2016 may be the turning point in regional aviation and regional connectivity thanks to the Ministry’s proposal of a Region Connectivity Scheme (RCS) that includes a Viability Gap Fund (VGF) to make flights to on certain ‘regional’ routes financially viable. VGF will be extended only to Scheduled Commuter Airlines (SCA).

A scheduled commuter airline is, as proposed by the ministry:

1. Has aircraft with capacity of 100 seats or less.
2. Has no restrictions on number of aircraft
3. Eligibility criteria for SCA in terms of paid-up capital will be kept at Rs 2 crore
4. Would need to operate a minimum number of movements per week to RCS destinations as prescribed
5. RDG will not be applicable to SCA
6. SCA operating on RCS routes will be eligible for VGF
7. SCA would be allowed to enter into code-shares with Indian and foreign airlines.
8. They would be free to sell their DFC to other Indian carriers.
9. Low landing, parking, navigation and other airport charges at non- RCS airports for SCA aircraft with 100 seats or less for a period of 10 years for a particular route.
10. SCA’s operating to Srinagar and the States in North East, may be considered for further subsidy from other Central Government schemes or from the State Government schemes.

Granting the status of a scheduled commuter airlines with a seating capacity of 100 seats of less is a very welcome move. It is perhaps for the first time that the government has attempted to link regional connectivity with suitably sized airplanes.

Aircraft with a seating capacity of 100 or less brings a good number of airplanes under the consideration set. Some airplanes, like the Embraer E190, may have a reduced seat count to bring the seat count to 100.

Notable aircraft with a maximum seating capacity of around 100 or lower are:

We have laid greater emphasis on western aircraft as such manufacturers provide superior product support. Only airplanes still in production / soon to be in production have been considered. We believe that high wing, high engine turboprops such as the Dornier 228, the Viking DHC-6 Twin Otter ATR 42,ATR 72 and Q400 (all marked in the graph above in green) are best suited  for regional connectivity as such airplanes are lesser prone to FOD at poorly prepared airstrips. The Dornier 228 and the Viking DHC-6 have excellent short and high field performance, as evidenced by the operation of flights by these two airplane types, to Lukla, Nepal – one of the most dangerous airfields in the world. The airplanes marked with yellow bars are single engine turboprops with excellent characteristics. Airplanes marked in both shades of blue are regional jets.

Having no restriction on the number of aircraft eases fleet induction pressures on SCAs. Usually, smaller the aircraft / scale of airline operations, the harder it is to find personnel. This largely slows the growth of such airlines. Crew shortage is a much larger problem at smaller airlines, especially regional airlines.

Suggesting a minimum paid up capital of INR 2 crore is very unwise. Most startup airline operators in India, with no credible background, pay around 10 months of lease as a security deposit. The oldest ATR 42-500 will be available at INR 0.5 crore per month. A lease deposit of 0.5 X 10 = INR 5 crore. Over this, an aircraft usually idles on ground for around 2 months before starting operations, which burns another INR 1 crore. In total, the cash outflow due to lease alone, before starting operations is a minimum of INR 6 crore per aircraft. With larger aircraft, this only increases. In the case of Air Pegasus, which reportedly (click here) pays a monthly operating lease of INR 0.9 crore per ATR 72-500 aircraft, had “spent INR 4.5 crore on lease-rent alone” a month before commencing operations. In addition to this, a lease deposit of INR 8.1 crore totals the airline’s pre-operations cash outflow to INR 12.6 crore.

Below are the minimum and maximum market lease rates of some regional aircraft (as of November 2015:

An airline in the Indian environment is not expected to operationally break even before two years of operations, for which significant capital is required. A paid up capital of only INR 2 crore may lead to:

1. Undercapitalisation.
2. No payment / delayed salaries. (Salaries alone contribute to INR 1 to 2 crore of expense per month, at a startup airline).
3. Lease payment defaults.
4. Possible cutting of corners threatening flight safety.
5. High chances for the airline folding up operations, which hurts the economy in many ways, both directly and indirectly.

All these factors lead to degraded lessor confidence, which will then be harder and financially more strenuous for other airlines to start and sustain operations. With this in mind, the ministry must significantly raise the minimum paid up capital of an airline to ensure that only serious players who can sustain the business enter the field.

To understand this, we refer to the graph below. A startup SCA, when operating the aircraft in the graph above, is expected to lose between INR 70 to 140 crore over two years, with an operational expense that varies from INR 300 to 600 crores, over a period of two years with a fleet of three airplanes. With a mean loss of around INR 100 crores, mean pre-start expense of around INR 20 crores, and mean lease deposit estimate of INR 30 crores, an airline will require a paid up capital of INR 150 crores to comfortably see through two years of operations with 3 aircraft. Minimum is INR 100 crore, depending on aircraft type. There is no advised upper limit (Vistara has pumped in INR 500 crores), but for the larger regional aircraft, around INR 200 to 250 crore is advised.

In the light of this, it is very important that the Ministry propose a higher minimum paid up capital.

The Ministry will need to explicitly specify regional routes eligible for RCS, and the number of minimum movements. Preferably, minimum capacity per week (either as seats or ASK) must also be specified.

The most interesting aspect of a SCA is the ability to enter into code shares. As a result, a mainline airline with a fleet type that operationally or commercially cannot penetrate certain metro – non metro and non-metro to non-metro routes can contract SCAs to provide last airport connectivity to its passengers.

Such a move will encourage SCAs to blossom in the country with a model perhaps similar to what the USA today observes – mainline airlines contracting certain flights as code shares handled by  ‘regional’ or ‘commuter’ airlines. This becomes a low risk option for mainline airlines, while SCAs do not have to bother about marketing, as they can easily feed off & into passengers from/to the marketing airline’s network. In such a case, the SCA may not operate under its own identity, instead taking on the brand of the mainline carrier.

The sale of DFCs will only make sense in case the ministry’s 300/600 rule comes into force.

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