Even as the Ministry of Civil Aviation is very close to award regional connectivity routes to air service operators, a study by CRISIL Research has found out that only 50 to 60 out of the over 414 identified un-served and underserved regional airports have the necessary infrastructure to support flight operations.
Thus only 14% of the airports and airstrips listed under the scheme are equipped to handle small aircraft which are upto ATR 42.
Besides, the study has indicated that a passenger load factor (PLF) of about 50-60% would be required to breakeven at the EBITDA (or earnings before interest, tax, depreciation and amortisation) level even though the government has offered subsidies to operate flights on regional connectivity scheme (RCS) routes.
These are some of the major challenges to encourage serious players to participate in the scheme. And even if they come on board their long term sustenance is questionable.
Counter-bidding for routes under the RCS of the government’s ambitious UDAN ( Ude Desh ka Aam Nagarik ) programme got over recently and the government will soon award the routs.
The government’s intention is genuine with a view to grow the Indian aviation market as well as to provide air connectivity to the hinterland but the targets set under UDAN mean a very steep takeoff.
Though domestic passenger traffic in India has grown 10% a year in the five fiscals to 2016 to 85 million annually, it is concentrated at the 6 metro airports, which account for about 65% of the total domestic passenger traffic, leaving the rest to the remaining 73 airports.
All about RCS
The government in October 2016 released final RCS note, just months after adraft was circulated for stakeholder consultation, indicating the government’s seriousness.
Under this, airfares for any given distance are locked and are subject to a quarterly revision based on CPI inflation. For instance, the RCS fares for 501-525 km sector should be below Rs 2,500.
Since these are not high passenger traffic routes and requires deployment of small aircraft which are costlier to operate, the government has decided to encourage the players by providing several incentives.
These includes benefits such as reduction in value-added tax (VAT) on aviation turbine fuel (ATF) to 1%, reduction in excise duty to 2% and exemption from levy of airport charges such as passenger service fee, development fee and user development fee on RCS tickets at both public as well as private airports. Besides aircraft to be operated under RCS will not be levied landing and parking charges and the sales tax would be levied only on 10% of the taxable value of the tickets for one year.
New airline licences are proposed to be given under the Scheduled Commuter Airline category to ease the pressure with respect to capital requirement and fleet expansion on airlines under the scheme. And the civil aviation ministry has asked the the finance ministry to reduce taxation on the import of aircraft to 3% from about 18%.
The counter-bidding for the scheme completed on February 1, 2017, and awarding of routes will be announced shortly. The selected airlines will receive route exclusivity for 3 years from commencement of operations. Route bidding and allocation will be carried out twice a year.
To qualify as an RCS route, at least one of the airports (origin/ destination) should be listed in the scheme and should not have scheduled commercial flights in the specified route during the past 1 year. A good 414 RCS airstrips/airports have been listed.
The G-60
But going by the findings of the CRISIL Research study only upto 60 airports/ airstrips including 12 underserved and the remaining un-served are infrastructure ready. They have the required runway length of upto 1600 meters that can handle an ATR 42 operation and the terminal buildings.
“Of these, 25 airports are under the control of Airports Authority of India, 11 under Defence, 11 are private and the rest under the respective state governments,” said Binaifer F. Jehani, Director, CRISIL Research, who has conducted the study..
These 55-60 airports could see an investment of Rs 50-100 crore per airport for expansion/ modernisation to facilitate aircraft operations and passengers, depending on the airlines’ interest, she said
The Centre for Asia Pacific Aviation (CAPA) recently in a report stated that the precious capital for airport development must be directed towards viable projects.
“Airport development needs to be pursued with viability considerations in mind. The greenfield airport at Durgapur in West Bengal, built with 100% private capital, has struggled to attract commercial airline operators. Reliance’s investment in regional airports in Maharashtra, and IL&FS’s interest in project in Karnataka have similarly not performed” CAPA had said.
“The tender process which awards concession to the bidder offering the highest revenue share needs to be reviewed,” it had added.
Implementation of RCS is subject to the state governments’ acceptance of a reduction in VAT on ATF to 1% at RCS airports and a 20% contribution towards viability gap funding (VGF).
As of January 2017, 19 states had given their consent for implementation of the scheme and of these 11 – Andhra Pradesh, Assam, Chhattisgarh, Gujarat, Jharkhand, Madhya Pradesh, Maharashtra, Mizoram, Puducherry, Uttarakhand and West Bengal– had signed memoranda of understanding. “Together, these states have about 8 underserved and 173 unserved airports – but only 23 of these have the requisite infrastructure,” Ms Jehani said.
Breakeven crucial for continuity
Though subsidies are offered to operate on RCS routes, CRISIL’s analysis indicates a PLF of 50-60% is required to breakeven at the EBITDA level, assuming the highest possible revenue per RCS seat (highest VGF per RCS seat + highest air fare per RCS seat for category 2/3 aircraft) for a stage length of 500-525 km.
“The passenger load factor required to breakeven at EBITDA will increase with aggressive bidding on VGF and reduction in fare charged by the airline operators,” Ms Jehani said.
She said VGF bidding is a very crucial part of the scheme as it will determine the profitability of the airline.RCS routes will be allocated to airlines on the basis of reverse bidding for VGF (lowest bid wins).
The scheme has prescribed a VGF cap per seat for each stage length. Also, an airline operating a Category I (under 20 seats) aircraft is entitled to higher VGF. For instance in a 476-500km slab, a Category I aircraft is entitled to a maximum VGF of Rs 5,730 per seat, whereas a Category2/3 aircraft ( more than 20 seats) can have a maximum VGF of Rs 4,050 per seat, which is about 40% higher VGF for Category I aircraft.
The amount of VGF provided to the airline is indexed to inflation, ATF price and dollar-rupee exchange rate.
As per the scheme, the airlines flying RCS routes should allocate 50% of the seat capacity as RCS seats, subject to a minimum of 9 and a maximum of 40 seats. The airfare cap and VGF will be applicable only to these RCS seats. Besides, RCS seats are not subject to any levies or charges imposed by airport operators such as the passenger service fees, development fees and user development fees, which account for about 10-15% of the ticket price at metro airports.
Subsidies critical
Under these circumstances, grant of subsidies could encourage players to invest in this project, said the CRISIL study .
“Even China has been subsidising its regional air routes since 2007. Between 2006 and 2015, domestic passenger traffic at Chinese airports grew 12% a year (CAGR) from 299 million in 2006 to 829 million in 2015, led by growth in number of airports from 144 in 2006 to 206 in 2015,” Ms Jehani said..
In India, the model has been modified to make it more competitive and transparent by allocating subsidies through VGF bidding instead of direct budgetary allocation as in the case of China.
Over the past 3 years, the budgeted subsidies for regional aviation in China has increased from about $70 million) in 2013, to $ 148 million) in 2016.
This is similar to India’s planned VGF collections of about Rs 500-600 crore ($90-95 million) per annum (assuming the levy is charged on existing fleet mix) of which 20% is funded by state government and the rest through a levy on flights on non-RCS routes.
“While the RCS scheme is expected to increase the reach of aviation in India from 79 airports in fiscal 2016, as it happened in China, the quantum of subsidies provided by the Chinese government has been increasing every year. Which means, while the implementation of RCS can improve connectivity in India, a continuous flow of subsidy will be crucial to make it all feasible,” Ms Jehani said.
However, according to some experts subsidy is a deterrent for serious investors to commit investment to such project.
“Rather than providing subsidy, the government should provide incentives which will make the business attractive. The Government should focus on ease of doing business and ease of operations. Subsidy is negative for foreign investors as thus may be discontinued at whims and fancy,” said Rajeev Wadhwa, Chairman and CEO of Baron Aviation which aggregates private jets for business and personal use.
