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Regional Aviation in India: A Review

Another season of airline launches is here with no less than seven new carriers announcing plans to start flying this year. It’s anyone’s guess how many will actually succeed. After Air Pegasus commenced operations on April 12, the list of hopefuls includes at least three other regional airlines: TruJet, Zav Airways and Air Carnival.

Why are so many newcomers keen to enter a market that already seems a tad overcrowded? The main reason is the steady growth of traffic. In 2014, about 67.4 million domestic passengers travelled by air, an increase of 10 per cent over 2013. This year promises to be even better. Yet no other major industry that is growing at such a healthy rate is in such distress. According to CAPA Centre for Aviation, India’s airlines are reeling under $10 billion in losses and close to $16-17 billion of debt. Although the precipitate and unexpected drop in the price of oil that began around the middle of last year brought some cheer, the industry is by no means out of the woods.

Numerous and New

India already has nine airlines – Air India, Jet Airways, IndiGo, SpiceJet, GoAir, Air Costa, AirAsia India, Vistara and Air Pegasus. But their operations are mainly skewed towards the lucrative metros and large cities, leaving many remote and isolated areas unserved. Since 97.5 per cent of India’s 1.2 billion populace has never seen the inside of an aircraft, and those deprived people mostly reside far from the metros, the next generation of aviation growth will be unleashed by regional airlines operating from regional airports.

In the last six years the Ministry of Civil Aviation (MoCA) has awarded no-objection certificates (NOC) to about 16 companies with the fond hope that at least some would cater to regional sectors. This is what the regional aviation scene currently looks like.

  • Air Costa became the first regional airline in South India in October 2013. Based in Vijayawada, it operates 34 flights daily with four Embraer E-jets (67-seat E-170s and 112-seat E-190s) to Bangalore, Chennai, Ahmedabad, Visakhapatnam, Hyderabad and Jaipur. Its Passenger Load Factor (PLF) are consistently above 75 per cent. It will add another three E-190s in 2015. In February 2014 it placed a massive order for 50 Embraer E-Jets E2 (25 E-190 E2 and 25 E-195 E2) and deliveries are scheduled 2018 onwards.
  • Air Pegasus was next off the blocks on April 12. This Bangalorebased regional airline with a fleet of two ATR 72-500 turboprops touches South Indian cities like Thiruvananthapuram and Hubballi and hopes to expand to Chennai and Kochi. It will add three planes in the next two months and reach 10 aircraft by the end of FY2016. n
  • TruJet (earlier Turbo Megha Airways) is based in Hyderabad. It hopes to commence operations as a scheduled regional airline with three ATR 72-500 aircraft by June. It will start with eight southern destinations, a mix of Tier-I and Tier-II cities. n
  • Zav Airways is a Kolkata-based regional helicopter operator that hopes to launch in June and cater to the East and Northeast with two Dauphin AS365 N3s. Its target fleet is 12 helicopters.
  • Air Carnival, based in Coimbatore, plans to launch around July-August as a regional carrier with a fleet of two ATR 72-500 aircraft and serve regional destinations. It plans to increase its fleet to 12 within two years. Apart from these regional carriers, FlyEasy (Bangalore-based), Premier Air (Bangalore) and Air One Aviation (Delhi), have stated their intention to commence operations as national airlines this year. There’s also talk about Zexus Air (Delhi).

Regional Aviation in India A Review-1Is Small Beautiful?

One factor common to the new regional carriers is that they aim to start small and scale up. Air Costa is following this strategy and it seems to be working. Even new airlines with pan-India licences like Vistara and AirAsia India began with just a handful of aircraft.

However, not all analysts are convinced about the commercial viability of small airlines, especially of stand-alone regional enterprises. Regional carriers like MDLR Airlines and Air Mantra started small, stayed small, and sank without a trace. According to Kapil Kaul, South Asia CEO of CAPA, “Stand-alone regional airline viability remains challenging unless the funding and operations scale is very aggressive and promoters have a long-term approach.”

It is tempting to open up new routes as Air Costa has done, and tap the latent demand, but sooner or later other airlines will muscle into the sector. As the rivals slash fares to woo the limited stream of travellers they soon face the same pressure on yields as on big-city routes. Losses are inevitable for at least 2-3 years till breakeven is achieved. The purchasing power of India’s regional travellers is not high, so airlines need to offer the lowest possible fares. Yet the principle of economy of scale, that’s useful to keep operating costs under control, kicks in only at around 10 aircraft, hence any small regional player must be well capitalised.

International and Regional

Till now an Indian carrier was not permitted to fly overseas unless it had operated domestically for at least five years and had at least 20 aircraft. Each airline was also obliged to deploy a specified percentage of its capacity on remote and commercially unattractive routes under the Route Dispersal Guidelines (RDGs). The Ministry of Civil Aviation (MoCA) is now trying to dovetail these two unwelcome measures.

However, the requirements of small regional airlines and international carriers are vastly different and attempting to create an artificial link between the two is meaningless. For instance, since regional operations need turboprops or regional jets, carriers will be forced to abandon their single-aircraft model that best suits low-cost operations. According to CAPA, “Domestic and international operations are subject to distinct and often unrelated market dynamics. Linking capacity on international routes to capacity on domestic routes is not logical and may force airlines into making poor commercial decisions in order to meet an arbitrary regulatory requirement.”

But unless the airlines fall in line they cannot aspire to operate short-haul overseas flights – which is essential to offset the sheer unprofitability of domestic flying. And why is domestic flying so uninviting? Mainly because of short-sighted Government policies that keep the cost of fuel high, raise airport charges, and interfere in numerous ways with the airlines’ commercial decisions in the garb of ‘regulation’.

The proposed policy will probably make things more difficult for small regional airlines, because the big guys will intrude where the small start-ups should be. Why not, instead, make it simpler for dedicated regional airlines to operate?

Infrastructure Woes

Commercial airlines in India currently fly to just 70 domestic airports, down from about 95-100 a few years ago. This is hardly surprising, because according to a FICCI-KPMG report the growth in Indian aviation and spread of regional services is being hampered in lack of infrastructure in smaller cities. Most small cities and towns do not have facilities for jets like the Airbus A320 and Boeing B737 that dominate the country’s commercial fleet. Their airports have short runways of length about 1,400 m; hence only 40- to 70-seat turboprops can use them. Even many newer airports that are under construction – often for political reasons, without ascertaining the operational necessity or commercial viability – are likely to end up short because of encroachments and landacquisition issues.

Short-haul regional flights must also counter the appeal of far cheaper modes of transport. In 2012-13, Air Mantra using two 19-seat Beechcraft 1900D turboprop aircraft recorded a PLF of less than 25 per cent between destinations like Amritsar, Chandigarh and Jammu, partly because these cities are well connected by rail and road. It had to suspend operations within months.

Hope for the Future

Under the new aviation policy expected shortly, regional scheduled carriers may be allowed to upgrade to pan-India status after three years of operation. Similarly, non-scheduled carriers can become scheduled commuter airlines after one year. This is all to the good. However, regional airlines also need Government support to help them achieve viability while serving remote destinations. This is the practice even in advanced countries. It is over 10 years since the Naresh Chandra Committee recommended scrapping of the RDGs and creation of an Essential Air Services Fund (EASF) to provide direct subsidy for remote routes through competitive bidding. Instead, the RDGs are proposed to be made even more onerous. Neither are they likely to promote regional aviation nor will they please the airlines.

As urbanisation spreads and incomes rise there’s bound to be increasing demand for regional aviation services. Small regional carriers operating mainly point-topoint flights with low per-seat costs and limited competition may be the ones best placed to succeed. But the Government needs to act more as a facilitator than a regulator. Before the inevitable rebound in oil prices, State Governments too need to resolutely reduce Value Added Tax (VAT) on aviation fuel, and underwrite a specified number of seats per airline to encourage them to serve remote areas. Regional airports and regional airlines also need to be exempted from a plethora of taxes and municipal charges, landing and parking charges, navigation charges, passenger service fees and other levies so as to make regional routes doable.

Then regional aviation may indeed have a bright future.

© India Strategic