Insights into Editorial: Connected by air – Udan to tap on India’s civil aviation opportunities

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Insights into Editorial: Connected by air – Udan to tap on India’s civil aviation opportunities 


 

udan

 

Summary:

Five airlines will operate on 128 routes connecting over 30 unserved airports under the regional connectivity scheme wherein fares are capped at Rs 2,500 for one-hour flights. As many as 70 airports, including 31 unserved and 12 under-served ones, would be connected with the UDAN flights.

  • The operators are Air India’s subsidiary Airline Allied Services, SpiceJet, Air Deccan, Air Odisha and Turbo Megha. They would be operating 19-78 seater aircraft. These flights would connect airports spread across over 20 states and union territories including Punjab, Uttar Pradesh, Madhya Pradesh, Maharashtra, Andhra Pradesh, Gujarat, Himachal Pradesh, Karnataka, Tamil Nadu and Puducherry.

 

Key features of the scheme:

Udan is a market-based policy intervention that builds on similar programmes in the US, Canada and Australia. It is also consistent with universal service approaches established for other network-based services such as railways and telecom.

  • The objective of the Scheme is to make flying affordable for the masses, to promote tourism, increase employment and promote balanced regional growth. It also intends to put life into un-served and under-served airports.
  • It offers viability gap funding to operators to fly smaller aircraft to such airports with a commitment to price tickets for at least half of the seats at ₹2,500 for an hour-long flight.

 

Need for schemes like Udan:

  • There are as many as 398 “unserved” airports which have no commercial flights and 18 “under-served” airports host less than seven flights per week.
  • Besides, a major reason for the poor regional air connectivity in India is that airlines do not find it lucrative to operate from small cities. The government has tried to address this concern by an adroit combination of subsidies and fare caps.

 

So what are the likely benefits?

  • First, commercialising these 416 airports will “democratise” publicly-owned sites which have hitherto been reserved for elite use. The average citizen would get a participative stake in their use and development.
  • Second, the government has rightly slashed taxes and charges on regional connectivity flights to narrow the viability gap. AAI will not charge any landing or parking charge and only 42.5% of the route and navigation facilitation charge. The owners of these airports will similarly exempt such flights from all charges whilst ensuring the full package of airport facilities.
  • Third, whilst Udan is branded as a new passenger facility, an additional business opportunity is the potential for moving existing perishable cargo, fragile goods and high-value export-oriented products by air. It is only a combination of passengers and cargo which can make the scheme sustainable. Public investments should be leveraged via private management model used for major airports. Investor consultations in state capitals being planned should include potential investors in airport management and development.
  • Fourth, some of the additional economic value and jobs are from developing these airports as growth centres. Providing secure and high quality road links, 24×7 electricity, clean water and sanitation are key for private management to step in with malls, airconditioned warehouses, hotels and new businesses which need secure air connectivity.

 

Benefits to airlines:

  • The Central Government will support the RCS Scheme by levying an excise duty of only 2% on Aviation Turbine Fuel (ATF) purchased at RCS Airports for a period of three years. The service tax will be levied at only 10% of the taxable value of tickets for RCS seats for a period of one year. The operating Airline will be free to enter into code sharing arrangement with domestic and international airlines.
  • The State Governments will charge Vat of 1% or less on ATF at RCS Airports for a period of 10 years. It will also provide security and fire services free of cost, besides providing electricity, water and other utility services at concessional rates.
  • Airline Operators will exempt RCS flights from landing charges, parking charges, and terminal navigation landing charges.

 

Benefits for consumers:

  • The benefits for tourist hotspots such as Agra, Shimla, Diu, Pathankot, Mysuru and Jaisalmer — that would now be just a short flight away, replacing cumbersome road or rail journeys — are obvious.
  • There are also significant multiplier effects of aviation activity, including new investments and employment creation for the local economies of other destinations.

 

How the policy protects interests of various stakeholders?

  • It retains the potential for business innovation by limiting the seats at the Udan price to 50% of capacity. The remaining seats can be sold at market rates. The policy is carefully and explicitly drafted to avoid ex-post disputes.
  • The policy is market driven. Flight operators had to do their own due diligence and come forward with proposals which would then be put out to bid. If a proposer failed to submit the lowest bid, they could still win by agreeing to match the lowest bid. This provision preserves the incentive for initiating proposals, whilst retaining competitive energy in the bid process.
  • The policy carries forward the spirit of cooperative federalism. The Central government will fund 80% (90% in the Northeast) of the subsidy amount to be paid to the operators as VGF. The state government shall fund the residual marginal amount.

 

Challenges:

The new policy is, however, not without challenges. For example, there are fears that a flight from an UDAN location will be low priority for air traffic controllers in big cities. Airports in many Tier 2 and Tier 3 cities do not have big runways, so they can’t take regular aircraft. That means airlines will need to induct smaller aircraft for short takeoffs and landings. Such aircraft needs specialised crew. India produces 200 to 300 pilots every year, and it’s safe to say that training specialised crew will take time. The government should give serious thought to these issues if its well-intentioned scheme of regional connectivity is to become a success.

 

Conclusion:

Providing regional air connectivity is an important policy goal for the government. Such services deliver a host of benefits by fulfilling latent consumer demand for convenient travel, making businesses and trade more efficient, unlocking India’s tourism potential, enabling fast medical service and promoting national integration. Moreover, building connections to tier-2 and tier-3 cities also generates powerful network effects with many regional passengers transferring on to the national aviation network between tier-1cities. The Udan (Ude Desh ka Aam Naagrik) programme is designed to jump start the regional aviation market by improving the profitability of under-developed regional routes.

It will strengthen the overall aviation network at a modest market-discovered price. Passengers will benefit from enhanced air services, airlines will see more traffic on their metro routes and India will gain through faster economic growth and national integration. Thus, Udan will surely be a meaningful contributor to India’s overall transformation.