Anticipated change(s) to the 5/20 rule and its impact

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The Indian government is in the final stages of finalizing the civil aviation policy and the 5/20 rule remains one of the core issues of contention. With the rule being integral to international operations and expansion strategy, airlines are lobbying hard for/against it depending on their own plans.

The 5/20 rule was introduced in 2004 and stipulates that an airline must have a minimum fleet of 20 aircraft and been in operations for 5 years before they are allowed to fly internationally.

The government is now considering changes to the rule. Sources indicate that possible scenarios could be as below and Bangalore Aviation has assessed the impact of the scenarios as well as the likelihood of the changes being pushed through:

1. Replace 5/20 with 0/20 – would replace the 5 year of operations mandate with the only requirement being a minimum of 20 aircraft in fleet. Impact would be an induction of capacity in the domestic market (which is growing at 20%). Current demand even if it continues to grow in the 15% range (CAGR) would lead to a growing supply demand imbalance leading to dropping fare levels (already down 15% – 20% from the prior year).

Overall – a simple replacement of 5/20 by 0/20 would be great for passengers in terms of fare levels but detrimental to the overall health of the industry.

2. Replace 5/20 with 0/20 with an 80/20 split on capacity allocation – similar to the above change but with an additional caveat on how the capacity is to be allocated. Sources indicate that the 80/20 split is being considered which would likely be in terms of seat capacity (also because bilaterals entitlements are in terms of seat capacity thus would make for easier reconciliation).

Within the 80/20 split additional variations would be:

a) 80/20 split for fleet above 20 aircraft i.e for fleet above 20 aircraft, 80% could be deployed on international operations while 20% to domestic operations)

b) 80/20 split by seat capacity – most likely scenario

c) 80/20 split by ASKMs – for each international flight a 20% factor by available seat kilometers (ASKMs) would have to be applied to domestic operations.

Scenarios b and c would be fairly complex and require oversight and monitoring regularly.

3. Replace 5/20 with 0/20, 80/20 split and revise Route Dispersal Guidelines – this is a point that seems to be overlooked. Carriers such as Air India, Jet, SpiceJet and Indigo have had to deploy domestic capacity on CatII and Cat III routes (see article on RDGs) to comply with this policy. As their domestic fleet are much larger than 20 aircraft, a change in RDGs would entail capacity being pulled from these routes which would be a detriment to the governments goal of regional connectivity. Mandating RDGs within the 80/20 split would again be fairly complex and require constant oversight and monitoring.

Likely impact to carriers and response:

• Jet Airways – as of March has capacity of 4.2 bn ASKMs per month with 60% deployed in international operations. Any likely change would force it to revisit capacity allocation. Will likely contest any changes to the rule.
• Air India – as they have not indicated any opposition to a change in policy, it is likely they have not considered impacts and will continue to fly loss making routes.
• SpiceJet – as of March has a capacity of 1.3bn ASKMs per month with 75% on domestic operations. A change in policy would require it to rework entire network and fleet plans. Will likely contest any changes to the rule.
• GoAir – currently no international operations but likely would have planned for international expansion given their fleet expansion (currently at 19 aircraft). Policy change at this time would require rework of entire network and fleet plans. Will likely contest any changes to the rule.
• Indigo – as of March has a capacity of 4.0 bn ASKMs with 90% on domestic operations. Policy would have limited impact as Indigo due to its fleet size will continue to increase frequencies and add 2-4 domestic cities per year. Will likely contest any changes to the rule.
• Vistara – has only a fleet of 9 aircraft and with a policy change could plan its network and fleet in a manner that is most beneficial. Will continue to push for policy change.
• Air Asia – has a fleet of  6 aircraft and with a policy change could plan its network and fleet in a manner that leans towards an international focus. Will continue to push for policy change.

In conclusion, the 5/20 rule – though likely to go away – will continue to be a contentious and complex issue for industry and policymakers alike. Bangalore aviation will keep you updated on changes as and when they happen.