Hub-and-Spoke Model: The Way to Go

There is a growing realisation that not just for the aviation sector but also for the country’s development, airline/airport activity has to be dispersed.

Various forecasts have pegged air passenger traffic in India to touch 300 million and have over 1,000 plus fleet by 2020. As per the Airports Authority of India (AAI), total domestic air passengers from April to December 2013 were 126.18 million, compared to 117.48 million during the same period in 2012.

Of these, the top six busiest airports were Delhi, Mumbai, Chennai, Bengaluru, Kolkata and Hyderabad. The six joint venture international airports at Delhi, Mumbai, Bengaluru, Hyderabad, Kochi and Nagpur handled 72.72 million passengers during the period, while 16 international airports carried 38.38 million passengers, thus accounting for nearly 90 per cent of passenger traffic. The other domestic and customs airports across the country made up the remaining 10 per cent.

For a vast country, these figures are highly skewed in favour of the major metros, but this landscape is changing as there are concerted moves by the government to connect pan-India through efficient multi-modal transportation network. India has reportedly over 400 airports and airstrips, though not all are operational. The AAI manages 125 airports, which include 11 international airports, eight customs airports, 81 domestic airports and 27 civil enclaves at defence airfields.

$40 Billion Needed for Airport Projects

CAPA estimates that India will require up to $40 billion of investment in airport projects by 2025, consisting of approximately $20 billion for expansion of current metro airports and construction of second airports in key cities. A further $20 billion will be required to construct Greenfield airports at most of the 35 largest non-metro cities – including large projects at Pune, Goa, Mopa and Dholera – as well as at several cities which are not currently connected. In all, India may require 40 to 50 Greenfield airport projects by 2025. Combined with upgrades to airspace infrastructure and ground transportation, total expenditure could reach $70 billion to $80 billion.

This implies that huge private investments will have to be attracted as AAI alone will not be able to raise the funds. There has been a demand that the government announce a policy which will ensure sustainable airport capacity to meet the demand forecast for passengers and cargo traffic on a country-wide basis.

Shift from Primary City Pairs

As of today, the airlines are optimised for high density passenger movement between primary city pairs and airport development has been focused around that. It is only of late that there is a growing realisation that not just the aviation sector but also for the country’s development, airline/airport activity has to be dispersed. In line with this thinking, there have been moves to promote regional aviation. Although regional aircraft, especially turboprops, offer advantages in operating efficiently with short runways and from relatively less improved facilities, India’s carriers today have relatively few regional aircraft whether jet or turboprop. With uncertain demand and doubtful basic infrastructure, Indian carriers have been reluctant to purchase aircraft optimised for regional service. However, the government is now offering various incentives to promote regional air service.

And the first of the regional operator – Air Costa from Vijayawada, commenced operations end 2013 with Embraer E-Jets. In its infancy, the regional airline has reportedly found success in its operations, thus prompting it to chalk out ambitious expansion plans. At the recent Singapore Airshow, Air Costa made bookings for 50 additional E-Jets, surprising many aviation experts. Nevertheless an indicator of what the potential is in regional aviation. There are said to be another 15 applications awaiting approval or in different stages for starting regional airlines.

Cost-effective ‘Hub-and-Spoke’ Model

Meanwhile, the Association of Private Airport Operators has sought a policy on commercialisation of all the non-metro airports by allowing private participation in both aero and non-aero activities. It said that the policy should be framed to make all strategically located Indian airports as ‘Hub-and-Spoke’ model to make them most efficient, cost-effective, liable, safe, secure and comfortable air travel to passengers. There are substantial economic gains which can be derived from a hub airport including improving employment opportunities. The efforts should be to have an integrated transport model connecting seaport, road and rail transport and to certain extent public road transport utilities to make hub-spoke model most efficient and cost-effective by utilising economies of both scale and scope and provide passengers and cargo seamless connection and more efficient services.

The AAI has priority list of towns/cities for promoting regional air connectivity. These are: Vijayawada, Guntur, Kakinada, (Andhra Pradesh), Kolhapur, Jalgaon, Nashik (Maharashtra); Muzaffarpur (Bihar); Durg, Korba, Bilaspur (Chhattisgarh); Ludhiana, Jalandhar, Patiala (Punjab); Bhavnagar, Jamnagar, Junagadh Gandhidham, (Gujarat); Ajmer, Kota, Bhilwada, Alwar and Ganganagar (Rajasthan); Hissar (Haryana); Rourkela and Brahmapur (Odisha); Dhanbad, Jamshedpur and Bokaro (Jharkhand); Pondicherry; Salem (Tamil Nadu); Imphal (Manipur); Belgaum, Bellary, Mysore and Mangalore (Karnataka); Agartala (Tripura); Agra; Saharanpur, Allahabad, Sambhal, Meerut, Aligarh and Moradabad (Uttar Pradesh); Gwalior, Singrauli, Burhanpur, Khandwa, and Jabalpur (Madhya Pradesh); Haridwar (Uttarakhand); Malda and Haldia (West Bengal).

Along with promotion of domestic air travel, there are voices which suggest that India should position itself as a global hub by effectively utilising world-class airport infrastructure capacity to handle large movement of aircraft and augment trade and tourism opportunities and to ensure seamless transition for the passengers and cargo on a pan-India basis. The Association said the policy should be to facilitate a collaborative approach between both airports and airlines to work in tandem to handle the international competition and the growing air passengers and cargo movements. The ‘hub-and-spoke’ model provides both cost and demand advantage over smaller networks.

Connectivity Issues

Route Dispersal Guidelines (RDG): It is a fact that route dispersal guidelines have offered only a partial solution to the issue of regional connectivity and has not been a successful model. The suggestion is that the policy address the requirement of innovative mechanism to achieve maximum connectivity with rural and inaccessible areas. It should address the issue to make the most efficient and economical use of routes permitted by adopting market discovered pricing mechanism and also to help improve connectivity to all the regional airports.

Regional Scheduled Operator Permit (RSOP): With the growing need for air connectivity, it is essential to support and encourage regional players to enter into the aviation sector. To keep the regional aviation sector on track, it becomes crucial to review their performance and keep in place stringent checks relating to their financial performance and safety and security standards.

While these carriers are essential for regional connectivity, they also lead to congestion at metro airports, hence the importance of developing Tier-II and Tier-III city airports. As metro airports are bursting at the seams, decongesting through secondary airports would not only facilitate regional aviation, but also the business viability of a regional airline. Therefore, all efforts should be to ensure regional connectivity while preventing unnecessary burden on airport infrastructure.

In order to set up the required infrastructure in such remote areas, it is essential to establish non-lapsable essential air service fund to provide explicit and direct subsidies to airport operators and airlines to meet the shortfall of viability gaps on similar lines as set up in the telecommunication sector.

Airline Economics

While regional airport development happens, airlines should look at using ‘right-sized’ jets, preferably those with 60- to 90-seat configuration, and with quick and efficient turnaround times of aircraft. The feeder concept to the metros will click only when the right aircraft is deployed. It is an opportune time to create a business model as there are regions waiting in the wings to grow and be part of national development.