Regional air connectivity: Will UDAN fly?

The government’s ambitious regional connectivity scheme UDAN (Ude Desh Ka Aam Nagrik) finally took off in late April with the Prime Minister flagging off the Shimla-Delhi, Kadapa-Hyderabad and Nanded-Hyderabad air routes.

UDAN seeks to link up scores of unserved and under-served airports in Tier-2 and Tier-3 cities with major cities and with each other. The plan is to subsidise air tickets, making it affordable for passengers in smaller centres to fly, and offer viability gap funding (subsidies) and incentives making it feasible for airlines to offer subsidised tickets.

For instance, half the tickets on one-hour flights under UDAN will have a fare cap of ₹2,500 and the remaining can be sold at market rates. The Central and State governments will subsidise airlines flying the UDAN routes. There will be concessions on fuel taxes, airport charges, etc and airlines will get three-year exclusivity on routes allocated in auctions.

UDAN is important not just because it can offer much-needed quick connectivity to the country’s interiors but also because it can provide a fillip to air traffic. Infrastructure constraints at airports in big cities could slow down the rapid passenger growth that Indian aviation has experienced the past few years. UDAN, if successful, can compensate and also provide feeder traffic to networks in big centres.

The first round of auctions, earlier this year, saw 128 routes being awarded to five operators — Alliance Air, Air Deccan, Air Odisha, Trujet and SpiceJet. The next round of auctions is expected shortly. The scheme got a boost last month when market leader IndiGo announced its plan to participate. With big players such as Alliance Air, SpiceJet and IndiGo throwing their hat into the ring, UDAN seems to be on a promising flightpath. But there are challenges and risks for the airlines — in terms of increased fleet maintenance costs and uncertain demand.

For the UDAN foray, IndiGo has signed a term sheet for 50 ATR turboprop aircraft worth $1.3 billion (about ₹8,500 crore) at list prices. Doing this, it is breaking away from one of the key tenets of low cost carriers — having a single fleet type. So far, the airline has been flying only the A320 (including the neo variant) aircraft. Operations with the smaller ATR aircraft are expected to commence by the end of calendar 2017.

IndiGo expects to have seven of these aircraft by March 2018 and 20 by December 2018. The airline plans a separate division to handle the turboprop operations. With a six-month window given to commence operations after winning the bid, IndiGo will likely participate in the upcoming auctions. While UDAN could be a growth opportunity, the fleet diversification could increase maintenance and manpower costs.

Also, if the selected regional routes do not deliver good traffic growth, the new aircraft could become a burden. SpiceJet also bears the risk of uncertain demand but has the advantage of already having the smaller Bombardier Q400 aircraft in its fleet that could be deployed for the UDAN routes.

It’s early days yet, but some concerns have emerged after the first round of auctions in March. Of the five airlines that won the bids, only two — Alliance Air and Trujet — have started operations so far. The others, including SpiceJet, have not yet revealed their plans; they have time only until September to start operations or their performance guarantees could be encashed. All necessary approvals have to be in place soon; this could be challenging. Also whether the governments pay out the viability gap funding in a timely manner needs to be seen.

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