PM Modi's UDAN gives an adrenaline shot to smaller Indian airports

The number of passengers at airports joined by the Regional Connectivity Scheme, or UDAN, has been increasing exponentially

The Regional Connectivity Scheme (RCS) named UDAN by the Modi government has served as an adrenaline shot for small-town airports within a short span of time. In October 2016, the Modi government had sanctioned 64 routes to airlines connecting smaller cities with each other and with India’s metropolitan cities and state capitals. According to the Airports Authority of India (AAI), almost five million people took flights to or from these airports in 2017-18. In 2016-17, almost four million people had used these airports. Between April 2017, when the first UDAN flight was operationalised, and August 2018, a little over two million more people have used airports that were notified for regional connectivity under the scheme. In effect, a scheme that finance minister Arun Jaitley dubbed in his last budget speech as a game changer that would allow those wearing 'hawaii chappals' (bathroom slippers) to travel by 'hawai jahaj' (aeroplane), has touched the lives of less than 0.2 per cent of India’s population. More optimistically, in 2017-18, six out of every 100 new passengers across India flew from airports connected by UDAN and four per cent of all domestic passengers flew from these airports. The growth in passengers at UDAN airports in 2017-18 was also significantly higher than the overall growth of domestic passengers in India.

While the number of people flying out of these airports in relative terms might look inconsequential, most of these airports have seen tremendous growth ever since UDAN was made operational. Among airports that have seen a massive explosion in the number of passengers post UDAN are Nanded in Maharashtra, Shimla in Himachal Pradesh, Jaisalmer in Rajasthan and Ludhiana in Punjab (See Graphic). Nanded’s passenger traffic grew 8,000 times in 2017-18, from six the previous year, while cities like Shimla, Ludhiana and Jaisalmer grew by over 1,000 times during the same period, from 58, 98 and 269, respectively. Nanded is connected to Hyderabad and Mumbai by Trujet, while Shimla and Ludhiana are connected to Delhi by Alliance Air. Spicejet connected Jaisalmer to Delhi in October 2017. The exponential growth in passenger traffic at these airports also seems to have continued well into 2018. What is perhaps most heartening is the emergence of passengers at airports where none existed a few months ago. Among them are Jagdalpur in Odisha, Pathankot and Jalandhar in Punjab, Salem in Tamil Nadu and Mundra in Gujarat. Almost each one of the 30 airports included in the first round of UDAN, barring Agartala in Tripura, had substantially more passenger traffic in April-August 2018 than the same period last year. This overall growth in selected UDAN airports is significantly higher than the growth in metro and other larger airports. Passenger traffic in airports at Mumbai, Hyderabad, Chennai and Bengaluru grew by no more than 20 per cent, while Kolkata grew at 26 per cent during this period.

According to AAI, routes started getting operationalised in April 2017 and the last one was brought into service as early as June 2018. Of all the smaller airports that were connected in the first round of UDAN, three have had a decline in passengers. These include Kolhapur in Maharashtra, Shillong in Meghalaya and Jamanagar in Gujarat. Curiously, in Jamnagar, where Reliance Industries operates the world’s biggest petroleum refining township, passengers declined by 12 per cent, while freight handled at the airport increased more than 60 fold in 2017-18 over the previous year. Jamnagar was connected to Ahmedabad in the first round of UDAN and is served by Air Odisha, which was acquired last year by GSEC Aviation, promoted by Rakesh Shah, the brother-in-law of billionaire Gautam Adani. In the first round of UDAN, the government had given contracts to five airlines, two of which are now owned by GSEC Aviation. These airlines were to connect smaller cities in India such as Bhatinda in Punjab, Salem in Tamil Nadu, Jaisalmer in Rajasthan, Jagdalpur in Odisha and the union territory of Puducherry, to other smaller towns and metropolitan cities. In September 2017, a second round of contracts was given to connect some other cities like Jammu in J&K, Hubli in Karnataka and Allahabad in Uttar Pradesh, with established players like Jet Airways and Indigo bagging some of the contracts. AAI was made the implementing authority of the UDAN scheme and a dedicated Regional Connectivity Fund (RCF) was set up to provide subsidies to all these airlines which were to provide half the seats in their respective flights at a ticket cost of no more than Rs 2,500. The RCF was funded by imposing a levy of Rs 5,000 on every flight in India. This levy has been challenged by the Federation of Indian Airlines in court.

Regional airlines gain too

The most visible impact of UDAN is not just a growth in passengers and therefore revenue at smaller airports, but also buoyancy in traffic for many of the regional airlines that bagged contracts under UDAN. For instance, Trujet, which started operations in 2015 as a regional airline, increased its ridership four fold from 2015 to 2017. In the first six months of 2018 alone, it has carried two-thirds the number of passengers it ferried in the whole of 2017, which indicates that it is well on its way to beating last year’s performance. Trujet has operationalised two of its routes -- Vijayawada-Cuddapah and Salem-Chennai -- in March this year. Air India-owned Alliance Air too doubled its passengers in 2017 to over a million as compared to the previous year. In the first six months of 2018, Alliance Air has already flown almost the same number of passengers it flew in the whole of 2017. Some of the other newer airlines like Air Odisha, Deccan Charters and Zoom Air are yet to show the same performance as some of their other UDAN counterparts. It isn't just these airlines but even the more established ones that are joining the fray in connecting smaller cities. So what explains this sudden interest in India’s smaller cities from airlines when they know they can’t charge half their passengers more than Rs 2,500 for every ticket?

One reason is the prospect of getting good revenues from the government for every flight they operate to smaller cities. The government has been collecting impressive amounts from various domestic airlines to build up its Regional Connectivity Fund (RCF), which will be used to compensate the UDAN operators for their cost differentials (called viability gap funding) in providing cheaper-than-cost airfares to people from smaller towns and cities. Between December 2016 and May 2017, the government imposed a maximum levy of Rs 8,500 on every flight in India. In June 2017, this levy was reduced to Rs 5,000 after the Federation of Indian Airlines (FIA) challenged the imposition in court. An off-the-cuff calculation would show that if the government collected the maximum levy of Rs 8,500 on every flight, it would have earned almost Rs 3.6 billion till May 2017. Between June 2017 and July 2018, the government would have earned Rs 5.6 billion on its reduced levy. While the official collection figures haven’t been revealed by the Modi government, the government’s Regional Connectivity Fund (RCF) would have built a corpus of over Rs 9 billion by imposing levies on every domestic flight to fund the UDAN scheme. Under the UDAN scheme’s guidelines, airlines can get up to 30 per cent of the total inflows of this corpus with an airline’s share going up to as much as 50 per cent in a particular region of India. According to Ministry of Civil Aviation’s revised UDAN document released in September 2017, “The total Viability Gap Funding (VGF) approved for a particular airline operator under the UDAN Scheme will be capped to an annual limit corresponding to 30 per cent of the estimated annual inflows in the Regional Connectivity Fund (RCF), provided further that the VGF approved to such airline operator in any given region does not exceed 50 per cent of the allocation cap for such region.”

Growth despite lower rail fares

What’s interesting, perhaps, is that the growth in the number of passengers at smaller airports has come in the face of other transport alternatives available to Indians between certain cities. This becomes especially glaring when one compares railway fares and airfares offered under the UDAN scheme. For instance, a second AC ticket on Indian railways between Hyderabad and Nanded costs around Rs 750. The airfare between these cities, which were connected under the first round of UDAN, costs just about Rs 1,100 on a TruJet flight that takes a little more than an hour. Similarly, a second AC train ticket between Jaipur and Jaisalmer -– a journey that takes more than 12 hours -– costs a maximum of around Rs 1,400. A Spicejet flight, which takes a little more than an hour between the two cities, would cost around Rs 2,400 on the same date. This becomes more evident in even smaller routes like Jalandhar-Delhi. An executive chair car on a Shatabdi train between the two cities costs about Rs 1,400 while an Alliance Air flight costs Rs 600 more and saves a passenger more than three hours of train travel.

By the look of it, UDAN airfares are a small premium to pay for passengers who are looking to make the switch from the highest class of train travel to a short flight. And this is the passenger dilemma that seems to have given Modi’s UDAN the wings to fly high.