UDAN: Push for low-cost air connectivity

To boost demand and overall growth in India’s economy, several sector-specific measures have been announced by the government: recapitalising state-owned banks, automobiles, micro, small and medium enterprises and affordable housing. Civil aviation is another important sector deserving policy attention as it is an important engine of growth. According to estimates, civil aviation has output and employment multipliers of 3.25 and 6.10: investment of INR100 in air transport boosts overall output by INR 325. Hundred direct jobs in air transport generate 610 additional jobs.

India may be one of the fastest-growing domestic air travel markets globally but the state of the civil aviation industry is far from healthy with huge combined losses of USD 1.7 billion in 2018-19. Airline bankruptcies are a reality, exemplified by the collapse of Jet Airways. Regional carriers like Air Odisha, Zoom Air, Air Carnival, Air Costa have also ceased operations during the last two years. This has a bearing on the government’s ambitious plan for regional connectivity to smaller cities by providing affordable air travel to citizens through its ‘Ude Desh ka Aam Nagrik’ scheme that kicked off in 2017.

A stimulus package for civil aviation is imperative as this industry cannot remain viable in a high-cost environment. Government policy can improve this state of affairs by lowering taxes on aviation turbine fuel – which accounts for 40% of operating costs - by including petro products in the Goods and Services Tax regime. Thanks to this cost structure, several smaller carriers have folded up. “The success of UDAN depends on the participation by established airlines. It does not make a business case for small and independent operators without scale,” the Centre for Asia Pacific Aviation stated.

“UDAN is a demand-driven scheme” insists Hardeep Singh Puri, union minister for civil aviation. Currently, only 194 out of the 706 sanctioned UDAN routes have become operational. Although the government offers viability gap funding to incentivise private operators to provide subsidised air travel, the operators make their own assessment of demand and factor in the impact of ATF to participate in the UDAN scheme. “The private sector will come in for investing only where they see a return”, adds Puri.

UDAN’s successful rollout is also predicated on operationalising 100-odd unserved airports all over the country over the next five years through higher budgetary allocations and public-private partnerships. The government has asked the Airports Authority of India to firm up plans to invest INR 250 billion over the next four years to upgrade airport infrastructure, especially in smaller cities. Currently, 24 unserved such airports have started operations. Certainly, there are serious challenges of operating airports and flight services running in hitherto unconnected regions.

Pakyong airport in Sikkim, built at 4,600 feet above sea level, exemplifies some of these challenges as flight operations from Sikkim to Kolkata have been affected due to visibility issues and poor weather. Pakyong is a visual flight rules airport that does not have instrument landing facilities. The required minimum to operate from this airport is 5,000 feet, which is difficult to achieve on most days in a year, according to the Mint. Suspension of flights is bound to impact the economics of participating in UDAN, a factor that bigger airlines can absorb but not the smaller independent carriers.

The viability of the recently started flights from Pithoragarh in Uttarakhand to Hindon air force base’s civil terminal in the National Capital Region also bear watching as all the seats will be sold on UDAN’s subsidised fares. A second airline is also beginning flights from Hubbali in Karnataka to Hindon in November. A rule of thumb is that the break-even passenger load factor is 50 to 60% at the earnings before interest, taxes, depreciation, and amortization level on UDAN routes even after subsidies are factored in. Clearly, civil aviation needs urgent attention to turnaround India’s growth story. For starters, lowering fuel costs will go a long way in improving the economics of this sector, especially for smaller regional operators to survive. A high cost environment will prevent UDAN from realising its game-changing potential to raise the penetration of air travel beyond the current level of 7% and make India one of the top three nations globally in domestic passenger traffic.

A stimulus package for civil aviation is imperative as this industry cannot remain viable in a high-cost environment. Government policy can improve this state of affairs by lowering taxes on aviation turbine fuel – which accounts for 40% of operating costs - by including petro products in the Goods and Services Tax regime. Thanks to this cost structure, several smaller carriers have folded up