UDAN : Concerns Raised by the Indian Aviation Industry

The final guidelines under the Regional Connectivity Scheme (RCS) as envisaged in the NCAP, which have been named as UDAN (Udey Desh ka Aam Nagrik) are set to be announced today by the Civil Aviation Minister Ashok Gajapathi Raju. The government believes that its ambitious UDAN will jump-start regional aviation in the country. This seems to be in sync with the IATA’s recent forecast: “In 10 years, the Indian aviation market will be the third largest in the world, overtaking the UK.”

“We are very hopeful of a positive response from the industry but our thinking is that with the scheme, we will in fact be jump-starting regional aviation,” Minister of State for Civil Aviation Jayant Sinha has said. 

He expressed his hope that the scheme would be “quite attractive” for consumers, carriers, small and regional airlines, lessors and other players in the ecosystem.

He said that the purpose of formulation of such a scheme is that regional carriers get the support they need both in terms of reducing their cost as well as in terms of viability gap funding so that they can serve tier-II and tier III cities.

The government had on July 1, 2016 unveiled the draft scheme which fixed all-inclusive fares at Rs 2,500 for one-hour flights in its attempt to make flying affordable for the common man. The complex scheme seeks to connect currently unlinked towns as well as extending viability gap funding (VGF) through a regional connectivity fund. There are 394 unserved and 16 under-served airports.

On one hand the government exudes optimism, while on the other hand, aviation experts have said they are not sure about how much of this projected growth will materialise considering several constraints currently plaguing the Indian aviation industry. They reckon legislative constraint is one major hurdle as far as Regional Air Connectivity is concerned. The established airlines grouping – the Federation of Indian Airlines (FIA) – who controls over 80% of India’s aviation, has asserted that the government does not have any authority or mandate to impose levy in nature of tax on scheduled flights. It has threatened to initiate legal action against the imposition of levy.

On its part, the government has defended the imposition of levy on scheduled flights from trunk routes to fund the scheme. The Minister of State for Civil Aviation Jayant Sinha has said that the government had a “very extensive” stakeholder’s consultation process prior to the formalisation of the RCS.

“We have already clarified from the ministry. Based on our own discussions with the Law Ministry, we think we can look forward to this kind of arrangement (imposition of levy) within the current legislation,” he said.

Apart from the upcoming legal battle, the country’s aviation industry has aired its various concerns about the regional connectivity scheme. A day ago, the Minister of state for Civil Aviation Jayant Sinha had hosted a round table in Delhi where the chief executives of airline companies, aircraft lessors and executives in the maintenance, repair and overhauling of aircraft businesses had been invited. Therein the executives voiced their fears. One serious concern is infra structure related – the non-availability of slots at major airports such as those at metros.

The majority of flights still operate from Delhi, Mumbai, Chennai, Bengaluru and Kolkata, airports. These metro airports today are running to capacity. Thus, they have very few slots available for each airline. Some of them like Mumbai have stopped allotting fresh slots altogether. The executives stressed that it was important that some slots be made available at the major airports. Slot constraints at the metro airports prevent the linking of smaller airports with the bigger ones. The hub and spoke model, thus, will not work. For effective execution  of the RCS, this is the basic requirement.

The aim of the NCAP has been – “Take flying to the masses.” The scheme entails capping of the fares at an affordable Rs 2,500 for flights of one-hour duration. (Although, one can travel by air for an hour in a scheduled LCC at less than Rs 1800 even today. Search a cheap air fare at this site now !) The government is aware that Rs 2500 does not fully cover the airplane’s operating costs. So, the government has proposed to indemnify the difference through subsidies which will be provided for a period of three years. The scheme is dependent upon VGF. So, the chief objective should be to rationalise the costs of aircraft operation. Unfortunately, that doesn’t seem to be happening because most of the overheads like landing costs, excise on fuel, user development fee, etc. are increasing. The proposed subsidy is very little for a small 10-20 seat air craft. The cost of seat per kilometer, their acquisition cost, is almost twice that of a regular 80-seater plane. Further, a potential investor will not like to run the business on “crutches of subsidies”.

Air Pegasus: A Quirk of Fate or a Genuine Incongruity ?

According to International Air Transport Association, India’s air passenger traffic growth rate is over 6 times more than that of the US. India’s civil aviation sector is now acknowledged as the fastest growing market in the world. The sector grew 23.29% in terms of passenger traffic during January-April 2016 compared with the corresponding period a year ago. With more people taking to air travel, the sector is set for an expansion.

The government has notified excise duty of 2 per cent for jet fuel purchased from airports that come under the Regional Connectivity Scheme, RCS which seeks to make flying more affordable for the common man..

How do Air Pegasus and Elix-Nordic view this situation ?

Air Pegasus, owned by Bangalore-based ground-handling services firm Decor Aviation, has failed to pay its leasing dues to its lessors Elix Aviation Capital and Nordic Aviation Capita. Instead, it has submitted a proposal to the two firms wherein it has pledged to pay off its dues with a 50% down payment with the remaining 50% to be paid off in monthly installments.

Shyson Thomas, MD, Air Pegasus at the launch
Shyson Thomas, MD, Air Pegasus at the launch

Shyson Thomas, Managing Director of Air Pegasus, presently grounded and unable to operate, has put 30% of Air Pegasus ‘ stake on sale and is looking for any willing investor. So far, there have been no takers.

The Indian Directorate General of Civil Aviation (DGCA) has set a September 1, 2016 deadline for Air Pegasus to resume commercial operations following which it risks regulatory sanctions.

Given Air Pegasus’ bankruptcy, lessors Elix Aviation Capital and Nordic Aviation Capital have attempted to de-register their respective ATR72-500s.

The Air Pegasus development clearly reveals that there is a visible incongruity between the ground realities and the government plans on India’s civil aviation. A ncap-2015-regional-aviation-indiacompany’s inability to pay the lease rent and its subsequent petition for deferment are construed as the beginning of the collapse of the business. The company is then well advised to salvage whatever it is left with.

With a phenomenal air passenger growth and an enormous future potential in India, Air Pegasus like stories become a matter of alarming concern among investors which directly influences expansion plans of domestic airlines.

Today, Indian aviation boasts of a rusty aviation business environment. The growth in traffic is primarily due to low air-fares. Any increase in air fare will cause this growth to cease. To break-even, the passenger load factor has to be maintained at or above 75%. Air operators in India know this very well. For a new investor, it becomes very difficult to venture into this business.

Initiatives like VGF, 2% excise duty, also do not hold promise. As per Ashwani Lohani CMD, Air India, “A professional firm cannot function on crutches. It has to make money of its own for survival.”

Another Casualty: Air Pegasus; Regional Air Connectivity has Few Takers Left

Air Pegasus which operates from Bangalore airport, to regional airports in South India like Hubli said that the airline had cancelled its two flights, ‘due to some technical glitch’. 

Number of Regional Air Operators Shrinking.

Southern India Regional Air Carrier, Air Pegasus, has temporarily suspended its flights with effect from July 26, 2016.  It has been one of India’s Regional Air Operators active in South India. Reports show that it has only one ATR72-500 (VT-APA), a 65-seater twin engine turboprop, left in flying condition. It operated it last on July 26, 2016. The airline had discontinued its feeder service to Kadapa in Andhra Pradesh due to low plane load factor over a year ago.

Read: Exit VRL; Few Takers Left for Centre’s Regional Connectivity Scheme

Air PegasusLow-cost carrier Air Pegasus today has 0.3% market share of domestic air traffic. Its web booking portal shows that all flights for July 28 are cancelled. It is presently selling tickets for some sectors from July 29. One may now safely assume that all is not well with Air Pegasus.

Though no official statement has yet been issued by the Company, it is presumed that the suspension of its flights is indefinite and linked to a combination of technical and financial difficulties. 

Air Pegasus’ situation has triggered concerns regarding its own fate as well as that of the Government’s much hyped Regional Air Connectivity Scheme. Will Air Pegasus meet the same end as failed stories like Kingfisher, MDLR, Paramount & others? This latest story adds to the growing list of airline ventures facing funding and other problems. It includes Bengaluru’s FlyEasy and Chennai’s Premier Airways, Zav Airways, Air One, Zexus Air, and  which are waiting in the wings to start operations. New entrants Turbo Megha and Air Carnival are yet to reap good profits. One existing airline Vijaywada-based Air Costa has a dubious record in flight cancellations as aviation data shows.

The Centre has proposed a Regional Connectivity Scheme by offering various sops to the airlines to fly on regional routes. The Government seems to have grand ambitions to promote regional air connectivity. But, it finds few takers of its scheme. A few days ago VRL Logistics backed out. Now,  a similar story of Air Pegasus has come out.

Although the government is hopeful that the new civil aviation policy will boost regional connectivity, aviation experts believe that it’s a tall order.  Even though the aviation sector is projected as booming, by pointing growing fliers’ numbers and statistics, there are very few enterprising Individuals and Companies who would like to take the risk of investing in an airline business. The Government’s new aviation policy has done little to address this issue. New regional airlines may take abnormally long time to break even. Becoming profitable appears to be a far cry.

Questions are now being raised on whether the proposed policy on regional air connectivity will ever take off or not even when the  aviation sector is booming. Will Air Pegasus become another casualty ? Given that the regional airline business has not been so lucrative in India, what would be its draw ? What will happen to Team Modi’s pet dream : “Take flying to the Masses” ?

Shyson Thomas, MD, Air Pegasus at the launch
Shyson Thomas, MD, Air Pegasus at the launch

Air Pegasus is backed by Decor Aviation, a Bangalore-based ground-handling services company which provides services across 11 major airports in India. Launched in April 2015, it has operated regular passenger flights between Bangalore International, Kochi International, Goa, Kadapa, Chennai, Hubli, Madurai, Mangalore, Pondicherry, and Thiruvananthapuram. Today, its promoter, its MD Shyson Thomas, a veteran ground handling operator, is desperately looking to raise money for his airline venture even reaching out to foreign carriers, private equity investors and his old clients. At the same time, he is confronted with one natural query. Thomas wonders, “Even if I manage to raise INR 100 million, will I be able to earn INR 1 million a month to pay my lenders ?”

Every cloud has a silver lining.

Indeed, there are a number of doubting Thomases who have reasons and evidences to regard Aviation as a dull business prospect. However, an analysis to find the reasons of failure of the failed stories would invariably point to one conclusion – ‘Most of those reasons were man-made, self imposed and avoidable’. In India, the situation is slightly different today. The situation is not as bad as is made out to be. Despite all the negative thoughts surrounding an aviation business, there is a  silver lining  : The demand for Air Travel in India is phenomenal – hitherto unseen anywhere in the world. +20% annual growth! 300 million fliers !! Yet only 2% of its population fly !!! This has often been showcased as superlatives that Indian Aviation has to offer by aviation bodies everywhere in the world.  It is for the supply side – the budding entrepreneurs – to see this as a golden opportunity. The onus is on them to lay their plans well, play their cards right and try not to repeat those mistakes. Sooner than later, the views on aviation business in India will change.