The aviation ministry will likely drop a rule requiring airlines to operate on domestic routes for five years before offering overseas flights, and sell shares in state-run airport operator Airports Authority of India (AAI) and chopper service Pawan Hans Helicopters Ltd early next year.
The move to ease norms for international flights as part of a new aviation policy may benefit Tata Sons Ltd’s joint ventures with Singapore Airlines Ltd and Air Asia Bhd that have lobbied for the rule to be dropped.
Under the so-called 5/20 rule, India also currently requires airlines to have a fleet of at least 20 planes before they operate international flights.
“No country has such a 5/20 rule,” aviation minister Ashok Gajapathi Raju said. “This is an opaque kind of a rule.”
Raju said some existing airlines had opposed a proposal to ease the norm for new airlines like AirAsia India and Tata SIA Airlines Ltd’s Vistara, given that the incumbents have had to adhere to the rule. They also want the new start-ups to fly on under-served regional routes that are typically loss-making.
“5/20 will go, 5/20 to my mind does not make sense,” said the minister, who unveiled the draft of the new aviation policy in New Delhi.
A spokesperson for Vistara, in which Tata group has a 51% stake and Singapore Airlines 49%, welcomed the government’s intention. “We think it will be beneficial for the economy and the customers and all the aviation industry as a whole,” the spokesperson said.
The matter of initial public offerings in AAI and Pawan Hans will be taken up and a listing for Air India may also be considered, Raju said.
“Pawan Hans and AAI can go straight off,” Raju said, referring to the fact that they are profitable. “If Air India can be listed, I would be the happiest person.”
Raju didn’t specify either the size of the stakes the government plans to sell in the two entities or the amount it proposes to raise.
AAI remains the most profitable company under the aviation ministry, although the advent of private operators in Bengaluru and Hyderabad in the last decade and the handing over of the Delhi and Mumbai airports to GMR Infrastructure Ltd and GVK Power and Infrastructure Ltd mean it’s no longer a monopoly.
AAI earned revenue of Rs.7,948.47 crore in 2013-14, up from Rs.4,289.21 crore in 2007-08. It earned a profit of Rs.764 crore in the last fiscal, down from Rs.1,081.87 crore in 2007-08.
The government has Rs.656.56 crore of equity in the airport operator, which also had cash reserves of Rs.8,784.59 crore and debt of Rs.1,656.49 crore as of 1 April, according to its annual report. Operating 125 airports, it has one of the largest land banks in the country.
Chairman Sudhir Raheja said AAI had about 17,000 employees, of which the air traffic and navigation department that makes up 27% of revenue, has 4,000 employees. The air traffic and navigation department is likely to be spun off from AAI before the proposed listing.
Pawan Hans is 51% owned by the central government and 49% by Oil and Natural Gas Corp. Ltd. It has 46 helicopters in its fleet, and made a profit of Rs.20.12 crore on revenue of Rs.525.17 crore in 2013-14.
The helicopter service is already registered as a company so it is likely to go public first, civil aviation secretary V. Somasundaran indicated. For an initial public offering of shares in AAI, the ministry will to check with other authorities like the departments of disinvestment and the Securities and Exchange Board of India.
“The aviation ministry plan to sell shares in AAI and Pawan Hans Helicopters is a step in the right direction. AAI listing can unlock huge value for shareholders, given the kind of significant growth in Indian aviation. AAI has a robust and proven business model where it lends its services and gets revenue share from private airport companies,” said Raja Lahiri, partner, Grant Thornton India Llp. Lahiri did not comment on Pawan Hans.
An investment banker said on condition of anonymity that both AAI and Pawan Hans could potentially be valued at up to ten times their earnings before interest, tax, depreciation and amortization—an indicator of operating profitability.
Air India, laden under debt and accumulated losses, is in the midst of a Rs.30,000 crore government bailout. It made a loss of Rs.5,388.82 crore on revenue of Rs.19,230.38 crore in 2012-13, compared with a Rs.5,490.16 crore loss on revenue of Rs.16,072.11 crore in 2012-13. It has debt in excess of Rs.40,000 crore.
The aviation policy the ministry is seeking to put in place is aimed at introducing greater transparency in the sector, Raju said. It’s the first time the government is seeking to make a policy for the aviation industry, in which decision-making has been piecemeal and arbitrary.
Raju said an expert group is being set up to frame the policy; the future of Air India will also be decided on the basis of recommendations made by this group.
“There are suggestions which have emerged…We don’t want to open a Pandora’s box…Can’t we have a professional body manage it? That’s also a suggestion. We have to look at all of them. We can’t procrastinate,” the minister said.
The ministry plans to modernize the Chennai, Kolkata, Ahmedabad and Jaipur airports through a public-private partnership model. Raju said he is open to the idea of Chennai and Kolkata airports being given out on a management contract, given that a lot of taxpayers’ money has been already spent on them by AAI.
Raju said he does not seen an immediate need to allow second airports in metro cities like Delhi, Bengaluru, Hyderabad.
Airlines stocks rose on Monday.
Jet Airways (India) Ltd gained 6.82% to Rs.268.60 and SpiceJet Ltd rose 5.02% to Rs.15.68 on a day the BSE’s benchmark Sensex edged up 0.02% to 27,874.73.
Shares of airport operators fell. GMR Infrastructure’s shares closed at Rs.20.55, down 4.42%, and GVK’s shares closed at Rs.12.22, down 1.45%.
Analysts said it was a step forward but gave the thumbs down to the ministry’s draft aviation policy.
“I can’t call this a draft policy, these are broad statements of intent but more depth will required before policy is formalized,” aviation consulting firm Capa Centre for Aviation’s South Asia CEO Kapil Kaul said.
Air India’s former executive director Jitender Bhargava termed the policy “pedestrian”.
“The draft civil aviation policy lacks both depth and direction. In its current state, the policy note appears pedestrian and more like a wish list—something that has been articulated many a time in the past without giving the statements proper legitimacy,” he said.
Bhargava said the reference to the aviation regulator Directorate General of Civil Aviation, for example, says it will aspire to work as per international standards, but makes no mention of how the objective will be achieved. A proposal to replace DGCA with a Civil Aviation Authority finds no mention in the draft policy.
“On Air India, it only speaks of an expert group to advise, but does not as a policy matter specify whether India needs a national carrier or not. Or how the government proposes to professionalize the management, and again, in what timeframe. While the aviation ministry’s attempt to have a comprehensive aviation policy needs to be applauded, lack of professional touch can only be bemoaned,” he said.
Pune-based aviation analyst Ameya Joshi said the draft highlights the problems and does not offer solutions.
“Like it promises to look after the taxation issues on ATF (aviation turbine fuel) and the 5/20 rule, along with route dispersal guidelines (RDG), but gives little on how and when this is expected to be resolved. The RDG, for example, has been pending for the last two years without a feasible solution which would be agreed to by all operators,” he said.
The US Federal Aviation Administration lowered India’s aviation safety ranking in January this year after finding the under-staffed DGCA not in compliance with international practices to monitor aviation safety.
The decision reduced India to a category that includes Ghana, Indonesia, Uruguay and Zimbabwe, and meant that Air India and Jet Airways—the two Indian airlines that fly to US destinations—wouldn’t be allowed to expand flights and their existing flights would be subjected to additional checks.
Raju said the FAA team was visiting India on 8 December to consider a review of the downgrade.
“We are hopeful we will get back,” he said.
The aviation minister also said he has ordered an inquiry into a recent incident at the Surat airport where a SpiceJet plane hit a buffalo on the runway during take-off. The plane was carrying 146 passengers and crew. The results of the inquiry will be out in three days.
“We can’t have buffaloes on runways…lives are important,” he said.
The article appeared in Mint. The article can be found here.