THE PROMISING ANNOUNCEMENT FOR CIVIL AVIATION – UNION BUDGET 2019-20

Indian Civil Aviation sector is facing plethora of issues in the aftermath of the collapse of Jet airways and debt ridden Air India. The domestic airlines are facing operational issues and most of them are debt ridden due to thin profit margins, lack of level playing field in the market.  Keeping these issues at their priorities the government has made some promising announcements in the union budget 2019.  These reforms can have curative implications on the civil aviation sector.

Highlights of the announcements –

• Policy interventions to be made for the development of Maintenance, Repair and Overhaul (MRO), to achieve self- reliance in aviation segment.
• FDI in sectors to be promoted in Aviation segment.
• Regulatory roadmap for making India a hub for aircraft financing and leasing activities from Indian shores, to be laid by the Government.

The Government has proposed to hike the Foreign Direct Investment (FDI) limit in domestic air carriers from existing 49 per cent, though no fix percentage has been quoted it has been said that the Government will examine suggestions of further opening up FDI in aviation. Earlier Union Cabinet allowed 100 per cent foreign direct investment in Indian aviation for automatic route. Even on previous occasions the government tried to divest its stake in Air India. An earlier attempt by the government to divest 76% stake in the national carrier did not find any taker.  The government now intends to sell 100% in the national carrier and the move to relax FDI may interest buyers of Air India. However, there is no clarity on the Substantial Ownership and Effective Control (SOEC) clause yet. The SOEC clause bars any foreign investor from taking complete control of the operations of the airline and be run by a board that has two third members as Indian.

The government has also proposed to implement measures to make the country a hub of aircraft leasing and aviation finance.

“As the world’s third-largest domestic aviation market, the time is ripe for India to enter into aircraft financing and leasing activities from Indian shores. This is critical to the development of a self-reliant aviation industry, creating aspirational jobs in aviation finance, besides leveraging the business opportunities available in India’s financial special economic zones (SEZs), namely, International Financial Services Centre (IFSC),” Ms.Sitharaman said in her budget speech.

The emphasis of the Finance Minister on development of Maintenance, Repair and Overhaul  (MRO) industry was welcomed by MRO Association of India.  It is estimated that this move will help to turn India from an importer of MRO to net exporter and will create over 100,000 direct jobs and revenues exceeding Rs. 35,000 crore in next five years.

Few long pending demands, which is, quotes as key demands by aviation industry such as to reduce taxation on aviation turbine fuel (ATF) or Jet fuel was not addressed by the Government. At present, jet fuel accounts for 35% to 50% of airline costs.

Analysis –

These announcements are welcomed by stakeholders and it reflects the government intentions to revitalize the civil aviation segment. Primarily the government is aiming to make the segment more investment friendly so that sufficient amount capital can be injected. The civil aviation segment is facing profitability issues due to cutthroat competition amongst the domestic airlines. After the collapse of Air India, Jet airways which was one of the prominent domestic airlines got defunct and there are many more who are facing fiscal issues. In such an alarming environment FDI promotion and relaxing the norms could be a curative measures to get back the segment its good fiscal health.  One prominent reason to focus aviation sector is to secure the revenue generation from the sector.

 The Maintenance Repair and Overhaul (MRO) sector would require tax rebate from the government to ensure that the cost of servicing planes in the country are at par with countries like Sri Lanka and Singapore. This will make the segment competitive and make it more profit generating.

Other announcement of making India a hub for aircraft leasing is also a work in progress and the civil aviation ministry has a committee with various stakeholders, including airlines, to make Ahmedabad’s GIFT city – a tax free zone – as the hub for aircraft leasing.

Implications over the civil aviation sector –

The impact of these announcements over the civil aviation sector can be summarized as follows

• The promotion of FDI can help in easy disinvestment of Air India, earlier government was selling the majority of its stakes in Air India but unable to found the investors. This time by relaxing the investments norms government may plan for 100% disinvestments in Air India.
• It will create a level playing field in the domestic aviation, which will make the sector profitable and attractive for the investment.
• India a hub for aircraft leasing is also a work in progress and the civil aviation ministry has a committee with various stakeholders, including airlines, to make Ahmadabad’s GIFT city – a tax free zone – as the hub for aircraft leasing.
• This will indirectly create employments in the segment.

Things that needs clarifications –

• There is no clarity on the Substantial Ownership and Effective Control (SOEC) clause yet. The SOEC clause bars any foreign investor from taking complete control of the operations of the airline and is run by a board that has two third members as Indian. Further rebates and exemptions need to be given for making environment investment friendly.
• Government needs to clarify on the role played by the DGCA in the segment and need to ensure that the market remains profit yielding.

Sourabh Kumar Mishra

Senior Associate

The Indian Lawyer