Despite the undoubted potential of regional aviation in India, the sector remains severely under-penetrated and standalone regional carriers have struggled. CAPA held a virtual discussion on the subject and came out with remarkable clarity on the failures so far, the ambition of having a sustainable and meaningful regional connectivity, and the way forward towards achieving these goals.

The regional connectivity is critical to India’s growth story. The Indian economy is undergoing a major transformation as it looks beyond the metro cities, into the country’s hinterland. This is where air transport, efficient and sustainable, comes into play.

We urge the government to consider these suggestions, involve the private players who are going to eventually deliver, and bring all concerned together onto the same page.

Opportunity and ambition of the sector:

  • Developing a competitive and viable regional aviation ecosystem is critical to support the orderly growth of Indian aviation. This applies to both airlines and airports.
  • India should be an ideal market for regional aviation. The majority of the population lives outside of the major cities, distributed across a large land mass. Many of the country’s most unique tourist attractions are located in remote areas.
  • For long-term growth, India needs turboprop, regional jet and commuter airline services to complement the national network.
  • India has aspired to develop effective regional connectivity since the launch of Vayudoot in the 1980s.

Reality

  • The current regional fleet in India comprises around 80-90 aircraft.
  • This represent only around 15+% of India’s domestic airline fleet, much less than in other large markets such as Australia, Brazil, Canada, Russia, USA, Indonesia.
  • The market has delivered a string of failed regional airlines. The reasons for the failure of these carriers are largely consistent:
    • Under-capitalisation;
    • Sub-scale operations;
    • Mixed fleet types;
    • Operation of old equipment;
    • Reliability challenges;
    • Poor governance.
    • Demand risks have been the core challenge
  • We have consistently advised our clients that starting with a strong capital base, management capability and governance standards are critical success factors for regional airlines.

Despite a number initiatives from 2004, regional aviation has failed to gain traction. However, NCAP 2016 reflects a genuine effort to develop the sector.

Liberalisation 2004-2006

  • A number of policy initiatives were introduced during the period 2004-2006 with the objective of stimulating regional operations e.g.
    • Reduction in sales tax on ATF to 4%;
    • Waiver of landing and parking charges.
  • However, inconsistencies in approach, an absence of infrastructure (particularly for maintenance) and skills shortages meant that there was no traction.

National Civil Aviation Policy 2016

  • NCAP 2016 reflected a genuine effort to provide powerful incentives, including cash subsidies, to attract new players and encourage mainline carriers to focus on regional services.
  • Regulatory changes were also introduced e.g. introducing a scheduled commuter airline licence category with a low capitalisation threshold.
  • More importantly, the Airports Authority of India invested in rehabilitating smaller airports for safe, regional operations.
  • We also recognise and appreciate that MoCA has diligently focused on making UDAN work. Their significant efforts and strategic intent are clearly visible.

Given the Hon. PM’s inspirational call for structural reforms across the economy, we urge that there be a review of regional connectivity & re-targeting of capital/assets

  • Such a review is critical because despite positive aspirations, most standalone regional airlines have failed. And the post-COVID environment will be even more challenging given that the entire Indian airline system is weak.
  • This review should also lead to a re-targeting of the planned USD4-5 billion* of capital and other assets that are earmarked for investment in regional aviation over the next 10 years e.g.
    • Development of 100 new low cost airports;
    • Operating expenditure and maintenance capex for these 100 airports;
    • Investment in current and planned RCS airports by the AAI;
    • Viability gap funding to be paid to airlines under RCS.

* The investment of USD4-5 billion assumes no expectation of a return other than indirect economic and social benefits. This capex would mostly be funded through budgetary support and passenger levies.

Massive investment on the scale of USD4-5bn requires strategic clarity with respect to policy objectives, especially to make regional aviation viable.

  • CAPA India is of the opinion that UDAN marked the democratisation of air travel in India. It sought to include people, companies and communities that are disconnected or dislocated from India’s economic system.
  • Regional air connectivity provides a mechanism to bring them into the mainstream. This worthy objective deserves to succeed. But for that to be achieved, we recommend a strategic review of regional aviation in India and a re-targeting of planned investment.

CAPA India welcomes the government’s strong thrust towards building robust regional air connectivity and giving its highest attention to make this work

  • There is a genuine and visible effort on the ground at MoCA to bring strength and stability to UDAN.
  • However, it is CRITICAL, A dedicated oversight authority should be established within MoCA, under a Joint Secretary, with responsibility for delivering short, medium and long-term objectives. The authority would:
  • handle the development of an appropriate ecosystem for regional aviation e.g. airlines, airports, air traffic management, skills and maintenance
  • ensure effective coordination between ministries and states.
  • Implementation will be carried out by the airlines, airport operators and service providers, but the authority within MoCA would be responsible for design and delivery.

Strong and viable regional connectivity is critical for Indian aviation, the economy, and regional integration

  • CAPA India strongly believes that viable business models are fundamental to the overall development of India’s regional aviation connectivity. Sustainable viability cannot be engineered with subsidies and structures which are not based on commercial principles.
  • The Government of India’s focus should remain on providing critical connectivity to remote and social obligation routes, with a funding mechanism in place as long as required. RCS should be designed to ensure that all remote locations are well-connected, with sufficient frequency. Currently, many remote routes remain unserved.
  • Viable business models will depend on the stability of demand (beyond the busiest 20% of regional routes) based on cost recovery models. Consumer propensity to pay is critical and that will depend on rising GDP, per capita incomes and other economic factors.
  • India continues to be a very price sensitive market. That is the reason why Indian air fares are the lowest in the world and airlines are mostly unable to recover costs.
  • As a result of UDAN, India has a powerful incentive framework for regional operations. However, the market will take time to reach the levels required and ultimately it is demand that will drive investors.

RDG and RCS should complement each other. India is the only country to have two subsidy-based policies within a largely loss-making airline system.

  • CRITICAL , RDG has been reasonably effective in developing regional connectivity over the last 26 years. This is an indirect subsidy model which requires airlines to internally cross-subsidise regional routes.
  • CRITICAL , RDG has a significant impact on airline viability because it results in sub-optimal route networks and over-concentration of capacity on certain routes. This becomes particularly challenging for startups and smaller airlines.
  • CRITICAL , When the RDG is up for review next year, changes should be implemented to reduce airlines risks, while maintaining social obligation objectives as a priority.
  • CRITICAL , RCS (UDAN) should complement RDG. The outcome should be an integrated scheme which delivers more tangible outcomes, without placing significant pressure on long-term airline competitiveness and profitability.

CAPA India’s recommendations (1/4)

Regional airlines

  • Successive failures of regional airlines in the Indian market since the 1990s, and particularly since 2004, are largely due to under-capitalisation, sub-scale operations, and poor fleet and network decisions, among other reasons.
  • Standalone, independent regional carriers or commuter airlines are unlikely to succeed without strong promoters with INR150-200 crores of start-up capital.
  • RCS will not achieve its objectives if it relies on such small, standalone carriers. The sector requires strong, well-funded airlines. Minimum capitalisation requirements, even for scheduled commuter licences, should be increased to avoid more failures.
  • The methodology of allowing airlines to identify routes where RCS subsidies are to be offered should be reconsidered. Most start-ups may not be able to qualify potential demand and yields, especially on virgin routes where there is no historical data. This is contributing to a high rate of exits from routes. VGF should only be given on routes whether there is possibility of achieving viability within 12-18 months while also serving policy objectives.

CAPA India’s recommendations (2/4)

Regional airlines

  • The methodology of allowing airlines to identify routes where RCS subsidies are to be offered should be reconsidered. Most start-ups may not be able to qualify potential demand and yields, especially on virgin routes where there is no historical data. This is contributing to a high rate of exits from routes. VGF should only be given on routes whether there is possibility of achieving viability within 12-18 months while also serving policy objectives.
  • Instead, MOCA should identify a bank of prospective routes on a pan-India basis after 1) conducting a detailed assessment of demand and 2) prioritising routes based on the need for connectivity to achieve economic and social objectives.
  • Do not depend upon airlines to come up with the right set of unserved and under-served routes.
  • Business plans of independent regional airlines should be analysed in detail, including their source of funds. There should be tremendous focus on safety and security capabilities. Critical manuals submitted with licence applications are often copy-paste documents.

CAPA India’s recommendations (3/4)

  • Regional connectivity is likely to best achieved by mainline carriers or independent carriers with significant capitalisation and credible plans to scale-up. Data since the 1990s shows that it is the regional fleets of mainline carriers e.g. Jet Airways, Air Deccan and Kingfisher, that have operated regional routes for longer routes.
  • Most of the RCS and regional fleet is in fact operated by mainline carriers e.g. SpiceJet’s Q400s, IndiGo’s ATRs and Alliance Air’s ATRs. These carriers are more likely to drive critical mass in regional operations because 1) they require feed for their narrowbody and widebody operations (this is a key driver of successful regional operations overseas) 2) they have stronger balance sheets and 3) they have the scale to secure better aircraft terms and conditions with OEMs or lessors, and with other vendors than independent carriers.
  • Region-wise allocation of a basket of RCS routes, based on transparent bidding and exclusivity, should be considered. This will enable operators to develop scale economies in a given region, and potentially develop a hub out of one of the metro airports.
  • For independent airlines, the ability to feed mainline carriers is critical for viability. Under certain conditions this should be mandatory. Capacity purchase agreements or affiliate models should be encouraged, especially with airlines that have no regional equipment e.g. Vistara, AirAsia and GoAir.
  • Trading of ASKs should be allowed between airlines, subject to guidelines.

CAPA India’s recommendations (4/4)

Regional airports

  • A basket of routes should be created based on a detailed assessment of demand, together with economic and social objectives. This will support the preparation of investment case for which airports should qualify for upgrade or construction. A 5-10 year masterplan, which prioritises investment projects, can then be developed.
  • However, before developing new airports, the initial focus should be on fully-leveraging the current infrastructure available at AAI airports. Investment in new infrastructure should be driven only by demand and should be pursued in a very careful and calibrated manner.
  • New infrastructure should not be developed unless there is clear and sustainable demand, and well-capitalised airlines are committed to operate. Capex should not be allocated based on the stated plans of small, standalone operators which may or may not materialise.
  • Unserved, under-served and new regional airports must be part of their respective city and state master plans.
  • Last mile connectivity must be prioritised. One of the shortcomings of the UDAN scheme is that last mile surface connectivity is often costly and not available to the level required.