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ICRA: Success of the Regional Connectivity Scheme (UDAN) hinges on broad-based participation

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The Regional Connectivity Scheme (RCS) – UDAN – has been finalised in line with the broad outline provided in the National Civil Aviation Policy (NCAP). The scheme reiterates strong focus on providing affordable and balanced regional connectivity through fiscal support and infrastructure development. As per the scheme, the airfares on the RCS routes would be capped from Rs. 1,420 to Rs. 3,500 for various stage lengths ranging from 151 km to 800 km, respectively.

In ICRA’s view, the participating airlines would benefit from support in the form of viability gap funding (VGF) from the Central and State Governments, as well as lower taxes, levies and airport charges; however, the restriction on maximum number of seats per flight under The Regional Connectivity Schemes (RCS) truncates the available benefits. ICRA believes that considering a maximum cap of 40 RCS seats in an RCS flight, ideal aircraft capacity would be 80 seats. Aircraft with higher capacity would have to operate more non-RCS seats which would not be eligible for VGF, which may necessitate use of smaller aircraft, restricting some operational and financial flexibility. Though the proposed financial support in the form of VGF would be a key aspect of the scheme, uncertainty on VGF tenure and cap on VGF might prove to be deterrents for participation of airlines. Nevertheless, indexation of VGF to ATF prices and USD-INR exchange rate would provide partial de-risking for the participating airlines from the key uncontrollable costs.

The RCS relies heavily on regulatory support from the central and state governments. The participating state governments need to extend financial and operational support. Resultantly, financially weaker states might opt out of the scheme. Further, the state governments would also need clarity on the long term benefits before committing immediate support.

According to Mr. Anand Kulkarni, AVP, Corporate Sector Ratings, ICRA Ltd, “The airlines need to evaluate the adequacy/timeliness of financial support as well as commercial viability of operating non-RCS seats on RCS flights, which are not eligible for any VGF. However, the scheme provides a good opportunity for regional airlines to stabilize their troubled operations. These airlines are currently operating on regional routes, which are less lucrative than the tier-I routes, without any fiscal support and they can benefit from the scheme. Considering very few of the national airlines currently have small sized aircraft, their participation is expected to be cautious. They can benefit from development of deeper feeder network to their major routes or filling gaps in their existing network using the RCS routes.”

The RCS is targeted to benefit passengers if implemented successfully. However, broad based participation of key stakeholders like airlines and state governments would be critical for success of the scheme. Clarity on some of the areas of the scheme including – likelihood of extension of tenure for VGF, possible lack of exclusivity on certain lucrative RCS routes and its commercial implications on airlines, financial viability of other stakeholders like RCS airports and airport operators, possible operational challenges at existing airports in order to serve RCS flights – would be required for broad-based participation of stakeholders and consequent success of the scheme, says ICRA in the report.

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