Civil Aviation Authority will replace DGCA

The Directorate General of Civil Aviation (DGCA) will be replaced by the Civil Aviation Authority (CAA) early next year. According to highly placed sources in the Ministry of Civil Aviation, the government is still debating on who will preside over the body. "We are working out the details of the body and then we'll send it for Cabinet clearance. The ministry will announce the launch of the CAA early next year," said a senior official in the ministry requesting anonymity.

He further added that the ministry is still deciding whether the body will be headed by a chairperson or a CEO or both. According to the draft, "the chairperson will be a person who is or has held the post of secretary to the government or an equivalent post in the central government." The ministry came up with the plan after it realized the need for a body which would be more autonomous than the DGCA.

"It is proposed to create a CAA to replace the DGCA. The proposed CAA would be able to overcome the constraints presently faced by the DGCA in terms of recruitment and retention of technical manpower and inability to quickly address operational issues due to lack of adequate administrative and financial authority," Civil Aviation Minister Ajit Singh has said.

The new regulatory body will be focused on making the aviation regulator independent by giving it more financial and recruitment powers. For instance, The Union Public Service Commission (UPSC) will not be involved in the recruitment process of CAA unlike in DGCA.

"The new regulator will also have the power to demand financial documents, balance sheets and other such confidential documents from the carriers," said another official from the ministry. He also added that the ministry is working out ways to give more powers to the CAA as far as air safety and monitoring airfares is concerned.

Airlines are responsible for hike in fares: Ajit Singh

Civil Aviation Minister Ajit Singh has said that Indian carriers are responsible for the recent hike in airfares. "Airfares are not regulated by the government and the airlines follow dynamic airfare policy," Ajit Singh said while responding to a question in Parliament.

In the last six months, air travellers have witnessed close to a 40% hike in airfares. This has been attributed to the critical financial conditions of the carriers, expensive aviation turbine fuel, User Development Fees (UDF) and an increase in Airport Development Fees (ADF).

"They offer different fare buckets for each flight. The fare-buckets vary from flight to flight. The airfares are dynamic and they increase with the increase in demand for seats. From September 2012 the scheduled domestic airlines have introduced a lowest fare bucket for advance purchase," said Singh.

The crisis in national carrier Air India and beleaguered Kingfisher Airlines has been attributed also to the steep hike in prices of air tickets, as sudden cancellation of flights reduced the capacity on various domestic routes.

Currently, the Delhi airport has been charging domestic passengers an ADF of Rs 200, and international passengers Rs 1,300. In Mumbai, the ADF is Rs 100 for domestic passengers, and Rs 600 for international travellers. Passengers flying out of Delhi airport have to pay an additional Rs 520 for domestic travel, and Rs 1,200 for international in the form of UDF.

"Scheduled domestic airlines have been asked to display established tariff route-wise and fare category-wise on monthly basis and also to notify noticeable changes to the Directorate General of Civil Aviation (DGCA) within 24 hours of affecting such a change. The intention behind the above directions is to keep the passengers informed of pricing patterns of airlines. Further, the DGCA also monitors tariff on specific sectors on regular basis," Singh explained in the Parliament.

Currently, Indian carriers are restricted to fix the prices of their tickets for a particular route as per the prescribed band, which depends on various factors. For instance, the airlines can hike the fare for a ticket from Delhi to Mumbai by up to Rs 22,000. At present, a traveller has to pay anywhere between Rs 8,000 and Rs 15,000 for a ticket on this route.

Jet would be better bet for Etihad

Etihad is set to gain the most if it strikes a deal with Naresh Goyal's Jet Airways and not with Vijay Mallya's Kingfisher Airlines (KFA), says aviation experts. They say that even though Etihad will gain a minority stake in Jet Airways, it will benefit immensely by the vast market share that the Indian carrier enjoys in the industry.

"The Abu Dhabi based Etihad Airways will be in a win-win situation since Jet Airways is in the running despite the losses and still enjoys a massive 24% market share in the domestic market in India," said an industry expert requesting anonymity.

Analysts suggested that even though the almost defunct Kingfisher Airlines offers 49% shareholding which will give a substantial amount of management control to the Middle-Eastern airline, the deal will cost Etihad a lot of work as it will have to start from the scratch.

"KFA is reeling under a debt of Rs 8,000 cr and has accumulated losses of over Rs 10,000 cr. Its operating licence has been suspended till the time it does not submit a comprehensive revival plan. If Etihad enters into a deal with this carrier, it will have to infuse Rs 3,000 cr and will get a considerable part of the debt as liabilities," said Jitendra Bhargava, an aviation expert.

The cash strapped carrier reported a net loss of Rs 754 cr in the second quarter of the current calendar year and has negligible market share due to frequent strikes and cancellations of flights.

On the other hand, the deal with Goyal's Jet Airways is valued between Rs 1,600 cr and Rs 2,200 cr. The deal includes a 65% premium from its current price has been demanded by Jet Airways. This, in turn means that the Gulf carrier Etihad Airways will have to shell out close to Rs 1,634 cr in order to gain a 24% stake in the company.

The immediate benefit that Etihad derives from the deal, if it is sealed, is the expansion of bilateral capacity, which allows it to get more Indian passengers in Abu Dhabi.

"Under the current system of bilateral capacity, Etihad's rivals Emirates and Qatar Airways are granted more capacity and frequencies into India thanks to the Organisation and Destination targeting system. With this deal, Etihad can leverage the vast network that the domestic carrier enjoys," said aviation expert Vinay Bhaskara.

Aviation sector doesn’t need Ajit’s committee

The decision taken by the Prime Minister's Office (PMO) to put on hold Civil Aviation Minister Ajit Singh's newly formed Aircraft Acquisition Committee (AAC) has been praised by industry experts.

The industry analysts said that the changes made by the minister in the committee promotes red tape in the process of acquiring aircrafts and hence creating more barriers in the growth of the industry. The PMO took the decision after it received the complaint that the Committee would delay the acquisition procedure of an aircraft and promote licence raj.

"I do not think that the new AAC constituted by the minister is adding any value to the entire procedure, rather it will only promote red tape in an already over regulated airline industry," said aviation expert Devesh Agarwal.

He explained that the aviation industry in India is already over-regulated unlike in other countries and the Association formed for recommending the purchase of aircraft would mean a delay in the procedure of importing the aircraft.

"An airline's request for purchasing an aircraft is entirely a company decision. So what is the need for the government to intervene in a company's decision apart from giving an approval?" asked Agarwal.

The report on the newly constituted committee clearly states that the AAC will first examine the applications and proposals in terms of air transport capacity required to meet air traffic demand, as well as the safety, security, and financial and commercial aspects.

An industry expert, who did not wish to be named, said, "Airlines are already facing a difficult situation, therefore, they would have considered the financial, commercial and all other aspects of adding an aircraft before taking the decision of importing one. So why does the ministry have to add such unnecessary conditions?"

The ministry had also stated in the document that the committee would consider 10 to 12 proposals in one meeting. "To scrutinize the proposal properly, it would be appropriate not to consider more than 10 to 12 proposals in one meeting of the AAC," stated the report.

Analysts fear that this will not only delay the acquisition period for the airline but would also promote favouritism while granting an approval. "Earlier, the committee would take up several proposals for approval in a meeting, however, if the changes in the committee are implemented, then, it may happen that an application of an airline may be conveniently axed if it is not in the good books of the committee or even the members of the ministry as they are the final authority to grant an approval," said another expert who requested anonymity.

According to the report, the committee is also empowered to cancel an approval if there is a delay in the induction of the aircraft on the specified route within the time period indicated by the airline while getting the approval from the committee. "This condition is absolutely not required as the induction of the new aircraft can get delayed for various reasons including financial negotiations or delay in completing the legalities," said the expert.

The committee, however, allows an airline to re-apply and go through the entire procedure of seeking an approval if financial transactions have been made. "However, where the airline has made financial transactions on the basis of 'in-principle' approval, it may apply for re-instatement of its 'in-principle' approval together with substantiating documents."

Rs 80k cr is airline industry’s total debt

The ailing airline industry accumulated a total debt of Rs 80,000 crore in 2011, says an internal report by the State Bank of India. This has been attributed to an increase in input costs, congestion, and high competition in a time of economic slowdown.
"The Indian airline companies are under huge debt. The combined airline debt stands around Rs 80,000 crore," the State Bank of India (SBI) has stated.

According to SBI's records, the largest public sector bank in the country registered a 5% increase in its exposure to the aviation industry. The bank, which has given loans to three of the biggest loss-making carriers in the country — Kingfisher, Jet and Air India — had an exposure of Rs 6,091 crore last year, as against Rs 5,799 crore in 2010.

The public sector bank has granted loans to Paramount Airways, Deccan Cargo & Express Logistics, Maritime Energy Heli Air Services and Jagson Airlines as well.

It is important to note that the bank has a maximum exposure to carriers that have been rated between borderline risk (SB-11) and pre-default risk (SB 15, which means the carrier is vulnerable to default). So this means that the bank has granted loans to airlines that are in critical shape financially.

"The increase in the share of the total exposure in the SB 11-15 rating band from 70% in March 2010 to 95% in June 2011 is due to the down gradation of rating of Kingfisher Airlines from SB 08 (average risk) to SB 15," the report suggested.

The bank has a total exposure of Rs 1,961 crore to cash strapped Kingfisher, which is currently on ventilator, with Rs 1,596 crore as loans and advances and an investment of Rs 365 crore in form of equity. The bank has reduced the rating of the airline from being an average risk to becoming a defaulter in its report.

The bank has given loans worth Rs 1,898 crore to Jet Airways India Ltd and just Rs 2 crore investments in form of equity. The total exposure of SBI to Jet Airways, excluding JetLite, is Rs 1,900 crore. JetLite, on the other hand, has been granted a loan of Rs 269 crore.

The third largest borrower of the bank is national carrier Air India, which has been given a loan of Rs 1,651 crore. The Paramount Airways account has been declared as a non-performing asset, thus resulting in a loss of Rs 87 crore.