The government’s regional connectivity scheme UDAN celebrated its 4th anniversary on April 27. But it has witnessed slow progress of implementation, as not even 50% of the route have been operationalised and according to a report, the second wave of the pandemic which started from mid of March 2021, may impact it further going forward. Rating agency ICRA in its report said that there is likely to be a further delay of two years in achieving the target of operationalising as many as 100 unserved and underserved airports and starting at least 1000 RCS routes by 2024.
Aimed at enhancing regional connectivity through fiscal support and infrastructure development, the maiden flight under the Ude Desh Ka Aam Nagrik (UDAN) scheme was flagged off by Prime Minister Narendra Modi from Shimla for Delhi on April 27, 2017. As of May 31, only 47% of total routes and 39% of airports (unserved and underserved) have been operationalised under UDAN, according to ICRA.
The demand-driven scheme was envisaged for a period of 10 years, with concessions from central and state governments and viability gap funding. The policy has made around 60 regional airports operational so far.
Regular Flow of Investment
The number of new RCS routes which started operations increased at a healthy pace and stood at 102 and 120 routes in FY2019 and FY2020 respectively, but have declined to 77 new routes in FY2021 due to the COVID-19 pandemic, ICRA said. Also, during FY2018 FY2021, a total of INR 3350 crore have been incurred by the central government towards the UDAN scheme and the budgeted outlay for FY2022 is INR 1130 crore.
ICRA said, as many as 52 unserved and underserved airports and 359 routes are operationalised as of June 30. The rating agency also said that to improvise the RCS network and achieve its target, the Airports Authority of India (AAI) has launched UDAN 4.1 as a special bidding round under UDAN 4.0 in March this year to award 392 routes. AAI is the implementing agency for UDAN.
Botched-up Balance Sheet
The weak credit profile of domestic airlines is expected to have an impact on the existing routes under the UDAN scheme, particularly for smaller airlines given the stretched liquidity position, low utilisation in some of the routes and will also impact future bidding of routes under the scheme, he added. According to ICRA, there has been a significant impact on the financial health of airline operators due to the COVID-19 pandemic.
ICRA estimates the domestic carriers to report a significant net loss of INR 210 billion in FY2021, and an estimated net loss of INR 127 billion in FY2022, with the industry’s debt level increasing to around INR 500 billion in FY2022.
What is Actually Happening?
Ever since the airport in Kalaburagi in Karnataka opened in November 2019, it has reported the highest growth in passenger traffic despite the impact of COVID-19 on the overall aviation industry. Adding to its newfound tag as an emerging aviation hub, Kalaburagi is now also a satellite centre of Indira Gandhi Rashtriya Uran Akademi, the pilot training institute.
Kalaburagi, which comes under UDAN, is not alone. Airports in Jharsguda, Hubli, Belgavi, and Kishangarh are among the handful few who have seen passenger traffic soaring above pre-COVID-19 levels. A recent report by Kotak Institutional Equities listed 12 such airports that have “become relevant over the past few years through the regional connectivity scheme”. None of the airports in metros has compared to the recovery seen in their smaller peers.
Joint Secretary MOCA, Usha Padhee said in an interview that every crisis is an opportunity in regards to the havoc created by the pandemic on the aviation sector.
She said “We had started UDAN operations when flights resumed in May 2020. Even as most metro airports had restrictions of various kinds due to COVID-19, there was a huge demand for air service in smaller airports. The routes under RCS (regional connectivity scheme) picked up as customers understood air travel was safer and also saved time,” she adds. Flights on these routes, adds the senior government official, now have a load factor of 80%.
Since 2017, the government has awarded 700 routes to airlines under UDAN. The initiative has also seen 60 airports, including heliports and water aerodromes opening up. Passighat (Arunachal Pradesh) and Jabalpur (Madhya Pradesh) became the 59th & 60th airport respectively to come under the regional connectivity scheme after SpiceJet started scheduled flights to destinations like Mumbai, Pune, Surat and Ahmedabad last week.
Despite the progress, UDAN has had its share of setbacks too. Just about half of the awarded routes are operational. Many regional airlines, who started operations banking on the scheme, have struggled to have a sustainable model. Some even closed down.
Post COVID-19, with capacity utilisation still low, the contribution from airlines has dried up, forcing the government to make a tweak so that the outgo from the Fund doesn’t eat up the corpus. The airlines have been asked to reduce the frequency of flights or the number of UDAN seats so that the need for funding reduces.
But sometimes, even the government support is not enough for airlines to begin services from a new airport. This leads to many routes, half of the 700 awarded, lying unused. There is something that the government is about to embark on that may help airlines, especially those with smaller aircraft, make a business out of UDAN.
UDAN 4.1 unlocked
The Ministry of Civil Aviation had started a “special round of bidding” in March 2021. This 4.1 round of UDAN includes routes that were otherwise cancelled in the earlier rounds along with new route pairs suggested by the stakeholders.
“We will give airlines a lot of operational flexibility. So if you have a 3-seater, 4-seater, 20 seater aircraft, or if you want to operate as a non-scheduled operator, this will be allowed. We will explore if this model will help airlines with small aircraft. If it works out, it will mark a new chapter for UDAN,” said Usha Padhee, Joint Secretary, Ministry of Civil Aviation.
The new round will also have routes that will be operated by helicopters or involve seaplanes. Special focus will be on routes served by helicopters, says Padhee, as these are places, mostly in the North-East that take a lot of time to reach by road. After Bareilly, Kurnool in Andhra Pradesh has become the second new airport to start its services this year. The operationalisation rate now is faster than the pace seen before COVID-19 when the government was opening a new airport and eight new routes under UDAN every month.
The Main Challenges
Poor infrastructure including the lack of operational readiness of airports in remote areas and lack of availability of bays in the private airports in the large metro cities, shortage of pilots, lack of favourable rules and delay in DGCA reforms. The situation will get worse as airlines in India plan to add over 900 aircraft in the next 10 years. There is a growing concern among industry professionals that increased pace of demand will overshadow meagre efforts made by the government in building infrastructure.
Of the 440-odd air routes allotted to 14 major and fledgling airlines under the two phases of UDAN, not more than 40 to 60 routes were operating regularly. This was because smaller operators such as Zoom Air, Trujet, Pinnacle Airlines, Heritage and AAA Aviation had succumbed to operational issues. Industry experts pointed out several operational, technical, procedural and financial problems in the scheme that failed to create a proper ecosystem for smaller operators. The operational costs of the operators of small aircraft went so high that the government subsidy could not compensate. The scheme hence benefited only the operators of larger aircraft like the ATR 72 and the Airbus A320.
A close examination of the distribution of successful UDAN routes by the operator, shows most of the successful routes have come from large operators like SpiceJet and IndiGo. Both these airlines have chosen to not take the Viability Gap Funding subsidy, but are instead leveraging the scheme strategically towards gaining additional slots for themselves at congested Tier-1 airports and gaining monopoly status on routes. However, UDAN cannot run without small aircraft operators as only small aircraft can land and take off from the majority of the 400 airports that the scheme intends to bring online.
The scheme also faced criticism for the financing model it had adopted. A viability gap funding structure, where a surcharge was levied on tickets on existing routes, which would be used to refund part of the ticket costs for the airlines flying on the UDAN route, was adopted which didn’t go down well with various quarters.
About the UDAN Scheme
The scheme aims to enhance connectivity in remote and regional areas of the country and make air travel affordable. It is a key component of the Centre’s National Civil Aviation Policy led by Prime Minister Narendra Modi and launched in June 2016. Under the scheme, nearly half of the seats in UDAN flights are offered at subsidised fares, and the participating carriers are provided with a certain amount of viability gap funding (VGF) – an amount shared between the Centre and the concerned states. The scheme will be jointly funded by the central government and state governments. The scheme will run for 10 years and can be extended thereafter.