Uncertainty on Availability of Airport Slots: A Red Flag for Airline Restructuring in India?
By Gausia Shaikh (REDD Intelligence)
Introduction
The insolvency resolution process of Jet Airways (India) Limited, one of India’s most popular airlines before it was grounded, has been a landmark journey on various fronts. As I mentioned in an earlier article, with its successful cross-border cooperation and coordination of insolvency proceedings in India and the Netherlands, Jet Airways has been an outlier and trendsetter and not just in the context of airline insolvencies.
While the ailing airline has found takers in the form of a consortium comprising financial advisory firm Kalrock Capital and UAE-based entrepreneur Murari Lal Jalan, the resolution of the company has yet to be completed. One of the primary reasons for the holdup has been the uncertainty surrounding the return of airport slots which had been withdrawn from the company and allocated to rival airlines after the airline went under.
The Insolvency and Bankruptcy Code 2016 (IBC) - India’s insolvency law - does not contain any sector-specific provisions for airlines. Consequently, the Jet Airways insolvency has proven to be quite the test case for circumstances unique to the airline industry.
In this post, we look at airport slots as important assets for the airline industry and analyse the existing legal position regarding airport slots of insolvent airlines.
Airport slots as critical airline assets
In the aviation industry, time slots allotted to airlines to take off and land from an airport, while also granting access to other airport infrastructure and traffic rights or travel routes between destinations, constitute critical assets.
According to Ministry of Civil Aviation’s (MoCA) guidelines, airport slots are allocated to airlines twice a year – once for the summer season starting on the last Sunday of March and then for the winter season starting on the last Sunday of October. The actual allotment takes place after discussions on existing slots with airlines, airline requirements, and slot availability. Once allotted, slots are retained by the airlines until required to be returned. When an airline is unable to operate slots allotted to it, its slots must be returned.
The question that then follows is, what happens when the airline becomes able to operate during the slots on a later date? Will the slots be returned to the airline?
The answer is no.
Slots that are returned by an airline are allocated to other airlines. Airport slots are, after all, a scarce resource in the airline industry. As such, to get back an airport slot, the airline is once again required to participate in the slot allotment process.
Airport slots in airline insolvencies
The question of return of airport slots becomes even more important when an airline is restructured following its insolvency. The typical process to be followed once an airline becomes insolvent is that it must inform the airport of its insolvency, convey details of the court-appointed resolution professional, i.e. the insolvency practitioner responsible for conducting the resolution process and running the company during such process, and explain its future intentions regarding the allotted slots. This information is to be provided to the airport coordinator, who is the single point of contact for airlines to communicate with airports.
Practically, the resolution professional appointed under the IBC, being the person effectively running the airline’s operations while the insolvency resolution process is ongoing, must initiate such dialogue. Following such talks between the resolution professional and the airport coordinator, slots can be reserved for a month. However, since IBC proceedings are known to take far longer than a month, slots remain susceptible to being withdrawn from the airline and allotted to other carriers. This is what transpired in the case of Jet Airways.
Jet Airways’ slot woes
Local reports suggest that when Jet Airways went under it had around 700 slots and traffic rights across both domestic and international routes. After it ceased operations in April 2019, all eyes were on these slots.
After receiving the requisite insolvency process intimations from the resolution professional and with no speedy resolution in sight for the ailing airline, its airport slots were withdrawn and allotted to other airlines. However, now that flight operations will need to be revived following the company's imminent restructuring, Jet Airways is in dire need of those very same airport slots. Without these slots, the complete revival of the company is almost incomprehensible.
Following the transfer of Jet Airways’ slots to other airlines in September 2020, the National Company Law Tribunal (NCLT) - India’s insolvency law tribunal - had sought submissions from the Directorate General of Civil Aviation (DGCA) (India’s civil aviation regulator) and the Ministry of Civil Avia-tion (MoCA) on the issue of reallocation of Jet Airways’ earlier slots back to the airline.
In response to the NCLT’s directions, the DGCA and MoCA informed the tribunal, earlier this month, that while they do not have any objections to Kalrock-Jalan’s winning restructuring bid for the airline, they will consider granting slots only after the NCLT has approved the bid.
Under the IBC, once bids are received for resolving insolvent companies, they go through an initial two-tier approval process. The first approval comes from the creditor committee constituted to make key decisions pertaining to the revival and restructuring of the company. Thereafter, the winning bid or resolution plan that was approved by the creditor committee is placed before the NCLT for its approval. It is only after the NCLT’s approval that the restructuring process under the winning resolution plan can proceed to be executed.
In Jet Airways’ case, the creditor committee approval was obtained October 2020, but the resolution plan has been pending NCLT approval since November 2020. According to the submissions made by the DGCA and MoCA, once the resolution plan is approved by the NCLT, the new owners of the company will have to make an application for required slots, following the usual procedure.
This decision falls in line with the existing legal position on the issue as India's current civil aviation rules do not contain a set procedure for reversion of slot rights back to a restructured airline. At present, participation in the comprehensive slot allotment procedure seems to be the only path available to such an airline.
What next?
Research suggests that while India is among the costlier places in the world to run a fleet of aircraft because of higher taxes, aviation turbine fuel costs, and airport charges, the Indian aviation industry will nonetheless have to cater to an estimated 442 million passengers by 2035, up from 316.5 million in February 2019.
With such an increase in demand, airports will have to strengthen their infrastructure and increase airport slot availability as airlines compete with each other for the acquisition of airport slots to cater to the rising demand. In such a scenario, it is likely that insolvent airlines, in the midst of their insolvency resolution process, might take a backseat in the larger scheme of things. However, asset availability and preservation are vital for the complete resolution of airlines.
With the coronavirus pandemic throwing a spanner in the works and adding to the financial woes of airline companies in particular, concrete restructuring plans with explicit clarity on the preservation of assets such as airport slots and routes are essential to stabilise the industry and help struggling air-line operators recover. The uncertainty on availability of slots may also dampen the spirits of potential bidders for airlines in the country. As such, this is a pertinent issue that needs to be addressed by the government and aviation authorities.
All said and done, the Jet Airways insolvency will set yet another precedent for the Indian airline industry as well as the IBC ecosystem at large.
(*) A modified version of this post was published on the REDD Intelligence website.