New Delhi: Nearly every aviation industry trade and analyst group ranks India as one of the fastest growing markets in the world. And yet, there is no country on the planet that better typifies Virgin Airlines owner Richard Branson’s infamous joke: “What’s the quickest way to become a millionaire? Start off as a billionaire and get into the airline business.”
On Wednesday though, Prime Minister Narendra Modi’s government kicked off the first of a much-awaited series of reforms that experts and airlines say will fix regulatory imbalances and hopefully construct a level-playing field that will lead to greater overall industry profitability.
The new civil aviation policy, cleared by the cabinet, comes with airfare caps of Rs. 2,500 for flights that last an hour, an ecosystem of incentives and sops that will hopefully fund the airfare caps while fixing India’s ‘ghost airport’ problem and a focus on constructing low-cost or no-frill airports.
But the biggest change in government policy comes in the partial scrapping of the much-debated ‘5/20’ rule: a policy requirement that said India-based airlines could fly overseas routes only after they have operated domestic flights for five years and have at least 20 aircraft in their fleets. Under the new civil aviation policy, the five year component has been done away with, while airlines are still required to deploy 20 aircraft for domestic operations.
In many ways, according to industry insiders and analysts The Wire spoke to, the ‘5/20’ rule is a microcosm of the regulatory imbalances that have marked the aviation industry over the last 12 years. “It’s a symbol of the misplaced prioritisation of our state carriers, how entrenched competition used connections to fight off new players and the lack of a proper rationale to back up protectionist measures,” a senior executive of a low-budget carrier, who declined to be identified, said.
The debate over 5/20 between different airlines, at the most basic level, is quite simple: Over the past decade, international or global routes have (on average) been seen as more lucrative than the competition-crowded, price-sensitive domestic routes. New airlines that are still trying to work out the economics of their domestic (Indian) routes and business, have looked at international routes as a protective cushion or at the very least as a means of exploiting the price difference between global and domestic aviation turbine fuel. Consequently, incumbent players, at any given point of time, support this rule in order to gain a competitive advantage over newer ones.
The two new players in the Indian airline industry, Vistara and AirAsia India, both do not satisfy the 20 aircraft rule currently. While Vistara has 11 aircraft in its fleet, with plans to lease up to 20 soon, AirAsia India has only six aircraft at present.
History of 5/20
But why was such a rule enacted in the first place? It was approved by the UPA government back in December 2004, under the tenure of civil aviation minister Praful Patel. According to a former civil aviation secretary The Wire spoke to, there were three broad reasons that were floated both publicly and informally during this time.
The first was the safety argument. With a number of new ‘start-ups’ entering the aviation industry, the Indian government didn’t want to risk a scenario where a new Indian airline caused an international incident by crashing a flight on a global route. The government reckoned that if it first forced Indian airlines to fly domestic routes while building up a decent fleet it could make sure they adhered to safety and other regulation standards.
The second was the domestic connectivity argument: namely that before Indian airlines could jump onto high-margin international routes, they first had to service the domestic market. This argument, and thus the 5/20 rule, was closely linked to the issue of ‘route dispersal guidelines’ or the allocation of a minimum number of flights to remote and less accessible locations.
SpiceJet’s Ajay Singh summed up this argument earlier this year when it was made clear that the government was willing to tweak the 5/20 rule. “All of us were asked to serve our great country before we got profitable rights to fly abroad. We served with great pride. What is wrong if these two foreign-controlled airlines are also asked to serve India before being allowed to fly internationally,” he said, referring to AirAsia India and Vistara, the two newer players that we’re lobbying against the 5/20 rule.
The third argument revolves around one of the more common rumours in the aviation industry – that the 5/20 rule was brought in specifically to help Jet Airways break the monopoly that Air India/Indian Airlines had on flying international routes as well as stave off competition posed by newcomers SpiceJet and Kingfisher Airlines. While this argument is obviously unconfirmed, shortly after the 5/20 rule was passed in 2004, the major winners were Jet Airways and Air Sahara, both of which were allowed to fly from India to international destinations; a right that was earlier accorded only to Air India and Indian Airlines. However, the latter two also ended up winning as they, until seven-to-eight years ago, were the only domestic carriers allowed to fly on the highly profitable Gulf (UAE, Oman, Bahrain, Qatar etc) routes.
Kingfisher and 5/20
The 5/20 rule has also found a starring role in one of the more publicised episodes of Indian aviation history: the Kingfisher Airlines saga. Multiple published accounts, which have documented the factors behind the downfall of Kingfisher Airlines, highlight how the company’s acquisition of low-cost carrier Air Deccan in 2008 could be largely attributed to the 5/20 rule. At the time, Air Deccan satisfied the requirements for flying international routes while Kingfisher still had a few years to go. Acquiring Air Deccan, Mallya reasoned, would allow Kingfisher to fly internationally and offset some of the company’s domestic losses.
Five months after the two companies merged, Vijay Mallya launched Kingfisher’s first Bangalore-London flight. However, with the onset of the global financial crisis, Kingfisher simply wasn’t able to manage the nuances of running both a high-end and low-cost brand. The resulting mismanagement and cash burn kicked off Kingfisher’s descent. While it’s difficult to argue, as some have, that the 5/20 rule was responsible for all the problems that ailed Kingfisher, it cannot be dismissed as negligible.
Back to the present, the arguments remain the same and yet the players have changed positions. Earlier this year, the dispute over 5/20 between incumbent players and newer airlines became public.
5/20 Rule and Vested Interests pic.twitter.com/fQRtfEZlbK
— Ratan N. Tata (@RNTata2000) February 21, 2016
Tata Group Chairman-Emeritus Ratan Tata – a man not known for being publicly controversial or even confrontational and whose corporate group has a stake in newcomers AirAsia India and Vistara – described the 5/20 rule as being “reminiscent of the protectionist and monopolistic pressures” practised by vested interests in other sectors. The Federation of Airlines – which represents Jet Airways, GoAir, SpiceJet and IndiGo – lashed back, declaring that Tata’s statement claimed “to be in national interest but [was] effectively in self-interest”.
“It may seem a little ironical that SpiceJet and IndiGo which once complained of being held back by the 5/20 rule, now support it against Vistara and AirAsia India. But that’s what happens when competitive interests and a severely imbalanced playing field collide,” an AirAsia India executive told The Wire.
To better understand the impact of the new civil aviation policy and the partial rollback of the 5/20 rule, there are three developments over the past decade that must be considered. Firstly, according to Amber Dubey, partner and head (aerospace and defence) at KPMG, flying international routes is no longer “a pot of gold”. “In domestic routes you might have five to seven competitors but on those global routes you have 20-30 competitors. Everywhere you go these days there is a Qatar or Emirates.”
Nevertheless, and secondly, for newer players such as Vistara and AirAsia India whose main investors have a foreign base (AirAsia in Malaysia and Singapore Airlines in Singapore), flying internationally is still important as they can make it work; which is why the ‘Federation of Airlines’ lobbied heavily in favour of keeping the 5/20 rule and why the two camps have bitterly argued over the last year.
Lastly, according to a number of analysts and industry insiders The Wire spoke to, the partial roll-back of the 5/20 is ultimately a compromise; a sign of the Modi government walking the middle path.
As one industry executive put it, “what has happened is that 5/20 has not become 0/20 but is effectively 3/20”, referring to the fact that it would take any new India-based airline three years to acquire 20 aircraft. Despite this, if Vistara and AirAsia India are able to push through, initial estimates put Jet Airways as being impacted most: the Naresh Goyal-run airline has anywhere between 50-60% of its capacity being deployed on global or international routes.
In the run-up to the new civil aviation policy, with public consultations being held and draft policies being released, the fate of the 5/20 rule was the subject of much speculation. Some feared that the status quo would remain while others believed that even if 5/20 was scrapped, it would be replaced with something equally onerous.
“While it [the new policy] is a sign of reform, there are many more pieces of the puzzle that need to fall into place such as the question of an independent civil aviation authority, clarity on FDI and the fate of Air India. But for now it’s strange the manner in which the 5/20 rule has been ended. The rule lacked logical basis and was called archaic even though it was formulated in 2004. It’s not completely gone but it has also been diluted. A rather anti-climactic ending,” said a senior industry executive.