership (PPP) models will be the way forward rather than relying on purely government-funded projects, but in order to attract private capital, a transparent and equitable economic regulatory framework must be defined. A long-term planning horizon must be adopted with respect to securing land for the development of future airports through to 2050.

Furthermore, if India's airports are to develop as global hubs, India's carriers must be provided with an environment in which they can thrive. Without strong home carriers, Indian airports will always remain as the spokes of offshore hubs. Hub development also requires a very high level of government support of airlines and airports, with Dubai and Singapore being excellent examples of what can be achieved through close coordination.

In the Indian context this means that state governments will need to become more involved with strategies to promote hub development. This will require a change in mindset to accept that it is permissible for a state government to pursue initiatives which might benefit a private airport operator but where the benefits for the local economy are far greater. Unnecessary politicisation of such issues prevents us from seeing the bigger picture.

When Sydney Airport, a 100% private airport, met with Air India in 2011 to encourage the airline to operate to the city, the Premier of the state government attended the meeting to offer public funds to provide marketing support for the new route. The State Government recognised that any private benefit to the airport operator would be dwarfed by the trade and tourism opportunities that the service would generate for the state.

Airline objectives

Taxation: The highly punitive fiscal regime in India is the primary problem for the aviation sector. The cost of Aviation Turbine Fuel in India is almost 60% higher than international benchmarks. Combined with a high base price, fuel now represents 45-55% of a carrier's operating costs. The volatility of such a significant cost input on this scale makes it extremely difficult to plan cashflow and working capital requirements. In additional to taxation on fuel, there are several other fiscal imposts including service tax and withholding tax. The negative fiscal environment must be addressed to provide a structure which keeps viability in mind. Rationalisation of sales taxation on fuel to a flat rate of 4% would immediately result in a cost saving of USD700-800 million. If the Government is prepared to consider allowing direct importation of fuel, it would appear to be far more logical to instead seek consensus on sales taxation with state governments

Cost of Operations: Aside from fuel, Indian aviation is facing an increasing cost environment. With almost USD10 billion of investment in airports over the last five years, airport charges are increasing, particularly at the major metros (Delhi has recently been granted approval to increase charges by 334%). Delhi and Mumbai airports, which together account for 40% of traffic in India, will completely pass through USD5 billion of expenditure to passengers. An additional nine airports are expected to see increases in charges. The proposed passenger fees will result in an increase in fares of a quantum that is likely to impact demand and traffic volumes. The need to upgrade ATM infrastructure is also expected to result in higher charges. The question of airport and airspace viability needs to be addressed in a manner which does not further destabilise the airline sector.

The high cost structure and punitive fiscal environment make it difficult for Indian carriers to compete with foreign competition and limit the potential to establish India as a global hub. Addressing this could positively transform India's role in international aviation.

Foreign direct investment: India is unique in maintaining a distinction between foreign investors and foreign airline investors. For 20 years India has grappled with this issue, with no clear rationale as to why the investor class that would bring the most expertise to the sector and offer higher valuations due to strategic synergies, is barred from participating. Strategic investment by airlines will provide confidence to further institutional capital to follow and will strengthen management capability. The positive indications are that investment by foreign airlines may finally be approved by Cabinet in Aug-2012.

It is important not to simply consider the foreign airline investment issue from the prism of the incumbent carriers. If the Government is open to issuing new licences, joint ventures between leading international carriers and large Indian corporations could arise (similar to the earlier Tata/Singapore Airlines project which was not approved), bringing a new level of capital and professionalism that would be highly positive for the sector. Without new players, India would have to ensure the survival of the existing airlines, which may ultimately be at a cost to the taxpayer.

Route Dispersal Guidelines: The requirement to operate social obligation routes creates a distortion for the airlines and at the same time does not appear to be achieving the ultimate objective of delivering greater connectivity to remote and less developed regions. Airlines are being forced to fly services which often have poor loads, a situation which benefits neither the industry nor the regions which are being served. A new approach needs to be considered which better matches the nature of air operations (routes operated, size of aircraft) with the connectivity needs of the remote regions, which could include reverse auctions for subsidies, as occurs in the US, Canada and Europe.

Five-Year/20 Aircraft Rule: There is no logic for this discriminatory regulation which requires Indian carriers - but not foreign airlines - to have operated domestically for five years and to have a fleet of at least 20 aircraft, before being permitted to fly overseas. It has prevented Indian carriers from claiming their rightful share of international traffic. This unnecessary regulation presents an obstacle to the establishment of potentially viable start-up airline models such as a low-cost, long-haul operation.

International Traffic Rights: Throughout 2011 private Indian carriers faced significant delays in the approval of applications to operate new international routes due to a policy of protecting Air India. National assets - in the form of bilateral entitlements - were being viewed through the prism of a seriously bankrupt company. Air India had limited capability to operate new routes, meanwhile blocking private carriers from doing so. For the private carriers this resulted in sub-optimal utilisation (and higher costs) of narrowbody aircraft as they were unable to conduct back-of-the-clock flying. And as aircraft could not be deployed overseas, domestic capacity increased putting further downward pressure on fares. In the first half of 2012 many of the applications have since been approved, however, it is important that in future a far more transparent and efficient process of evaluating applications is employed.

Market Expansion and Entry: Oversight of the industry must take into account an in-depth structured analysis of airline financials. Airlines should not be permitted to expand if they are burdened with huge debts, negative net worth and limited cash. In addition, it is a concern that airlines that have previously closed have been able to obtain an NOC to relaunch even though previous debts to banks and suppliers have not been cleared.

New airlines should be permitted to enter, in fact it should be actively considered for operators with strong business plans and which are well capitalised. MOCA must develop the capability to critically evaluate business plans for which it must remain at the cutting edge of airline strategic thinking. Given the financial weakness of incumbent operators, the market should not be reliant upon them to deliver additional capacity. And in particular new attention needs to be paid to the regional airline policy which has not been successful even though the objective of increasing connectivity to Tier 2 and Tier 3 cities is an important one.

Alliances: The process of Indian carrier accession to membership of Star Alliance and SkyTeam has become Air India-centric and is holding up the integration of Indian aviation into the global system. A more rational approach should be adopted as alliance membership could provide valuable passenger feed both in terms of volumes and yields. Airlines should also be permitted to codeshare to maximise the commercial viability of their operations and to offer greater options to passengers.

Commercial Flexibility: The restrictions on airlines being able to adjust their forward schedules in response to market demand limits their commercial flexibility. As does micro-intervention on issues such as the ability to charge additional fees for exit row seats or extra baggage. Since these ancillary charges allow passengers to benefit from lower base fares and to customise the product to better suit their requirements and budget, whilst allowing airlines to develop a more sustainable operation in an environment of wafer thin margins, there appears to be no rationale for prohibiting them.

Legal Framework: Aviation is subject to acts of parliament which date from the 1930s with limited relevance to today's environment. This structure imposes archaic procedures higher costs.

Airline Objectives 2015: Over the next three years the negative fiscal environment must have been addressed, this would be the most significant contribution that could be made to the sector. Additional distortions, such as the five-year rule, restrictions on foreign airline investment, route dispersal guidelines, allocation of bilaterals to private carriers and limitations on ancillary revenues must be dismantled. Most of these restrictions are arbitrary with no clear rationale. Moving forward, the focus for the Ministry should be on ensuring a safe, secure and competitive industry, with new licences granted to applicants with sound business models and adequate capital. Encouraging skills development will require particular attention as this is one of the most critical but overlooked supply side challenges for the industry in the future, not just in India but globally.

Freight

An efficient air cargo and logistics sector is vital for competitive trade and investment. In many ways it is already more liberal than passenger services (India follows an open skies policy with respect to all-cargo operations), however, there remain areas for further progress. The fact that air cargo is lower profile than passenger operations means that there should be fewer political obstacles to reform in this area. Successful air cargo operations are based on global transport and logistics networks. If India is to integrate into the global supply chains leading global operators must be allowed to establish their operations in the country either in terms of all-cargo air services or the establishment of infrastructure such as warehousing and high volume throughput systems.

However, if such infrastructure is to be developed it will require the support of dedicated air cargo capacity. The opportunity should therefore be taken to unilaterally dismantle barriers to entry, including 100% foreign direct investment. The cooperation of other government agencies is also required - particularly quarantine, customs and excise to expedite cargo processing and to reduce dwell times at Indian airports which are significantly inferior to international benchmarks. Ultimately, an efficient air cargo environment will support inward investment in manufacturing in India due to the ability to seamlessly integrate with global supply chains.

General Aviation (GA)

With a clear vision, general aviation could emerge as a key driver of regional connectivity and economic development. The paradox of Indian GA is that this sector, which has massive growth potential, has no dedicated policy or regulatory frame nor infrastructure or services to support it.

There needs to be a realisation that the GA sector is already large with close to 750 aircraft (larger than the scheduled fleet), and could grow to a fleet size of around 2000 by 2020. This is a sector which must be acknowledged, incorporated and supported. Failure to pay attention to GA could impede the development of an important component of the aviation value chain and have worrying safety and security implications.

At a policy level, GA has largely been ignored and operates in the shadow of commercial airlines. There has been limited consideration for GA requirements in air traffic management planning, or in the development of dedicated infrastructure at airports other than Delhi and Mumbai. The Government recognises the need to extend the aviation network beyond scheduled operations between metro cities, as demonstrated by the fact that it has introduced incentives for regional operators operating aircraft seating less than 80 passengers. Under the regional airline policy, a flat rate sales tax of 4% applies on fuel in every state (the rate otherwise varies by state and can go as high as 30%). This sales tax concession on fuel should be extended to GA.

A national airport Master Plan should seek ways to increase capacity and flexibility for GA. This will include ensuring adequate parking and hangar space, allowing MRO/FBO activities on the airport, and developing ATC procedures capable of accommodating increased small aircraft movements. Second, serious consideration should be given to the development of disused or low traffic secondary airports for GA. This can provide seedbed opportunities for aviation in areas where it is not yet significant. State governments could become active in reviving smaller airports, particularly for air taxi operations for business, tourism and freight, which could benefit regional development.

Access to airspace should be equitable and ensure that GA can operate effectively. There also needs to be recognition that not all airspace needs to be controlled, and with appropriate regulations and facilities this in itself could facilitate GA movements.

Scant regard is paid to GA in the current regulations. Limits on imports of aircraft and especially parts do not recognise differences between helicopters and fixed wing aircraft. The multiplicity of aircraft types, fragmentation of operators and evolving technology will undoubtedly create headaches for the regulator. There is a shortage of personnel to develop, monitor and enforce regulations in GA. Quality and safety audit systems are seen as deficient. The sheer resource requirements to address this issue may necessitate the establishment of a dedicated division within the regulator or even a restructuring of the DGCA.

There are too many agencies involved in the acquisition of an aircraft. Lax or inappropriate standards increase accident risk, reducing the appeal of the sector for investment and increasing the cost of capital. However, there is an opportunity at present to take a clean-sheet approach and structure a new regulatory framework that would allow India to develop a safe, modern and efficient GA sector.

The Ministry of Civil Aviation must push ahead with its plans to appoint a Director for GA so that there is a dedicated bureaucrat responsible at a policy level for addressing the wider infrastructure, fiscal or technical problems faced by the GA industry.

Maintenance, Repair & Overhaul (MRO)

India has limited in-country third party MRO facilities. With a couple of exceptions, Indian carriers do not have in-house capabilities beyond line maintenance, which means that they rely on offshore providers for MRO services. With its relatively low labour costs and large pool of basic science and engineering graduates, with investment in skills and training India in theory has the potential to emerge as a competitive MRO destination. However, it is hampered by a fiscal environment that imposes additional taxes on third party operations. Until these issues are resolved, Indian airlines will continue to send aircraft overseas for maintenance, representing a loss of foreign exchange for the country and lost employment opportunities for Indian engineers. Furthermore, the regulatory requirement for airlines to conduct line maintenance in-house also increases costs with no clear benefit.

Education and training

The ability to bring India in line with the global aviation community will hinge upon the skills and competency of the workforce. However, education and training has virtually been an afterthought in Indian aviation. The industry has muddled through by deploying ad hoc measures to fight fires. This approach must be change if India is to deliver a professional, sustainable and safe industry. CAPA estimates that an additional 300,000-350,000 skilled staff will need to be trained by 2020 to support the projected growth of Indian aviation.

There is a need for a fundamental overhaul of the quality of training in India and it must happen quickly and in a cost effective manner. But if India succeeds in this mission, it will in the process create a massive export opportunity. There exists the potential for India to become a low-cost, outsourced aviation education and training centre for the world, provided that international quality standards can be established.

The Government took a positive step in Jan-2008 when the foreign direct investment cap in flying schools and training institutes was increased to 100%. However, international training providers still report frustration with very slow and ambiguous approval processes. The Government must adopt a more pro-active, fast-tracked and encouraging stance with respect to the establishment of new institutes. Furthermore, although the foreign university bill is beyond the purview of MOCA, an initiative could be taken to convince the Ministry of Human Resource Development that aviation is a new and specialist discipline of national interest which warrants exemptions for the participation of foreign universities as there are no established Indian centres of excellence in the subject.

Environment

Sustainability issues are increasingly prominent in the global aviation industry. India needs to develop a roadmap for addressing issues such as carbon emissions in line with IATA's targets. India also needs to establish targets of its own that are appropriate for the market. Investment in new technologies and enhancing the efficiency of airports and airspace will make an important contribution. The industry needs to be prepared as CAPA expects a significant increase in activism in relation to emissions and noise. As stated earlier, careful planning with respect to land use can mitigate potential noise pollution before it arises. As an emerging aviation power, which is likely to be the third largest market in the world by the end of this decade, India needs to be seen to be responsible and to be taking a leadership role in the challenges that face the industry. But strategies also need to be developed for how to respond to situations such as the European Emissions Trading Scheme.

Conclusion

Once the bottlenecks have been removed, the industry can be left to itself. At present the reason that the Government is faced with the current crisis is because it has not created an environment which supports viable operations. Furthermore, planning is of vital importance and is a feature that Indian aviation has lacked. MOCA must set out the vision for the sector, create a level playing field and then let market forces decide the outcome. The focus should then be on policy, safety, environmental issues, competition and viability and placing the consumer at the centre.

This CAPA perspective on policy and regulation is the second in a series on structural issues in the Indian aviation sector which will be released over the coming weeks. Each of these topics will also be discusssed at the forthcoming CAPA India Aviation Summit in Mumbai on 30-31 October 2012. For further information visit https://centreforaviation.com/events/capa-india-aviation-summit-2012/