Airline Startups In India Are Having A Tough Time Getting Off The Ground

The Boeing CompanyAir India Boeing 787-8 taking off

The airline business is cutthroat in virtually every market in the world, but it is especially difficult for start-up airlines in India. Fuel prices and fickle passengers aside, start-up airlines in the country must contend with a truly suffocating piece of government regulation that hinders their growth.

Although Indian tech start-ups seem to be doing well, start-ups in most other sectors generally face an uphill battle against protectionist policies and a highly corrupt government.

As flying goes, India's domestic routes are crowded with too many airlines competing for too few routes that can sustain a profit. As a result, no Indian airline actually makes substantial profit from domestic flying.

However, in order for an Indian airline to be able to fly lucrative international routes, they must adhere to the 5/20 rule which require them to have been in business for at least five years and have a fleet of at least 20 aircraft.

As a result, opponents of the rule argue that it has shielded the country's two international carriers, state-owned Air India and Jet Airways from start-up competition. Recently, Amber Dubey, head of aerospace at KPMG in India, told the Business Standard that the rule was anachronistic, anticompetitive and discriminatory.

REUTERS/Amit DaveJet Airways Boeing 737 landing in Ahmedabad

In a recent report, the CAPA Center for Aviation called the 5/20 rule "one of the most damaging and discriminatory regulations in India."

Since the rule doesn't apply to foreign carriers, international airlines have benefited greatly from the lack of internal competition. Airlines like Lufthansa, British Airways, and Virgin Atlantic have solidified their hold on highly profitable flights connecting Europe and North America with the Indian subcontinent.

The 5/20 rule doesn't just hold down plucky entrepreneurs, it's also stands in the way of investment from major corporations that seek to improve both the product and infrastructure of India's aviation sector. In the same report, CAPA cited the rule as a contributing cause for the 2012 liquidation of UB Group's highly rated Kingfisher Airlines.

APVistara Airlines Announcement

More recently, the 5/20 rule threatens the survival of Vistara, the country's latest airline - a joint venture between Tata Group and Singapore Airlines. Set to launch this October, the new carrier run by the country's most prominent corporation and the world's best airline, will be beset with the same challenges that held back previous entrants like Kingfisher.

Fortunately for Vistara, there has been a recent push within the government for the rule's abolition. However, no substantial plans for the rule's review has occurred. But if India wants to see its airline industry follow the example of the developing world, it may want to study the success of JetBlue, Virgin Atlantic, and Virgin America - and give the country's startups more room to maneuver.