Regional Connectivity Scheme: An Appraisal

A study conducted jointly by the Federation of Indian Chambers of Commerce and Industry (FICCI) and the renowned consultancy firm KPMG, has predicted that India which is currently the ninth largest civil aviation market in the world with a market size of $16 billion, was well on its way to occupy the third slot by 2020 after US and China and the largest by 2030. However, forecast in 2016 by the International Air Transport Association (IATA) in comparison, was somewhat less optimistic. As per IATA, India would be third largest market only by 2026. However, both the studies have indicated that one of the factors driving growth of the Indian aviation industry would be enhanced regional connectivity.

Regional Connectivity Scheme

With these reports in the background, in June 2016, the Ministry of Civil Aviation (MoCA) unveiled the new National Civil Aviation Policy (NCAP). The major focus of the NCAP was on the growth of Regional Aviation in the country, a segment that had remained neglected and under developed so far. However, as per analysts, Regional Aviation had the potential to provide the next phase of growth for the India airline industry as the non-regional segment was reaching saturation point. Real growth in the Indian airline industry was envisaged through what is dubbed as the Regional Connectivity Scheme (RCS). This scheme was based on the concept of Ude Desh ka Aam Nagrik or UDAN for short, conceived and initiated by Prime Minister Narendra Modi himself. The objective of the UDAN scheme was to provide the facility of air travel to the masses at affordable cost through providing connectivity to Tier-II, -III and -IV cities and capping airfare to 2500 for a flight of a duration of one hour. As operations on regional routes by the regional airlines were not expected to be profitable, especially in the initial stages and hence would not be very attractive to operators, a scheme to subsidise losses suffered by the operators was also included in the plan. This was called Viability Gap Funding (VGF) for which funds were to be built up through levy on non regional flights as also contribution by the central and state governments.

The first round of bidding saw 128 routes being awarded to five operators namely Alliance Air, Air Deccan, Air Odisha, TruJet and SpiceJet. New airports were added in the network after the first round of allocation of routes and the ultimate goal is to bring 200 new regional airports into the network beginning with 100 new airports by the end of financial year 2018-2019. The maiden flight post first round of bidding that got airborne on April 27, 2017, was by the state-owned Alliance Air operating a flight from Shimla to Delhi, flagged off by the Prime Minister. On the same day, he also flagged off flights on the Kadapa-Hyderabad and the Nanded-Hyderabad sectors through video conference. Bidding for the second round was launched by the MoCA on August 24, 2017, the process having ended on November 30, 2017.

Progress of the Scheme of the Lack of It

Whether the scheme will ultimately be successful or not, will, in the final analysis, depend to a large extent on its financial viability and the return on investment by the regional carriers. However, there have been a number of impediments plaguing the scheme to start with. At the end of August this year, as against the 128 routes allocated, only 16 were operational, registering a very low success rate. Besides, all the 16 routes on which regional carriers have commenced operations, are providing connectivity to the airports in metro cities and not to other regional airports. Thus the true objective of enhancing connectivity amongst regional airports which is a major part of the scheme, has not yet been realised.

THERE IS CLEARLY THE NEED TO GENERATE DEMAND FOR RCS TO REALLY TAKEOFF. THIS IS A FUNDAMENTAL PRINCIPLE FOR ANY BUSINESS TO GROW AND PROSPER.

Of the five regional carries allotted routes in the first round of bidding, only three namely SpiceJet, Alliance Air and Trujet have been able to launch operations. Of the three carriers, SpiceJet was already in the regional market in a big way with its fleet of Bombardier Q400 turboprop aircraft. Thus only one in the privatelyowned category namely Trujet, has been able launch regional operations. Alliance Air is wholly owned subsidiary of the stateowned national carrier Air India. Air Odisha is yet to commence operations and Air Deccan is yet to acquire regional aircraft.

Viability Gap Funding (VGF)

An important consideration for the success or even mere survivability of RCS is VGF. This is a way of hand-holding by the government especially to help newcomers in this segment of the Indian Airline Industry. Funds for VGF were to be built up through a levy on air tickets for passengers flying on existing non-regional airlines operating on major routes. This levy was to be limited to a maximum of 5,000 per flight. The major private airlines were always opposed not only to the levy; but to the RCS as well. It is understood that there has thus been a problem as the levy has neither been collected nor demitted to the Ministry. After some dithering and delay, a fresh notification has been issued by the MoCA to the non-regional airlines asking them to remit to the Ministry, the funds collected by way of levy on air tickets with effect from September 1, 2017. The airlines in turn are passing on this cost to the consumer by charging 50 per ticket. The collection and disbursement of this fund is to be administered by the Airports Authority of India (AAI) and whether this method of building up funds for VGF is successful or not, is yet to be seen.

Congestion at Metro Hubs

A part of regional operations would require regional carriers to operate to major hub airports to provide feeder service to mainline carriers. Unfortunately, in India, the six major hub airports at Delhi, Mumbai, Kolkata, Chennai, Bengaluru and Hyderabad are already heavily congested and are literally bursting at the seams. The authorities at Chhatrapati Shivaji International Airport, Mumbai have reportedly declined to allocate operating slots to regional carriers. The management of Delhi International Airport is alo reluctant and has suggested use of the Indian Air Force airfield at Hindon, East of Delhi to accommodate regional flights. Kempegowda International Airport (KIA) at Bengaluru is overloaded with traffic and is not in a position to accommodate regional flights easily. The irony is that KIA is not willing to permit reopening of the airport under the control of Hindustan Aeronautics Limited (HAL) for regional flights, citing terms of the Concession Agreement under which no airport within 150 km of the existing one can be permitted to operate commercial flights. Efforts are on to resolve this deadlock through legal and other means.

The Final Word

It appears that it has not been smooth sailing for RCS so far. There is certainly a long way to go for the scheme and there are clearly a host of challenges that lie ahead for this segment of the Indian Airline Industry. What is important is that the government must not expect RCS to survive or prosper through subsidy alone. There is clearly the need to generate demand for RCS to really takeoff. This is a fundamental principle for any business to grow and prosper. Policies and procedures related to RCS do need a thorough review and restructuring sooner than later.