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Mumbai: No-frills, low-luxury regional airports in tier-II and tier-III cities will trigger the next wave of growth for India’s aviation industry. That’s the nub of the draft national civil aviation policy as the government sets the ground for greater air connectivity.

The policy reiterates that the government will go ahead with the existing route dispersal guidelines, under which airlines have to fly to remote areas even as it moots the creation of new airports that cost less than 50 crore.

“Connectivity is extremely important not only to enhance social life, but also to enhance economy in a region. Connectivity through airlines is the most cost-effective way to achieve both objectives. And, if the initiative is implemented strategically in numerous regions across then country, then it will help to develop the nation’s economy," said Nawal Taneja, professor emeritus at Ohio State University, who serves as an adviser to airlines and governments worldwide.

But greater regional air travel also calls for a business strategy that is different from the usual one adopted by airlines in India—that of being a provider of low-cost seats between two airports.

Taneja said that such a strategy warrants a different mindset for the value proposition. Then, all resources must be assembled to develop, market and monitor such a plan, he said. “Many leading businesses are taking this approach of digitizing their businesses—autos, hotels, pharmaceuticals, banks, etc.—only a handful airlines around the world are exploring such initiatives," he said.

According to a November 2015 report by rating agency India Ratings and Research Pvt. Ltd, the measures adopted in the draft policy on regional connectivity have the potential to galvanize passengers in places where connectivity is currently dismal.

With the renewed interest of new airlines in regional flights and expected low operational costs due to no-frills airports, passenger traffic could improve drastically, the agency said.

The 2016-17 Union budget has also given a push to greater domestic air travel as the central government aims to partner with state governments to develop unused airstrips. Civil aviation minister Ashok Gajapathi Raju said the government has devised an action plan for the revival of such airports.

The government will identify such airstrips and then ask state governments to share the cost of developing regional airports.

The plan also includes the revival of airports owned by state-run Airports Authority of India (AAI). In fiscal year 2016-17, AAI proposes to revive 10 such airports. These airports are initially unviable and would require budgetary support from the government.

R.K. Srivastava, chairman of AAI, said that despite the projected growth, India remains the least penetrated market, with 0.4 trips per capita per annum, compared to 2 in the US. India has a strong 300 million middle-income group with disposable income to travel at least once a year by air, he said.

Srivastava added that in recent years, AAI has developed 33 airports. Of this, the capacity at 10 airports, which was enhanced to 30 million passengers per annum, has already reached the levels of saturation and requires further augmentation.

The available terminal capacity as on date is 250 million, of which capacity utilized is only 190 million, according to Srivastava. However, the capacity required in the next 10 years with the present trend of growth is 572 million.

AAI plans to spend about 20,000 crore over the next five years, of which 18,000 crore has been earmarked for aerodrome schemes, 128 crore for information technology upgradation and 865 crore for airport systems.

Similarly, for air navigation services another 550-plus crore and for ground safety and security equipment 515 crore will be required to be spent, Srivastava said.

AAI has already started talking to project management consultants to develop 11 airports, including in Agartala, Guwahati, Srinagar, Lucknow, Pune, Patna, Tiruchirappalli and Leh.

Local airlines, too, are exploring the possibilities of regional connectivity. India’s second largest low-fare carrier, SpiceJet Ltd, started operating to tier-II and tier-III cities with smaller 78-seater Bombardier Q400 turboprop planes in 2011.

SpiceJet, however, faced losses due to poor demand. Engineering troubles coming from having a second type of fleet, other than Boeing family planes, also affected the profitability of the airline.

SpiceJet’s Bombardier fleet started making money six months ago. Taneja said SpiceJet needs to develop a far more comprehensive strategy than simply reducing and controlling costs and implementing band-aid solutions.

“Yes, infrastructure is an issue as the government and the private sector must develop small, much less costly, and simply functional airports. But until such airports are developed, SpiceJet must work with what is available. It is possible. Leadership needs to develop a vision and a determination to work around the constraints. In the airline business, there have been and always will be complexities and constraints," he added.

Small regional airlines are also trying their luck in India, eyeing a regional connectivity boom.

In December, Air Costa, the South Indian regional airline run by Air Costa Aviation Pvt. Ltd, secured a no-objection certificate from the ministry of civil aviation for pan-India operations. The airline, promoted by Vijayawada-based construction firm LEPL Group, is expected to start flights to Delhi, Bhubaneswar, Varanasi and Pune from the summer of 2016.

Many small airlines that started have shut shop, while some did not even take off.

Religare Voyages Ltd, which runs Air Mantra, stopped operations of the regional airline eight months after its started in July 2012 because of poor bookings, Mint had reported on 31 March 2013.

Promoted by brothers Malvinder and Shivinder Singh, Air Mantra started operations with daily flights connecting Amritsar and Chandigarh.

MDLR Airlines Pvt. Ltd, the only regional carrier that started operations in 2008, stopped flying on 1 October 2009.

Apart from MDLR, several companies, including Star Aviation Pvt. Ltd, ZAV Airways Pvt. Ltd, Jagson Airlines Ltd and King Air Pvt. Ltd, were licensed to fly as regional carriers, but none of them could start because of high jet fuel prices and the economic slowdown of 2008.

Significantly, Paramount Airways Pvt. Ltd, a scheduled airline that had a substantial southern focus, suspended operations after the aviation regulator cancelled its operating licence when it fell short of the minimum five aircraft requirement.

Paramount Airways had also used Embraer aircraft with no middle seat and offered a twin-class configuration.

The ministry of civil aviation had introduced so-called scheduled operator permits for regional airlines in August 2007 to increase air services to smaller cities.

Regional airlines are required to operate in small towns within one of the designated regions—north, south, west, east and north-east region. But they are not allowed to connect to more than one major city, except those licensed to fly in the southern region.

Besides Air Costa, the fresh entrants include TruJeT (run by Turbo Megha Airways Pvt. Ltd) and Air Pegasus (Decor Aviation Pvt. Ltd).

But the International Air Transport Association (IATA), a lobby group of world airlines, has some reservations on the draft civil aviation policy.

“The approach seems to be extremely prescriptive—one which may result in a distortion in the efficient functioning of the market for air services; contribute to building further sub-optimal schemes for air service provision which can realistically never be dismantled and which may forgo demand/supply market mechanics to over-invest in infrastructure, which may not be economically sustainable," IATA said.

The Regional Connectivity Scheme (RCS) proposal adds to the regulatory burden on airlines and builds further on the lexicon of existing categories of air routes in the domestic Indian market that airlines need to fly, IATA cautioned.

It adds to the existing category I, category II, category II-A and category III routes under the route dispersal guidelines, IATA noted.

“The 2% connectivity fund levy is going to add a huge burden of cost to the industry in India. It’s already very expensive place to operate; by putting this regional connectivity fund levy on it’s going to add something like $350 million a year further to additional costs for airlines in India," said Tony Tyler, director general, IATA.

“And rest assured, in the end, it’s the airlines who are going to pay because of the competitive market—fares are set in the market, the amount the passenger pays is set in the market. So it’s going to be a real drain and a financial strain on the airlines in India," Tyler added.

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