Slow but Steady

Over the past decade or so, aviation in India has made rapid strides, largely due to the aggressive expansion of the country’s clutch of private carriers. However, it has also become decidedly metro-centric, because that is where passengers are abundant. About 70 per cent of domestic passenger traffic passes through the six metro airports and some, such as Mumbai, are fast approaching their handling limits. The Ministry of Civil Aviation (MoCA) recognised this as an unhealthy trend some years ago. It saw the urgent need to extend flight services to remote and isolated regional destinations and at the same time to decongest the metro airports.

The MoCA’s regional aviation policy was issued in August 2007 and offered some incentives to encourage small carriers to link Tier-II and Tier-III cities to the nearest metro. The Ministry probably had the hub-and-spoke model of aviation in mind and felt that small regional carriers might naturally assume the role of feeders to the major airlines. However, the half-hearted concessions, linked to the capacity and weight of aircraft, were gleefully grabbed by the major carriers. Regional airlines had no chance of competing against them, as it was proved in the case of the ill-fated MDLR Airlines and Air Mantra. Air Costa, the Vijayawada-based enterprise that launched operations in mid-October, is only the third designated regional airline to enter the market. Hopefully, it will not be the last.

Feeding Frenzy

Is the feeder airline role likely to work in India? In many countries, regional carriers operate from low-cost regional airports in a hub-and-spoke system, sharing a symbiotic relationship with a mainline carrier. Inherently expensive regional operations are made viable through code-share deals whereby the major carrier assures its regional partner a fixed profit on the completion of each flight. Thanks to this financial backing, the ‘regionals’ can offer competitive fares and strive to feed the voracious network as many passengers as possible, without losing sleep over empty seats. The model worked well for decades but is now under considerable strain because many major carriers are financially stretched and are becoming ever stingier with their regional partners.

In India, if regional aviation depended on regional carriers, it would be practically non-existent. Regional connectivity is based not on commercial logic (which points firmly towards the metros) but on coercion. The government compels the major carriers to service many more out-of-the-way destinations than they wish to by means of the Route Dispersal Guidelines (RDG). According to the RDG, all scheduled operators are required to deploy specified percentages of their trunk-route capacity onto routes that link remote and smaller cities and towns. Many of these routes, however, are commercial lemons, and carriers find it extremely difficult to cover costs. In the absence of the RDG, most of them would be abandoned.

Plane Truths

Under the MoCA’s regional aviation policy, a dedicated regional carrier can begin with just one aircraft but should operate with three aircraft within two years and five aircraft at the end of five years. The logic is compelling because if the minimum number of aircraft were too high, very few entrepreneurs might be attracted. However, economies of scale work only at about 15 aircraft. Will a time ever come when a regional airline has so many planes? Even Air Costa which plans to have ten Embraer regional jets by the end of 2014 and a total fleet size of 25 by 2018, has no intention of remaining confined to its own region but plans to obtain a pan-India licence soon. And charter airline Air One that has sought permission to start a new airline would rather be a regular scheduled carrier. That sums up the dismal state of regional airlines in India.

Regional aviation is in the doldrums partly because many small cities and towns do not have facilities suitable for narrowbody jets such as the Airbus A320 and Boeing 737 that form the bulk of the country’s commercial fleet. Their airports have short runways of length about 1,400 metres; hence only 40- to 70-seat turboprops can use them. Not many smaller Indian airports are likely to generate even that kind of steady traffic, at least to begin with. Air Mantra using small 19-seat Beechcraft 1900D turboprop aircraft recorded passenger load factors (PLF) around 20-25 per cent and flight cancellation rates nearing 50 per cent between destinations such as Amritsar, Chandigarh and Jammu! Unsurprisingly, it had to suspend operations. Yet across the globe, the high price of aviation fuel means that only aircraft with at least 90 seats can keep seat-mile costs under control and remain commercially viable. While 50-seat regional jets were acceptable when the international price of crude oil was about $10 per barrel, they are seen as prohibitively expensive now that crude oil hovers around $100 a barrel.

Who can blame India’s major airlines for their fondness for the A320 and Boeing 737? These jets, with a capacity of 180+ seats, are very economical to operate. And forthcoming models such as the A320neo and the Boeing 737MAX will have even lower operating costs. Air India, Jet Airways and SpiceJet do have a few smaller ATR-72 turboprop planes, which are suitable for remote airports but IndiGo and GoAir have all-jet fleets. A suitable indigenous regional turboprop, designed for Indian conditions, with low acquisition and operating costs, would be of immense help in boosting regional connectivity.

Politics or Economics?

In an industry that depends on wafer-thin margins, a regional airline can succeed only if it operates on a low-cost basis. But can operating expenses be trimmed when input costs are so high? With VAT on aviation fuel ranging between four and 30 per cent, fuel constitutes almost 40-50 per cent of an airline’s total costs. And there just aren’t any low-cost airports in India. Airport privatisation which the government has been pursuing with considerable enthusiasm has served to trigger steep increases in airport charges, while the Airports Authority of India (AAI) with only a handful of profitable airports can hardly be expected to sacrifice any more revenue.

That is why the possibility of small regional carriers acting as feeders and linking remote destinations to the nearest metro seems doubtful. Operating costs would be too high; profits elusive. Passengers would be reluctant to pay high fares for shorthaul flights when multiple options for surface travel are already available. These surface modes are neither too inconvenient nor too uncomfortable and could bring considerable financial savings. Many airports are situated in way-out places, so the time and expense of reaching there also needs to be factored in, whereas railway stations and bus stands are usually centrally located. Besides the ever-increasing security checks associated with air travel mean more wasted time, quite unlike surface modes where passengers can hop on practically till the time of departure. All in all, short-haul regional flights do not present a pretty picture.

Therefore, the identification of suitable sites for regional airports is crucial. In some cases, where air connectivity is not commercially viable because the potential routes are too short, the government might better focus on improving roads and creating high-speed rail links. Sadly, all too often, building a new airport is a political decision, unrelated to economic logic. Spain’s collection of white-elephant small airports serves as a warning of what happens when local politicians decide where to build airports.

Fast-Tracking Progress

If regional carriers cannot be feeders, what role can they play? Air Costa is perhaps on the right track. Using Embraer E170 and E190 regional jets, it plans to focus on unconventional city-pairs, connecting Tier-2 and Tier-3 cities point-to-point. If the routes are judiciously chosen it might work better than linking with the nearest metro. The airline may escape short-haul woes where even the lowest fares seem high in comparison with surface travel. Its operations may also avoid overlapping those of the major carriers.

Few would dispute that Indian aviation including regional aviation, has a bright future. That several hard-nosed global airlines are keen to enter the market proves the point. If the shortterm outlook seems rather challenging, it is only because of skewed government policies based on the archaic premise that aviation is for the rich, that have made India one of the world’s costliest places to operate an airline. If the punishing tax regime were rationalised, the scene would improve dramatically. In September, the government granted new bilateral international traffic rights to domestic carriers to fly to foreign destinations from eight regional airports. This too may be a good way to decongest the metros and should be extended to more airports. It may succeed in encouraging regional carriers to operate from these airports as well.

Reduced input costs, improved infrastructure and generous subsidies—all of these are necessary to help regional aviation play a meaningful role in the aviation sector. Many state governments are moving towards reducing excessive taxes on fuel. And the middle class is increasingly turning to flying, thanks to discounted offers, higher purchasing power and sheer aspiration. Regional aviation is slowly but surely spreading to smaller cities. And if regional airlines can establish new routes to remote regions, it is a sure way to attract tourism, investment and jobs. Therein lies hope of getting tardy governments to speed up longoverdue reform and give regional aviation a boost.