The Maharashtra govt is willing to underwrite seats of airlines to ensure viability of business proposals to connect smaller cities with bigger cities
Mumbai: Looking to boost connectivity to smaller cities, the Maharashtra government is willing to offer incentives to airlines, but has no plans to start services on its own or to buy an airline.
The ministry of civil aviation on Tuesday said that permission for taking over a loss making airlines can be considered by a state government, on the basis of applicable regulations and guidelines.
Though the Maharashtra government has no such plans, it is willing to underwrite seats of airlines to ensure viability of business proposals to connect smaller cities such as Kolhapur, Sholapur, Nasik, Aurangabad, Amravati, Nanded, Ratnagiri and Jalgaon with bigger cities such as Mumbai, Pune and Nagpur, according to two government officials.
“We are ready to offer compensation to airline operator if they don’t get 75% booking on their flights," said one of the officials cited above.
Under the arrangement, the government can block a certain number of seats for a specified airline operator at a pre-specified fare for operating between an industrial centre of the state and Mumbai.
The operator has to first make efforts for selling all the seats on its aircraft at prevalent market rates. In case it is not able to sell all the seats, the government pays for the number of seats blocked at pre-decided fares.
The Maharashtra government has also called a meeting of airline operators on 7 August to explore the possibility of connecting tier II cities with major cities in the state.
“Air connectivity is a major factor when industry zeros on location for setting up factory. Enhanced air connectivity will definitely increase Maharashtra’s competitiveness. Besides, it will also help attract more tourists, both national and international," the first official said.
The second official, who is from the chief minister’s office, said the state government is also thinking of offering higher allowance to government officials who travel to Mumbai for official meetings, court hearings or other administrative work.
“The government believes this move will help ensure minimum time is wasted in travel," the second official added.
In the past, states such as Madhya Pradesh and Odisha have experimented with such underwriting incentives to improve connectivity to Tier II and III cities.
Some state governments even operate separate air services to boost connectivity. According to the civil aviation ministry, state governments can operate commercial flights. Currently, Rajasthan has a non-scheduled operator permit (NSOP) and has three operational aircraft. NSOP refers to operating an airline without publishing operating schedules like normal airlines. The civil aviation department of Jharkhand got the initial no-objection certificate (NoC) in 2013. Gujarat State Aviation Infrastructure Co. Ltd has also got an initial NoC to start non-scheduled operations.
According to a 2014 report by consultancy KPMG, in most leading international aviation markets, regional air connectivity is promoted by the government. The report cites that many governments support airlines for adding new destinations to their flight routes, by sharing risks such as demand-related uncertainties by offering guarantee for a certain number of seats per flight.
According to aviation consultancy firm Capa India, Indian airlines have lost more than $10 billion since fiscal 2009. Airline debt stands at around $11.3 billion, rising to close to $14 billion if liabilities to vendors are included. At an industry level, airline debt is now equivalent to more than 100% of airline revenue.
Many airlines have been shut down in the past. Kingfisher Airlines was grounded in October 2012 and its operating licence was suspended by the regulator following a strike by the airline’s employees who hadn’t been paid for months.
In 2012, Paramount Airways Pvt. Ltd suspended operations after the aviation regulator cancelled its operating licence when it fell short of the minimum requirement of five aircraft that airlines need to possess.
Six private airlines, Damania Airways, Skyline NEPC, Modiluft, East West, Gujarat Airways and Span Air, that started operations after 1992, when the airline business opened up to private companies, closed shop in the first five years.
“Without government support, it is impossible to run regional operations to a new route. It takes time to break even a new route connecting Tier II from a big city. This applies to a NSOP operator and regional airline," said a senior executive, who ran a regional airline, requesting anonymity.
According to a 2013 report by consultant Deloitte, the seat sharing approach between the government and operator is understood to be a balanced one. While the airline has the incentives to sell all its seats at market rates (usually higher than the rate at which government underwrites the seats), in case it is not able to do so, underwriting of seats by the government assures it of recovering some part of the cost of operations.
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