UDAN has failed to take off – The govt must give it a relook

July 10, 2020 7:45 AM

The scheme makes for good messaging and good politics, but not good economics. with Some airlines at the brink of bankruptcy, the govt must give it a Relook

Estimates are that the UDAN routes have not been cash- or value- accretive to airlines. Estimates are that the UDAN routes have not been cash- or value- accretive to airlines. (Representative image)

By Satyendra Pandey

In 2016, during the Modi government’s first term, the country saw its first National Civil Aviation Policy. Integral to the policy was the regional connectivity scheme, aptly named the Ude Desh Ka Aam Nagarik (UDAN) scheme. The scheme itself was launched with much fanfare including the slogan “from hawai chappal to hawai-jahaz”. Put simply, it incentivised airlines to fly to under-served airports. The goal: connecting all parts of India. Yet, three years and four airline failures later, the jury is out on whether the scheme has delivered the desired outcomes.

The UDAN scheme is a supply-side focused initiative, and entices airlines to fly underserved routes, through economic incentives. These include a reduction of charges and also cash subsidies for a portion of seats on the aircraft. The cash is generated from levies on passengers flying on core routes, mostly between metro cities. The only caveat is that, in exchange for this cash, the airfares on these routes have to be capped at pre-determined levels. And, the cash-subsidy is only valid for three years, after which the route is assumed to have gained enough traction.

It goes without saying that the scheme depends on robust passenger demand on core routes to generate the cash. And, with the passenger demand at 40-50% of previous levels, and not expected to recover anytime soon, the cash-flow has simply dried up.

The subsidy burden on the government, if all UDAN route flights operate as planned, is estimated to be between Rs 1,700-1,900 crore per annum. Collections were way short of this even prior to the Covid impact. The budgetary support requirements for the scheme were estimated at Rs 441 crore for FY19 and Rs 480 crore for FY20. In earlier years, the shortfall was made up by a dividend payment by the Airports Authority of India (AAI) that, ironically, is also the designated implementing agency for the scheme.

But, now in a catch-22 situation, the AAI is also owed money (at times by the same operators that the scheme will subsidise with dividends paid by AAI). With lack of funds coupled with the current, low traffic levels, the government will have to find alternate means.

It doesn’t help that some regional airlines, including ones that are about to get launched, have developed route-networks that have 60-90% of flights under UDAN. These operators have built entire business plans that depend on subsidies as a major revenue stream. With the funds drying up and with no additional government support, these airlines now face an uncertain future.

Looking beyond just the economics, the intent versus impact of the scheme has been very different. The intent was to encourage greater connectivity, especially to the underserved parts of the country.

It was widely believed that areas such as the North-East, which has been a focus area of the government, would finally get the connectivity they required; not only to the metro-cities, but also intra-region connectivity. Yet, a cursory glance at the routes flown indicates that this has just not been the case. Rather, airlines have leveraged the scheme strategically towards gaining additional slots at congested tier-1 airports, monopoly status on routes and lower operational costs.

Some argue that the scheme has been a success because it spurred larger airlines like Indigo and SpiceJet to order regional aircraft and start to fly several new routes. But, this is flawed on several fronts. One would expect several new or existing pure regional airlines coming up or, at the very least, continuing operations on a sustainable basis. But, that too has not happened.

As of the time this article was being written, only 26% of the total 705 routes have been assigned to operators; the number being flown on is even lower. Several ghost airports continue to exist and several communities are left wanting for connectivity.

Estimates are that the UDAN routes have not been cash- or value- accretive to airlines. Few airlines, such as Air Odisha and Air Deccan, have ceased operations altogether (together, they were to fly 84 UDAN routes).

Others such as StarAir and TruJet continue, but the business plan fails to hold when the cash from subsidies is delayed or taken away. Alliance Air (a subsidiary of Air India), which continues to fly several un-served and underserved routes is doubly funded by taxpayer money—since it is government-owned and loss-making, and further because it receives UDAN subsidies. Surely this would beg the question ‘why have the scheme in the first place’?

If the intent of the scheme was to make for viable and sustainable regional operations, as of now, this has not got fructified. This, while passengers on core metro-routes are forced to pay an additional Rs 50 as UDAN levy.

The difference between intent and impact can also be traced to a failure to address structural challenges, an inability to take on airport monopolies, a lack of focus on the demand side and attempting to address the chances of failures without adequately addressing the costs of failure. These are areas that the government will have to address if the scheme is to be revived.

As of now, the scheme makes for good messaging and good politics, but not good economics.

With more airlines at the end of the liquidity runway and positioned at the brink of bankruptcy, the outcomes are not looking very good. The government may likely have to revisit its flagship aviation scheme, and the Covid crisis has likely added to the urgency of this.

Author is former head of strategy, GoAir, & led the advisory and research teams at CAPA
Views are personal

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