It is becoming increasingly clear that only large and established airlines can take advantage of the scheme
Ude Desh Ka Aam Nagrik or UDAN, an ambitious regional connectivity scheme was launched with much fanfare by Prime Minister Narendra Modi in April 2017. It is now in its third phase with 15 airlines applying for 111 routes through auctions. This might, at first sight, seem like a sign of progress, but a closer look suggests otherwise.
While new routes are being allotted the older ones have not yet reached critical mass. Since its start two years back UDAN has already claimed eight victims-- reports suggest eight regional airlines have ceased operations.
Captain GR Gopinath of Air Deccan, one of the first successful private sector airlines to operate in India, has also been unsuccessful in his second innings. Air Deccan participated in an earlier round of UDAN but has not flown since October 2018.
This leads to two questions. First, is Air Deccan finding the competition too hot to handle or are there other reasons why many airlines are unable to succeed? Secondly, if the earlier phases were not successful why has the government gone ahead with the phase III of UDAN?
To be fair to the government, launching UDAN on a national scale and insisting it be successful in a short period of time is being too optimistic, especially since most airlines flying on the high-density traditional route are not making money. Indeed, this would be a big reason for players to shy away from operating in the regional space.
Apart from structural issues, UDAN faces the infrastructural problem. In the first two rounds of bidding, 450 routes were cleared covering 71 airports as part of the regional connectivity scheme (RCS). But even after two years only half of these airports have been connected.
Part of the reason for the slow progress is that the Airports Authority of India (AAI) does not own many of these airports. Some of these airports are owned by the armed forces while others are owned by the state and central government-owned units.
Airline sector consultant CAPA in its report rightly said UDAN’s success is dependent upon established, incumbent operators. There is little or no business case for small, independent operators without the scale.
Running an airline is a costly business. The government has tried to sweeten the deal by providing a subsidy to an airline operator who flies on these routes and charges not more than Rs 2,500 for an hour’s flight. These subsidies might be tempting for an established player who can offset the delay in subsidy payment from its operations in another sector. But going by the government’s record in paying subsidies, new and small players would not be able to bear the losses arising out of delays.
Which is why perhaps there is only one regional airline – TruJet---that is still flying under UDAN, apart from established players like SpiceJet and Alliance Air in the first phase and Jet Airways and IndiGo in the second.
Recently, 58 licenses of regional carriers Air Odisha and Deccan Charters who were awarded 84 routes (65 percent of all routes in phase 1) were cancelled as these carriers could not either launch their flights or maintain regular flights. What is surprising is that despite the hurdles faced by regional airlines 15 airlines have bid for Phase 111 of Udan. The answer probably lies in the opportunity in regional air transport. SpiceJet had said it is operating at an occupancy rate of over 90 percent in this route while TruJet says it is operating over 85.
Participants in UDAN are going the same way as those in the main airline space--the efficient ones are able to continue while others such as Air Deccan who were thriving in the earlier environment with limited competition are struggling to keep their heads above water.Having said that, the government would have to see to it that they get their act in place, especially when it comes to the subsidy. Companies are participating in UDAN trusting the government will be keeping its part of the commitment. In banking, we have already seen a number of defaults on account of the previous government not keeping its part of the bargain, especially in the infrastructure and power sectors. There is no room for mistrust this time.