Tuesday, February 11, 2020

UDAN is not flying high

An interesting government scheme in recent years which fascinated me is UDAN (Ude Desh Ka Aam Nagarik). Even for a casual observer, the objectives are very enthralling. 

First, it’s ambitious. Before the announcement I never knew that India had so many airports and airstrips. As a matter of fact, many airports - Ambikapur, Dimapur, Neyveli, Rourkela, Bokaro, Rupsi, Bareilly, Vellore, Shravasti etc - became operational after the announcement of routes.

Secondly, staggering number of air routes announced under this scheme – 688. If all these routes are operationalized, then mobility of Indian citizens might be one of the biggest in the world. 

Third, airline job will lose its fanfare and be like any other jobs. New pilot schools will come up; new air-crew schools may come up like nursing schools. Lot of new job openings will come - air flight controllers, maintenance engineers, ground staff etc. 

Fourth, India might see some companies churning out 18/24/48-seater aircrafts. Will SARAS get a new life? Don’t know. But there is a great chance that some Indian companies might take up small aircraft manufacturing or at least its assembly in India. 

Fifth, freights transportation time across India will reduce drastically. Apple from Srinagar Mandi might reach Kochi within hours; Kerala paratha and curry from Kannur will reach Tezpur for lunch. Does people know about Kerala paratha in Tezpur? I don’t know. But you got the point, right?

Sixth, boon for farmers. For e.g. Maharashtra is one of the biggest producer state and Kerala is one of the consumer states. Problem till now was how to transfer perishable items like onion, tomato from Nasik to Kozhikode quickly and ensure that, farmer is getting a larger share of revenue. Well, UDAAN is the answer for you.

Benefits are high. At the same time there were questions lingering on my mind.

Can we make these many airports operational and stay profitable or least make only marginal losses? 

Do we have enough capability to train enough manpower in short interval to operationalize UDAAN? 

From where new/old aircrafts will come? One can’t operate big jets on these routes and become profitable. On the other hand, buying aircrafts and building up associated infrastructure is a huge financial commitment (even if it is small). In an industry where only a couple of operators are profitable and saw winding down of numerous companies, who will make huge capital expenditure.

Will these routes make enough money to justify expenditure? How long Government of India – whose policies changes quickly, bureaucratic red tape with not so friendly tax regime - will underwrite the losses airlines are making in these routes? 

Will there be frequent cancellation of planes in these routes due to low passenger load factor; which in turn reduces the reliability of these services in travelers mind. 

Will government reduce sky high tax on ATF and other equipment and services on these routes? Even if Union government does it, will state governments follow it up? ATF, like petrol and diesel is not currently under GST and union government charges around 10+% on it. State government can charge whatever they want on ATF.

If freight traffic proved to be more profitable, then, will government promote freight over passengers? Its looks like a viable alternative; promoting freight solves another set of problems as well. However, it’s not glamourous. 

Will routes and time be wisely chosen? like current routes where railway tickets are always in regret; buses are always full?

Will these small planes get enough slots on major airports like Mumbai, Delhi, Bangalore, Hyderabad, Chennai, Kolkata etc at prime time? Getting slots are one of the costliest things in airline industry. Short regional routes might need busy morning and evening slots so that the passenger can reach a city in the morning, complete the work, and leave by evening. Coming and leaving the city at odd times may not be that interesting. In addition to that, regional traffic often peaks on weekends.  

After three years this may be the right time to answer some of those questions.
The idea of regional connectivity is not new; it came from P V Narasimha Rao’s days in 1994. Initial scheme was affecting the profitability of airlines and government decided to tweak it during UPA II. Report came on 2013 and UPA II didn’t get enough time to implement it. Modi administration took it and under his regime in 2017, April 17 first UDAAN flight was flown between Delhi and Shimla. 

Five airlines - SpiceJet, Alliance Air, TrueJet, Deccan Charters and Air Odisha – tried their luck in the first round (later joined by zoom airline in another round) where 128 routes were awarded (only 54 of them became operational).
Out of this Air Odisha has two aircraft (one of them a 20-year-old Beachcraft plane) and AirDeccan had 3 Beachcraft aircrafts. 

Government offered incentives like,
  • Tax reduction on ATF
  • Waiver on landing and parking charges.
  • Significant reductions on route navigation charges
  • Exclusive rights on the routes for 3 years (this clause was modified later) etc.
  •  Viability Gap Funding for airlines to make up their losses (this fund comes via a levy of 7500 to 8500 on all departing domestic airlines, which of course will be passed on to passengers)

List looks good on paper. But the fate of AirOdisha, AirDeccan indicates that, this is not enough to boost regional connectivity. 

Extremely high operating expenditures and dangerously low passengers load factors resulted in the closure of small airlines. Interestingly for them, non-scheduled chartered services were more profitable then scheduled ones.

Only a fraction of announced routes were operationalized in all rounds.

UDAAN 1.0: 54/128
UDAAN 2.0: 106/297
UDAAN 3.0/3.1: 88/335
UDAAN 4.0: current avathar

It’s not same with all airlines and all routes; IndiGo seems to be doing good with routes allocated to Kannur Airport. In addition to that not all routes are not hopeless.

If government’s intention is to bring in new airlines, then it must investigate how small airlines with couple of planes can profitably operate on regional routes even if they lack the scale and other advantages big airlines. 

How to make Indian market attractable for small aircraft manufacturers to set up shop. Bring ATF under GST or make sure that states cut taxes on ATF; set up small exclusive runways for small aircrafts in major airports without affecting existing operations etc. Government should focus on selected number of small routes which are sustainable initially then expand; rather than doing everything at a time.

UDAAN already reached 4.0. It’s a time to take a break and analyze hits and misses. 


1.Business Standard

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