Cleared For Takeoff: Addressing Legal Hurdles In India’s Aviation Industry

Introduction

The Aviation sector in India has been soaring to new heights in recent years, with a significant increase in the number of passengers, airlines, and destinations. However, the country’s aviation ambitions are accompanied by a complex web of legal challenges that must be addressed to ensure sustainable growth and prosperity.

Current Legal Hurdles

While the industry is expanding, with more individuals opting for air travel due to its convenience and time-saving advantages, this progress brings along its own set of challenges, as outlined below:

• Complex Regulatory Environment: A complicated web of regulations governs various aspects of the aviation industry in India, leading to uncertainties for aircraft manufacturers, financiers, and lessors. This can deter investment and innovation in the sector.
• Unpredictability in regulations: Frequent changes and unpredictability in regulations can deter potential investors and make it difficult for airlines to operate efficiently. 
• Taxation on Aviation Turbine Fuel (ATF): The absence of the GST on ATF results in higher costs for airlines, making air travel more expensive for passengers thereby affecting the profitability and growth potential of the industry.
• Insolvency Law Hurdle for Lessors: The Aircraft Rules, 1937, acknowledge that lessors have the right to reclaim their aircraft. However, the Insolvency and Bankruptcy Code of India, which governs the bankruptcy legislation, introduced a “moratorium.” According to legal principles, if there is any conflict between a “rule” (delegated legislation) and a law passed by parliament, the latter will take precedence. Therefore, when a moratorium is put in place, the IBC procedures take precedence over the lessors’ rights under the Aircraft Rules. Because of these prevailing concerns, lessors frequently charge Indian businesses more lease rates and security deposits than their European counterparts. This often prevents Indian businesses from growing and sustaining in the market.
• Cutthroat Competition: The Indian domestic aviation market is known as one of the most competitive and price-sensitive markets. Indeed, CAPA India has pointed out that the competition dynamics of the Indian aviation market are not aligned with the industry’s long-term viability, which might result in legal complications from an antitrust standpoint. 
• Unclear Role of Government and Regulatory Framework: The government’s role in resolving issues related to airline operations has been unclear, resulting in complications. Additionally, Regulatory inconsistencies and bureaucratic hurdles can make it challenging for airlines to comply with regulations.
• Foreign Direct Investment (FDI) Uncertainties: Despite relaxed FDI regulations in 2012, the Indian aviation sector struggles to attract foreign investment due to bureaucratic complexities and delayed approvals. Instances like Etihad Airlines’ failed attempt to acquire a stake in Jet Airways highlight these challenges.

• Ensuring Safety Standards: Striking the right balance between safety and growth is essential for India’s aviation sector. To ensure that safety requirements are met, India must keep collaborating with international aviation organisations and implementing best practices. While encouraging investment and innovation, the government must make sure that laws are in place to ensure the security of passengers and crew.

Aviation’s Economic Potential

This sector is a powerful driver of economic advancement. It not only facilitates connectivity but also generates employment, promotes tourism, and boosts trade and commerce. India’s growing middle class and increased disposable income have contributed to the rise in air travel demand.

A well-developed aviation sector can significantly contribute to the nation’s development by connecting remote regions, fostering trade, and attracting foreign investment. However, realizing this potential depends on overcoming the legal hurdles that currently hamper growth.

Impact On Airlines

The legal hurdles in the aviation sector impact both domestic and international carriers. Domestic airlines face challenges related to regulatory compliance, taxation, and aircraft financing. International carriers entering the Indian market encounter complexities in terms of regulatory uncertainties and the potential risks associated with defaults by Indian lessees.

For sustainable growth, airlines need clear and predictable legal frameworks that promote investment and ensure compliance with international standards.

Legal reforms that address these challenges will benefit both Indian and international carriers operating in India.

Development Of Infrastructure

Airports, Airspace, and Connectivity

Legal reforms alone are not sufficient to drive aviation sector growth. They must complement infrastructure enhancements. India needs modern airports, efficient airspace management, and improved connectivity to support the industry’s expansion.

Developing world-class infrastructure, coupled with legal reforms, can enhance the passenger experience, reduce operational costs, and boost the industry's competitiveness on the global stage.

The proposed Airport Economic Regulatory Authority (“AERA”) aims to address these gaps. The GOI has made it mandatory for all new greenfield airports to provide separate cargo facilities: storage, ground handling, and loading. Further, in a bid to bring Indian airports to par with the international ones the GOI has decided to float a separate air cargo policy, AERA, and revamp the entire electronic data interchange system. A commercial centre needs an efficient and well-organized airport.

Government Initiatives

The Indian government has introduced several initiatives[1] to boost the aviation sector, including:

• The Ude Desh Ka Aam Naagrik (“UDAN”) scheme, aims to connect small and medium-sized cities with major airports. Under this scheme, the government is aiming to establish around 100 airports by 2024.
• The government has set goals to make 1,000 UDAN routes operational and develop 100 unserved and underserved airports, helicopters, and water aerodromes by 2024.
• The aircraft leasing and financing businesses are conducted within the International Financial Services Centre (“IFSC”), and GIFT City is designated as an offshore hub for financial services.
• The National Civil Aviation Policy 2016 (“NCAP”) is the government’s strategy to make flying more accessible by reducing prices and enhancing connectivity. It supports e-governance, deregulation, streamlined processes, and ease of doing business.
• MOCA has introduced Krishi UDAN 2.0., which outlines a vision for enhancing value realization by better integrating and optimizing agricultural harvesting and air transportation, contributing to the sustainability and resilience of the Agricultural value chain under varying and dynamic circumstances.

Nevertheless, there are still hurdles to surmount, such as enhancing regional connectivity, and addressing the high costs associated with aviation fuel.

Legal Reforms

To fuel the growth of the aviation sector in India, the nation must undertake essential legal reforms. Key areas requiring reform include:

• Simplify regulations: Consolidating various aviation regulators into a single Civil Aviation Authority could simplify regulations and reduce complexity. This would provide a single window clearance authority for the industry, promoting an investor-friendly environment.
• Reduce the tax burden on ATF: Bringing ATF under the GST regime is essential to reduce the tax burden on airlines and make air travel more affordable for passengers.
• Streamline Aircraft Repossession Processes: Streamlining and clarifying the process of aircraft repossession and export in case of defaults by airlines or operators is crucial. Predictability in this process will encourage investment in the sector.

Maintenance-Repair And Overhaul (MRO)[2]

MROs in India need to be a one-stop shop for line maintenance, airframe maintenance, engine maintenance, and component overhaul. The potential lies in capturing the majority of heavy aircraft and engine maintenance, which airlines and aircraft owners usually outsource to foreign MRO facilities. GOI amended the foreign investment policy for the aviation sector to allow 100% FDI through an automatic route in MRO facilities, which will boost aircraft maintenance activities.

Indian carriers spend about $700 million a year on maintaining their fleet. National Aviation Company of India Limited (NACIL) has engine MROs in Delhi and Mumbai. With foreign participation and expertise, this step will help bring the costs down when aviation fuel prices are on the rise. Now with international standards of repair and overhaul facilities in India, the aircraft will not need to visit other places for maintenance and related services, thereby saving costs.

Conclusion: Clearing The Flight Path

The aviation sector in India has immense potential, but it must overcome legal hurdles to ensure sustainable growth.

Clearing the flight path for India's aviation sector involves legal reforms that balance safety and industry growth. By addressing these obstacles and working in collaboration with industry stakeholders, India can unleash the complete potential of its aviation sector, fostering nationwide connectivity and contributing to economic advancement.

The sky is the limit, and with appropriate legal reforms, India’s aviation sector can soar to unprecedented heights.

FAQs

[1] https://www.investindia.gov.in/sector/aviation.

[2] https://www.niti.gov.in/sites/default/files/2022-10/MRO_Report-FINAl.pdf.

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