Flight tickets set to get costlier as govt mulls avenues to fund regional connectivity

As the Ministry of Civil Aviation puts together a Regional Connectivity Scheme (RCS) to extend the aviation boom to smaller towns and cities, flyers on trunk routes may have to partly fund it through a nominal charge that could creep into their fares.

And the bump-up in the flight tickets could happen as soon as next month after the whole process of public consultation on draft RCS and its notification is completed.

R N Choubey, aviation secretary, said his ministry will soon be coming with a separate rule on whether the regional connectivity fund (RCF) would include a single charge on every flight departure to an airline or a cess on the flight tickets.

He said the size of the RCF has been fixed at Rs 500 crore, which would consist of a contribution of 20% from states and a levy on metro flights.

"We are giving final touches to that aspect. That will be a separate rule which we are working on," he said.

The government is looking to boost air passenger traffic on unserved and underserved airports by providing a host of tax incentives, service charge exemptions and a viability gap funding to airlines to make it commercially attractive for them to fly on these sectors.

Unserved airport has been described as the one where no flights were operated for two seasons – summer and winter schedules. An airport could be categorised as underserved if it had less than seven flights per week.

Choubey was expecting around 90 airports to be taken up under the RCS in the initial phase.

As per the ministry data, there were currently 394 unserved and 16 underserved airports. According to the aviation secretary, of these 30 can be operationalised without any further cost. Besides these, there is a budgetary allocation by the government to develop of 60 airports.

"Those 30 airports (ready for operations) are low hanging fruits. The finance minister has also announced in the Budget that the government will provide funds for revival of another 60 airports. So, 90 airports will targeted out of the 394 airports. If the demand is more than a higher number of airports will be considered," he said.

The RCS, which caps the fare at Rs 2,500 for a route length of 500 kilometre, would be applicable on flight route length between 200 km and 800 km. This has been relaxed for flights to remote and hilly regions.

VGF that an airline can avail has been capped at 40 RCS seats or 50% capacity of a fixed wing aircraft. However, if the 50% is less than nine RCS seats then an operator would be eligible to claim VGF for nine seats. For helicopters, it is five RCS seats. The floor for RCS flights per week has been fixed at three and ceiling at seven.

A lot would depend on whether states would come forward to offer the tax breaks and other incentives to make the scheme a success.

RCS would require the state governments to cut VAT on aviation turbine fuel (ATF) to 1%, offer free security and fire service and make electricity and water available at concessional rates.

Choubey does not see much resistance from states as they would not have to shell out additional cash for the scheme except for their contribution of 20% to the VGF.

"Remember today there is no activity at these airports. No ATF is being sold. Effectively speaking, there is no revenue forgone. The only cash out from the state government is 20% of the VGF other than there is no cash out," he said.

RCS flights would also not attract the steep landing, parking and terminal navigation landing charges that airlines currently bear at major airports.

The RCS offers operators a rebate of 2% on VAT even as they would be charged service tax at 1/10th rate.

The ministry has also worked out VGF ceilings for different route lengths for reverse auctioning by airlines. The final VGF caps will emerge after the bidding. The upper limit for VFG has been indexed to inflation and jet fuel prices and for airfare to inflation.

Choubey said the fare caps include small returns for operators; "If you don't allow a rate of return then nobody will invest."

The airlines selected for RCS flights on various routes would be given a period of exclusivity to ensure sustainable development of the route, which could be hampered by overcrowding.

The scheme will be in operation for 10 years with individual route contracts for three years. However, if the passenger load factor (PLF) shot up to over 90% in the second year then VGF allocation would be brought down to 50%. If the trend continued for the third year then it would be further snipped to 25% and eventually withdrawn after three years.

M Sathiavathy, directorate general of civil aviation, said those eligible for the RCS were scheduled airlines, scheduled commuter airlines and chattered operators. She said the aviation regulator would soon be coming out with criteria for selection operators for the scheme which will specify type of airline, number of aircraft and capital required.