For airlines, how frustrating is flying remote routes really?

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In recent months, two opposing sections of airlines in India have been intensely lobbying to have it their way in a long-awaited aviation policy. Pitted on one side are new airlines such as Vistara and AirAsia India that have been demanding that the policy abolish a rule that prevents them from flying profitable international routes until they are five years old and have at least 20 planes. On the other side are older airlines such as IndiGo, Jet AirwaysBSE -0.30 %, SpiceJetBSE -1.74 % and GoAir that insist that if the so-called 5/20 rule goes, so should the Route Dispersal Guidelines (RDG), which force them to deploy flights to remote areas.
No doubt both are business unfriendly rules. Any rule that forces a commercial enterprise to act against its wishes or interests is dispiriting. But is the RDG really as bad as the older airlines insist? These airlines under the aegis of a lobby group called Federation of Indian Airlines (FIA) contend that RDG forces them to launch flights to unprofitable routes. Is this true?

Data that airlines provide to the aviation regulator DGCA suggest otherwise. Take a look.

Aviation authorities have classified airline routes in India into four broad categories. The first is Category I routes — the metro, or trunk, routes such as Mumbai-Bangalore, Kolkata-Delhi, Mumbai-Delhi etc. The second, Category-II routes, connect the metro airports with airports in the North East, Jammu and Kashmir, Andaman and Nicobar and Lakshadweep. Examples: Delhi-Srinagar, Delhi – Guwahati, Delhi – Dibrugarh. The third, routes within the North East, Jammu and Kashmir, Andaman and Nicobar and Lakshadweep, are classified as Category II-A. Examples: Agartala- Bagdogra, Imphal-Guwahati. All routes that do not fall in Category-I and Category-II constitute the fourth, called Category-III routes. Examples: Delhi – Pune, Bengaluru – Pune.

A word now about the RDG conditions.

Airlines have to deploy minimum capacity (as % of capacity deployed in Category I) in the manner below:

Categories

Capacity deployed is calculated in Available Seat Kilometres (ASKM), a measure of an airline flight’s passenger carrying capacity. It is equal to the number of seats available multiplied by the number of miles or kilometres flown.

One would expect airlines to be stingy with capacity on unprofitable routes, right? Well, not really.

More than what is needed

Turns out airlines are deploying excess, in some cases excessive, capacity than what is required under RDG.

Aditya Ghosh, President, IndiGo, said his airline has consciously chosen to keep its deployment on Category II routes more than the mandated minimum so that its planned increases on metro to metro and other trunk routes are not held up at any point of time, given its aggressive aircraft induction plans.
SpiceJet, Jet and GoAir, whose promoters or executives have been vociferous about the loss-making attribute of RDG routes, said the FIA will answer on their behalf. Ujjwal Dey, Associate Director, FIA, said if the RDG were not in place, airlines would have planned aircraft rotations at will without any Category II operations. (The responses of Ghosh and Dey matched almost word for word).

But both the responses only underscored something that is well known — RDG limits the choice of airlines. They refused to answer if RDG routes, as they claim, are loss-making. Dey and Ghosh did not respond to a set of follow-up questions and repeated reminders.

If airlines had to maintain a buffer to meet RDG requirements, they would keep it to a bare minimum, should such an exercise entail losses. That is what all commercial enterprises — not just airlines — do to avoid flouting rules.

Two executives of the FIA airlines, who agreed to speak only if their names and the identity of their employers are not revealed, admitted that their airlines make profits on Category II and Category III routes. This explains the excess capacity on these categories, according to them.

One of the tenets of network scheduling of airlines is that they withdraw from lossmaking routes and increase flights to profitable routes.

Viewed from this prism, Category IIA routes are no doubt lossmaking. That is why airlines maintain a minimum buffer as required by RDG.

Ghosh said it can be argued that some of these operations will be profitable in the current cost scenario, where the cost of ATF has fallen considerably. “This is however a temporary phenomenon, and once crude oil prices, and consequently ATF prices increase, the bulk of the Category II and Category IIA routes will become loss making once again.”

If that is true, ET asked Ghosh if he could explain the excess capacity IndiGo deployed on RDG routes even during periods when oil process were costlier. Of course, it wasn’t just IndiGo.

Fuel rates don't always bite

No answer came.

ET then approached two analysts to understand more about the RDG routes.

Mark Martin, founder of Martin Consulting, an aviation consultancy, said airlines in India fly these (RDG) routes because the yields are good. “Plus there is the additional revenue that comes in from cargo,” he said.

Martin said an airline will fly routes to make money and will do everything possible to ensure that they are profitable at some stage. “Typically this takes between three and six months.” In other words, airlines will pull out of routes that make losses.

Some of the Category II routes such as Imphal, Dimapur, Guwahati, Jorhat, Tezpur and Dibrugrah are high traffic destinations, he said.

Breakdown of routes done by Ameya Joshi, another aviation analyst, threw up similar results. Majority of the airlines get profit from Category III routes where the traffic maybe lesser (than Category I routes) but the competition and options for passengers are low, he said. Only government run Air India flies nearly every RDG route.

Limited options, Limited competition

Joshi, who studies networks of airlines, said Category II routes could be loss making for airlines but they are volume driven. Fares on some routes such as Delhi-Leh and Delhi-Srinagar are generally very high during the peak summer season, though they drop during the winter, according to him.

That is not to say fares on RDG routes are cheap. Not by any yardstick. They have mercifully dropped a little thanks to falling oil prices.

Not so cheap fares

Are these high fares justified by high flying costs on these routes? No. The flight duration on most RDG routes are between 1.15 hours and 2 hours, which means usage of jet fuel is not very high, according to the analysts.

Many of the RDG airports are operated by government run Airports Authority of India. AAI airport charges are cheaper than Category I airports such as Delhi, Bengaluru and Mumbai that are operated by private players.

Some RDG airports such as Bagdogra have also offered a three-year sales tax waiver on ATF for airlines to coax them to launch flights. On November 18, 2013, IndiGo added Bagdogra as its 30th domestic destination. The airline launched three new flights connecting Bagdogra with Delhi, Chennai and Kolkata on January 31, 2014.

On that occasion, Ghosh said there is “increased flow of tourist and business traffic” to these cities.

In an earlier interview with ET, Ghosh was asked whether the IndiGo brand will be seen in more international markets using the new 250 planes it had ordered. “The Indian market is growing. We would be foolish to not focus on India,” he replied.

Indeed, Indian domestic passenger traffic grew more than 20% in 2015 from a year ago.

Last Monday, IndiGo added Dehradun, a Category 3 route, as its 40th destination.

Last Wednesday, Aviation Secretary RN Choubey told ET: “Notwithstanding whatever decision is taken on the 5/20 rule, RDG will stay.”