In April, another ill-starred regional airline bit the dust. Air Mantra was billed as India’s first new regional carrier after 2007 and launched operations last July with two 19-seat Beechcraft 1900D turboprop aircraft connecting Amritsar and Chandigarh. Later Jammu was added to its itinerary and it even flirted with the idea of touching Kargil. But how long can any airline survive with passenger load factor (PLF) averaging 20 to 25 per cent and flight cancellation rates nearing 50 per cent? Although the management cited technical factors for the abrupt grounding, the main reason was low PLF. Mantra’s only regional predecessor, MDLR Airlines, operated from March 2007 till November 2009, before being forced to quit because it could no longer meet lease payments. MDLR was launched during a major growth spurt in Indian aviation, but then fuel prices began a relentless climb and the carrier was soon floundering in a sea of red ink.

Most experts and decision-makers believe that the next boom in India’s aviation industry can only come from improved regional connectivity. They also agree on the need to speedily take aviation services to distant parts of the country. Minister of Civil Aviation Ajit Singh says, “The growth in the civil aviation sector needs to be equitable and inclusive, providing connectivity to Tier-II and Tier-III cities as also to remote and difficult areas of the country.” Then why do regional airlines find the going so depressing?

According to the Centre for Asia Pacific Aviation (CAPA), although the government is obviously keen to encourage regional connectivity, viability remains a key challenge. “There is clearly a fundamental issue with the viability of regional operations due to the cost structure, airport infrastructure limitations and the overall policy framework.”

Governmental Gaffes

Passengers will fly only if the price is right. Air Mantra for instance, netted just 100 travellers last October and 300 in November. The reason was high ticket prices. Passengers were unwilling to pay Rs. 3,000 for a flight from Chandigarh to Amritsar when they could conveniently make the trip by surface at a fraction of the cost.

Why is flying so expensive? Many politicians and bureaucrats can scarcely hide their belief that air travel is a luxury. They view aviation as a sector to be milked for revenue because “the rich can afford to pay”. However, while that may be true for the metros, it hardly applies to the smaller cities and towns that dot the country. Travellers from remote areas also need to get around quickly especially in an emergency and surface transportation facilities may not be adequate. Many who have recently joined the middle class cannot afford high fares.

Yet, the cost of domestic air travel is bumped up by stiff taxes on aviation turbine fuel (ATF) and a slew of other charges. Indeed, for India’s carriers, foreign operations are much more attractive than domestic flights, because fuel can be obtained from abroad perhaps at 20-40 per cent cheaper. Since fuel accounts for about 45 per cent of the operating cost of an airline, the savings overseas can only be substantial.

In the domestic market too, the airlines overwhelmingly prefer the lucrative inter-metro routes rather than the smaller destinations. Most carriers are noticeably reluctant to fly to remote locations because they know they will have to contend with low yields and will find it extremely difficult to cover their costs. At present, 36 per cent of domestic capacity is devoted to connecting just the six largest cities to each other. And affordable regional air connectivity seems a distant dream.

In a classic bureaucratic response, the government tries to compel carriers to touch more destinations via the ham-handed Route Dispersal Guidelines (RDG). According to the RDG, all scheduled operators are required to deploy specific percentages of their trunk route capacity onto routes that link remote and smaller cities and towns. Most of these, to put it mildly, are not commercially viable. In addition, many do not have runways long enough for narrow-body jets like the Airbus 320 and Boeing 737. Air India and Jet Airways can use smaller ATR 42 and ATR 72 turboprop planes, but how can carriers with all-jet fleets like IndiGo and GoAir rationally meet the RDG? Before adding 15 Bombardier Q400 turboprop aircraft to its fleet in 2011, SpiceJet too had only Boeing 737s which can access just about 40 airports in the country. Airlines therefore prefer to fly bigger aircraft to commercially viable destinations such as Guwahati and Dibrugarh, leaving other remote areas unconnected. “This system is clearly not working,” confesses the Director General of Civil Aviation, Arun Mishra. He adds that flights to smaller cities and towns will always be non-profitable and will need financial support.

A better way to stimulate regional expansion would be to construct enough low-cost airports and encourage small, lowcost, no-frills regional airlines operating small aircraft. Regional airports are rightly seen as growth drivers for Indian aviation. In fact, 80 such airports at small towns and cities have already been identified where connectivity needs to be provided. In 40 of these, it is possible for airlines to operate immediately because the facilities are adequate. For the remaining airports, a suitable low-cost model must be introduced, coupled with a viable model for regional airline operations, so as to attract adequate investor interest.

A Level Playing Field?

When the Ministry of Civil Aviation (MoCA) issued its regional aviation policy in August 2007, it aimed to encourage small regional airlines to connect Tier-II and Tier-III destinations to the nearest metro, thus sparking a regional aviation revolution in India. It also offered several concessions to facilitate regional operations. However, the policy has been an abject failure because it ignores a crucial aspect. Thanks chiefly to the RDGs, the national carriers already occupy most of the routes that fledgling regional airlines might otherwise have chosen. National carriers operating smaller aircraft enjoy all concessions intended for regional airlines. In addition, they can fly anywhere in the country, while regional airlines are limited to their own region. Large carriers with an extensive network have an edge because passengers naturally prefer to fly the same airline seamlessly on different legs of the journey. Therefore, regional airlines cannot easily compete with national carriers and a level playing field for both is largely illusory. Instead, regional carriers need to enter into code-sharing agreements with the national carriers, so that they can fly in cooperation on different routes.

Various measures are currently being mulled by the Ministry to give a boost to regional aviation. These range from outright subsidies for regional airlines to a seat credit system to replace the RDGs. One proposal is to allow scheduled regional airlines to induct aircraft with less than 19 seats for deployment on regional routes. However, this is against the global trend of replacing small aircraft with larger ones in order to bring seatmile costs under control. According to CAPA, “Offering high fares on old, small aircraft is not going to stimulate the market. And if subsidies are going to be used to bring down fares, who is going to monitor these small operators to ensure that public funds are being used correctly? An oversight committee will be required to manage the process adding yet another layer of bureaucracy and costs.”

The MoCA appears to have discarded an earlier plan to levy a cess on passengers flying on metro routes to support an Essential Air Services Fund (EASF), meant to promote regional air connectivity. It now proposes to foot the bill through budgetary resources, besides route-specific support from state governments and the Airports Authority of India (AAI). The government-funded EASF would provide financial support to airlines for operations on unviable routes, at least to begin with. According to initial estimates, an annual provision of Rs. 250-300 crore would suffice to support connectivity to 40 regional Tier-II and Tier-III airports in the first phase.

In a noteworthy break from its fondness for milking the airline industry, the government is reportedly also planning to make around 90 small airports in the country concessional, in addition to providing subsidy to carriers flying on those routes. The AAI would have to waive navigation, landing and parking charges, which account for about 10 per cent of airline costs, for all Tier-II and Tier-III and some other non-metro airports. Airlines would also enjoy a flat four per cent sales tax on fuel, as against an average of 25 to 35 per cent in some states. State governments would need to share the construction costs of airport infrastructure at these locations and would be requested to offer other concessions, especially lowering tax on ATF to four per cent or below. The question is, will it happen?

Regional carriers in India can only hope to succeed if they get loads of encouragement. It begins with the recognition that regional airlines do a vital job that no one else wants to do, where the risks are large and the payoffs small. They can only be viable if they operate under a regional aviation policy that unambiguously offers them sufficient financial stimulus and other support.