Aviation: The Wind Under Wings

Can the government’s Regional Connectivity Scheme, intended to connect the unconnected through short-haul flights, turnaround the fate of existing regional carriers that are facing, an existential crisis...

-by Ashish Sinha

In June, civil aviation minister Ashok Gajapathi Raju had said: “The government is open to ‘light handholding’ should any airline face financial crunch.” On 27 July, barely a month later, Bangalore-based regional airline Air Pegasus shut operations. On 4 August, regional airline based out of Vijaywada, Andhra Pradesh, Air Costa, suspended operations for a day but is up and running now. Another Andhra Pradesh-based regional operator Trujet is not in a good place, say industry insiders. But so far, there has been no official attempts at ‘handholding’ any of the regional carriers.

Meanwhile, some 1,500 kilometers away from Hyderabad, the civil aviation ministry, housed in the Rajiv Gandhi Bhawan, Delhi, is working to set the Regional Connectivity Scheme (RCS) in motion. It aims to boost short-haul air travel for the common people. RCS has proposed an airfare of Rs 2,500 per hour flight on a certain number of seats on-board a regional carrier flying between 200 km and 800 km.

While the intention behind connecting the un-connected by regional airlines is noble, the business environment for operating an airline continues to be foggy. The way the government sees it, there are 394 unserved and 16 under-served airports in the country apart from 31 inactive airports, which are waiting to see activity. This is driving the civil aviation ministry to push RCS. “We need to make air travel affordable. There is tremendous demand for air travel. It will grow even faster when we provide airfares starting from Rs 2,500, which is a very attractive price point,” says Jayant Sinha, minister of state for civil aviation.

All that is very well, but why are the regional airlines crumbling down within a year or two of starting operations? Answers to this question can help RCS take off.

What Went Wrong?
Take the case of Air Pegasus, operated as a subsidiary of Decor Aviation, an aircraft ground-handling services company. Before 27 July, Air Pegasus had a fleet of three ATRs 72-500s. These are said to have been repossessed by Elix Aero, an aircraft leasing firm, for non-payment of dues. News reports suggest the aircraft lessors have also approached the civil aviation regulator, Directorate General of Civil Aviation (DGCA), asking it to deregister these planes to enable them to take the aircraft out of the country. The management of Air Pegasus, however, is confident of revival and is said to be in talks with creditors to infuse funds in the company. The carrier, which was launched in April 2015, operated flights from Bengaluru to Chennai, Cuddapah, Hubli, Madurai, Mangalore, Puducherry, and Trivandrum in South India. Experts say the company requires cash infusion to fly again.

According to a senior official in the ministry, the government is not looking at any intervention in the Air Pegasus matter for now as it is a private matter between the leasing company and the airline.

Air Costa, promoted by LEPL Group, a diversified group with strong interests in real estate business, also faced some issues with its creditors in early August, which “have been resolved”, says a company spokesperson.

Dhiraj Mathur, partner, Aerospace & Defence, PwC India, says the regional airlines are not able to survive today because of high costs. “They have a restricted and value-conscious market. They also have to bear high-structural costs. These factors hamper their ability to honour their obligations to lessors,” says Mathur.

Kavi Chaurasia, vice-president, marketing and brand communication for Air Costa, agrees with him. “A minimum of five to six planes are needed to stabilise operations of a regional airline. This helps them to fight competition as for regional airlines it is only one way to fly — within your defined region. But for a full-service or a low-cost carrier, it is a two-way path. They can enter regional markets (short-haul sectors) as well as the main trunk routes.”

Numbers Speak
Cash crunch is at the core of challenges faced by regional airlines. Sample this: a regional airline such as Air Pegasus or Trujet has to shell out over Rs 2.5 crore per month in aircraft lease. For a one hour flight between Hyderabad and Vijayawada, these airlines shell out around Rs 4,500 per seat in fuel cost. Taxes and other levies are additional. Then, there are maintenance, employee, and other fixed costs. The source of revenue boils down to what can be earned per seat, which is where the situation becomes tricky. The ticket price between Hyderabad and Vijayawada can range from Rs 1,500 to Rs 3,000 or more depending on when it’s booked. An AC bus fare between these two cities is pegged at around Rs 1,100, while a low-cost carrier which can also operate on these routes can tend tickets at around the price points of an AC Bus fare in order to attract customers. With limited fleet and flight schedules, operating flight every hour for the regional players becomes a loss-making proposition. “The outgo is much more than the earnings. This situation can only improve if the regional players have more flights, more aircraft, some sort of cap on low fares, lower ATF (aviation turbine fuel) taxes and waiver or lower user development fees charged by bigger airports such as Hyderabad,” says a senior executive of a regional airline requesting anonymity.

“Today, they are stuck in a vicious circle where they need economies of scale to grow, but to grow they need profitable operations. Swift and economical rail and road connectivity for regional destinations also give tough competition to regional airlines which intend to sell “convenience” in a market where price consciousness dominates over other considerations,” says Mathur of PwC.

Ground handling by private players is also a major expenditure head for all airlines, which together spend around Rs 2,500-2,700 crore annually. For regional carriers, this is a major expenditure which may prove to be a hurdle in the success of RCS. To make matters more complicated, the new civil aviation policy says there will not be any hiring of employees for ground handling operations through a third-party supplier. This is expected to result in litigations which may further delay the roll out of regional connectivity scheme.

What Government Wants?
R.N. Chaubey, secretary, Civil Aviation, says that the government is hopeful of finalising the RCS by mid-August. Almost 390 airports and airstrips have been identified for the scheme. Additionally, there is a plan to revive 60 airports, 10 of which are with the Airport Authority of India and the balance with the state governments, which will be revived with financial support from the Centre.

Most crucial aspect of RCS is fixing the subsidies, incentives and the viability gap funding (VGF) for those becoming a regional carrier under RCS. Currently, 65 per cent of the air traffic is on 12 routes, but RSC could change that. “RCS will open up growth opportunities beyond key routes,” Chaubey said earlier this month.

Smaller states want lenient cap on the minimum distance of 200 km. The present cap on regional scheme is between 200 km and 800 km. North Eastern states want the Centre to bear the entire subsidy and want an extension of subsidy scheme on aircraft from the proposed three years to five years. Considering the huge investment that is required for development and revival of these airports, Chaubey says the reduction of entry barriers for airline operators is difficult as “balance has to be worked out”.

Charters Eye Regional Market
While the government machinery is at work to set the ball rolling on RCS, the non-scheduled operators or the air charter services firms with plane capacity of 20-50 passengers are also eyeing the regional markets as the business of air charter does not involve daily use of their aircraft. If the non-scheduled operators are to be believed, the aviation ministry is working on a proposal to allow them to deploy their aircraft on regional routes. According to a ministry insider, there could be a way where a minimum number of hours are fixed if the air charter companies want to convert into a regional carrier.

Even the civil aviation minister Raju has supported this view. He recently said: “Regional routes cannot be connected by large aircraft. New players with smaller aircraft can operate on shorter runways.” According to Jayant Nadkarni, president of Business Aircraft Operators Association, chartered operators connect remote cities in the US and other developed countries. “If we are allowed to operate on these routes, it will give a push to RCS,” says Nadkarni. But Bhupesh Joshi, CEO, Club One Air, is of the view that “in order to allow charter firms to turn regional, a number of steps are required including allowing us to handle our own ground operations and lowering interest rates on loans on aircraft purchase, among others.” But first, there are a number of measures that are required for the regional connectivity scheme to take wings.

Corrective Measures
So what can be done to make a success out of the RCS? “State governments must sign up for the RCS and then honor their financial commitments on time,” says Mathur. Other measures that are doable, include keeping the rules regarding implementation of RCS and VGF “simple and transparent”.

“The state governments should resist the temptation of increasing taxation on ATF. Availability and financing of smaller planes will be an issue as well as the training infrastructure for pilots. This is where the government could explore supportive/facilitative intervention on behalf of players,” says Mathur.

Chaurasia of Air Costa has a few concerns too. “The main highlight is the upper price cap of Rs 2,500 for less than 500 km or one hour flight, which is not enough to maintain the market lucrative.There has to be a lower cap floor price in order to save the smaller airlines which will then initiate services to serve the unserved sectors,” says Chaurasia.

While replying to a question on regional connectivity, Raju, the civil aviation minister says: “Airlines are like horses. We can take them to the water but can’t force them to drink.” Now the airlines are only hoping that the path leading to the water will be cleared in a manner that they can drink and replenish themselves so as to make RCS a big success.

[email protected]; @ashish_BW

This article was published in BW Businessworld issue dated 'Sept. 5, 2016' with cover story titled 'New Age Classroom'

http://businessworld.in/article/Aviation-The-Wind-Under-Wings/23-08-2016...