Flight Plan

Regional airlines fly into rough weather

Forum Gandhi | Updated on August 08, 2021

Turbulent times: Trujet, which began operations in January 2021, is struggling to stay afloat despite government incentives under the UDAN scheme   -  The Hindu/SRIRAM MA

From poor applicability of policy to lack of quality manpower and capital, problems plaguing them are manifold

Over the past three decades, nearly 40 companies have launched regional airlines, though only a few have managed to stay afloat, which indicates deep-rooted problems carriers face to sustain operations over a longer period of time. TruJet, FlyBig and StarAir have barely managed to sustain operations in the midst of a pandemic that has burnt holes in the balance sheet of even national airlines.

Since its inception, the regional connectivity scheme (RCS) — UDAN (Ude Desh Ka Aam Nagrik) has had four rounds of bidding. Over 780 valid routes were allotted to the shortlisted airlines out of which only 359 RCS are operational now. Under the scheme, financial incentives such as Viability Gap Funding (VGF) from Central, State governments and airport operators are extended to the operators.

In spite of such a scheme in place, why are the regional airlines ailing? BusinessLine spoke to experts who track the RCS closely, and they cite a number of reasons for the poor applicability of the policy, including lack of traffic, manpower, capital, management and business model flaws along with the changing norms of the RCS.

Nripendra Singh, Growth & Strategy Consultant at Frost & Sullivan, said that UDAN’s purpose was to give the much-required push to the scheme, and it is not possible without the government pitching in. The focus was airline penetration as a whole in the country by enhancing regional connectivity to develop the sector and the incremental advantage it brings into the country’s GDP.

A major drawback of the scheme, said Singh, is that it was introduced almost a decade after two national low-cost carriers had established themselves. This left little room for regional players to flourish.

The aviation industry, he added, has a very glamorous image, which manages to lure business houses to invest money. “Even today, India hasn’t been able to unleash the complete air traffic potential. While metro cities have reached saturation, regional connectivity is yet to see growth. This has attracted multiple business houses and entrepreneurs to invest in the regional airline segment. In reality, in India, aviation is a high fixed cost market with wafer-thin margins,” he said.

If that was not enough, the lack of traffic and affordability becomes a hindrance for the regional carriers. Satyendra Pandey, Managing Partner, aviation consultancy firm AT-TV, said that traffic is the lifeline for the current business models of the regional carriers. “Miniscule traffic volumes effectively mean that regional airlines are challenged on cash-flow, adding to the inadequate capital,” he explained.

Entry barriers for launching an airline are low, hence several entities try their hand at it. But the viability of an airline’s operations depends on how deep pocketed the owners are. Hence, within a year of operations, they start looking out for investors, which, often do not happen. While, Tata Sons which operate Vistara Airlines and AirAsia India can afford to sustain losses over a longer period of time, a company such as Megha Engineering which operates TrueJet is unable to do so. It sold a 49 per cent stake to US-based Interups to raise ₹250 crore. However, the airline is yet to see the money. Similarly, FlyBig, which started operations only in January 2021 too is still looking for an investor to stay afloat. According to sources, some of the top management personnel such as the CEO and CFO have already left the airline even as there has been a delay in the disbursement of salaries for the rest of the employees.

Singh of Frost & Sullivan said another problem that has been impacting the operations of the airline is the lack of quality manpower. While Indigo, which owns 54 per cent market share in the country, has been able to hire top talent, the rest, especially regional airlines, have been finding it hard to do so. “While IndiGo is able to hire expats for key roles, regional airlines haven’t been able to do so which has hurt their operations,” said Singh.

Last year, the Ministry of Civil Aviation issued revised RCS guidelines reducing the viability gap funding (VGF) by 60 per cent for those airlines that operated allotted routes over 500 kms for more than four days a week. During the bidding process, the threshold of 500 km did not exist while the airlines had the liberty to choose the number of days they could operate.

“The RCS norms and changes are ad-hoc in some instances and don’t bode well for airlines that have to plan months in advance,” Pandey said. He explained that the earlier guidelines were favourable for the regional airlines. Today, even if an airline exceeds the limit of 500 kms by 1 km, they will not get the VGF concession. The regional airlines continue to seek a better framework for them to operate within but there has been no direction from the government yet.

Published on August 08, 2021

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