Last week, the aviation ministry released a list of successful bidders under its Udan scheme, set to connect big cities with smaller towns. The five airlines that were awarded the rights to fly on so-called regional routes are Airline Allied Services (Air India’s subsidiary), SpiceJet Ltd, Turbo Megha Airways, Air Odisha and Air Deccan. Udan is short for Ude Desh Ka Aam Nagrik, which loosely translates as let the common man fly.
Under the scheme, the selected airlines will enjoy a three-year exclusivity period on the specific routes they have won. This means there will be no competitive pressures to worry about during that time. Aviation turbine fuel tax rates have been reduced in collaboration with the states. There are no airport charges. Airlines will reserve 50% of seats under the stipulated fare cap.
According to Dhiraj Mathur, partner and leader of the aerospace and defence practice at PwC India, “the difference between earlier attempts to boost regional airline connectivity and now is that there is immense government support in the form of lower taxes, viability gap funding (or subsidy) and assurances to build airport infrastructure.”
But the challenges are immense. Regional airline operations are likely to be leaner with thin margins, meaning the biggest risk really is if the government doesn’t pay the subsidy on time. Getting payments from the government is a huge problem, as there are elements of red tape and corruption entwined here, said Mathur, adding, “Moreover, the state governments, too, have to live up to their commitments (as far as tax reliefs are concerned).”
What about profitability? According to Ansuman Deb, an analyst at ICICI Securities Ltd, the government’s cost sops will ensure loss-free operations unless the traffic demand is very low. However, traffic growth is of supreme importance, and it is difficult to predict traffic demand on these routes. That uncertainty is a risk for this scheme. One of the biggest challenges in developing regional routes is the lack of depth in the market, translating into low load factors.
In general, India has seen 20% domestic passenger traffic growth in recent years, according to data from the Directorate General of Civil Aviation (DGCA). Under the scheme, traffic demand situation will be clearer as the scheme progresses. “However, some routes have better potential than others like Delhi-Shimla,” says Deb, adding, therefore, that the profitability of operators will be route-dependent. Fares on seats not part of the scheme and compensation airlines shall receive from the government will also play a key role in determining profits. It helps that the outlook on crude oil prices is muted from a medium-term perspective.
An important objective of the scheme is to facilitate / stimulate regional air connectivity by making it affordable. Analysts say even as the intent of the policy is good and the efforts laudable, its success will depend on proper implementation and traffic demand/load factors. It’ll be a while before the results are visible, and its success can be measured. Needless to say, if the scheme is successful, it will have a positive impact on travel- and hospitality-related sectors. Domestic air-travel demand could get a fillip, which will be positive for the aviation sector from a long-term perspective. Developing regional routes is expected to eventually feed into major routes, and that augurs well for the sector.