A Crucial Debate

The ‘5/20 Rule’ has been responsible for the Indian airline industry’s inability to compete with foreign airlines in capturing market share of traffic from India to international destinations

Issue: 04-2015By Air Marshal B.K. Pandey (Retd)Photo(s): By Airbus, Bombardier

The ‘5/20 Rule’ as it has been commonly referred to, mandates the domestic airlines in India to have a minimum of 20 aircraft in their fleet and must have completed operations for five years in the domestic segment before they can be licensed to undertake operations on international routes. This rule was formally cleared by the Union Cabinet in the year 2004 just when the second wave of resurgence in the Indian airline industry had commenced. The revival of the Indian airline industry in the latter part of 2003 was flagged by the arrival on the civil aviation scene of Air Deccan, the first airline in India based on the no frills low-cost model. Air Deccan was a bold and novel experiment by Captain G.R. Gopinath and was followed by a number of privately owned airlines with varying but competing business models. The major players to emerge on the scene were IndiGo, Kingfisher, SpiceJet, GoAir and Paramount Airways. Of these only IndiGo, SpiceJet and GoAir continue to operate, the others having faded into oblivion over the last decade.

As of date, IndiGo and SpiceJet are compliant with the 5/20 Rule. GoAir that has completed more than nine years of operations in the domestic segment, is short by just one aircraft in its fleet the strength of which stands at 19. GoAir has placed orders for 72 Airbus 320neo airliners and delivery is expected to commence in 2015. For all practical purposes, GoAir is on the verge of being compliant with the 5/20 Rule.

At the end of the tenure of the UPA II Government, the then Minister of Civil Aviation, Ajit Singh, had made a mention of the need to do away with the 5/20 Rule all together. However, as there was stiff opposition from the well established airlines who did not want any competitive elements to emerge, no decision was taken by the government on the proposal to do away with the 5/20 Rule.

When the NDA Government revived the proposal to do away with the 5/20 Rule, there was an immediate division in the airline community more or less on predictable lines. Those airlines that were compliant with the 5/20 Rule were opposed to the proposal and were in favour of maintaining the status quo. Those airlines that were about to commence operations or were waiting in the wings for licence from the Directorate General of Civil Aviation (DGCA), were in favour of the 5/20 Rule being abolished. GoAir was happy with either course of action. The state-owned national carrier Air India perhaps had no option but to accept diktats from the government. There are however merits to the arguments both for those who oppose the 5/20 Rule and those that are in favour of retaining it.

Opposition to the 5/20 Rule

In the last one year, two new airlines have emerged on the scene. The first that commenced operations on May 30, 2014, was the no frills low-cost carrier AirAsia India, a joint venture amongst Tata Sons with share holding of 30 per cent, the well known Malaysian carrier AirAsia Berhad with 49 per cent and Telestra Tradeplace with 21 per cent. This was followed by entry of the Tata Sons and Singapore Airlines (Tata-SIA) joint venture that is a full service carrier named as Vistara. This airline commenced operations on January 9, 2015. What is of significance is that it was only after the grant of licence to these two new airlines that the Ministry of Civil Aviation (MoCA) came up with the proposal for abrogating the 5/20 Rule.

There is a host of arguments against retaining the 5/20 Rule. First of all, in the considered opinion of most, this rule is not only bizarre, it is also unique to India as such a practice is not followed anywhere else in the world. This restriction imposed by the Government of India on its own newly established carriers has been responsible for the inability of the Indian airline industry as a whole to compete with foreign airlines in capturing market share of traffic from India to international destinations. One of the indications of a resurgent economy is significant rise in air traffic of a nation’s airlines. Unfortunately, the 5/20 Rule proved to be a major impediment to the growth of traffic for the Indian carriers in the international segment. Foreign carriers operating into and out of India cornered most of the traffic as these were not subject to such restrictions while operating to and from India. There is little doubt that the finances of Indian carriers would have been in a far more healthy state as compared to the pitiful state that they have descended to. Abrogation of the 5/20 Rule will certainly strengthen the finances of Indian carriers and help them to compete globally.

What is even more surprising and not understandable is that the Ministry of Finance as well as of Corporate Affairs and even the Planning Commission have repeatedly pointed out in the past that the 5/20 Rule was devoid of logic and that the barriers to international operations were anti-competitive. Besides, the requirement to have a fleet of 20 aircraft would entail huge investments which given the prevailing precarious financial state, start-up airlines would find it unaffordable. It has been estimated that international traffic handled by the Indian carriers has the potential to reach 100 million by 2021. The Government of Kerala has been keen to establish their state-owned carrier Air Kerala with a view to exploit the immense potential of international traffic to the Middle East. However, plans of the Government of Kerala have not been able to take off purely on account of the 5/20 Rule. Abolition of the 5/20 Rule will undoubtedly be in national interest.

Arguments for the Retention of the 5/20 Rule

The major players in the Indian airline industry have always been united in opposing any move to abrogate the 5/20 Rule. Their argument to support retention of the 5/20 Rule is based primarily on the fact that while all the start-up airlines had to wait for five years and build up their fleet strength to 20 aircraft to be eligible to fly, there cannot be any justification whatsoever for the newly launched airlines such as Vistara and AirAsia India to excluded from the purview of these regulations and be permitted to operate on international routes right away. They are of the firm view that abrogation of the 5/20 Rule at this point in time would smack of favouritism as it would give unfair advantage to Vistara and AirAsia India and would be grossly unfair to the Indian carriers that have already endured the painful regulatory process. They feel that the start-up airlines must first prove their capability in the domestic segment as the other airlines had to do before they are unshackled and permitted to commence international operations. They are unequivocally for maintenance of the status quo.

The Federation of Indian Airlines (FIA) has also written to the Ministry of Civil Aviation that the 5/20 Rule ought not be abolished as without it, it will no longer be a level playing field.

New Proposal by MOCA

Finding itself on the horns of dilemma, the MoCA has postponed decision on the issue and instead has opted to continue with further discussion with the stakeholders. To add a new dimension to the imbroglio, the MoCA has proposed a new arrangement that has rendered the situation even more complex. Ostensibly to protect the interest of established airlines, under the proposed dispensation, the start-up airlines will initially be allowed to operate only to those international destinations that are six hours or more of flight time from the departure aerodrome in India. The new proposal by the Ministry links overseas flying rights to increased connectivity to India’s remote regions represented by a system of earning credit points called Digital Flying Credits (DFC) based on performance while flying in the domestic sector. For flying to the Gulf and South East Asian destinations, start-up airlines will need to accumulate 600 DFCs. Mittu Chandilya, CEO, AirAsia India, estimates that his airline will take at least two-and-a-half years to accumulate 600 DFCs to be eligible to fly on international routes in the region.

Kapil Kaul, CEO, Centre for Asia-Pacific Aviation, feels that the proposed dispensation “is quite complex and needs some clarity”. He is of the view that the government needs to review the new proposal and should come up with something more logical.