Till date, regional airlines in India have been looked upon in poor light, largely because of the past and the present. No regional airline in India has survived long, collapsing under the pressures of mismanagement and poor planning. Even today, the way in which regional airlines are both managed and run is disappointing.
The ministry’s proposal for Scheduled Commuter Airlines (SCAs), and the associated benefits, are huge. For one, SCAs will be able to enter into code shares with other airlines. This will be the starting point for capacity purchase agreements (CPAs) as seen in the US of A where mainline airlines contract commuter or regional airlines to offer last airport connectivity. It turns into a win-win for both mainline and the regional or commuter airline.
Yet, the paid up capital requirement, as stipulated by the ministry, reduces entry barriers. This will allow the “not-so-good” to enter the business, mismanage the business, ultimately leading to a collapse, non-payment of salaries, and the like. So how much does an airline require to run?
It depends on many factors. We look into market lease rates of popular aircraft, and the amount of money the airline is going to lose over a period of 2 years. The projections are based on statistical data derived from many airlines, and will make you appreciate how much an airline really needs. We also expand the aircraft set to include other, smaller, in production turboprops.
The Route Dispersal Guidelines (RDG) was introduced in 1994 to provide air connectivity to Jammu & Kashmir, North East, Island territories, and Tier-2 and Tier-3 cities, by way of internal cross-subsidy by airlines, using their profits on 12 trunk routes.
Nearly 20 years after its introduction, the ministry is revisiting the rules to keep the rule relevant in today’s domestic scenario.
The ministry, as you will learn, is forcing regular scheduled airlines to deploy more capacity on category (CAT) II and IIA and III routes, and as part of the regional connectivity scheme, airlines will have to contribute to the Ministry’s Viability Gap Fund (VGF) 2% of the fare of almost all tickets sold.
Under India’s Companies Act of 2013, companies that have a net worth of $80 million, a turnover of at least $160 million, or net profits of at least $800,000 must develop a Corporate Social Responsibility (CSR) policy and spend a minimum of at-least 2% of net profit.
In this case, the Ministry is imposing a 2% on ticket revenues, not profits, irrespective of the size or health of the airline. And is forcing airplanes to fly more onto ‘unprofitable’ routes, without any subsidy, which effectively increases the amount of CSR done in the Indian aviation industry, despite the thin margins and heavy losses.
Everyone today looks upto India as the next destination for growth. The Ministry of Civil Aviation, in its draft National Civil Aviation Policy, has captured the attention of everyone with the claim of a large middle class population, and the promise of certain reforms that should may better the ease of doing business.
We appreciate what the Ministry has done, is doing, and will do. But certain claims must be taken with a pinch of salt, must be questioned, and analysed, just to prevent over-optimism and to make room for realism. Like for example:
India is a 300 million strong population of middle class persons. The Ministry targets each of these 300 million to fly atleast once in their life. Pertinent questions: What is the definition of middle class? What subset can really afford air travel? These questions are important to prevent overcapacity in the Indian market based on optimism.
India targets 300 million domestic ticketing by 2022. That means, calendar year (CY) 2021 must end with 300 million domestic passengers in a single year. India will end CY 2015 with 80 million domestic passengers. What is the compound annual growth rate (CAGR) required to touch 300 million in CY 2021? Is this CAGR too high to achive? What do market leaders like Airbus say?
Today, we focus on these two issues, which form part of the Ministry’s vision, and we see if this is achievable. Our views on the Regional Connectivity Scheme and the 5/20 are ready, which we hope to release tomorrow. We will also be commenting on Scheduled Commuter Airlines (SCA) and Safety, and lightly touch upon Aeronautical ‘Make in India’, Aviation Education & Skill Development, and Air Navigation Services.
To read about the first two issues, please click here.