Regional Connectivity Scheme may not take wings

While India has a population of 1.3 billion, only 81.091 million domestic passengers travelled by air in 2015. The 20-plus per cent growth in traffic that year was mainly due to low fares because of the fall in Aviation Turbine Fuel price. Indian airports handled 223.8 million passengers in 2015-16. The top six airports accounted for 70 per cent of the traffic, while the rest was spread over 69 smaller airports that have regular scheduled air services.

Predictably, air traffic is very unevenly spread. Though India has over 400 airports, including many crumbling airstrips, only 75 of them have regular scheduled air services. The others are either under-served or unserved. The Airports Authority of India (AAI) has 30 airports that offer no air services. Numerous smaller cities have no air connectivity as airlines find services to them commercially unjustifiable. The demand for travel is enormous. India’s railways handle in two days about as many passengers as the airlines carry in a year. The lack of air connectivity must be hurting many smaller cities’ socio-economic development. While the Modi government’s initiative to enhance regional air-connectivity through the Regional Connectivity Scheme (RCS) is commendable, it overlooked some inevitable problems of execution.  

The Centre accepts that such services can work only through subsidies — by the central and state governments, the airports, and even the airlines. To make airfares affordable, the government decided to limit them to Rs 2,500 per flying hour for fixed-wing aircraft. For the shortest fixed-wing aircraft flight, of about 200 km to 225 km, involving less than an hour of flying, the fare will be limited to Rs 1,770. Similarly, for the very longest flight under RCS, the fare is to be limited to Rs. 4,070. Naturally, the airlines, which will operate regional aircraft, that have a very high cost per seat-km, cannot break-even at such low fares. Thus, subsidies are needed to meet the shortfall through the government’s Viability Gap Funding (VGF). These will have to be high as regional services generally have low loads, low-yield fares, and generally operate over short sector lengths. Because of off-optimum flying conditions like speed and altitude, these commercial flights also have the highest cost per seat-km.

A two per cent tax on all non-regional air services per ticket was planned as the airlines’ contribution to the VGF. For example, the cess on domestic non-regional flights would be Rs 7,500 for a sub-1,000 km flight, Rs 8,000 for 1,000-1,500 km, and Rs 8,500 beyond 1,500 km. It was expected to generate a total annual revenue of Rs 4 billion. However, all private airlines went to court but failed to secure a stay order. Only one airline, presumably state-owned Air India, had paid the VGF cess to AAI —charged with operating the RCS scheme. State governments, which will benefit much from air connectivity, are to contribute 20 per cent of the VGF cost. They have also been asked to offer discounted electricity and water, free security, firefighting services, and reduce the excise duty on ATF at the regional airport to just two per cent. At some non-RCS airports, the charge is up to 30 per cent all over India. States will also have to provide free land for any airport development work required. The state governments may find this daunting.

Not surprisingly, only Maharashtra and Gujarat, both BJP ruled, agreed to participate in RCS. The Union Ministry of Civil Aviation will account for the remaining 80 per cent of VGF. It will also reduce the central excise duty on ATF to 2 per cent for RCS operations, and will levy service tax on just 10 per cent of the taxable value of the tickets sold. As for the airports, whether owned by AAI, state governments, or private companies, they will no longer impose landing, parking or any other changes on RCS aircraft of less than 80 seats and 40,000 kg all-up weight at RCS airports. But where will the money to run those airports is to come from? Private airports in particular, set up in a flush of enthusiasm without sound commercial prudence, could be particularly hard-hit. About 40 airports are likely to be selected initially for RCS, including some in the poorly connected northeastern region. The government also wishes to provide funds for the revival of another 60 airports. That may be unnecessary. If a city’s airport has fallen into disuse, that is because the airlines did not find it commercially viable. That situation will not change overnight. Even with VGF, the airlines may stick to a few larger city regional airports initially.

However, numerous conditions apply. The VGF scheme is offered for only three years from the start of services and will end after seven years. The Centre’s service tax discount is initially for one year. For an 80-seat aircraft, the VGF subsidy will be offered only for the first 40 seats, and the airlines can charge higher fares for the rest. The RCS is to last for only 10 years. These conditions are utterly unrealistic. In the US, such services have been heavily subsidised for decades with an end nowhere in sight. They are not yet self-sustaining. The airlines may not wish to start regional services if they are to be  terminated in a few years. It takes considerable effort and expense to start a new route. There is no way the airlines can operate without the perpetual subsidies and sweeteners. Airlines have to bid to win RCS routes for monopoly operations for fixed periods. Their response is predictably poor. When the first round of bidding ended, only 11 bids were received — mainly from charter and non-scheduled operators, who lead a hand-to-mouth existence. There were just three scheduled airlines — Air India, which did not have the option to decline; SpiceJet, the only private airline to break ranks; and Trujet, a small regional start-up. As usual, Air India may do most of the donkey-work.  

For routes where 80-seaters may be too large, the Centre is willing to order aircraft of about 20 seats and lease them to the airlines. (AAI, in charge of RCS, may have no expertise in leasing, but that is another story).

Hindustan Aeronautics Ltd. (HAL) , which still licence-produces the old Dornier Do.228 19-seat aircraft, is also offering it to RCS airlines. However, the cost per seat-km of such very small aircraft is prohibitively high, even with VGF. Clearly, if a city cannot provide enough traffic year-round to help such a service to break-even at subsidised fares, it should be dropped till it reaches that level some day. Far too many things are already going wrong at this embryonic stage. However, the last nail in the RCS coffin could be the lack of adequate finance for the VGF scheme. The government plans to launch initial services in another month or two but the RCS may not last beyond a couple of months.

The author is a civil aviation analyst