Aviation Sector: What will keep Corporate and Disputes Practices busy in 2024

Aviation Sector: What will keep Corporate and Disputes Practices busy in 2024

Aviation Sector Overview:

The aviation sector plays a crucial role in driving economic progress, not only by enhancing connectivity but also by generating employment, promoting tourism, and fostering trade and commerce. The surge in air travel demand in India is attributed to the growing middle class and increased disposable income among the populace.

In the past year, there has been noteworthy growth in the sector, marked by the opening of four new airports and four new terminals. This development brings the total number of operational civil airports in India to 149, a figure twice as high as that from a decade ago. Despite offering significant growth potential, the aviation industry in India has witnessed the closure of several airlines due to challenges such as high costs and unsustainable debt. Notable examples include NEPC, Kingfisher, Modiluft, and Jet Airways. A more recent case is Go First, formerly known as Go Air, which filed for bankruptcy in July 2023.

Understanding the Challenges in the Aviation Sector:

The question arises: why do airlines often face failure in India? Examining the case of Go First provides insights into the common challenges. Go First cited a shortage of funds and a lack of parts supply from Pratt and Whitney, the engine manufacturer for the Airbus A320 fleet owned by the airline. This echoes a recurring theme seen in the struggles of other airlines, including Jet Airways and Kingfisher, which faced similar issues, ultimately leading to their discontinuation.

Jet Airways, as India's oldest private airline, faced challenges linked to a takeover bid for Air Sahara. The subsequent efforts and financial resources invested in reviving Air Sahara compelled Jet Airways to sell a significant stake to Etihad Airways. Additionally, competition from newly launched low-cost carriers and the operational challenges associated with managing a mixed fleet of aircraft contributed to the difficulties faced by Jet Airways and other airlines in India.

Legal Development:

  • The Ministry of Corporate Affairs, through Notification No. S.O. 4321(E), dated 03.10.2023, has taken a significant step by exempting transactions, arrangements, or agreements related to aircraft, aircraft engines, airframes, and helicopters from the moratorium provisions under the Insolvency and Bankruptcy Code of 2016 (IBC, 2016). The moratorium provisions, when applied, can impact the rights of creditors and lessors during insolvency proceedings, potentially causing substantial financial losses. This exemption is particularly crucial due to the high value associated with aircraft and related equipment, which could affect the ability of lessors and creditors to finance and lease these assets in the future. The Ministry of Corporate Affairs' (MCA) Notification, signaling India's commitment to comply with the Cape Town Convention/Protocol, carries significant implications for the international aviation community. Following the announcement, the Ministry of Civil Aviation emphasized the confidence it instills in aircraft lessors, contributing to the positive reassessment by the Aviation Working Group. This change is anticipated to benefit not only lessors and creditors but also Indian airlines, potentially leading to reduced leasing and financing costs as confidence in the Indian legal system grows.
  • However, challenges have surfaced post the MCA Notification. It remains uncertain whether the exemption applies to ongoing insolvency proceedings where the moratorium is already in effect. The lack of clarification on this issue has prompted Go First's lessors to seek legal intervention for aircraft deregistration and clarification from the Directorate General of Civil Aviation (DGCA). The applicability of the amendment to ongoing proceedings appears to be a matter left for determination by the courts and tribunals.

 

  • The Ministry of Civil Aviation has recently introduced the Aircraft (Security) Rules, 2023, aimed at bolstering civil aviation security in alignment with international conventions. These rules comprehensively address various facets, outlining roles, responsibilities, and security measures in the realm of aviation. The Aircraft (Security) Rules, 2023, hold a pivotal role in upholding the security of the aviation sector in India. By comprehensively addressing a diverse array of security concerns and delineating specific procedures, these rules serve to safeguard passengers, crew, and aviation assets from potential threats and acts of unlawful interference. Moreover, they establish a transparent framework for reporting, investigating, and rectifying security incidents, thereby preserving the integrity of the aviation industry. Adherence to these rules is imperative not only for the security of aviation operations but also for fostering public trust in air travel. Given the dynamic nature of aviation security, these rules provide a foundational framework for adapting to emerging threats and technologies. Effective implementation will require regular training, coordinated efforts among stakeholders, and staying abreast of evolving security practices to ensure the continued safety of civil aviation in India.
  • On May 10, 2023, the National Company Law Tribunal, New Delhi (NCLT) accepted the application filed by Go Airlines (India) Limited (Company), which ranks as the third-largest airline company in India based on passenger market share in 2022. The application was made under Section 10 of the Insolvency and Bankruptcy Code, 2016 (IBC), leading to the imposition of a moratorium for the Company. The voluntary insolvency plea has introduced complex challenges across various legislations within the already fiercely competitive airline industry. Moving ahead, the Company is likely to encounter regulatory hurdles as it addresses show cause notices and undergoes audits from the Directorate General of Civil Aviation (DGCA), which seeks revival plans for the resumption of its operations. Furthermore, challenges arise from aircraft lessors aiming to reclaim their aircraft and other rival airlines expressing interest in acquiring the Company's assets. Stakeholders are keenly awaiting the resolution of the Corporate Insolvency Resolution Process (CIRP) to determine whether the Company can undergo effective restructuring or, reminiscent of the fate of Jet Airways, Kingfisher Airlines, and Air Deccan, may be headed towards liquidation.

Business Development:

  • Several initiatives and schemes contribute to the growth and development of India's aviation sector. The Ude Desh Ka Aam Naagrik (UDAN) scheme aims to connect smaller cities with major airports, with a target to establish around 100 airports by 2024. The government's goals include making 1,000 UDAN routes operational, developing 100 unserved and underserved airports, helicopters, and water aerodromes by 2024. Additionally, the aviation and financing businesses operate within the International Financial Services Centre (IFSC), with GIFT City designated as an offshore hub for financial services.
  • Hon’ble Prime Minister Narendra Modi inaugurated and laid the foundation stone for 20 infrastructure & development projects worth Rs. 20,140 Crores at Trichy in Tamil Nadu on 2nd January, 2024. This included inauguration, dedication and laid the foundation stone for projects of Airport, Railway, Highway, Seaport, Petroleum & Natural Gas, Atomic Energy and Higher Education.
     

Challenges:

The aviation sector faces several challenges that hinder its growth potential:

  1. Complex Regulatory Environment: The intricate web of regulations governing the aviation industry in India creates uncertainties for stakeholders, potentially deterring investment and innovation.
  2. Unpredictability in Regulations: Frequent changes and unpredictability in regulations can discourage potential investors and hinder the efficient operation of airlines.
  3. Taxation on Aviation Turbine Fuel (ATF): The absence of Goods and Services Tax (GST) on ATF leads to higher costs for airlines, impacting passenger affordability and the industry's profitability and growth.
  4. Insolvency Law Hurdle for Lessors: Conflicts between Aircraft Rules, 1937, and the Insolvency and Bankruptcy Code can disadvantage lessors, impacting leasing rates and security deposits.
  5. Cutthroat Competition: The highly competitive and price-sensitive nature of the Indian domestic aviation market may result in legal complications from an antitrust standpoint.
  6. Unclear Role of Government and Regulatory Framework: Ambiguities in the government's role in resolving airline issues and regulatory inconsistencies pose challenges for compliance.
  7. Foreign Direct Investment (FDI) Uncertainties: Despite relaxed FDI regulations, bureaucratic complexities and delayed approvals hinder foreign investment in the aviation sector.
  8. Ensuring Safety Standards: Balancing safety with growth requires collaboration with international aviation organizations and the implementation of best practices to secure passengers and crew.

Concluding Remarks:

The sector has many challenges and the most recent challenge arising out of regulatory framework as mentioned above is exclusion of aircraft, airframes, and helicopters from the moratorium as it will have potential impact on forthcoming airline insolvencies. The absence of the moratorium protection for these vital aviation assets creates significant hurdles for insolvent airlines to continue their operations as a going concern within the Corporate Insolvency Resolution Process (CIRP). Consequently, this complicates the feasibility of creditors or debtors choosing the Insolvency and Bankruptcy Code (IBC) as a resolution mechanism for distressed airlines. To unlock the full potential of India's aviation sector, legal reforms are crucial. Clearing legal obstacles involves simplifying regulations, reducing the tax burden on ATF, and streamlining aircraft repossession processes. By addressing these challenges collaboratively, India can foster nationwide connectivity, contribute to economic advancement, and ensure sustainable growth in its aviation sector.

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