Areas of Service
- International Tax
- International Tax Litigation
- Competition Law
- Human Resources Law (Employment and Labour)
- International Dispute Resolution and Investigations Practice
- Mergers & Acquisitions
- Private Equity Investment
- Joint Ventures
- Capital Markets
- Private Client
- Fund Formation
- Technology Law
- Intellectual Property
Liberalization of the Indian civil aviation sector in the mid to late nineties has led to a large number of private players entering the sector in addition to the two established national carriers (Air India and the erstwhile Indian Airlines). Apart from the fact that liberalization of this sector came alongside the phase of rampant economic development in India, growth of the Indian tourism industry and the ever-increasing disposable incomes of `the Indian middle-class have contributed to the admirable levels of growth that the civil aviation sector has achieved in the last decade, in addition to the support provided in the form of structural reforms, airport modernizations, entry of private airlines, adoption of low fare model and improvement in service standards.
During the implementation of the Eleventh Five-Year Plan (2007-2012), India has emerged as the ninth largest civil aviation market in the world with the total number of passengers handled at Indian airports, during the period growing at an annual average growth rate of 11.5% and cargo handled at Indian airports growing at an annual growth rate of over 11%.1 The Indian aviation sector as a whole grew around 13.6% on a yearly basis in the FY 2010, which places it among the fastest growing aviation industries in the world. It has been estimated by the Indian Government, that India has the potential to become one of the three largest aviation markets in the world by 2020.3 However, this growth is not an indicator of profitability.
Airline losses approached USD 2 billion in the financial year ending March 2012, after losing USD 3.5 billion over the previous three years. However, growth in FY 2012 is expected to slow down to less than 10%.5 This can inter alia be attributed to high oil prices and other operational costs and poor capacity rationalization by the airlines. All this coupled with other economic factors has brought the Indian aviation market to a tipping point. FDI in the aviation sector alone cannot be a panacea for the cash-strapped industry but this has to be backed up by considerable reforms from the Government.
For example, the Ministry of Finance imposes a Service tax on air tickets, landing and navigation charges, which contravenes International Civil Aviation Organization's (ICAO) guidelines. India, as a longstanding ICAO member, had helped frame these policies. In addition, taxes on Aviation Turbine Fuel ("ATF") cause prices being nearly 60% higher than elsewhere in the world. This, combined with an excise duty of 8.2%, leads to fuel accounting for about 45% of the total operating costs of Indian air carriers, compared to a global average of 33%.8 The Airports Economic Regulatory Authority (AERA) has effected a 346% increase for charges at Delhi's Indira Gandhi International Airport ("IGIA"), placing IGIA among the world's most expensive airports.
- The private sector has played a vital role in the development of public-private partnership ("PPP") airports – the development of the Hyderabad and Bengaluru airports and modernization of the Delhi and Mumbai International Airports are excellent examples of the same being achieved successfully through the PPP mode.
- The Eleventh Five-Year Plan period witnessed a rising trend of domestic carriers adopting the low cost carrier model.
- Many private players in the aviation industry, like IndiGo and Spicejet, have completed five continuous years of operation in the domestic sector and have become eligible for operating flights on international routes also.9
- Passenger handling capacity has tripled from the FY 2006 and Cargo handling capacity has increased six-fold from the same period – this can be attributed partly to the capacity augmentation prior to the Commonwealth Games 2010.10
- According to KPMG estimates, due to a significant growth in traffic, Indian carriers are poised to add around 370 aircraft to the existing fleet strength by FY 2017. These acquisitions may be made through multiple modes like direct purchase, direct lending, operational lease, finance lease, sale-and-lease-back etc. with funding options including capital markets and long-term borrowings.
- Aircraft Turbine Fuel ("ATF") is subject to a plethora of cascading taxes by multiple government entities. In the period from October 2010 to March 2011, Indian oil marketing companies increased the price of ATF by nearly 50%, thereby leading to fuel prices being nearly 60% higher than competing hubs like Dubai, Singapore, Kuala Lumpur etc.11 The rise in ATF prices by 3.5 per cent, in line with the rise in international oil prices which has resulted in an increase in airfares12, which has resulted in an increase in domestic as well as international air travel prices.
- The FDI Consolidated Policy defines Civil Aviation to include Airports, Scheduled and Non-Scheduled domestic passenger airlines, Helicopter services / Seaplane services, Ground Handling services, Maintenance and Repair organization, Flying training institute and Technical training institutions. The Government of India has approved FDI up to 49% in Indian carriers – however, cash infusion from foreign investors into the Indian aviation sector has been almost negligent with airlines faced with high operational costs and the burden of accumulated losses over the past five years.
FDI Cap in Air Transport Services
- FDI up to 49% and investment by Non-resident Indians ("NRI") up to 100% is allowed under the automatic route with respect to investment in Scheduled Air Transport Service/Domestic Scheduled Passenger Airline.
- Foreign airlines can invest up to 49% through the government approval route by investing in existing companies (other than Air India), which operate as scheduled or non-scheduled air transport services, or by incorporating a joint venture company subject to certain conditions.
- In case of Non-Scheduled Air Transport Service/Non-Scheduled airlines, Chartered airlines and Cargo airlines, FDI up to 74% (Automatic Route up to 49% and FIPB Approval beyond 49% and up to 74%) and investment by NRI up to 100% is allowed on the automatic route.
- Further, FDI up to 100% is allowed under the automatic route for investments with respect to helicopter services/seaplane services subject to DGCA approval.
FDI Caps in other services under Civil Aviation Sector
- FDI up to 74% (Automatic Route up to 49% and FIPB Approval beyond 49% and up to 74%) and investment by NRI up to 100% is allowed on the automatic route with respect to Ground Handling Services. However, this is subject to sectorial regulations and security clearances.
- FDI up to 100% is allowed on the automatic route for Maintenance and Repair organizations, flying training institutes, and technical training institution.
- FDI in Greenfield airport projects is up to 100% under the automatic route. Further, the FDI under existing airport projects is up to 100% (Automatic up to 74% and government route beyond 74%)
- The Reserve Bank of India ("RBI") vide Circular No. 113 dated April 24, 2012 has allowed companies in the civil aviation sector to avail ECBs for working capital requirement as a permissible end-use for the civil aviation sector, under the approval route subject to fulfillment of certain conditions mentioned in the circular.
As of 2012, there are six Indian air carriers operating eleven brands which operate flights within India as well as on international routes.
- Air India – Alliance Air – Air India Express
- Jet Airways – Jet Konnect – JetLite
- Kingfisher Airlines – Kingfisher Red
The market share of private scheduled domestic airlines is over 80%. The current market share is outlined quite differently than it was in 2011, when Kingfisher was the largest domestic carrier with a market share of 20%13, until it held merely a 4.2% share at the back of severe financial crisis.14 In addition, most major global airlines operate flights out of the major airports in India to the Americas, Europe, the Middle East, Africa, Australia and to the rest of Asia.
Directorate General of Civil Aviation15
The Directorate General of Civil Aviation ("DGCA") established under the Ministry of Civil Aviation is the main regulatory body that supervises civil aviation in India. The functions of the DGCA include regulation of air transport services to and from and within India in compliance with the Aircraft Rules, 1937, licensing of pilots, aircraft maintenance engineers and monitoring of flight crew standards registration of civil aircrafts and certifying their airworthiness, investigation of minor air incidents and providing technical assistance to Courts / committees of Inquiry appointed by the Government; supervision over Flying/Gliding Clubs, licensing, safety oversight and surveillance of aerodromes and air carriers, advising the Government on matters relating to air transport including bilateral air services agreements with foreign countries.
Airports Authority of India
The Airports Authority of India ("AAI") was established by the Airports Authority of India Act, 1994 formed by the merger of International Airports Authority of India and National Airports Authority through the Airports Authority Act, which came into existence on 1st April 1995 with a view to accelerate the integrated development, expansion and modernization of the operational, terminal and cargo facilities at the airports in the country conforming to international standards, the AAI is entrusted with the task of regulating airports all over India.
Bureau of Civil Aviation Security 16
The Bureau of Civil Aviation Security ("BCAS") was initially set up as a cell of the DGCA in 1978. It served to coordinate, monitor, inspect and train personnel in civil aviation security matters. The BCAS is the regulator for civil aviation security in India. Currently, its functions include laying down standards and measures in respect of security of civil flights at international and domestic airports in India and Indian aircraft operators at foreign airports and standards for pre-embarkation security and anti-sabotage measures in respect to civil flights and ensuring their compliance.
Airports Economic Regulatory Authority
Airports Economic Regulatory Authority ("AERA"), regulates tariffs and other aeronautical charges, as well as monitors airport's performance standards. It creates a level playing field and fosters healthy competition amongst all major airports (government owned, public private partnership – based, Private), encourage investment in airport facilities, regulation of tariffs of aeronautical services, protection of reasonable interests of users, operation of efficient, economic and viable airports
Important industry associations
Federation of Indian Airlines, Air Cargo Agents Association of India, Indian Commercial Pilots' Association, Aeronautical Society of India.
The Aircraft Act, 1934 and the Aircraft Rules, 1937
These legislations were enacted to control the manufacture, possession, use, operation, sale, and the import and export of aircrafts. They stipulate parameters for determining airworthiness, maintenance of aircrafts, general conditions for flying and safety, registration of aircrafts and conduct of investigations.
The Civil Aviation Requirements
They stipulate general guidelines regarding airworthiness, airport standards and licensing, aircraft design standards and type certification, flight crew standards and licensing, aircraft operations, air space and air traffic management, aviation environment protection etc.
The Aircraft (Carriage of Dangerous Goods) Rules, 2003
It regulates air carriage of dangerous goods like explosives, radioactive material etc. and also provides for the establishment of training programs by or on behalf of shippers of dangerous goods, operators, ground handling agencies, freight forwarders and agencies involved in the security screening of passengers, their baggage and cargo.
The Air Corporations Act, 1953
It provides for the establishment of air corporations, namely, Indian Airlines and Air India International and also facilitates acquisitions by such corporations.
The Airports Authority of India Act, 1994 ("AAI Act") and Rules
It established the AAI to administer and manage airports and aeronautical communication stations. The AAI Act was enacted to constitute and formulate the framework within which an authority for governing the airport infrastructure would be established. The AAI Act vests the AAI with the mandatory function of managing the airports, civil enclaves, aeronautical communication stations, eviction of unauthorised occupants of airport premises and to provide air traffic services and air transport services at any airport and civil enclave.
The Carriage by Air Act, 1972
The act seeks to implement the provisions of the Warsaw Convention relating to international carriage by air, which affixes liability for international carriage of persons, luggage or goods performed by aircraft for reward. 17
The Tokyo Convention Act, 1975
This legislation was enacted to implement the provisions of the Tokyo Convention.18 It applies the penal law of India to an act or omission committed on board an Indian-registered aircraft while in flight elsewhere than in or over India
The Anti-Hijacking Act, 1982
The Anti-Hijacking Act implements the Convention for the Suppression of Unlawful Seizure of Aircraft and provides for punishment for the offence of hijacking.
The Suppression of Unlawful Acts against Safety of Civil Aviation Act, 1982
The Suppression of Unlawful Acts against Safety of Civil Aviation Act, 1982 implements the above mentioned Convention and provides for punishment of various offences like committing violence on board an aircraft in flight, offences at airports, causing destruction of or damage to navigation facilities etc. The objective of the Convention is achieved through both these legislations.
The Airports Economic Regulatory Authority of India Act,2008 ("AERA Act")
AERA regulates tariffs and other aeronautical charges, as well as monitors airport's performance standards. The Act also established the Appellate Tribunal which adjudicates disputes between the service providers inter se or between service providers and consumer groups.
Tax Laws affecting Aviation Industry
The 12.36% service tax on air tickets, landing and navigation charges has kept the cost of air travel high. The government has recently contemplated the exemption of the sale of airline tickets from service tax. 19
In addition, high rates of sales tax (as high as 30% in some states) to excise duty at the rate of 8.2% on ATF have also resulted in very high operating costs for the Indian air carriers. Keeping in view the fact that all the airlines are constituted as companies, applicable tax rates on dividend distribution tax, corporate tax and sale of securities of such companies would be akin to any other company incorporated in India.
The Indian Aviation Industry has shown tremendous growth potential in the past decade both in terms of volume as well as in quality of services rendered. The opening up of foreign investment up to 49% and permitting ECBs for meeting working capital needs in civil aviation has widened avenues for foreign investors to participate and benefit from the growth of the aviation industry. However, for the aviation industry to grow and become sustainably profitable and prone to investment and growth, more reforms/guidelines are required to be drafted and introduced to bring it at par with the other jurisdictions. The need of the hour to provide an impetus to the aviation sector could be in the form of a relaxation of tax rates and reduction in airport infrastructure charges, which will in turn go a long way in bettering the profitability of Indian air carriers.
1 Report of the Working Group on Civil Aviation for the Twelfth Five Year Plan (Aug 31, 2011), http://planningcommission.nic.in/aboutus/committee/wrkgrp12/transport/report/wg_civil.pdf.
2 Aviation in India (Jul. 30, 2012), http://www.oifc.in/Sectors/Infrastructure/Aviation.
3 India's domestic aviation market shows rapid growth in first half, CPA - Center for Aviation, available at http://www.centreforaviation.com/analysis/indias-domestic-aviation-market-shows-rapid-growth-in-first-half-58687 (as on August 12, 2012)
4 Remarks of Tony Tyler at the Confederation of Indian Industry (Jul. 25, 2012), http://www.iata.org/pressroom/speeches/pages/2012-07-25-01.aspx.
5 India domestic passenger growth slows to 8% in Dec-2011; 2012 growth to slow from 16.6% in 2011, http://centreforaviation.com/analysis/india-domestic-passenger-growth-slows-to-8-in-dec-2011-with-growth-to-slow-from-2011-rate-of-166-66992
7 Kingfisher Airlines shrinks to becomes India's smallest domestic carrier in Mar-2012, available at http://centreforaviation.com/analysis/kingfisher-airlines-shrinks-to-becomes-indias-smallest-domestic-carrier-in-mar-2012-71975 (as on August 12, 2012) ("Kingfisher Shrinks")
9 See DGCA Guidelines for Operation of Indian Scheduled Carriers on International Routes (Jan. 21, 2005), http://www.dgca.nic.in/aic/aic02_05.pdf.
15 Duties, Functions & Responsibilities, http://www.dgca.nic.in/dgca/func-ind.htm
16 Directorate General of Civil Aviation, http://india.gov.in/sectors/transport/index.php?id=7
18 The Convention on Offences and Certain Other Acts Committed On Board Aircraft was concluded in Tokyo in September 1963. The Convention relates to offences against the penal law or to any act which may interfere with the safety of persons or property on board the aircraft while in-flight or engaged in international air navigation.
19 Aviation ministry proposes abolition of service tax on air tickets & sales tax reduction on ATF (Jun. 4, 2012), http://articles.economictimes.indiatimes.com/2012-06-04/news/32031727_1_aviation-hub-tax-on-air-tickets-atf