It is good to see UDAN, the civil aviation ministry’s new scheme for regional air connectivity, flagging off with its first round receiving better response than expected. Of 11 airlines submitting bids, five have been shortlisted with plans to ply 128 new routes. The scheme will, at one shot, add over 50 new airports to India’s operational network of 75, and open up as many as 1.3 million seats in unserved sectors. If the scheme takes off, the resulting connectivity with the hinterland can have a multiplier effect on tourism, employment and economic prosperity. The Centre has also allayed concerns of a large subsidy bill, with just ₹205 crore earmarked annually for a limited window of three years.
Considerable groundwork seems to have gone into its design. Unused and partially-used airports have been revived, based on traffic potential, to cater to it. To woo low-income travellers, half the seats are being offered at fares of ₹2500 an hour, with operators bidding for exclusivity on each route. The difference between actual costs and the tariffs will be filled through viability gap funding by the Government. To keep cost structures low, the Centre is offering concessional excise duty on fuel and service tax abatement, the States are chipping in with lower VAT and land, while airports have waived landing and parking charges. There’s a plan to make the scheme self-sustaining through a Regional Connectivity Fund, to be created by imposing a levy on the larger operators plying lucrative national routes. While the said operators are up in arms against this, the targeted collection of ₹500 crore annually (about ₹50-100 per ticket) can easily be passed on to passengers and looks unlikely to burden the industry. Over time, if this scheme takes off, the Centre can possibly even consider winding down the Route Dispersal Guidelines that force these airlines to deploy capacity in less viable routes.
But having said this, it is not the design of the scheme but the financial wherewithal of the selected regional operators that will decide its take-off. It’s unlikely to be smooth sailing. One, none of the established and profitable national carriers are among the winning bidders in this first round. Some — Alliance Air, SpiceJet, TurboJet Megha, Air Odisha and Air Deccan — have faced financial turbulence in the past. Two, while the three-year exclusivity may hold fare wars at bay, the airlines will still be up against high-cost aircraft leases, competition for qualified crew and seasonality in traffic. These factors, taken with lax working capital management, has often grounded Indian regional airlines; Air Pegasus and Air Costa met this fate in the past year. But then, it would be impossible for the ministry to foresee or sort out all such operational issues at the outset. The best it can do is to allow the scheme to take wing, and then apply the learnings from this to set financial criteria for its subsequent round of bidders.