Open skies over small town India

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The are a number of opportunities in the aviation sector in India. They include: development of greenfield airports, city-side development in non-metro airports, aviation academies, and maintenance & repair operations (MROs). The most recent initiative from policymakers is the creation of a separate category for regional airlines. The entry of low-cost carriers has brought down the cost of air travel. However, this has largely benefited travel between metros. The minimum airfare between Delhi and Mumbai is almost the same as that between Delhi and Bhopal, despite the latter route being only half the distance. The introduction of regional airlines helps in bringing lower airfares to travellers in and to non-metro cities as well.

Passenger traffic has been growing at almost 25% annually since 2003 and this growth is not restricted only to metros. According to Airports Authority of India estimates, traffic in Tier-II and Tier-III cities such as Ahmedabad, Pune, Goa, Amritsar, Coimbatore and Vishkapatnam is expected to grow by at least 20% a year until 2012. As the impact of the Indian growth engine reaches smaller towns, the travel demand in such cities will also increase. Furthermore, increasing congestion and real estate costs in the metros will make non-metro cities attractive destinations for business.

Regional airlines will operate with hub-and-spoke networks, connecting non-metro cities in a region to the main metro city. From this point, full-service airlines will carry traffic to other metros. While a regional airline should have a fleet of five aircraft by the end of the second year, they can commence operations with a single aircraft. Such a low entry barrier will encourage many players to enter the market. The existing policy framework in aviation also encourages regional airlines through the waiver of landing and parking charges for smaller aircraft. Regional airlines could also benefit from lower parking charges by using non-metro airports as hubs. The US has a mature regional airline model wherein one out of every four domestic passengers flies a regional airline. Most regional airlines are subsidiaries of larger airlines or have interline or code-sharing arrangements with larger airlines.

By introducing a separate category for regional airlines, the government may have unintentionally solved a coordination problem for the third-party MRO business. There have been some moves by the industry to set-up third party MROs that could service all aircraft, including Boeing and Airbus. It creates a natural demand for smaller aircrafts, 50-100-seater ATRs, CRJs and Embrears.

Despite the buoyant outlook, there are some uncertainties that could spoil the party for regional airlines. They need to cooperate with larger airlines, as the final destination for travellers from smaller towns is likely to be metros in other regions.

While regional airlines are not allowed to operate between metros, they are allowed to connect between Chennai, Hyderabad and Bangalore in the southern region. Therefore, it is no coincidence that three out of the four licences that are likely to be awarded are for the southern region. This brings regional airlines in direct competition with full-service carriers and could evoke a strong response from them.

Moreover, some non-metro routes could be quite profitable and the main airlines could skim the cream off such routes while leaving unprofitable routes to the regional airlines. The government should keep a close watch on the competitive environment for regional airlines. At the same time, the policy framework should allow inefficient players to be eliminated or taken over.

Another critical success factor for regional airlines is being able to secure slots at busy metro airports. With air traffic already congested in metro airports, regional airlines may not be able to secure attractive slots during peak hours. This could ground their plans. Therefore, there is need for the government to allocate some slots on a preferential basis to regional airlines. Finally, increasing air traffic controllers’ productivity to handle more flights per hour will also create more slots for regional airlines.

The start of regional airlines opens another interesting chapter for aviation in India. The travelling public from non-metro cities will be particularly delighted, as their costs are likely to come down. The government has set the right tone by creating a competitive environment. It should now let the market work and only step in to remove policy constraints or anti-competitive behaviour by larger airlines.