Connectivity levy of 2% to add $350 million a year to costs of Indian airlines: IATA

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Mumbai: The proposed 2% regional connectivity fund levy is going to add an estimated $350 million a year to additional costs for airlines in India, warns lobby group International Air Transport Association (IATA).

IATA, which represents around 260 airlines comprising 83% of global air traffic, said the 2% levy proposed in the draft national civil aviation policy to promote regional connectivity is likely to add a huge burden to the industry in India.

“It’s already a very expensive place to operate… by putting this regional connectivity fund levy, it’s going to add something like $350 million a year further to additional costs for airlines in India,” said Tony Tyler, director general, IATA, in an interview.

To be sure, the government is yet to approve the draft national civil aviation policy that proposes to impose the said levy to provide viability gap funding for airlines for regional connectivity and various tax sops and setting up of no-frills airports.

“And rest assured, in the end, it’s the airlines who are going to pay. Because of the competitive market, fares are set in the market, the amount the passenger pays is set in the market. So it’s going to be a real drain and a financial strain on the airlines in India,” Tyler said.

The civil aviation ministry expects to implement the aviation policy by the beginning of the next fiscal year, after the cabinet approves it at the end of the month.

IATA forecast that India will be the third largest aviation market in the world within 10 years.

Meanwhile, the draft civil aviation policy has seen strong reactions and lobbying from older airlines like IndiGo (InterGlobe Aviation Ltd), Jet Airways (India) Ltd, SpiceJet Ltd, GoAir and new entrants like Vistara and AirAsia. The newer airlines want a relaxation in the policy, allowing them to fly abroad, while the older airlines say this should not be allowed.

The aviation ministry is expected to take decisions on the controversial 5/20 rule in the policy. The rule says an airline needs to fly five years in the domestic market and have a fleet of 20 aircraft before it can fly abroad.

Tyler said he has two other concerns on the draft civil aviation policy, besides levy. He pointed out the issue about the proposed auctioning of traffic rights and the proposal to use dual- or multiple-till philosophy (to determine charges) at Indian airports.

“I have never heard of the auctioning for traffic rights before. This is something that no country does. They don’t do it for very good reasons. If you auction traffic rights the consequences will be very hard to predict,” Tyler cautioned.

“One of them I feel would be the concentrating of the market in a few powerful hands. After all the only people who will be able to afford to buy traffic rights will be the ones who are making lots of money already. So I think it could be a very anti-competitive move and it’s something that is really unprecedented in world aviation,” he said.

Referring to the hybrid-till approach, Tyler said airport regulation is a very complicated issue which involves a lot of factors including the rate of return, the sort of till that the country wants to use and the amount of investment required.

In the single-till model, all airport activities—aeronautical and non-aeronautical—are taken into account to determine airport charges. So airlines and passengers are charged less. This model, currently followed at the Hyderabad airport, is also followed in UK airports such as Heathrow and Gatwick. In contrast, only aeronautical activities are considered under the dual-till model, which private airport operators prefer since it will fetch them higher revenue. Under the hybrid model, 70% of non-aeronautical revenues are also taken into account. This is the tariff model proposed for the upcoming Navi Mumbai airport. The privatized airports in Delhi and Mumbai also operate under the hybrid-till model.

Airports earn non-aeronautical revenues such as rentals from retail outlets and airport parking charges, besides aeronautical revenues from flight operations.

“There are a lot of different elements in there and its wrong to just take one of them and regulate. Aera (Airports Economic Regulatory Authority of India) is the one who should determine what sort of till should be used. Putting it into law and regulation through the civil aviation policy is the wrong approach. Aera and the ministry of finance itself both support a single-till approach which is certainly the one that IATA believes is the correct way to move forward in this area,” Tyler said.