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Loosen the paid-up capital requirement for aspiring airlines, policy panel says

February 26, 2020

Sangam Prasain, The Kathmandu Post, February 26, 2020

Two international airports are coming up, and new carriers will be needed to fill the available slots, as per the team.

Experts have urged the government to loosen the paid-up capital requirement for aspiring airlines as available slots are set to expand with two international airports coming up, and new carriers will be needed to fill them.

Less stringent conditions will allow new players to enter the country’s burgeoning aviation market, the government panel formed to make recommendations to amend the country's aviation policy said.

The five-member team led by former tourism secretary Yajna Prasad Gautam submitted a draft of the new national aviation policy to the Tourism Ministry last Wednesday. Government officials and specialists will review it before forwarding it to the cabinet for final approval.

The panel has advised that instead of fixing steep paid-up capital requirements, the government should adopt a liberal policy by allowing aspiring airlines to show their working capital to obtain an air operator’s certificate (AOC).

As per the panel's recommendations, start-up international airlines will need to have a paid-up capital of at least Rs500 million to obtain a flying licence from the Tourism Ministry. In order to get the AOC, which is granted by the aviation authority, they will need to have a working capital of Rs2 billion, including the Rs500 million paid-up capital.

For domestic airlines, the panel has recommended a paid-up capital of Rs250 million to obtain the flying licence, and a working capital of Rs500 million to get the AOC.

The prevailing Aviation Policy 2006 requires international and domestic airlines to have a paid-up capital of at least Rs500 million and Rs150 million respectively to get the AOC.

Civil aviation rules were amended in 2018, and the minimum paid-up capital requirement for new international airlines was raised. The requirement for domestic airlines remained unchanged.

As per the new rule, airlines aspiring to obtain a Class A licence to fly aircraft having a maximum take-off weight of more than 125 tonnes should have a minimum paid-up capital of Rs1 billion.

In order to obtain a Class B licence needed to fly aircraft with a maximum take-off weight of more than 40 tonnes, airlines need to have a minimum paid-up capital of Rs750 million. The paid-up capital requirement for a Class C licence to fly aircraft with a maximum take-off weight of less than 40 tonnes is Rs500 million.

The new rule says airlines are required to increase their paid-up capital by Rs100 million for each aircraft they add to their fleet beyond the mandatory requirement of three aircraft.

The paid-up capital is usually the amount that a company needs to deposit in a commercial bank, and represents money that is not borrowed. A company's paid-up capital figure represents the extent to which it has funds for its operations.

Working capital represents a company's ability to pay its current liabilities with its current assets, including bank loans, commitments and guarantees.

“The working capital can ensure that the company will be able to pay the staff and insurance even if it goes bankrupt,” said Suman Pandey, chief executive officer of Fishtail Air and one of the panel members.

“As airlines are required to deposit the paid-up capital to obtain their licence, it can face a cash crunch when it moves to the second stage of obtaining the AOC from the aviation regulator. At this time, the working capital, which may be in the form of a bank loan, guarantee, investment commitment and other credit facilities, can help the airline to show its strength to convince the regulator,” said Pandey.

The panel has suggested keeping the old rule that requires domestic airlines to have operated for five years and have at least three planes before being allowed to fly international routes. The panel has not talked about the mandatory requirement for domestic airlines to operate services in remote areas.

The existing policy has mandated domestic airlines to serve remote sectors, and those not flying remote routes have to contribute to the remote area air service operation fund.

The panel has allowed the government to take control of the airfare structure for every flight sector after specifying the upper and lower limits. “But we instantly removed the lower limit after criticism from the public,” said Pandey.

Some aviation experts said that the government had fixed the lower limit to prevent unhealthy competition that caused a number of airlines to go bankrupt.

“Nepal has a glaring history of how a powerful company can lower ticket prices and prompt its rival to launch an airfare competition. It is evident, one will collapse. The powerful remains in the market and can have a monopoly again,” said a senior retired official of the Civil Aviation Authority of Nepal. “So, for a country like Nepal, the lower limit is also decisive.”

The current policy allows airlines to import non-pressurised aircraft that are up to 20 years old, and the panel has recommended lowering the age limit to 15 years. The panel has recommended maintaining the 15-year age limit for pressurised aircraft. Non-pressurised aircraft refers to single-engine planes and helicopters whose cabin air pressure at cruising altitude is lower than air pressure at sea level.

“We have encouraged investors to bring new planes in the amended policy,” said Pandey. “We have recommended providing a discount on customs and lease tax, and also an income tax discount for three years for companies importing aircraft aged less than five years.”

The draft says that the Civil Aviation Authority should be given the legal right to auction planes that are left at the airport for more than two years. The policy panel has suggested that aircraft wet lease should be permitted for a maximum period of six months.

It has also recommended developing low cost carrier concepts and building infrastructure like parking bays and terminals, particularly and separately, targeting them.

Source: https://kathmandupost.com/money/2020/02/25/loosen-the-paid-up-capital-requirement-for-aspiring-airlines-policy-panel-says