MC Exclusive: Govt likely to cut FY26 budgetary funding for UDAN scheme

Flight route under UDAN scheme.

The central government is likely to trim funding for the country's regional air connectivity scheme (RCS) — UDAN, or Ude Desh ka Aam Naagrik, in the upcoming Budget for 2025-26, because passenger traffic under the scheme has remained muted for the last few years,  several government officials told Moneycontrol.

Apart from muted traffic under the scheme, many domestic airlines have curtailed  tickets sold under the scheme on routes that have been operational for more than three years, and in some cases even flights on these routes have been shut down, leading to a rethink of the financial model of the scheme, the officials said.

"The number of tickets sold under the RCS-UDAN have fallen significantly from the highs seen in 2019-20 and 2021-22, as domestic airlines are not operating flights beyond the initial three years," a senior government official told Moneycontrol.

He added that increased competition from new high-speed railways and  expressways, coupled with rising fuel prices have forced airlines to stop operations of non-profitable routes under the scheme.

"Around 13 lakh passengers have traveled under the scheme in FY25 (till November), which is lower than earlier expectations, and the target of 30 lakh passengers is likely to be hard to achieve in the remaining four months," a senior government official working with the Airports Authority of India (AAI)  told Moneycontrol.

He added that while the passenger traffic numbers under the UDAN scheme have been slightly better in the first eight months of 2024-25 compared to last year, when around 12.5 lakh passengers had taken to the skies in the same period, interest from airlines to operate new routes under the scheme has fallen significantly.

Emails sent to the Ministry of Civil Aviation (MoCA) and AAI remained unanswered at the time of publishing.

Subsidies to airlines for operating on less lucrative routes under the RCS-UDAN viability gap funding (VGF) is limited to three years from the start of operations on the route. Thereafter, airlines lose the subsidy, which makes it difficult for them to sustain operations.

Another AAI official told Moneycontrol and that the central government is not keen on continuing fund the scheme per the current financial model, and a new model is in the works to only include flights operated by sea planes and helicopters.

"Discussions are underway to limit the scheme to help airlines operate flights that require a sea plane or helicopter in hilly and coastal states to improve the regional connectivity of smaller airports," the second AAI official said.

In the last eight years, 1.46 crore passengers have flown under the scheme till November 28, 2024, Civil Aviation Minister Rammohan Naidu had said in response to a Lok Sabha question this week. Around 2.6 lakh passengers had flown in 2017-18, 12.4 lakh in 2018-19, 29.9 lakh passengers in 2019-20, 14.98 lakh in 2020-21, 32.99 lakh in 2021-22, 20.86 lakh passengers in 2022-23, and 19.2 lakh passengers in 2023-24.

Last week, senior analysts from the ratings and research firm ICRA had also said that the scheme is yet to realise its potential, and other transport modes such as the semi-high speed Vande Bharat Express trains pose a significant competition to the scheme, especially for short journeys.

"We have done some analysis on UDAN a couple of months back, and  the scheme is yet to realise its full potential,” said Kinjal Shah, Senior Vice President and Co-Group Head, ICRA, last week in a webinar.

"Penetration on the UDAN routes has remained very low, at around 1 to 4 percent,” said Shah, and added that another factor which has prevented  significant offtake of the scheme is volatility in passenger traffic.

In August, Naidu had said that MoCA will seek an extension of the RCS beyond the initial 10-year period that was announced at the time of its launch in 2016.

Naidu had informed parliament in August that MoCA is working to address the issue of airlines stopping operations on regional routes after subsidies are stopped.

"A specific situation has arisen and airlines are backing away... after three years. We will address this issue,” Naidu had said, and added that the government will tweak the RCS norms so that after one year the routes can be bid for again.

In the FY25 budget, the government has earmarked Rs 502 crore for the scheme, down from Rs 1,244.07 crore (BE FY24) and a revised estimate of Rs 850 crore.  The FY24 allocation was double that of 2022–23.

UDAN is a regional airport development programme under the centre’s regional connectivity mission, aimed at refurbishing under-served airports to make air travel more affordable.

In recent years, the centre has been improving regional air connectivity through UDAN, which focuses on linking tier two and three cities.

According to the latest AAI report, as of October 3, 2023, after five rounds of bidding under UDAN,  operations had commenced on 493 routes connecting 70 destinations, including two water aerodromes and nine heliports.

However, a Moneycontrol  analysis of routes operational under UDAN  based on the flight schedules of  airlines, and data from online and local travel agents, showed that only 225 routes were running as of October 2023. Around 228 routes have been stopped by airlines due to the factors outlined above, and  40 routes could not be verified.

Under UDAN, VGF equivalent to 50 percent of the seating capacity on an aircraft is given. In return, the airlines sell 50 percent of the seats at a flat rate of Rs 2,500 per flight hour  in order to make air travel accessible to those who could not hitherto afford to fly.

The cost of the subsidy is borne by flights plying non-RCS routes, which pay a levy of Rs 15,000 per departure, as per the latest revision that came into effect in April 2023. The airlines pass this on to passengers on non-RCS flights. A total of Rs 2,038 crore has so far been collected as RCS levy.