Taking Indian Carriers International Relaxing the 5/20 Rule

The Indian travel and tourism industry has witnessed sustained growth in the
volume of both inbound and outbound international traffic.
International traffic handled by Indian carriers increased by 12.0% y/y (17mn)
over 2015. Foreign carriers witnessed a similar trend, with international traffic
growing by 15.4% y/y (32mn) over 2015. While traffic has increased, Indian
carriers cater to a relatively small percentage of the overall international traffic in
and out of India.

This trend is indicative of the Indian airline industrys inability to capitalize on

growing traffic volumes, as theyre constrained by the Indian governments 5/20
rule for the industry. According to this rule, an Indian airline can fly passengers to
international destinations or vice-versa only if they:

Have been running domestic routes for a period not less than five
years

Have a fleet size of not less than 20 aircraft

Some private players in India fail to meet one or both of these criteria.

Major Indian Private Airlines

Airline
Name

Year When Operations

Began

Years Since Operations

Began

Indigo

2006

10

101 (+ 14 On
Order/Planned)

SpiceJet

2005

11

42

Jet Airways

1993

23

95

Go Air

2005

11

19 (+ 1 On
Order/Planned)

AirAsia
India

2014

Vistara

2015

Fleet Size

The Governments New Proposal

While the Ministry of Civil Aviation has hinted at changing the rule, there is still
some ambiguity about what the change entails and how itll be brought about.
According to ministry sources, the draft being debated by the ministry includes
pointers related to the utilization of credits earned by airlines. For example, an
airline would require 300 Domestic Flying Credits (DFC) before commencing
flights to SAARC countries and countries with territories located beyond a 5,000
km radius from New Delhi. For locations other than that, airlines would need to
accumulate 600 DFC before commencing flights. An aircraft can earn 30-35
credits a year by following the route dispersal guidelines. So, an airline with a
fleet of 10 aircrafts could take a year before it becomes eligible to offer
international flights.

The proposal indications also suggest that all domestic airlines would need to
earn at least 300 DFCs per annum after commencing international operations in
order to retain their international flying status.
It still remains to be seen whether the 5/20 rule is modified or tweaked to say
3/10, 0/10, or even 0/20.

What Could Change if the 5/20 Rule is Modified?

We believe the rationale behind these changes is clearly to prop the Indian airline
industry, which has grappled with diminishing profitability on account of greater
competition, low load factors, and increasing fuel expenses.
We see the following implications if and when such favorable changes come into
play:

Ease of Doing Business - The new mandate would be a shot in the

arm for new airlines such as Air Asia & Vistara, who could fly on
international routes and leverage growing traffic and load factors.

Regional Connectivity - An indirect consequence of the loose reins

could be greater regional connectivity. Airlines flying to remote
destinations may spur better airport infrastructure at intermittent
stopover locations.

Lower Fares - A growing number of airlines flying to international

destinations would certainly mean competitive pricing. That could make
air travel a viable option for travelers whod otherwise consider flying to
domestic destinations an expensive indulgence.

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