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Analysis: FAA downgrades India to Category 2 safety status

by Vinay Bhaskara

Earlier this month, the United States Federal Aviation Administration (FAA) announced a major downgrade of India’s aviation safety rating, citing a lack of safety oversight on the part of India’s Directorate General of Civil Aviation (DGCA). The downgrade to Category 2 is a significant national embarrassment, and comes after months, if not years, of FAA warnings to the DGCA over insufficient staffing levels of flight inspection safety officers and inadequate training for officers that certify a plane’s airworthiness. As per the FAA’s press release,

India has been assigned a Category 2 rating under its [the FAA’s] International Aviation Safety Assessment (IASA) program, based on a recent reassessment of the country’s civil aviation authority. This signifies that India’s civil aviation safety oversight regime does not currently comply with the international safety standards set by the International Civil Aviation Organization (ICAO)

Category 2 status is generally reserved for nations with poor aviation safety records and regimes. As of 31st January, 2014, 11 nations (including India) out of 100 have been assigned Category 2 status under IASA guidelines, including Bangladesh, Barbados, Curacao, Ghana, Indonesia, Nicaragua, Philippines, Serbia, Saint Maarten, and Uruguay.

The downgrade has a major impact on India’s airlines, who will not be allowed to launch any new services to the United States (despite the open skies bilateral relationship between the two nations). Existing services (such as Air India’s nonstop flights between Mumbai and Newark) will continue, but are now subject to “heightened FAA surveillance” within the United States. Furthermore, existing code share agreements between Indian airlines and US carriers are affected. To that effect, American full service carriers United Airlines and American Airlines have removed their code from all Jet Airways flights, though the broader code share partnership between Jet Airways and United still exists with the Jet Airways code still placed on United flights within the United States.
The trigger for the FAA review appears to have been a December 2012 audit by the International Civil Aviation Organization (ICAO), who found India deficient in the areas confirmed by the FAA. India had held Category 1 status since 1997, however rumblings began to emerge as early as 2009 that the FAA was unhappy with the state of Indian aviation safety.

India has made tentative strides towards addressing the FAA’s concerns, and just last week the Indian Cabinet approved the appointment of 75 additional inspectors in an attempt to stave off the downgrade. Civil Aviation Minister Ajit Singh claims that India has satisfied more than 95% of the FAA’s concerns, and addressed 29 of 31 discrete issues, stating that India is targeting March for restoration to Category 1 status. However, given the extended timeframe over which these issues have persisted (at the very least since December 2012), it is unlikely that the FAA will recapitulate so easily.

For India’s airlines, who operate a combined 28 flights per week (21 by Air India, 7 by Jet Airways) to the United States, the downgrade represents yet another financial challenge for India’s battered airline industry, which is already dealing with the internal pressures of several new startup airlines such as Vijaywada based Air Costa, Air Asia India, and the yet to be named Tata – Singapore Airlines joint venture. Jet Airways in particular will be affected, as in May, the carrier had planned to launch services between its new scissors hub in Abu Dhabi and New York JFK using Boeing 777-300ER equipment. Those plans will have to be delayed, though partner Etihad, who are starting the second daily Abu Dhabi – New York JFK flight with their own 777-300ER before handing off to Jet, can continue to operate the route unabated. Moreover, depending on the duration of the downgrade, it could also affect any plans Jet Airways has of shifting its current services to Newark from Brussels to Abu Dhabi or any other scissors hub. The loss of the United Airlines code share will cause some revenue reduction, though the cumulative annual value of this revenue is likely smaller than Rs. 1 Crore, and some of it will be retained through interline tickets issued by online travel agencies (OTAs). Perhaps reflecting these impacts, Jet Airways’ already depressed share price has shed nearly 10.3% of its value since the news was announced. However, Bangalore Aviation feels that the impact of the FAA downgrade has been overstated. Financially, Jet has made progress in restructuring its international operations by reducing the costs of aircraft on ground, and the carrier can once again turn to the leasing market to utilize its Boeing 777-300ERs. Its customers will still have ample and growing access to the US via Abu Dhabi, and we estimate the overall financial impact to be between Rs. 6-8 Crore only.

While Air India does not, at the moment, have any plans to change its service offering to the United States, the downgrade could still have severe impact. Several aviation safety agencies around the world, most notably the European Air and Space Agency (EASA) follow the FAA’s lead in downgrading the safety status of nations, and downgrades by other global agencies could affect the expansion plans of Air India, or even low cost carriers (LCCs) such as SpiceJet or IndiGo who are pursuing international growth in Asia and the Middle East. Air India’s plans to join the Star Alliance global partnership of airlines is expected to continue as scheduled, but the value of membership will be heavily diluted by the code share provisions of the downgrade. Namely, Air India will not be able to enter into code share or joint venture (profit sharing) partnerships with American Star Alliance member United Airlines. And even if the official impact is muted, there will still be a revenue impact, as the corporate travel contracts for many companies include many provisions banning employees from flying airlines from Category 2 nations unless absolutely necessary.

What makes the downgrade particularly frustrating is that India’s beleaguered airlines are not even at fault, yet they will bear the financial brunt. The downgrade is a severe national embarrassment for India, who will not be taken seriously as a global aviation power despite its status as the ninth largest air travel market in the world (projected to rise to third by 2025). And the failure is primarily driven by government, as the combined efforts of former Civil Aviation Minister Praful Patel, the Civil Aviation Ministry, and the DGCA since 2004 have turned India from “the next big thing” in global aviation into a worldwide aviation industry laughingstock. While the current regime, such as Minister Ajit Singh, and Air India Chairman Rohit Nandan have managed the situation better, India’s macroeconomic conditions are no longer conducive to positive momentum in the Indian aviation industry. And as India edges towards a landmark election, the FAA downgrade is not likely to reflect well on the current UPA government. In an ideal world, that would result in significant and aggressive action towards correcting the mistake. Sadly, the more likely scenario is for the current government to turn the blame outwards, perhaps even linking it to last year’s diplomatic spat between India and the United States over the actions of Indian diplomat Devyani Khobragade. This is simply not true. All nations are subject to ICAO and IASA safety guidelines.

Extra: Read the FAA’s press release announcing the downgrade

Extra: The checklists used during IASA assessments

About Vinay Bhaskara

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