National Civil Aviation Policy 2015: The 5/20 Rule

This section looks at the 5/20 rule, which the Ministry was deciding whether to keep, abolish or replace. In short:

• Only four Indian airlines or airline groups flew international.
• Air India and Jet Airways put more capacity on international routes than on domestic ones.
• 5/20 had served no purpose so far.
• The rule was not applied evenly: Air India Express, on its own AOP, flew international from day one.
• Under the proposed 300/600 DFC rule, a low cost airline with 180 seat aircraft could in theory earn 600 credits in 1.5 years.
• The 300/600 rule had loopholes that defeated the Ministry's own aim.
• Neither 300/600 nor 5/20 proved anything.
• Scrapping 5/20 was needed to reach the domestic travel targets.

What the rule did

The rule on domestic airlines flying abroad had clearly been shaped by vested interests. An airline had to fly domestic for at least five years and have at least 20 aircraft before it could fly international.

Of the 10 airlines in India at the time, only four flew international, and only Air India and Jet Airways did so on a large scale. Together, Jet Airways and Air India (including Air India Express) supplied 92% of all international capacity flown by Indian carriers. Yet the same two airlines supplied only 38% of domestic capacity.

If 5/20 was meant to boost domestic connectivity at the cost of international flying, the imbalance at these two airlines made no sense. Jet Airways' domestic capacity was just 62% of its international capacity. Air India's domestic capacity was just 36% of its international capacity. IndiGo and SpiceJet, by contrast, flew international capacity equal to just 12% and 27% of their domestic capacity, because they focused on the home market.

Those with the right to fly abroad either used it too much or too little. The rule had done nothing to balance domestic and international capacity.

If India wanted the economic gains of more domestic travel, it had to let every domestic airline fly international. That would bring in foreign visitors who would then fly domestic to reach their destinations. It was the only realistic way to reach 300 million domestic tickets by 2022, because demand would not come from within the country alone.

The Air India Express case

Air India Express, registered as Air India Charters Ltd, was a separate airline with its own AOP number, S-14, distinct from Air India's S-9. S-14 was issued on 22 April 2005. Aeronautical Information Circular 2 of 2005, dated 21 January 2005, laid down the 5/20 rule. Yet the airline began flying on 29 April 2005 with a Thiruvananthapuram to Abu Dhabi flight. Its first flight was international, on a separate AOP.

Even if one argued it was a subsidiary of Air India, this was the first time Air India operated Boeing 737NGs. The airline had no prior experience, crew or maintenance set up for the type. A new operator with a new aircraft type flew international from day one.

The 300/600 DFC proposal

The Ministry offered three options: keep 5/20, abolish it, or replace it with domestic flying credits (DFCs). An airline would need 300 DFCs before flying to SAARC countries and to countries lying entirely beyond 5,000 km of New Delhi, and 600 DFCs before flying anywhere else.

In theory, an airline that added one 180 seat Airbus A320 every month and put each aircraft on eight flights a day from day one could earn 600 DFCs in 1 year 6 months, ignoring capacity on CAT II routes.

In practice, AirAsia India had earned 153 DFCs by September 2015, after 16 months of operations. At its rate of about 20 DFCs a month, it would pass 300 DFCs before May 2016 and 600 DFCs before July 2017, which would be three years of operations. A growing fleet would get there sooner.

But the 300/600 rule served no real purpose. If an airline had to earn at least 300 DFCs a year to keep flying international, why demand 600 in the first place? The point of DFCs was to encourage domestic flying. Seven A320s flying all year could earn more than 300 DFCs. So an airline with 100 A320s could put 93 of them on international routes and only seven on domestic, and still qualify. That was the opposite of what the Ministry wanted.

The 300 DFC destinations were SAARC countries and places entirely beyond 5,000 km from New Delhi. SAARC was workable. Flying beyond 5,000 km was not, for a start up. It needed longer range aircraft and would reduce the number of narrowbody and regional aircraft India needed to grow domestic traffic. The 5,000 km circle shut out nearly all of Asia and the whole of the Middle East, the very places with enough traffic.

Our view

Since the only choices were 5/20 or 300/600, the best course was to abolish the rule altogether. That would pull in traffic to feed the domestic market, and the multiplier effect would help the country and consumers.

One caution: start up airlines that were short of capital or badly run could have safety problems that might drag down India's safety rating. Close monitoring of flight safety at airlines was needed.