Not quite flying: Why the Modi govt's UDAN scheme is struggling

All airlines operating on UDAN routes have hit turbulence financially, though not entirely due to the scheme. Places to be connected in the first round still have no airports or airstrips

Connecting small towns, unserved and underserved airports on India's air map: That’s how UDAN was imagined when Prime Minister Narendra Modi inaugurated the first flight of the regional air service on April 27, 2017, between Delhi and Shimla.

As many as 688 routes connecting cities and towns have been announced for UDAN (Ude Desh Ka Aam Nagrik) Regional Connectivity Scheme (RCS) so far. It’s the world’s most ambitious aviation programme, but a look at the performance of airlines, airports and state governments shows that it has failed to soar high. Only 232 routes — a third of those planned — are working to date, according to official figures.

Many routes declared operational do not have flights after Jet Airways and two smaller airlines collapsed. Even successful airlines like SpiceJet have abandoned some routes due to lack of passengers. All airlines operating on UDAN routes have hit turbulence financially, though not entirely due to the scheme. Places that were to be connected in the first round of operations still have no airports or airstrips.

Routes to nowhere

UDAN’s troubles started with its inauguration in 2017. Five airlines — SpiceJet, Alliance Air, Trujet, Deccan Charters, and Air Odisha — were awarded 128 routes among them. Only 54 routes operate yet. Deccan Charters and Air Odisha bagged two-thirds in the first round of bidding, but they performed so poorly that those routes had to be cut.

Deccan Charters had its contract cancelled; that hurt the government’s plan to connect capitals of India’s northeastern states with one another. Eventually, Alliance Air was given the task in December 2019.

Deccan Charters was to connect Kolkata to smaller towns like Cooch Behar, Burnpur, Jamshedpur and Rourkela. None of these routes have been operationalised. It was also to connect Maharashtra’s Sholapur, Kolhapur and Jalgaon cities to Mumbai. Sholapur has still not been connected, and Kolhapur and Jalgaon got flights to Mumbai in September 2019 after the routes were re-awarded under the third round of UDAN to Trujet.

Air Odisha bagged the highest number of routes (50), but it never got flights running to key places. Routes like Gwalior-Lucknow, Delhi-Kanpur and Varanasi-Delhi were delayed as a result. On routes where it managed to fly, there were frequent cancellations. The airline was eventually debarred for not operating at least 70 per cent of scheduled flights on UDAN routes. It was tasked with connecting Odisha’s capital Bhubaneswar with the state’s major cities and towns like Jharsuguda, Jeypore, Rourkela and Utkela. Except Jharsuguda, none of these smaller airports have been connected.

Alliance Air, a subsidiary of state carrier Air India, was asked to fly between Bhubaneswar and Jharsuguda as late as September 2019. Air Odisha also had crucial routes in Chhattisgarh, Tamil Nadu, Andhra Pradesh and Karnataka. These included routes connecting the Union Territory of Puducherry to Tamil Nadu’s Chennai and Salem, and Chhattisgarh’s Jagdalpur in Maoist-affected Bastar district to state capital Raipur and Visakhapatnam in Andhra Pradesh. Jagdalpur remains off India’s air map.

Rao, Manmohan, Modi: Govts change policies

Prime Minister P V Narasimha Rao’s government in 1994 formulated India’s first guidelines for improving regional air connectivity. The route dispersal guidelines (RDG) required airlines to operate at least 10 per cent of their deployed flight capacity on trunk routes (or Category-I routes) connecting major cities like Delhi, Mumbai, Kolkata, Bengaluru, Trivandrum, Chennai and Hyderabad on routes that connected cities in Jammu and Kashmir, the northeastern states, Andaman & Nicobar Islands and Lakshadweep.

At least 10 per cent of Category-II flights were to be operated between cities in these regions, according to the RDG. All other regions were classified as Category-III, with airlines required to deploy 50 per cent of their capacity on Category-I routes in these regions.

In 2012, a committee appointed by the civil aviation ministry recommended discarding RDG after a government-commissioned study found them to be debilitating to airlines. “While this regulation may serve a social need, economically it results in losses for India’s domestic airlines, since they must allocate their scarce resources and aircraft to service routes that experience light passenger traffic. Air carriers flying to these regions may not be able to recover the cost of operation,” said the committee’s report.

The study explained how airlines were getting past RDG. Air India, Jet Airways, and IndiGo connected Category-I airports with flights originating abroad. Such flights were classified as international and, therefore, exempt from the responsibility of serving Category-II routes under RDG.

The Manmohan Singh government sought an alternative to connect India’s smaller airports, enlisting another private consulting firm for a road map.

The company gave its report in 2013, but Singh was voted out of power the next year. In 2016, the Narendra Modi government used the report’s recommendations to announce UDAN.

At its launch, UDAN listed 398 unserved and 16 underserved airports or airstrips across India in the first round of bidding. States could develop new airports under the scheme. Airfare caps were introduced depending on distance — ranging from Rs 1,420 for the shortest flight to Rs 3,500 for the longest.

UDAN gave a host of incentives to airlines — significant reduction in central and state taxes on aviation turbine fuel, waiver on parking and landing charges, a 58 per cent discount on route navigation and facilitation charges, and exclusive rights on networks for three years.

Airlines were to be compensated for capped airfares through a system called viability-gap funding (VGF), which was to be paid out of a corpus named Regional Connectivity Fund (RCF).

Half the seats on a flight would have capped fares and the rest sold at market rates. Airlines were expected to sell subsidised seats first, and they were to operate at least three flights a week from an airport.

The Airports Authority of India (AAI) was to collect money for RCF and disburse it to airlines as compensation for cost differentials. The government told Parliament in 2016 that the RCF was built with a levy of Rs 7,500 to Rs 8,500 on all departing domestic flights in the country. As much as 80 per cent of the levy so collected would pay for the dues of airlines and the rest of the funding would come from state governments. A rough calculation, based on 900,000 flight departures on an average over the past three years, shows that AAI would have collected upwards of Rs 700 crore a year from RCS levy.

Making flying a hard business

With such lucrative concessions, the ouster of Air Odisha and Deccan Charters seems an anomaly. Take the case of Deccan Charters. The airline never commenced operations for the 180-km-long Dehradun-Pantnagar route, but was entitled to a VGF of Rs 2,594 per RCS seat. The airfare for RCS seats was capped at Rs 1,500. Deccan Charters had proposed to operate an 18-seater aircraft every day on this route, with half the seats classified as RCS and therefore subject to capped fares. The route was to be ready in August 2017 but opened two years later with state-owned Alliance Air flying.

Alliance Air, for the financial year 2018-19, ferried 2,174 passengers between Dehradun and Pantnagar over 86 days. That’s barely 12 passengers on each flight, with Alliance Air likely operating either its 48-seater ATR-42 or the 70-seater ATR-72. Even if it used its smallest plane, Alliance Air would have been flying with three-fourths of its plane empty — a loss for any airline.

Air Odisha presents an even egregious picture. Its first UDAN flight connected Ahmedabad to the port town of Mundra in Gujarat on February 17, 2018, but it flew only eight times that month, ferrying 42 passengers on these trips. That’s five passengers per flight on its 18-seater Beechcraft planes. Between February and September 2018, its average passenger load factor was 28 per cent — a suicidal prospect for any airline. The average passenger load factor for all domestic airlines that year was 87 per cent. No wonder then that Air Odisha stopped flying for UDAN in 2018.

Air Odisha never flew on certain routes allotted to it, and the Chennai-Cuddapah route could well explain why. The airline had bid for this route as part of a network of seven cities in southern India. Trujet won another network connecting some of the same cities that Air Odisha had. This meant that both Trujet and Air Odisha could fly the Chennai-Cuddapah-Chennai route. While Air Odisha failed to fly on this 228-km route by September 2017, Trujet launched a service in November 2017. In 2018-19, Trujet had an occupancy rate of 50 per cent on this route — an average of 45 passengers per flight on its 70 seater ATR-72 aircraft. Trujet is running losses but is not in a bad shape. Air Odisha and Deccan Charters have disappeared off the UDAN radar.

Air Odisha in 2017-18 earned a revenue of Rs 1 crore, of which Rs 50 lakh came from its UDAN operations and the rest from its non-scheduled charter services. Air Deccan, the parent company of Deccan Charters, was no different. It earned Rs 63 crore in passenger revenue but barely Rs 1 crore came from its limited UDAN operations. Like Air Odisha, the rest of its revenues were attributable to non-scheduled charter services. Air Odisha and Air Deccan’s losses in the 2017-18 financial year were Rs 5 crore and Rs 114 crore, respectively. Trujet, the biggest of the three airlines, saw its revenues growing from Rs 115 crore in 2015-16, when it started operations, to Rs 281 crore in 2017-18. Its losses widened to Rs 85 crore from Rs 50 crore during this period. Trujet didn’t respond to Business Standard’s questions.

Modi government rethinks strategy

With UDAN floundering, the government unveiled revised rules for the second round of bidding in 2017. It now allowed two airlines to fly on the same route, but on the condition that a competing airline would have to obtain a no-objection certificate (NOC) from the airline awarded a specific network. If the airline got an NoC it would not be eligible for any benefits under UDAN. The list of underserved airports and airstrips was changed and increased from 16 to 28. The list of unserved airports was also changed, and it shrank to 300 from 398. An airline’s deadline to start operations was halved to 180 days. The minimum and maximum fares for RCS seats were reduced marginally from Rs 1,420 to Rs 1,410 for the shortest route and Rs 3,500 to Rs 3,470 for the longest.

In October 2018, the government made guidelines for the third round of UDAN to bring water aerodromes and sea planes within the scheme’s ambit. As many as 10 water aerodromes, including four in Gujarat, were identified for development. Airlines could now bid for specific routes instead of the network-oriented approach of the previous rounds. The list of unserved airports was changed and reduced to 236 from 300, while underserved ones were increased to 35 from 26.

A record number of routes (297) were given to 15 airlines and helicopter operators in the second round of bidding for UDAN. As many as 335 routes, including those that collapsed in the first round, were offered in the third round (and a subsequent round called UDAN 3.1), and a similar number of airlines participated in the bidding. Big airlines like IndiGo and the now-defunct Jet Airways threw their hats in the ring for subsequent rounds. But the incentives and reforms achieved little — only 106 routes awarded in the second round and 88 offered in the third round have been operationalised to date.

Jet collapsed, scuttling the routes it bagged — like the one connecting the holy city of Allahabad to Lucknow, Patna, Nagpur and Indore. Zoom Air, which had bagged contracts in the second round, also succumbed to a host of reasons, including concerns over aircraft safety. It had won contracts for the Kolkata-Jorhat-Passighat network and routes connecting Kolkata to Tezpur. It started flying on the Kolkata-Tezpur route by the end of April 2018. But when it ceased operations in October 2018, it had flown just 4,327 passengers over this six-month period, with just about 10 passengers on every flight. Zoom Air was to receive more than Rs 5,000 for every RCS seat on this route and the fare was capped at Rs 3,200. But even this couldn’t generate interest among flyers in either Kolkata or Tezpur. The reasons for Zoom Air’s failure are similar to other regional airlines that shut down. It had a fleet of just five aircraft and its cash flows were unsustainable in the aviation business.

A big airline like SpiceJet had to back out of routes like Chennai-Hubli, Kolkata-Jharsuguda and Guwahati-Lilabari due to weak demand.

Some of the routes, though, have done well, especially those operated by IndiGo, the country’s largest airline. IndiGo has established itself as a major connector of Kannur after the Kerala airport was operationalised in December 2018. It has bagged most routes connecting Kannur under UDAN and all these routes have seen impressive ridership.

UDAN misses, and hits

The success and failures of routes and airlines under UDAN underscore a couple of trends. Firstly, India’s mainline airlines, with their bigger fleets, deeper pockets and wider networks, have an advantage over companies with purely regional ambitions. Secondly, the choice of networks and routes is critical for success. “Larger networks and better financial muscle certainly matter. Regional flying cannot be a standalone business for those with purely regional ambitions. This is because viability-gap funding, on which these airlines were banking, hasn’t really worked. In India, it’s hard to make money even with a 90 per cent passenger load factor. The government funding is available for only half the seats in UDAN. These subsidised seats need to be sold first before seats can be offered on much higher market rates. With low demand on many routes, how will airlines fill the remaining half,” asks Ashish Shah of Centrum Broking.

Despite initial troubles, SpiceJet and IndiGo have performed better than others under UDAN. This despite the fact that SpiceJet flew fewer routes than some of the other airlines in the first round. IndiGo entered UDAN a year later than other ‘regional airlines’. IndiGo makes more money every hour than Air Odisha made in a year. Its daily revenues are more than what Air Deccan and Zoom Air earned in an entire year. Air Odisha and Air Deccan’s operating expenses per revenue passenger kilometre (money spent on every kilometre flown by a passenger) were Rs 1,592 and Rs 933, respectively. Air Odisha spent almost five times more ferrying passengers than it earned from them — the worst among all airlines in India. Air Deccan’s expenses on every passenger exceeded its revenues by more than 20 per cent. IndiGo and SpiceJet, which fly more and operate mostly on non-UDAN routes, spent Rs 3.68 and Rs 3.98, respectively, on every passenger per kilometre and earned slightly more.

Airlines that failed UDAN were clearly unprepared for the business. Air Odisha had two aircraft, one of which (a 20-year-old Beechcraft 1900D) ran into engine troubles, forcing it to cancel flights on the Ahmedabad-Mundra-Jamnagar-Diu network. Air Deccan acquired three Beechcraft 1900D, but this aircraft’s production had ended in 2002. It is unclear how the government gave routes to the two airlines that clearly had little capacity to serve. An email sent to Pradeep Kharola, secretary in the civil aviation ministry, remains unanswered.

Networks in southern and western India, industrial centres, and tourist places have done better for airlines. Most of the routes awarded under the first round of UDAN through 2017-18 first witnessed a full year of operations in 2018-19. Mumbai-Kandla was the best performing route, with almost 70 passengers on each SpiceJet flight daily.

Trujet, despite its financial troubles, also saw impressive footfalls on its Chennai-Salem and Hyderabad-Cuddapah routes. Bigger airlines found slots at Mumbai, Delhi, Hyderabad and Bengaluru airports which allowed them to time their flights to UDAN destinations appropriately. A former official of a now-defunct airline explains how: “To give you a hypothetical example, if I have to operate two flights a day from Mumbai to Nashik and back, I can’t time my first flight at 2 PM and a return flight at midnight to Mumbai. People would want to fly out in the morning and be back by late evening.”

"It's virtually impossible to get slots during these times at Mumbai and other airports. It further reduces the scope of any regional airline’s business. UDAN is all about connecting a big airport to a small airport. Unless such problems are taken care of at bigger airports, regional connectivity will suffer,” he says.

His views match with the 2018 statement of the Mumbai airport’s CEO, that smaller planes used for UDAN were taking runway time and reducing capacity to handle more lucrative flights.

Putting the plane before the horse

As many as 414 airports and airstrips were identified in 2016 for UDAN, but just 44 were operationalised as of December 2019. This meant that airlines awarded UDAN contracts were unable to start services on time; possibly one of the reasons for the scheme’s low target-achievement ratio. At least 10 routes — including Ambikapur, Neyveli and Rourkela — were awarded to airlines, primarily Air Odisha, in the first round of UDAN. But none of these airports are operational; they were put up for auction again in the third round.

Some other airports like Dimapur in Nagaland were selected for UDAN in the first round but were ready only by December 2019. AAI had in 2016 said it would invest Rs 17,500 crore to upgrade airports but revised estimates of its capital budget show that it spent less than Rs 500 crore a year on RCS works in 2018-19. When the Union Budget 2017-18 allotted funds, the civil aviation ministry got Rs 200 crore for RCS.

The government promised to increase that figure five times and give Rs 1,014 crore for RCS in 2018-19. It managed just Rs 441 crore because of a fund shortage. The civil aviation ministry planned Rs 8,554 crore as capital outlay from 2016-17 to 2018-19 — an amount that’s half of what the AAI had promised to invest in upgrading RCS airports and other infrastructure. The result of this is still visible.

The government, in the second round of UDAN, approved airlines to connect Bokaro, Bareilly, Rupsi, Vellore and Shravasti, but airports at these places are not ready. In later rounds, the government gave contracts for sea plane services to connect Andaman & Nicobar Islands and connect Guwahati to nearby cities by land planes on the Brahmapautra river. With airports needing money, landing planes on water, quite like what Modi did during his 2019 election campaign, could well be an easier way to get UDAN flying.