Will new aviation policy make regional flying profitable?

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Mumbai: The new civil aviation policy cleared by the Indian cabinet on Wednesday is aiming to take flying to the masses. The civil aviation ministry has announced a complex regional connectivity policy that seeks to connect unconnected towns with the help of viability gap funding. This will be done by capping fares at about Rs.2,500 for those routes and helping airlines with some funding to ply them. The funds will be generated by charging a cess on other domestic flights.

So will this help new airlines and regional airlines make profit? May be not. But sure, the overall market size can explode, experts feel.

“New airlines may not be able to make profit overnight as they will need to create a network and feed for making money from the potential new market,” said K.G. Vishwanath, a partner at consulting firm Trinity Aviation Consultants Pte. Ltd of Singapore.

Vishwanath crunched some numbers to prove this. Sample this, today the cost of operation of one seat per km (cost per available seat kilometre or CASK) is anywhere between Rs.3 and Rs.4 for low-fare airline such as IndiGo (run by InterGlobe Aviation Ltd) and SpiceJet Ltd, Vishwanath said.

CASK is a key metric of operating efficiency of an airline.

This calculation is at a crude price of $45 per barrel and has been achieved due to some economies of scale. India’s largest and most profitable airline IndiGo probably has the cheapest CASK in the world, which is very difficult to emulate, he pointed out.

“With lesser taxation on jet fuel cost and no airport charges for an airline flying into an unserved airport, CASK can potentially go down to around Rs.3 per km. If we were to assume a medium-term crude price of $60 per barrel, the same CASK will go up to Rs.3.50 or so. Regional flights within one hour flying of around 500 km may get a yield of Rs.2,000 or yield of Rs.4 per available seat kilometre at best. This implies a break-even seat occupancy requirement of over 85% which is very difficult to achieve in the initial years,” Vishwanath calculated.

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Airlines flying to tier II and tier III cities will be exempted from landing charges, parking charges and navigation charges to boost connectivity to remote areas. Airlines are also given incentives to fly to tier II and tier III airports with sales tax levied at 4% for jet fuel at these facilities. They need to pay 4-25% elsewhere.

Vishwanath argued that it is incrementally positive for existing pan-India airlines since new customers will now enter the market from tier II markets.

The existing pan-Indian airlines include IndiGo, SpiceJet, Jet Airways (India) Ltd, Air India Ltd and GoAir (run by Go AirLines (India) Pvt. Ltd).

However, he said that the existing regional airlines or newer airlines such as Vistara (run by Tata SIA Airlines Ltd) and AirAsia India don’t have the size to tap this golden opportunity profitably.

Vistara and AirAsia India are pan-India airlines while India has regional airlines such as Air Costa Aviation Pvt. Ltd, Air Pegasus (Decor Aviation Pvt. Ltd) and TrueJet (Turbo Megha Airways Pvt. Ltd).

The ministry of civil aviation had introduced the scheduled operator permits for regional airlines in August 2007, to increase air services to smaller cities.

Regional airlines are required to operate in small towns within one of the designated regions—north, south, west, east and the north-east. But they are not allowed to connect to more than one major city, except those licensed to fly in the southern region.

Vishwanath predicted that India might emulate a US model where big airlines may not choose to spread too thin into these regional markets but instead get into code-sharing with regional airlines to make the best use of this opportunity.

G.R. Gopinath, who founded India’s first low-fare carrier Air Deccan, said that the intention of ‘Viability Gap Funding’ is good but not practical to implement as state governments are involved and it is difficult to determine losses of regional airlines.

“The cost of a 1 hour flight at 75% occupancy is Rs.3,500 to Rs.3,800. The government wants airlines to charge not more than Rs.2,500 and losses will be reimbursed! And state government is involved. How do you determine the loss of the airline? Difficult to implement. Messy,” Gopinath said.
He suggested that it would be better to follow Europe, where in some airports they pay 10 euros per passenger carried, as it is easy to encourage and implement since it is linked directly to the passenger.

Another leading analyst watching the airlines space closely endorsed Gopinath’s views. “Outlining regional connectivity intent without airport infrastructure in place and without state’s buy-in will not cut ice with existing airlines nor with potential airline start-ups,” he said, on the condition of anonymity.

At least two senior airline executives pointed out that they are facing huge shortage of slots in major airports. They said slots are not available in Mumbai and Delhi to connect to regional airports, potentially impacting the government’s dream of realizing its target of growing domestic passenger traffic nearly four-fold to 300 million by 2022.

“If the government gets its act right, one thing is for sure. The overall market size can explode,” Vishwanath of Trinity added.

On Wednesday, civil aviation secretary Rajiv Nayan Choubey had said that some airstrips/airports that are being used for cattle grazing and date back to the World War era will be developed as no-frills airports at an indicative cost of Rs.50-100 crore and could host such flights.

The draft guidelines on regional connectivity will be placed on the ministry’s website in the next 10 days, said Choubey, who has been pushing for an integrated aviation policy since last year.