What if '5/20' rule goes tomorrow?

VT-TTB, the first A320 aircraft of Vistara at Delhi Airport.

The so called '5/20' rule which restricts Indian airlines with less than 5 years of domestic flying experience and a fleet size of less than 20 from flying on international routes, was introduced in 2004, close to the arrival of low-cost carriers (LCC) in India. It was meant to protect the then incumbent players like Air India, Air Sahara, Jet Airways from the potential competition from new entrants like Air Deccan, Kingfisher Airlines, SpiceJet and others. On October 30, the Ministry of civil aviation (MoCA), the nodal ministry on aviation has released a draft policy called 'National civil aviation policy 2015' (NCAP 2015). And the MoCA is expected to come up with the final aviation policy by the year end. One of the proposals on the draft policy includes revision of '5/20' rule, either partial or complete removal of it. Federation of Indian Airlines (FIA), the lobbying group consisting Jet Airways, SpiceJet, IndiGo and GoAir, is actively opposing any relaxation in the '5/20' rule.

IndiGo, the largest carrier in terns of passenger carried is also by far most insulated from the '5/20' decision. As it operates only 30 international flights a day in comparison to more than 650 daily flights across its network of 34 domestic and 5 international destinations. Although it openly opposes any relaxation in '5/20' rule in the past, IndiGo President, Aditya Ghosh in an interview with TV-18 network said he is "agnostic" to it. As IndiGo as it is waiting for the delivery of 430 odd A320NEOs on order, likely to focus heavily on the domestic market in the next few years. In 2015, Indian domestic aviation market became the fastest growing market with 20% year-on-year growth. IndiGo is likely to stay away from actively opposing it as it helps it otherwise also. With '5/20' rule gone AirAsia India, IndiGo's potential rival in the domestic market will then divert capacity away from Indian domestic market and put them on international routes, leaving IndiGo with a clear ground. So it would be most rational step for IndiGo not to oppose '5/20' relaxation.  

SpiceJet, although its share of international flights in the overall daily departures is more than that of IndiGo. But SpiceJet has only 12,411 weekly departing seats as of August 2015. It currently serve 6 international destinations in a network of 40 cities. Although SpiceJet is a FIA member and opposing any changes in '5/20' rule but it is unlikely to get affected much as it has only limited international operations. And currently it focuses on gaining back its mid-2014 level market share when for the first time it became India's third largest airline by market share beating Air India at the fourth positing. The ex-CCO Sanjiv Kapoor was a vocal opponent of '5/20' relaxation but he is expected to re-adjust his line as he changes side from a incumbent LCC to a new FSC (Vistara).

GoAir, the 10 years old airline which has a fleet of 19 aircraft has suffered the most as it is barred from flying on international routes only because it lacks just 1 aircraft to satisfy the '5/20' rule. Although one can question its desire to fly on international routes as it could have easily arrange one more aircraft to become eligible as per '5/20'. As the aviation minister Ashok Gajapathi Raju has said if someone get ragged in college it doesn't make it a custom which all of his/her juniors have to go through. GoAir should indeed welcome liberalization and complete removal of '5/20' as soon as possible as it will make GoAir eligible too.

Air India, the national carrier and the airline with maximum international exposure ranked second in terms of international seat capacity with 72.951 weekly departing seats as of August 2015. Air India which is no longer in the FIA, but follow the FIA line to oppose any kind of relaxation (partial or complete) of '5/20' rule. Being a network carrier it serves both short-haul and long-haul routes using a mixed fleet of narrow and wide-body aircraft. Being a Govt run entity, the airline is infamous for its inefficiencies and bureaucratic interference, currently it is surviving on a Govt bail-out package (30,000 Cr  Rs over 7 years). Air India has its primary hub at Delhi Airport which also hubs Vistara (both FSC) therefore any major international expansion by Vistara likely to affect Air India the most. But that will be the case even in 2020 when Vistara will officially become eligible as per present '5/20' rule. Protectionism has long been practiced in India and yield no real good for the country. Govt. is subsidizing Air India in order to maintain a stable air-connectivity between India and the rest of world, so if Vistara, AirAsia India or some other new airlines grow big and able to serve the same purpose then there would be no need of subsidy anymore.

Jet Airways, currently the largest Indian airline by fleet size and also in terms of international seat-capacity with 88,082 weekly departing seats as of August 2015. Around two third of its operating revenue comes from its international operations. Interestingly a lion-share of Jet's international services are short-haul and operated by its Boeing 737 family fleet, mostly to Middle-East and SAARC countries. Since the 2011 global economic crisis Jet Airways has significantly scaled down its long-haul international flights and as many as 10 wide-body aircraft were given on lease to other airlines. Even with favorable conditions now, it is unwilling to resume those flights anytime soon. And with Etihad taking 24% stake in Jet in 2012, slowly the airline halted its own growth to Europe and North America and indeed started feeding Etihad's network with multiple India-Abu Dhabi flights even from secondary Indian cities. Jet Airways currently connects 10 Indian city with Abu Dhabi with direct flights.

Jet Airways, the only private airline (currently operating) which did not undergo the '5/20' restriction and in fact benefited from it in the initial years, therefore its opposition to the proposed '5/20' relaxation should not be taken seriously. Most of its international routes are profitable and helping it recovery in its grand turn-around plan by 2018. Therefore Jet Airways is opposing hard on '5/20' relaxation and trying to resist competition from Vistara (FSC rival), as long as possible.

No. of weekly departing international seats as per August 2015 data

Vistara, which positioned itself as a premium full-service carrier suitable for long-haul inter-continental flights will have long waiting time before it can actually fly to Europe or North America from India. It will have a fleet of 9 A320 aircraft by the year end and has plans to add 4 more A320s by early 2016, the 7 A320NEO on order to come during 2017-18. Vistara's chief commercial officer, Mr. Giamming Toh had indicated in the past that it could take anything from 12 to 18 months to arrange wide-body fleet before flying to long-haul destinations. So if Govt. suddenly relaxes the rule, Vistara will initially have to content with flying on short-haul routes with its A320 (wl) fleet. The current generation of A320 (current engine option) aircraft has a maximum range of 3,300 nm or 6,100 km (wl: winglets version), although the A320NEO will have an extended range of 3,700 nm or 6,900 km. Within this much range accessible, it can only operate flights to South Asia, Southeast Asia, Persian-Gulf and parts of western China. Given the small size size of fleet and the already established domestic network, it is expected that Vistara will initially have very limited capacity left for international flights other than late-night or early morning hours. Then it has an option of dry-leasing more narrow-body aircraft from third party lessors but that too going to take time specially with Vistara's 3-class cabin configuration.

Lets look at Singapore Airlines (SIA), one of Vistara parent. It has 63 Airbus A350 on order with scheduled delivery to start in early 2016. Firstly, the A350s are replacement aircraft for SIA's fleet of 25 old Boeing B777-200 (average age: 13 years). And the old B772s likely to go for scrapping and it is highly unlikely that Vistara will utilize those old aircraft. Secondly, if SIA diverts some of the brand new A350s on order to Vistara. But SIA has already announced its initial A350 schedule with flights to Dusseldorf, Amsterdam and others in 2016. So even if SIA agrees, Vistara would not get any of A350s anytime soon in 2016. As already mentioned dry-leasing aircraft from a third party lessor will take at least 12-18 month's time.

AirAsia India, which has a small fleet of 6 A320 aircraft after 17 months of operations, was initially planned to have a fleet of 25-30 A320 aircraft by the end of 2015. But the airline management said it has halted the growth plan as it is waiting for the MoCA to clarify the policy on the international flights. AirAsia India is an affiliate to Malaysia based AirAsia bhd. and the later has 49% stake in the former. 5 of its 6 aircraft are ex-AirAsia group. Currently AirAsia group has total 188 A320 aircraft operating in different airlines under the group and has 341 aircraft of A320 family on order including 300 A320NEOs. AirAsia India, being a LCC use only single type of narrow-body aircraft. And it is arguably in a better position to arrange more narrow-body aircraft in a shorter time to fuel its international expansion. But Bangalore-Kempegowda International Airport used to be its soul hub in India but since June 2015 it opens a second hub at Delhi Indira Gandhi International Airport. Now it will be interesting to see AirAsia India preferes Delhi or Bangalore for launching its initial international operation. AirAsia India is widely expected to connect Indian cities with major hub airports in Southeast Asia specially Kuala Lampur. Although recently the managing director Mittu Chandilya has signaled that his airline willing to fly on virgin international routes, or the routes no airline is operating currently. And he mentioned countries like Myanmar, Cambodia as potential destinations.

Given its earlier expansion plan was never realized and the current fleet is significantly smaller than what was initially planned. It is unlikely that AirAsia India would be able to deploy a huge capacity on the international sector by 2016. As it will not be an easy task to develop a network either from Bangalore or Delhi in a short time as it was portrayed before. Given the slow pace of growth of its current fleet, one can doubt its capability to lease dozens of aircraft in a short time as its fellow AirAsia group members also have limited fleet size and have their own growth plan.

Conclusion

So, even if MoCA completely removes the present '5/20' rule in the final civil aviation policy (NCAP 2015), 'heaven will not fall' as described above for the incumbent airlines specially the impact will be much less in the near future. Over the longer term, MoCA can't anyway restrict them from flying on international routes. There is absolutely no need of knee-jerk reactions and pushing the panic buttons as aviation industry is expected have a good time at least in the next few years with favorable oil prices and high growth of passenger traffic. In fact, it is better to let have them fly international now, starting with a much smaller scale allowing old players to re-adjust to the market forces. And for any airline which like to focuses more on the domestic market, like IndiGo & GoAir, it will be a bonanza as AirAsia India will have less capacity available for domestic growth. Currently Indian carriers all together utilize close to 57% of their international entitlements while foreign carriers operate more than double the seats than what all Indian carriers together operate out of India. With '5/20' rule gone more Indian airlines will be able to fly on international routes and utilize their entitlements although the situation is not expected to change over a years time but it will improve with time as more Indian players will fly interntaional even from their very first year of operation. And for long term development of an aviation hub in India, it will be important to have a good network-carrier in Delhi. And with SIA and Tata group parentage Vistara signals such a potential in the long run.

Note:

I have not included Air India Express in this discussion.