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NALSAR UNIVERSITY OF LAW

TOPIC- GLOBALISATION IN AVIATION SECTOR

SUBMITTED BY-POONAM KATOCH

LLM (3ST SEM), ROLL NO-30

SUBMITTED TO- MR . SHAIK NAZIM AHMED SHAFI

AKNOWLEDGEMENT

I would like to express my sincere gratitude to Prof. Mr.Shaik Nazim Ahmed Shafi NALSAR University of Law, Hyderabad and owe my foremost regards to him for giving me an opportunity to carry out this project work under his guidance. This work would not have been possible without his invaluable support and thought provoking comments. It is due to his patient guidance that I have been able to complete the task. I also extend my gratitude to the Librarian and the Library staff who made available the required materials within time. I am indebted to all those who guided me while doing the research work. Their valuable contributions have played a vital role in the completion of this project. Though I have tried out best at the same time I know that there is nothing called perfection so I would like to have all valuable suggestions for future I dedicate this project to all the people who believe that hard work and creativity needs protection and encouragement. Poonam Katoch, LLM 3rd sem NALSAR Universty of Law, Hyderabad.

CONTENTS

1. INTRODUCTION 2. HISTORY OF CIVIL AVIATION IN INDIA 3. OPEN SKY POLICY 4. NEED OF OPEN SKY POLICY 5. OPEN SKY POLICY IN INDIA A CRITICAL ANALYSIS 6. AVIATION GROWTH AFTER OPEN SKY POLICY 7. FACTORS AFFECTING THE AVIATION SECTOR OF INDIA 8. BILATERAL TREATIES 9. THE INDIAN AVIATION INDUSTRY :CHALLENGES 10.GLOBALISATION OF AVIATION 11.GLOBALISATION REGULATION 12.FDI IN AVIATION 13.FDI IN AVIATION: WHY NOT ALLOW FOREIGN AIRLINES TO FULLY OWN INDIAN CARRIERS 14.SOCIAL IMPACT OF GLOBALIZING AIR TRANSPORT: INDIAN SENARIO

GLOBALISATION AND AVIATION INDUSTRY OF INDIA

Globalization, in its most literal sense, is the process of making, transformation of things or phenomena into global ones. It can be described abstractly as a process by which the people of the world are unified into a single society and function together. This process is a combination of economic, technological, socio-cultural, and political forces. The idea of globalization is, however, also often used to refer in the narrower sense of economic globalization involving integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. Here much, but not all, of the focus is on the narrower perspective, although clearly the increase in mobility and personal interchanges that air transport facilitates has broader socio-cultural and political implications. 1.Introduction Aviation industry remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries. Airlines have recognized the need for radical change to survive and prosper. The new trends emerging in the aviation industry in a global scenario are the increased globalization of economies, liberalization of aviation policies, new technological developments in civil aviation, privatization of airlines and airports and liberal and open skies bilateral agreements. A number of factors are forcing airlines to become more efficient. The liberalization of international air transport regulation continued to evolve at various levels since 1980s. Bilateral air services agreements remain the primary vehicle for liberalizing international air services for most States. Most of the international air services operate under bilateral or regional regimes, the International Air Services Transit Agreement (IASTA) provides for the multilateral exchange of rights of over flight and non-traffic stops for scheduled air services among its Contracting States. The agreement is entered in 1945 and is a cornerstone of multilateralism in air transport.

There has been an attempt to liberalize air transport services through the multilateral trading mechanism under the World Trade Organization (WTO) through the General Agreement on Trade in Services (GATS). With the liberalization trend competition and consumer protection issues are coming into consideration, and many States have already adopted the relevant laws.

Also privatization of government-owned airlines has been one of the pre-eminent transformations in air transport. The motives for privatization vary from purely economic, improving operating efficiency and competitiveness, to a more pragmatic desire to reduce the heavy financial burden for governments for financing capital investment in new equipment. Whatever the reason, the privatization of government-owned airlines has accompanied a more commercially oriented outlook within a liberalized competitive environment. In Europe, the European Union (EU) has ruled that governments should not be allowed to subsidize their loss-making airlines. Elsewhere too, governments' have led to a gradual transfer of ownership of airlines from the state to the private sector. In order to appeal to prospective shareholders, the airlines have to become more efficient and competitive. Deregulation is also stimulating competition. The US led the way in 1978 and Europe is following suit. The EU's final stage of deregulation took effect in April 1997, allowing an airline from one member state to fly passengers within another member's domestic market. Beyond Europe too, 'open skies' agreements are beginning to dismantle some of the regulations governing which carriers can fly on certain routes. Nevertheless, the aviation industry is characterized by strong nationalist sentiments towards domestic 'flag carriers'. In many parts of the world, airlines will therefore continue to face limitations on where they can fly and restrictions on their ownership of foreign carriers. Despite this, the airline industry has proceeded along the path towards globalization and consolidation, characteristics associated with the normal development of many other industries. It has done this through the establishment of alliances and partnerships between airlines, linking their networks to expand access to their customers. Hundreds of airlines have entered into alliances, ranging from marketing agreements and code-shares to franchises and equity transfers, this is in response to the regulatory constraints (such as bilateral restrictions on market access, ownership and control), a need to reduce the cost, and economic incentives to restructure into larger networks as markets become more competitive. Successful airlines will be those that continue to tackle their costs and improve their products, thereby securing a strong presence in the key world aviation markets.

The impacts of globalization on national and international policy making processes are illustrated by an examination of the effects on air transport industries. Trends towards the liberalization of air transport activities have been noted in many countries, mainly, to date, those of developed or rapidly developing status. Specific demand and supply conditions affect the air transport industries, and a particular regulatory framework has grown up since the 1940s. The study examines trends towards the privatization of airline companies in the context of : (a) The development of so-called global 'alliances' or 'partnerships' and (b) Liberalization at regional level and within trade groups such as the European Union. The new challenges of the General Agreement on Trade in Services (GATS) are considered, especially in terms of how developing countries can develop appropriate policies in response to the forces of globalization, increasing liberalization and competition.

2. HISTORY OF INDIAN CIVIL AVIATION

The first commercial flight in India was made on February 18, 1911, when a French pilot Monseigneur Piguet flew airmails from Allahabad to Naini, covering a distance of about 10 km in as many minutes. Tata Services became Tata Airlines and then Air-India and spread its wings as Air-India International. The domestic aviation scene, however, was chaotic. When the American Tenth Air Force in India disposed of its planes at throwaway prices, 11 domestic airlines sprang up, scrambling for traffic that could sustain only two or three. In 1953, the government nationalized the airlines, merged them, and created Indian Airlines. For the next 25 years JRD Tata remained the chairman of Air-India and a director on the board of Indian Airlines. After JRD left, voracious unions mushroomed, spawned on the pork barrel jobs created by politicians. In recent years, however, this image of Civil Aviation has undergone a change and aviation is now viewed in a different light - as an essential link not only for international travel and trade but also for providing connectivity to different parts of the country. Aviation is, by its very nature, a critical part of the infrastructure of the country and has important ramifications for the development of tourism and trade, the opening up of inaccessible areas of the country and for providing stimulus to business activity and economic growth.

Until less than a decade ago, all aspects of aviation were firmly controlled by the Government. In the early fifties, all airlines operating in the country were merged into either Indian Airlines or Air India and, by virtue of the Air Corporations Act, 1953; this monopoly was perpetuated for the next forty years. The Directorate General of Civil Aviation controlled every aspect of flying including granting flying licenses, pilots, certifying aircrafts for flight and issuing all rules and procedures governing Indian airports and airspace. Finally, the Airports Authority of India was entrusted with the responsibility of managing all national and international air ports and administering every aspect of air transport operation through the Air Traffic Control. With the opening up of the Indian economy in the early Nineties, aviation saw some important changes. Most importantly, the Air Corporation Act was repealed to end the monopoly of the public sector and private airlines were reintroduced.

3. OPEN SKY POLICIES

At the outset we must point out that the concept of 'Open Skies' is much misunderstood in its meaning and implications. Strictly speaking Open Skies means unrestricted access by any carrier into the sovereign territory of a country without any written agreement specifying capacity, ports of call or schedule of services. In other words an Open Skies policy would allow the foreign airline of any country or ownership to land at any port on any number of occasions and with unlimited seat capacity. There would be no restriction on the type of aircraft used, no demand for certification, no regularity of service and no need to specify at which airports they would land. Defined in this manner, it is not surprising that Open Skies policies are adopted only by a handful of countries, most commonly those that have no national carriers of their own and that have only one or two airports. No sovereign country of any eminence practices Open Skies least of all the European Union, UK, USA, Japan, Australia or countries in South East Asia.

4.NEED FOR OPEN SKY POLICY

A recurring demand often voiced by interested parties is that, in order to

promote Travel & Tourism, India should adopt an Open Skies policy. It is argued that the current policy restricts the access of foreign airlines. As a result potential tourists are not offered a choice of airlines or seats when travelling to India. This problem is exacerbated during the holiday season when it is difficult, if not impossible, to get a seat either into the

country or out of it. It is argued, therefore, that India should adopt an Open Skies approach to any foreign carrier wanting to fly into India, which literally means allowing them unlimited service, capacity and points of call

5. Open Sky Policy In India A Critical Analysis

At the time of independence, eight airlines were operational in India. With an attempt to further strengthen the base of the aviation sector in India the govt. of India together with Tata Airlines formed Air India. The soaring prices of aviation fuel, mounting salary bills & disproportionately large fleet took a heavy toll on the financial health of companies. The government settled up the Air Traffic Enquiry Committee in 1950 to look into the problems of the airline. By the Air Corporation Act of 1953 the govt. of India nationalized nine airline companies. This Act established the Indian Airlines (IAC) to cater domestic air travel passengers & Air India International (AI) for international air travel passengers. This Act ensured that IAC & AI had a monopoly over the Indian Skies. A third government- owned airline Vayudoot which provided feeder services with small aircrafts & letter merged with IAC in 1994. This govt. owned airlines dominated Indian Aviation Industry till mid 1990s. Capt. Rajiv Gandhi pilot himself contemplated the open skies policy that was put into practice in 1993 by adopting the OPEN SKY POLICY the govt. of India allowed air taxi operators to operate flights from any airport both on a charter & non-charter services & decided their own flight schedules cargo & passengers fare. The operators were however required to use aircraft with a minimum seats & conformed to the prescribed rules. In 1994 the Indian govt. as a part of open sky policy ended the monopoly with the Air Corporation Act 1994. After opening the sky by 1995 several private airlines had ventured into the aviation business & accounted more than 10% of the domestic traffic. In 1996 private air taxi operators carried 49.08 lakh passengers which amounted to a 41.14% share of domestic traffic. In recent past Indian civil aviation sector has grown manifold. Though some airlines have closed down & some of them have merged with other airlines, several new players have entered the industry & many more about to enter in the field thereby providing more choices to the passengers. Today

air travel is no more the monopoly of the rich. With the launch of LCC in India air travelling has become simpler & cheaper. Private players like Kingfisher Red, Jetlite, Indigo etc are coming up with attractive rates for their passengers. Now airline has become a common mans travelling means. The airline adding more & more cities to their list of destinations covered throughout the country. It can be summarized that India has made travelling easier for the masses.

6. Aviation Growth After Open Sky Policy

The Indian civil aviation sector is witnessing a passenger growth of 20% annually for domestic sector & 15% on international sector. There has been dramatic increase in no. of aircraft from 212 in 2002 to 345 in 2012 expected to increase at the same rate in near future already 412 aircraft are under order from various airlines. As per earlier civil aviation minister Mr. Patel presently only 0.8% of Indian population travel by air which is expected to grow at more faster rate in future due to higher GDP growth. For example, for 10% of Indian population to travel by air we require 5000 aircraft. The international sector has also been opened to carriers having minimum of 20 aircrafts & 5 years of experience in domestic sector which made eligible to fly international for Kingfisher, Jet Air, and Spice Jet & making eligible shortly to Indigo & Go airlines. There is view among the business community that infrastructure constraints are hampering the faster growth in aviation sector. A second revolution appears to be necessary & urgent requirement. A liberal fresh approach in attracting capital in aviation infrastructure sector is required.

7.Factors Affecting The Aviation Sector Of India

After open sky policy is launched in last few years aviation industry saw a downward trajectory largely due to the following reasons: Defective business model of LCC which opened the sky for the average traveller, the revenue model adopted by Indian LCC 15 market share driven rather than bottom line based. The aviation industry suffered a loss of more than 4000 crore in fiscal year 2007-2008. In order to

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grab the market share LCC started selling tickets at a price below cost incurred. But realizing the threat & after mergers the ticket price stabilized & airline balance sheet is showing operating profit but still loss of earlier years is effecting their balance sheet& now traffic is increasing & airline are adding more aircraft but they should avoid overcapacity in the market. The other factors affecting the health of the aviation industry is landing charges, ground overheads & govt. taxation. These are in addition to cost of borrowing the necessary capital for purchasing/ leasing aircrafts. Research of the domestic aircraft shows that more than 50% of the revenue collected on airline operations in India goes to the govt. this is all in addition to the cost of capital, maintenance & insurance, manpower, marketing & distribution. To do this the economics of airline operations should be rationally examined & corrective measure taken to help the industry. One of the critical stumbling blocks to the growth of travel & tourism in India is the high cost of domestic flights; it is cheaper to fly to another country from India than to fly within the country. This affects both the domestic & international travellers. Based on the international comparisons, there costs are at least 50% higher making the industry unviable especially on short haul operations. However with the adoption of the policy of liberalization & open sky policy in India, Indian govt. by allowing private companies to operate air taxies brought a revolution in the Indian aviation because of competition among the private operators the air travel has become more affordable to the common people. While the national airline in India is incurring huge losses & seeking tax payers money to run it, it is high time that the govt. should withdraw themselves from aviation business like some other countries & allow the private companies to operate the air travel with necessary regulations. As the Indian aviation industry has faced a no. of challenges & availed many opportunities during the past century future seems to be bright with passenger traffic estimated to grow at CAGR of over 15% in coming future years. The ministry of civil aviation would handle around 280 million passengers by 2020 which requires 110 billion US dollars for development of infrastructure & purchase of new aircrafts. Exactly after 100 years of civil aviation launch in India the aviation industry has been growing in rapidly except for 2-3 years of negative growth due to recession & other world problems. Aviation industry has a bright future in India.

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8.BilateralTreaties
However, almost 99 per cent of Members of the International Civil Aviation Organization (ICAO) follow the system of negotiated bilateral treaties determining the aviation relations between two sovereign Contracting parties. In fact, the bilateral aviation regime is considered the fundamental basis for a disciplined and regulated aviation system between the nations of the world. It provides not only regularity of operations through scheduled services but also stipulates the basis of ownership, number of seats to be utilized, type and certification of aircraft and visiting ports of call. The Bilateral Agreements also protect the different kinds of aviation Freedoms granted to contracting parties by specifying the reciprocal rights to be enjoyed by each.

Indian Bilateral Treaties

India has signed over 180 Bilateral Agreements with different countries. In 2002 the total number of seats available was 38.09 million. Of this, the capacity operated was approximately 19.174 million seats. Since the average size of traffic to and from the country is slightly in excess of approximately 14 million passengers, normally the contracted rights should suffice the traffic demand.

Utilization of Bilateral Treaty Contracts

It is in the actual utilization of the contracted seats that the problem arises. Of the contracted amount, 50 per cent are to be utilized by the national carrier and 50 per cent by the airline owned by the contracting country. However, whilst the foreign carriers are in a position to use over 70 per cent of their entitlement, the national carrier is only able to utilize 29.4 per cent of their share. It is this shortfall that creates pressure on seats, particularly during peak tourism national carriers do not have sufficient aircrafts to be able to utilize the bilateral rights available to the country and enter into commercial and code sharing arrangements to maximize revenue. Whilst this does improve their profitability in the short run, it has a long-term adverse effect in that it deprives the country of much needed air bridges to bring in tourists and carry trade.

Under the present bilateral system, the utilization of the traffic rights on international routes to and from India, as negotiated by the Government of India, is restricted to the two Government

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owned 'national' carriers - namely Air India and Indian Airlines and either or both these carriers are the Indian designated carriers under the various Air services Agreements. The Operating Permits restrict the privately owned carriers, such as Jet Airways and Air Sahara, to operate only domestic routes within India.1

9. The Indian Aviation Industry Challenges

Infrastructural woes : With infrastructure constraints one of the biggest obstacles in the growth of Indian civil aviation, a good deal has already been invested in airport development. The Indian Civil Aviation Ministrys Vision 2020 plan stresses a need to develop the countrys infrastructure, with a particular focus on well-equipped, user friendly airports to handle as many as 280 million passengers per year expected in the country by2020. Public-private participation and FDI has funded the construction of ultra-modern airports at Bangalore, Hyderabad and Kochi in South India. While New Delhi airport has been given a boost with the commissioning of Terminal III in 2010, modernization programmes at Chennai and Kolkata are far from complete. Furthermore, the countrys plan to develop and modernize airports at 35 secondary cities has yet to pick up momentum, while the construction of Navi Mumbai Airport, which is meant to relieve congestion at Mumbais main Chhatrapati Shivaji International Airport, has encountered repeated delays.

There is non-availability of FBOs (Fixed Base Operator), terminals. The numbers of agencies for ground handling are extremely restricted, there is non-availability of MROS (Maintenance, Repair & Overhaul) and increases cost of maintenance.

Rising Airline Turbine Fuel (ATF) prices is another serious factor . Aviation Turbine Fuel (ATF) prices in India are higher than the international market. The airline industrys operational cost component is dominated by the cost of the (ATF). The ATF price accounts for nearly 45% of the operational expenses. A 10% increase in fuel price would push up costs by atleast 4%, thus causing a dampener on the financial health of an airline business.

Presently capacity constraints are reported mainly at Delhi and Mumbai airports. Congestion leads to a huge wastage of fuel. It is estimated that if a flight hovers in the sky for an additional half an hour due to delay in allocation of landing slot, it can consume between 25 to 30 per cent extra fuel thereby increasing the operational cost of the airline. Half an hour of hovering costs airline anywhere over Rs. 50,000 /-.There are over 40 flights that operate about 80 trips
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between Mumbai and Delhi every day. If all of them have an average circling time of 30 minutes each,around Rs 40 lakhs of fuel is wasted in a day. The congestion also affects the turn around time of the aircraft and reduces the average aircraft utilization.

High airport charges :The airports / aeronautical charges include - Route Navigation Facility Charges (RNFC) - Landing, Housing and Packing Charges- User Development Fees ( in case of private airports) - Terminal Navigation Landing Charges - X-ray Baggage Charges

Alternate/secondary airports not available Airline operators elsewhere in the world have the flexibility of using alternate or secondary airports where the airport charges are comparatively low. This option is not available in India.

Lack of technical manpower: The Civil Aviation Sector is facing acute manpower shortage, especially in the technical cadre. As per estimates of the Sub-Group on Human Resource Development for the Civil Aviation Sector, India would need 5,400 pilots by the end of the 2012.Similarly the demand for Aircraft Maintenance Engineers and Air Traffic Controllers would rise with the increasing number of flights and the new airports. Pilots and airline pilots in particular, need to be trained as older ones retire. However for training the pilots, there is an acute shortage of qualified Flying Instructors.

Land Encroachment Another problem that some airports face is the proliferation of slums around the airport boundaries in places like Mumbai. This is another security threat.

Land acquisition: Recent government initiatives of building Greenfield, merchant, cargo and low cost airports and modernization of existing domestic and international airports require huge tracts of land. Of late, a number of large projects are facing extreme opposition from landowners of the land acquisition process has recently come to significant highlight. The coordination between administrative departments of the state and central government agencies plays a major role in the land acquisition process.2

10. Globalization of Aviation

Overview
What is Globalization?

http://www.slideshare.net/VanditaHajra/challenges-and-issues-faced-by-the-indian-aviation-industry

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Globalization is a term that includes a wide range of social and economic variations. It can encompass topics like the cultural changes, economics, finance trends, and global market expansion.3

Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries. In the past decade, air travel has grown by 7% per year. Travel for both business and leisure purposes grew strongly worldwide. Scheduled airlines carried 1.5 billion passengers last year. In the leisure market, the availability of large aircraft such as the Boeing 747 made it convenient and affordable for people to travel further to new and exotic destinations.

Governments in developing countries realized the benefits of tourism to their national economies and spurred the development of resorts and infrastructure to lure tourists from the prosperous countries in Western Europe and North America. As the economies of developing countries grow, their own citizens are already becoming the new international tourists of the future. Worldwide, IATA4, International Air Transport Association, forecasts international air travel to grow by an average 6.6% a year to the end of the decade and over 5% a year from 2000 to 2010. These rates are similar to those of the past ten years. In Europe and North America, where the air travel market is already highly developed, slower growth of 4%-6% is expected. The most dynamic growth is centered on the Asia/Pacific region, where fast-growing trade and investment are coupled with rising domestic prosperity. Air travel for the region has been rising by up to 9% a year and is forecast to continue to grow rapidly, although the Asian financial crisis in 1997 and 1998 put the brakes on growth for a year or two. In terms of total passenger trips, however, the main air travel markets of the future will continue to be in and between Europe, North America and Asia. Airlines profitability is closely tied to economic growth and trade. During the first half of the 1990s, the industry suffered not only from world recession but travel was further depressed by the Gulf War. In 1991 the number of international passengers dropped for the first time. The financial difficulties were exacerbated by airlines over-ordering aircraft in the boom years of

3 4

http://www.unesco.org/education/tlsf/mods/theme_c/mod18.html

en.wikipedia.org wiki International Air Transport Association

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the late 1980s, leading to significant excess capacity in the market. IATA's member airlines suffered cumulative net losses of $20.4bn in the years from 1990 to 1994. Since then, airlines have had to recognize the need for radical change to ensure their survival and prosperity. Many have tried to cut costs aggressively, to reduce capacity growth and to increase load factors. At a time of renewed economic growth, such actions have returned the industry as a whole to profitability: IATA airlines' profits were $5bn in 1996, less than 2% of total revenues. This is below the level IATA believes is necessary for airlines to reduce their debt, build reserves and sustain investment levels. In addition, many airlines remain unprofitable. To meet the requirements of their increasingly discerning customers, some airlines are having to invest heavily in the quality of service that they offer, both on the ground and in the air. Ticketless travel, new interactive entertainment systems, and more comfortable seating are just some of the product enhancements being introduced to attract and retain customers. Despite this, the airline industry has proceeded along the path towards globalization and consolidation, characteristics associated with the normal development of many other industries. It has done this through the establishment of alliances and partnerships between airlines, linking their networks to expand access to their customers. Hundreds of airlines have entered into alliances, ranging from marketing agreements and code-shares to franchises and equity transfers. The outlook for the air travel industry is one of strong growth. As already forecasts suggested, the number of passengers were doubled in 2010. For airlines, the future will hold many challenges. Successful airlines will be those that continue to tackle their costs and improve their products, thereby securing a strong presence in the key world aviation markets.

Globalization has had varied influences on policy making in the aviation industry, by influencing the making of key decisions in the industry. Globalization in this case has influenced economic policy making in aviation industry. One of the effects or influence to economic policy making in aviation industry is that, it has made it more complex. According to top managers in aviation industry globalization has made this policy making quite challenging due to the very many factors that are globally affecting it and the various needs of the different stakeholders that has to be fulfilled. Globalization has affected aviation industry in its decision making. This is because all the decisions made in this industry have to comply with

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international standards. This is so because globalization comes along with standards which all the industries have to adhere to. Decisions that are made in

aviation industry also have to be according to international trade policies. Aviation industry faces big challenge in line with global competition and balancing of various stakeholders needs.

11.Globalization Regulations:
With the advent of Globalization, a term generally interpreted as a positive thing, it is likely that those with more to lose will indeed lose more than those with nothing to lose. As aviation procedures are harmonized by regulators in their effort to attain a world-wide standard, it is always easier to achieve consensus by lessening expectations and associated freedoms.

IAOPA (The International Council of Aircraft Owners and Pilots Associations) is the only international organization devoted to fostering freedom to fly within the world-wide General Aviation community. It is privileged to have a voice at ICAO, the International Civil Aviation Organization, where world-wide aviation regulations (and the harmonizing of) are hammered out. The International Council of the Aircraft Owner and Pilot Associations (IAOPA) announced Feb. 1 that its next biennial World Assembly will be hosted by AOPA China in 2014. Delegates to the World Assembly will discuss a wide range of general aviation issues and take part in aerial activities. Those discussions will likely focus on airspace access and freedom of flight, air traffic control services, user fees, security, and how IAOPA chapters throughout the world operate.5

12.FDI in Aviation:
FDI Proposal: The Civil Aviation Ministry is expected to soon circulate a proposal before the union cabinet to consider allowing up to 49% equity investment by foreign carriers in domestic airlines. In case of listed airlines, if the proposal does not get a waiver from SEBIs Takeover Code, foreign carriers may have to first make an open offer of 26% stake to public shareholders and later acquire up to 23% stake (from promoters or fresh equity), such that their stake remains within the 49 % cap. Indian Carriers: The FDI proposal, if approved, would certainly be an important milestone in the aviation sector and may provide much-needed relief to the

http://www.aopa.org/News-and-Video/All-News/2013/February/4/IAOPA-to-hold-World-Assembly-in-Chinain-2014

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domestic aviation industry reeling under the pressure of mounting losses and rising debt burden. Besides, the move will help bring global expertise and best industry practices over the medium term.

Foreign Carriers: It will not just provide entry into one of the fastest growing aviation
market globally but also an opportunity to establish India as their hub for connections between US/Europe and South-East Asian countries. While full-service airlines could help them further consolidate their market position on international routes (and improve connectivity within India), acquisition of low cost airlines could help them compete in a market where travellers are highly price sensitive.

Consumers: New players could enter the market as they could now have a strategic foreign
player with deep pockets to support the airline in difficult times. Besides, it would provide more flexibility in international travels when one travels through the same airline domestically as well as internationally. Overall, this could increase competition, offer more alternatives, reduce tariffs and improve customer service standards over the medium term. However, the Global Airline industry is itself currently going through a tough phase (Bloomberg World Airline index down 22%, Asia-Pacific Airline index down 25% in last one year), due to below trend economic growth across advanced economies and high crude oil prices ($100-125/Barrel). Besides, aviation economics currently remain unfavourable in India due to intense competition, mandatory route dispersal guidelines, higher taxes on ATF, airport related charges and inadequate airport infrastructure. For example, airlines like Air Asia (citing high infrastructure costs) & American Airlines (parent facing financial stress) have recently withdrawn from India. Lastly, foreign carriers already enjoy significant market share of profitable international routes and have wide domestic access through code sharing agreements. Given these considerations, we believe, attracting investments from foreign airlines may not be easy.

13. FDI in aviation: Why not allow foreign airlines to fully own Indian carriers?
Since the Arvind Mayaram panel submitted its report on easing off caps on foreign direct investment (FDI) in select sectors last week, there has been considerable confusion over

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whether Civil Aviation was one of the sectors mentioned in this report. Only nine months ago, the Government reversed its 1996 decision and allowed foreign airlines to buy up to 49% stake in Indian carriers. Why would it want a second wave of reforms in such a short time, specially when only two foreign airlines have made commitments in all this time? Etihad Airways wants to acquire 24% stake in Jet Airways while AirAsia wants to set up an airline from scratch in partnership with the Tatas and Telestra Tradeplace. So most babus in the ministries of commerce, finance and even aviation thought this is a mistake and aviation perhaps is not included in the list. Some pointed out that perhaps the move is to align FDI in different aspects of aviation but not raise that for foreign airlines any further. Now, todays Business Standard speaks of the Government proposal to allow foreign airlines up to 74% stake. If this is correct, it is rather foolhardy .6 First, what is the point of opening up the sector partially and in multiple steps? If the intent is to liberalise, why not go whole hog and allow foreign airlines to own 100% in Indian carriers? Because 74% will give the management control but also make sure they need an Indian partner to comply with the cap. Second, even if the cap on FDI is set at 74%, how will it benefit foreign airlines wanting to come in unless other silly rules, framed to keep a tight leash on airlines and potential investors, are also eased? 1) India does not have an open skies policy so it signs bilateral air services agreements with countries where it wants reciprocal flights to operate. The ASAs are between two Governments and their modalities are handled by the Ministry of Civil Aviation. Why not abolish ASAs and like USA and other western markets, allow any carrier to fly in or out with minimal permissions? 2) If FDI by foreign airlines is allowed up to 74%, many global airlines will want to set up subsidiary companies in India and may not necessarily seek out existing Indian airlines. Just like the AirAsia proposal, the foreign carriers may opt for roping in any Indian, non-aviation investor for the mandatory 26% Indian shareholding and begin an airline from scratch. This will also allow them to use the Indian bilateral in addition to the rights they already have as foreign carriers. So how will then this liberalisation of foreign airline stake help the loss laden Indian airlines? And if our domestic airlines are unlikely to benefit from the FDI easing, what is the point of this policy change anyway?
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http://www.travelbizmonitor.com/49-fdi-can-transform-indian-aviation-sector-civil-aviation-minister-19737

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3) There is one catch though. Foreign airlines may be forced to rope in Indian airlines as minority partners because we still have the ancient 5 by 20 rule which stipulates that any domestic airline must have a 20-aircraft fleet and must have completed five years of domestic operations before it is allowed to fly overseas. But again, when the intent is to liberalize, why continue with this silly 5 by 20 rule anyway? 4) Two investors Etihad of Abu Dhabi and Air Asia of Malaysia have announced investment into Indian ventures after getting approvals from their own shareholders, believing that the 49% cap on foreign airline investment cannot be breached. Though Etihad has only picked up 24%, AirAsia has picked up 49% equity. Now, with a sudden change in FDI caps, are these two investors not going to rethink their entire India strategy? Why would Air Asia then need two Indian partners for example? And why would Etihad continue to pay a premium for 24% of Jets equity when it can possibly rope in a minority Indian partner for considerably less? In effect, the 74% cap on foreign airline investment is a half baked proposal. We should either go the whole hog and allow foreign carriers to buy out Indian airlines completely or remain content with the existing 49% cap. Over six decades of protectionism have not got us any dividends. Its time to go for a disruptive policy change and see what happens. Air India needs to be privatized, the irrationally high taxes imposed on aviation fuel and MRO need to be drastically reduced, the five year restriction on flying international needs to be removed; and bilateral restrictions need to be suspended, say for a five year trial period. Then the increase in FDI limits will bear fruit, says Amber Dubey, partner and head-aerospace and defence at global consultancy KPMG. Anyhow, from all available indications, the Government may be preparing a smokescreen for its own short term gains and the Mayaram panels recommendations on aviation may turn out to be frivolous in the end. Various Government arms are themselves unclear till now about what exactly has been proposed by this pane. A senior aviation ministry official pooh-poohed the entire proposal on foreign airlines, saying there was no request from any stakeholder till now to further raise the limit of investment for foreign airlines to 74%. And since there is no request, what is there for the ministry to consider at this stage? It is likely that in its comments on the proposal, the Ministry of Civil Aviation will opine against raising the limit for foreign airlines to own up to 74% equity in Indian carriers, up from 49% at present. A senior Government official from another nodal ministry told Firstpost late last week the Government needs to be seen accelerating reforms to prevent a possible downgrade from international rating agencies and therefore it is mooting proposals which could be surprising. But any flip flop on foreign airlines is not just surprisingly

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, it is something like history repeating itself. According to a report by the Centre for Asia Pacific Aviation (CAPA), In the 1990s when aviation deregulation allowed the entry of private carriers on domestic routes, initially as air taxis and subsequently as scheduled airlines, India permitted up to 40% foreign direct investment, including by foreign airlines. Jet Airways at the time in fact maximised this provision, with both Gulf Air and Kuwait Airways each holding a 20% stake in the fledgling airline. This strategic investment undoubtedly provided Jet Airways with a number of benefits including access to expertise and international feed. However, in 1996 the Government of India announced that foreign airline shareholdings were not in the interests of Indias aviation sector and would no longer be permitted. Ostensibly this was because private carriers were still relatively small and the concern was that foreign airlines would control their development in such a way as to feed their offshore hubs, relegating the Indian carrier to the status of a regional carrier. But in reality it was a move designed to thwart the ambitions of the Tata Group and Singapore Airlines to jointly launch a domestic carrier in India. Jet Airways had to buyback the shares from its Gulf investors. The government position at that time was: as and when Indian carriers were of a sufficient size to be able to negotiate as equals with foreign airline investors then the restriction would be removed. But with the changing global environment in the 2000s, the spectre of security concerns, and the potential impact on Air India, were raised whenever the issue came up for discussion. And for many of the incumbents it suited their cause to limit the potential for a professional, wellfunded competitor to arise in the market.7

14. Social impact of the globalizing air transport: The case of India
Air transport is the fastest mode of transport for long distance passenger and high value cargo. According to International Air Transport Association, India has one of the fastest growing aviation industries and the countrys rank has improved from 9th position in world's aviation market in 2006 to 12th in 2008. India is currently the 9th largest aviation market handling 121 million domestic and 41 million international passengers. Today, more than 85 international airlines operate to India and 5 Indian carriers connect over 40 countries . The market grew at a
8

CAGR of 18 per cent and was worth US$5.6 billion in 2008. Indian carriers currently have a
7

http://www.firstpost.com/business/fdi-in-aviation-why-not-allow-foreign-airlines-to-fully-own-indiancarriers-900293.html 8 http://www.ibef.org/industry/indian-aviation.aspx

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fleet size of 310 aircrafts.18 Passenger (domestic and international) traffic has almost doubled between 2004 and 2007 while cargo traffic increased by 33.8 per cent between 2004-05 and 2007-08.19The air transport sector has been liberalized in a phased manner. In 1994, the monopoly of government in airline operations ended and private players were allowed to enter the market. In 2007, private operators catered to nearly 82 per cent of the market. Competition among private operators brought down prices and no-frill airlines made air travel affordable for a large number of people. The number of domestic passengers availing private air services (both scheduled and non-scheduled) increased from 15 000 in 1990 to 35 163 in 2006-07.20 Important policy changes include open sky policy for cargo, Indian private airlines are allowed to fly on designated international routes, among others. There are, however, some FDI restrictions on ownership by foreign airlines. With the growth in demand, airports started facing capacity constraints and the government is now encouraging private investments in development and maintenance of airport. For Greenfield airports, up to 100 per cent FDI is allowed through the automatic route while for others, clearances are required beyond 74 per cent. FDI up to 100 per cent is allowed in ground handling services (74 per cent through automatic route), in maintenance and repair, flying training institutes and technical institutes. Private developers are allowed to set up captive airstrips and general airports 150 km away from an existing airport and they can avail 100 per cent tax exemption for airport projects for a period of 10 years. The global slowdown and high fuel prices has adversely affected the growth of the Indian aviation industry. However, the government has focused on upgrading the infrastructure. The Vision 2020statement announced by the Ministry of Civil Aviation21 projected that there will be investment opportunities of US$110 billion in the Indian civil aviation sector (US$80 billion in new aircrafts andUS$30 billion in development of airport infrastructure). Air cargo traffic will grow at over 11.4 per cent per annum and will exceed 2.8 million tonnes by 2010.

Airline industry in India is plagued with several problems. These include high aviation turbine fuel (ATF) prices, rising labour costs and shortage of skilled labour, rapid fleet expansion, and intense price competition among the players. But one of the major challenges facing Indian aviation industry is infrastructure constraint. Airport infrastructure needs to be upgraded rapidly if Indian aviation industry has to continue its success story. Some steps have been taken in this direction. Two of India's largest airports-Mumbai and New Delhi-were privatized recently. Two Greenfield airports are coming up at Bangalore and Hyderabad in southern India.

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Investments are pouring into almost all aspects of the industry, including aircraft maintenance, pilot training and air cargo services. The future prospects of Indian aviation sector look bright. Aviation Industry in India is one of the fastest growing aviation industries in the world. With the liberalization of the Indian aviation sector, aviation industry in India has undergone a rapid transformation. From being primarily a government-owned industry, the Indian aviation industry is now dominated by privately owned full service airlines and low cost carriers. Private airlines account for around 75% share of the domestic aviation market. Earlier air travel was a privilege only a few could afford, but today air travel has become much cheaper and can be afforded by a large number of people. Worlds aviation industry is primarily regulated by rules and laws formulated by the procedure of international treaty and convention. Most of these can be found in the Annexes and Docs of International Civil Aviation Organisation (ICAO). However, all ICAO member states being sovereign nations have the prerogative of making their own laws and rules, which have to be notified by them in ICAOs Aeronautical Information Publication and inform the organisation on the differences so made.9

ww.icao.int/Meetings/atconf6/Documents/WorkingPapers/ATConf.6.WP.080.1.en.pdf