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Indian Aviation Industry in High Spirits

Excessive lobbying by major domestic carriers like Kingfisher Airlines and GoAir urging the Government of India to allow Foreign Direct Investment (“FDI”) by foreign airlines has finally borne fruit. The Ministry of Civil Aviation has reportedly forwarded its recommendations to the Department of Industrial Promotion and Policy, Ministry of Commerce, Government of India (“DIPP”) which is in the process of formulating a Cabinet note allowing upto 49% FDI in domestic airlines by foreign airlines via the Foreign Investment Promotion Board (“FIPB”) approval route.

The present FDI Policy permits foreign investors, other than foreign airlines and NRIs, to invest upto 49% in the domestic airlines under the automatic route. Foreign airlines are permitted to invest in cargo airlines, helicopters and seaplane services upto 74% (upto 49% under the automatic route and upto 74% with prior approval). NRIs are however permitted to invest upto 100% in domestic airlines, cargo airlines, helicopters and seaplane services.

Although the Government has agreed to consider permitting foreign airlines invest in India, the Government still has concerns regarding national security and has therefore, proposed that the foreign airlines will need prior clearance from the security committee of the Home Ministry in addition to the FIPB approval. The Government’s main security concerns, it appears, linger around the ground handling services and therefore, stringent terms and conditions may be imposed in this regard. Consequently, the security clearance as well is most likely to be associated with ground handling services which include, inter alia, check-in, baggage handling, cargo handling, aircraft cleaning, loading and unloading of food & beverages on aircraft, providing back-up electricity to aircrafts while they are at the airports, and ferrying passengers to and fro from the aircrafts.

Furthermore, the Ministry of Civil Aviation has also sent out a letter on February 15, 2012 to the Ministry of Commerce requesting it to take steps to allow direct import of Air Turbine Fuel (“ATF”) by domestic carriers in pursuance to the decision taken by the Group of Ministers on Civil Aviation in their meeting of February 7, 2012. The Minister of Civil Aviation has also simultaneously urged the Chief Ministers of all states to reduce the sales tax on ATF, which varies from 4% to 30% as of date but did not get favourable response in most cases. The move has come in light of the fact that ATF prices in India are 30% to 40% more than the prices in international market due to higher base price as well as taxes. Interestingly, while the revenue to the Government generated from the sales tax on ATF ranges from 0.5% to 2%, for the airlines it forms almost 40% of their operational costs.

The Government, it appears is frantically endeavouring to rescue the country’s aviation industry from its excessive cash deficit and inefficient restructuring. In any case, both the above moves by the Government have been warmly welcomed by the industry.