India Must Remove Legal Hurdles To Drive Aviation Sector Growth

India's aviation sector has seen multiple airlines fail even as it offers a huge growth potential, giving the country's young demographic and rising incomes.

NEPC, Kingfisher, Modiluft, and Jet Airways are among the carriers that couldn't stay afloat because of high costs and unsustainable debt. One of the most recent examples is Go First, which filed for bankruptcy in July 2023.

Rising crude prices, high taxes on aviation fuel, lack of enough pilots and shortage of homegrown aircraft maintenance infrastructure are some of the challenges that airlines face. The industry is also beset by legal challenges, hampering expansion and growth.

According to Syed Tamjeed Ahmad, co-managing partner at Spaviatech Law, enforcing legal remedies for aircraft lessors, and bar on fractional ownership of aircraft are among the legal hurdles that the aviation industry faces in India.

India ratified the Cape Town Convention & its Aircraft Protocol, which deals with lessors' rights in aircraft lease transactions. However, compliance has raised concerns due to conflicts with the Insolvency and Bankruptcy Code, enacted in 2016. These conflicts have not been addressed because because international treaties must be passed by the legislature to become domestic law. 

While the Cape Town Convention Bill was drafted in 2018, it has not been approved. According to Adithya Variath, a faculty member at the National Law University, Mumbai, this has, in general, created a conflict in India with regard to India’s international compliance.

Insolvency  Law Hurdle For Lessors

The Aircraft Rules, 1937, acknowledge the rights of lessors to take back the aircraft. On the other hand, the insolvency law that introduced a "moratorium" is governed by the Insolvency and Bankruptcy Code of India.

According to legal principles, if there's a conflict between a "rule" (delegated legislation) and a law passed by parliament, the latter takes precedence. So, when a moratorium is imposed, the lessors' rights under the Aircraft Rules are secondary to the IBC proceedings.

According to Ahmad, due to these prevailing concerns, the lessors often charge higher lease rentals and security deposits from Indian companies than their European counterparts. This often acts as a hindrance for Indian companies in expanding or sustaining in the market, he said.

Other than that, allowing fractional ownership of aircraft will help. It lets an aircraft to be owned by more than one entity, helping in sharing costs and making ownership more affordable. 

Onerous Rules, Taxes

Heavy regulation in the aviation business along with high taxation rates on different aspects of the sector are another set of hurdles for the industry, according to Nitin Sarin, Managing Partner at Sarin & Co.

As per Indian regulations, an airline needs to have 20 aircraft in its fleet before it can fly internationally. That means that they have to scale up in the initial stages itself. 

Moreover, Sarin said, the aviation is still considered a luxury business and is heavily taxed. For instance, "when it comes to fuel taxes, we pay significantly more than many other countries," he said. 

According to Vikrant Pachnanda, partner at Fox and Mandal, another obstacle is that rising fuel costs affects the ability to maintain competitive prices along with a good profit margin.

Variath said aviation is vulnerable to financial difficulties arising out of rising operational costs.

Foreign direct investment is permitted up 49% through the automatic route, beyond which government approval is necessary. Additionally, the process of obtaining a licence through the DGCA is both time-consuming and expensive, and there is insufficient enforcement, said Pachnanda.

Experts suggest start with the Cape Town Convention. 

The first thing India needs to do to ensure the confidence of the leasing community is to bring a parliamentary statute to enforce the provisions of the Cape Town Convention/Aircraft Protocol, Ahmad said.

Since this will have a bearing upon the CPC, Specific Relief Act as well as the IBC, in the meantime, the government can issue a directive u/s 14(3)(a) insolvency code to exclude aircraft lease transactions from the ambit of the moratorium, he said.

Variath also suggested that apart from working on the infrastructural issues, the government needs to streamline regulatory framework governing the aviation sector. 

Ahmad said a long overdue reform for general aviation is to permit fractional ownership of aircraft, at least for corporates. This, he said, will ensure that there would be less dependency on lessors for the players from the general aviation industry.