BENGALURU: U de Desh Ka Aam Nagrik (UDAN), is now into its fourth year, and the fourth round of bidding to operate aircraft for Union Territories and North East regions was called for in December 2019. Airlines enthusiastically competed in the third round of bidding to connect 89 airports across 29 States in January 2019.But will it be commercially viable? And will the Regional Connectivity Scheme (RCS) be able to propel economic growth in Tier-II and Tier-III cities?
Joint Secretary, Ministry of Civil Aviation, Usha Padhee told The New Indian Express, that much thought had gone into ensuring UDAN made financial sense to bidders. “Airlines will not bleed because of their foray into RCS. A 3-year exclusivity in operations is given to airlines on the RCS route so that they can de-risk themselves,” she said. “We offer VGF (Viability Gap Funding, a grant given one time or deferred) for up to three years. If an airline has at least 60% occupancy, it can become financially viable even with the air fare cap in place. It also depends on the airline to create a market appetite.”
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Of course, 3-5% of routes may end up being financially unviable, but the exit and entry norms are quite flexible in such cases, Padhee explained. “If an airlines decides it is not profitable to run a specific route after a year, they are free to discontinue,” she said.
Right from its launch in October 2016, contracts have been awarded for 688 routes across the country. To incentivise airlines to step into this unchartered territory, subsidy in the form of VGF is provided. The Ministry of Civil Aviation contributes 80 per cent of the VGF amount, while the remaining comes from the respective state governments where the airport is operational while in the case of Northe-Eastern states and Union Territories, the share ratio is 90:10.But to avail subsidy, a few terms have to be honoured, the major one being 50% of seats to be charged at a fare cap of Rs 2,500 per hour of flying. To garner funds for it, an UDAN levy (a sum of Rs 5,000 collected from airlines on every flight operating on major routes) is being collected. The subsidy is exempt from GST for three years, and it was announced in January 2018.
Captain GR Gopinath, who launched India’s first low-cost airline, Air Deccan, said, “UDAN concept is a great model, but to make it a success, two points are crucial. Infrastructure at operating airports must be massively improved and red-tapism reduced...I was very clear from the beginning that Air Deccan had to compete with train fares and not with other airlines. Low fares ensured people who never travelled by flight were drawn to the idea. When you stimulate the market and more numbers opt to travel by your airline, it becomes financially viable.”
Synergia Foundation, Bengaluru-based strategic think-tank, said UDAN levy is estimated to bring in around Rs 400 crore. “Domestic air travel is expected to reach Rs 70,000 crore this year, which implies that the UDAN levy will be just 0.6% of total revenues. If airlines pass this levy on to consumers fully, it will be about Rs 50 per ticket. If the average subsidy amounts to, say, Rs 1,000 per seat, this levy can create 50 lakh UDAN seats or 1 crore seats, representing about 10% of expected flyers this year.
An offshoot of air connectivity is economic growth, the foundation said. An International Civil Aviation Organisation (ICAO) study found the output multiplier and employment multiplier of aviation is 3.25 and 6.10, respectively. This implies that every Rs 100 spent on air transport contribute to Rs 325 worth benefits, and every 100 direct jobs in air transport results in 610 jobs in the economy as a whole. The study also attributed over 4.5% of the global Gross Domestic Product (GDP) to civil air transport.