The aims of the government’s new regional air-connectivity scheme are laudable. It intends to provide affordable air connections to smaller towns that are not yet properly served by airlines. As a necessary step to this, it hopes to create a market for leasing passenger aeroplanes to various entities that will serve these new destinations. Nevertheless, it appears the policy, Ude Desh ka Aam Nagrik or UDAN, is a confusing, socialistic network of bureaucratic controls, restrictions, artificial monopolies and cross-subsidies that might create sustained inefficiencies, reduce consumer choice, raise fares, and always be prone to legal challenge.
The most crucial element of the scheme is that successful bidders for one of the new regional routes will receive a subsidy of between Rs 2,350 and Rs 5,100 per seat from the government. In addition, fares will be capped at Rs 2,500 for short flights of under 500 kilometres. Various other subsidies are also planned — waivers on airline fuel excise, on landing fees, and so on. The government might also subsidise start-up capital to make new regional airlines viable. The question is should the government of India be further subsidising air passengers? It already runs Air India, which has for years made enormous losses for the taxpayer. The government’s defence would no doubt be that all these subsidies would not come from the taxpayer. Some would come from a pool of cash that existing airlines would be forced to pay into, through a mandatory levy. Naturally, there are consequences of such a forced cross-subsidy: Either airlines will discover their profit margins have further declined, and they will face the renewed threat of going out of business in an already fragile sector, or they will raise the prices travellers pay on existing routes. Too much in this scheme smacks of Licence Raj-era thinking.
The exact amount of the levy that airlines will have to pay has not yet been announced. However, it is unlikely that airlines will pay up without a legal battle. The government should ask itself whether a scheme that is clearly so unsteady, and so vulnerable to rent-seeking and to legal challenge, is likely to attract genuine entrepreneurs or fly-by-night operators. Who will seek to bid for a sector knowing that the subsidy might at any point be revoked by a court order? In addition, has the government not considered the effect of this scheme on the existing hub airports? Will they be forced to provide cheap landing rights to these flights? If so, would that not be another source of legal challenge? And, in any case, multiple new flights would increase congestion considerably and reduce the utility of air travel for all passengers. In other words, while the aim of the UDAN scheme is admirable, the entire thinking behind its execution is flawed. There is only one way to grow connectivity: To build more airports at both the hub and the spoke, and ensure free and undistorted competition in the skies.