On August 26, the Union minister of civil aviation via a social media platform announced the award of routes in Phase 4 of the regional connectivity scheme (popularly called UDAN). The Northeast figured prominently in the award; in the words of their own representative, “Bonanza to North East.”
Of the 78 routes awarded, 41% are focused on the Northeast. All seven sister states have been covered with Assam leading with 20 routes while Mizoram has only two. Interestingly, Meghalaya has been awarded 10 routes. But the award of the routes is only part of the story. Whether these will be flown remains to be seen.
Because of a host of challenges that span operations, finance and commercial aspects. Take short runways, high altitudes and a lack of aircraft support infrastructure. Throw in challenges of financing, technology and logistics. Soon even the most basic operation soon starts to look fairly complex.
The fanfare may be short-lived
The beautiful Northeast has been an area where many aviation entrepreneurs want to start operations. Yet when it comes to planning a venture even the most seasoned entrepreneurs bow out. Because of a host of challenges that span operations, finance and commercial aspects. Take short runways, high altitudes and a lack of aircraft support infrastructure. Throw in challenges of financing, technology and logistics. Soon even the most basic operation soon starts to look fairly complex. On the commercial front the demand patterns are highly cyclical and the volumes are low. And then there is the issue of viability where it requires financial support to ensure that flight services continue year-round.
While the UDAN scheme was launched with much fanfare, it has been fraught with challenges. A series of decisions have been taken which stare at the face of commercial viability
The government tried to address this via a host of measures including viability-gap-funding (VGF) which is a cash-payout to airlines to subsidize seats. This payout is shared between the centre and states. For the centre, the cash-in is generated from levies on passengers flying on core routes mostly between metro cities. The state is left to its own measures to generate the cash. In exchange for this cash, the airfares on these routes have to be capped at pre-determined levels. And the cash-subsidy is only valid for 3 years after which the route is assumed to have gained enough traction (a matter of much debate).
While the UDAN scheme was launched with much fanfare, it has been fraught with challenges. A series of decisions have been taken which stare at the face of commercial viability. Earlier this year airlines were advised to cut frequencies from a daily flight to 3-4 times a week; subsidy levels were being adjusted for certain routes; and airlines were advised to fly only those routes that are under 500kms. These measures are all focused towards cash-conservation and do more harm than good. Yet they have been necessary. Because the cash-flow has simply dried up.
Questions remain on where additional funds will be secured
The UDAN scheme largely depends on levies collected from passengers flying core-metro routes. It follows that any dip in core-metro passenger volumes will impact the scheme. And that is exactly what has happened. Due to COVID-19, traffic is down 50% – 60% (to levels last seen in 2006). With the funds depleted and given the broader challenges with the economy funding the scheme is now a challenge.
To put this in perspective, the subsidy burden on the government if all UDAN routes are flown as allocated is estimated to be between 1700 – 1900 crores per annum. The collections were falling way short of this even prior to the COVID impact.
The budgetary support requirements for the scheme were estimated at INR 441 crores for FY19 and INR 480 crore for FY20. In earlier years, the shortfall was made up by a dividend payment by the Airports Authority of India — the designated implementing agency for the scheme. But that is not repeatable in the present scenario. Because the Airports Authority of India too faces a cash crunch which is driven by suspension of revenue payments from PPP airports and forecast Capex spend.
Where additional funds will be secured remains to be seen.
The government maintains that the scheme has been a success and it would follow that several new regional airlines rushing to fly. Yet looking back, UDANs success has come from mainly from airlines such as SpiceJet and Indigo rather than pure regional airlines.
The success of the scheme is not quite as imagined
Till date, the scheme has had both success and failures. To the credit of policymakers, the scheme is tweaked at each bidding round with each successive bidding round taking into account inputs from discussions with the industry. Yet this is also a paradox. Because airline ventures have to play in long-term cycles spanning decades. Planning around a changing scheme is akin to shooting a moving target.
The government maintains that the scheme has been a success and it would follow that several new regional airlines rushing to fly. Yet looking back, UDANs success has come from mainly from airlines such as SpiceJet and Indigo rather than pure regional airlines. Ironically both these airlines have not taken subsidies (or Viability Gap Funding) but have leveraged the scheme strategically towards additional slots at airports, monopoly status on routes and lower operational costs. AirIndia is also flying some UDAN routes via its subsidiary AllianceAir. Yet numbers indicate that these are not purely commercial decisions. Most recent estimates peg its losses from the NE operation in the range of INR 200 crores.
Will we finally see robust NE connectivity?
Airlinks are critical to the NE from a strategic & development perspective. Between the seven sisters’ states, currently, only 11 airports are served via six airlines. Of this, Air India has the most significant footprint, with 289 daily flights servicing fifty-seven domestic destinations. These include Guwahati, North Lakhimpur, Tezpur, Pasighat, Imphal, Shillong and Dimapur. With this scheme additional connectivity is on the anvil. But that assumes all routes will be operationalized and past experience has demonstrated that between award of routes and operations there is a large variance.
Whether the Northeast requires more connectivity is not even a question. But for sustained and sustainable connectivity policy planning has to be thorough. Second and third order effects have to be modelled and on-ground challenges highlighted. Further these inputs have to be coupled with plans that are fit for context. A failure to plan adequately may come back to haunt. As has been famously said:
“Failure comes from a failure to imagine failure”
– Josh Wolfe (founder Lux Capital)
As of now there have been four iterations of the regional connectivity (UDAN) scheme. The results speak for themselves. UDAN1 did not see any routes in the North East; UDAN2 saw Tezpur, Jorhat, Lilabari and Pakyong being connected (Tezpur and Pakyong operations have since ceased); UDAN 3 saw Lilabari, Guwahati, Imphal and Dimapur routes flown but all are loss-making; and UDAN4 has now seen the award of 78 routes of which 41% are from the Northeast.
The government’s flagship aviation scheme finally has a NE focus. But whether it will fly remains to be seen.
(The author is an aviation professional. His positions include working as the Head of Strategy at GoAir and with CAPA (Centre for Aviation) where he led the Advisory and Research teams. Views expressed are personal)