Covid-19 slowdown: PM Modi's pet UDAN scheme faces major headwinds

Future of many regional airlines looks uncertain if the fund that underwrites their operations dries up due to massive drop in traffic between bigger cities

As airline companies stare at billion-dollar losses and a possible washout in 2020, Prime Minister Narendra Modi’s pet regional connectivity scheme, UDAN (Ude Desh Ka Aam Nagrik) risks being reduced to a blip on India’s aviation radar without state support. 

This ambitious scheme, launched in 2017, is meant to connect smaller cities and towns in India with each other and the big ones. Airlines have to sell half their seats at subsidised rates, and airfares are capped at anywhere between Rs 1,420 and Rs 3,500, depending on the length of the flight. Most of the 266 routes connected under UDAN to date could face formidable challenges, with loss-making airlines reluctant to ply on these non-lucrative sectors, drying up of the funding mechanism that supports airlines in this scheme, fiscal constraints of governments and reconfiguration of airline priorities towards high-profit sectors when a semblance of pre-Covid-19 flying behaviour returns. 

Senior officials in the Union Ministry of Civil Aviation confirmed to Business Standard that airlines had approached them for several concessions to be extended under the scheme, and that relief measures to UDAN operators was under deliberation.

UDAN faces headwinds for three reasons. Firstly, the source of compensating airlines for providing cheap subsidised tickets to small-town flyers is on the verge of drying up. The government compensates airlines through a levy of Rs 5,000 on every departing flight in India on non-UDAN routes. The money so collected is deposited in a regional connectivity fund (RCF) managed as a charitable trust by the civil aviation ministry. 

While the government hasn’t revealed details of the funds collected so far, an off-the-cuff calculation shows it could be around Rs 450 crore a year on an average. With almost two months gone without any passenger departures, the government would have missed out on collecting Rs 75 crore for RCF so far this financial year. With uncertainty over future departures and apprehensions surrounding safety of flying amid the coronavirus pandemic, these collections could plummet. 

In other words, small-town people could afford to fly under UDAN because big-town residents funded their ticket through every flight they boarded. If flights don’t take off from Delhi or Mumbai, people in Tezpur or Jharsuguda wouldn’t be able to afford their flight tickets. “There is a corpus that will suffice for two to three months even without any levy on departures. Airlines would want to start flying on UDAN routes before flying to bigger cities because there is government support available through viability-gap funding (VGF). Many airlines have approached us saying they are willing to restart operations on UDAN routes with adequate social distancing in place,” said a senior Airports Authority of India (AAI) official. Most Indian airports in the country are managed by AAI.

Secondly, there is an increasing financial pressure on the central and state governments that provide additional support to airlines so that they can sell cheap tickets below their cost of operations to small-town flyers. With the coronavirus crisis throwing central and state government budgets in disarray, many would have to rethink their continued support to an industry still considered a preserve of the middle classes and the affluent. 

Both the central and state governments are mandated to tax aviation turbine fuel (ATF) bought by these airlines at UDAN airports at a fraction of the prevailing tax rates. Under the scheme, airlines pay just three per cent tax on ATF when they refuel at these smaller airports – a tithe of what they pay at other airports. With taxes on common-man fuels like petrol and diesel substantially hiked to shore up crisis-hit government revenues, continuing to tax ATF at a fraction of the rates could be a recipe for political embarrassment. 

Since the onus to recommend and provide various concessions for airports in small towns is on state governments, many could simply cut off all support till their budgets are restored to a pre-crisis level buoyancy. This could also have a spillover effect on the state governments’ contribution to VGF. The National Civil Aviation Policy, 2016, mandates state governments to contribute 20 per cent of the VGF. On so-called ‘state regional connectivity’ routes, respective states are required to reimburse the entire VGF amount to the airline without any contribution from the Centre or through the RCF. There are 100 such routes in the country which state governments have proposed to develop on their own. There is no budgetary support for airlines under UDAN with annual allocations of Rs 400 crore predominantly invested in aeronautical infrastructure development in smaller towns. 

With the sword of Damocles hanging over UDAN, officials in the civil aviation ministry recently held a meeting with various airlines to "take their inputs for propagating the scheme further".

Thirdly, reduced government financial assistance could force cash-strapped airlines to suspend operations on many UDAN routes, most of which are low-volume, low-fare and loss-making routes. A 2018 study by the Federation of Indian Chambers of Commerce & Industry (Ficci) estimated that only 44 of the 414 unserved and underserved airports in the country displayed ‘high potential’ where airlines could make a profit without government support. Some airlines like Spicejet connect many of these airports to bigger towns. The airline has in the past claimed not seeking VGF where it can turn a profit. While bigger airlines can continue flying on viable routes without assistance, the future of regional airlines relying on UDAN for their bread and butter looks malefic if RCF dries up. 

Official data showed that regional airlines in UDAN faced higher flight cancellations than ever in March 2020 owing to the coronavirus crisis. Zoom Air, which has historically clocked high cancellation rates among airlines, did not fly in March. Others like Trujet saw a cancellation rate of 35 per cent – the highest ever in its recent operational history. Cash flows and reserves of regional airlines are also much smaller to sustain them for long without government intervention. 

“Though it won’t be formally put in cold storage, restarting UDAN wouldn’t be a priority. When air travel restarts, airlines would initially open up only profitable UDAN sectors. If UDAN has to be brought on track, various exemptions provided under the scheme would need to be extended by a few more years. The smaller players that rely exclusively on UDAN for survival would face greater challenges and extensions in the concession period would help them more than bigger airlines” said aviation analyst Ajay Atwaney.

“We have received various representations from airlines to extend the VGF concession period of three years. That is definitely on the agenda,” said a civil aviation ministry official who did not wish to be named. Under UDAN, every airline receives funding from the government under VGF for selling subsidised tickets for a period of three years, after which all seats could be sold at the much higher market price. They are also assured ‘exclusivity’, with no competitor being awarded contracts on their routes. The intention behind limiting support to three years was to prevent airlines from becoming ‘VGF addicts’ in perpetuity. 

With coronavirus disrupting operations and traveller footfalls at most airports likely to dip in the times to come, an extension of the concession period could be a lifeline for those regional airlines which have tiny fleets and smaller aircraft, and which often supplement their UDAN revenue with charter operations. 

The Ficci report stated: “Despite higher VGF per seat provided to aircraft with less than 20 seats, they face significant challenges in achieving financial viability. They will need to operate at least six UDAN fights per day and supplement their revenue with charter operations. Charter revenues need to increase substantially in the fourth year when the VGF and exclusivity period are withdrawn.” 

With the future of the world’s largest regional air connectivity programme and more importantly with PM Modi’s much treasured dream of common folk wearing “hawai chappals and flying on hawai jahaaj” at stake, UDAN could be put on life support for the sake of survival in the times to come.