Regional Connectivity Scheme: Will airlines find it viable?

Regional air connectivity is one of the promises the Modi government made in its election manifesto. From the draft Regional Connectivity Scheme (RCS) unveiled today, it is clear that a lot of work has been done on coming up with a scheme which encourages airlines to start flights to remote destinations, to airports which are right now lying unused and to those airports where there are few flights but not adequate in number.

In intent, the draft policy cannot be faulted. But how successful will it be in reality? Will airline operators who have till now found no viability in connecting Chandigarh to Bhatinda, Mumbai to Mehsana or Jamnagar, Delhi to Ambala, now found these quaint routes viable?



Remember, there are close to 400 ghost airports in India, airports which have not seen a single flight in the last two schedules. There are another 16 airports which are termed "under-served" which means they do not have more than a flight a day. The government wants to kill two birds with one stone: make sure that these ghost and under-served airports become active while also ensuring that small cities and India's hinterland gets on to the aviation map.

Whether the scheme will ultimately work or not will depend entirely on route economics. For its success, the complicated math given in the draft RCS today should ultimately ensure a viable rate of return for airline and helicopter operators. That is the bottomline.

The scheme has capped fares for RCS routes, which means maximum fares on these routes are pre-decided by the government based on the route length. Though the scheme provides caps for viability gap funding (VGF) too on these routes - this is the amount of assistance or subsidisation the government will offer airlines to start flights to airports which till now have been lying unused - viability will be the determiner.

Civil Aviation Secretary R N Choubey said today that the fare and VGF caps have been decided keeping a reasonable rate of return in mind for airlines and this could be as high as 16 percent. Separately, DGCA M Sathiavathy said she has received enquiries from new players who are keen to start flights with small aircraft to the RCS routes but are awaiting guidelines.

A new category of airlines, scheduled commuter airlines, is being created for RCS where a new operator may be allowed to start operations with just one aircraft. State governments have a major role to play in this scheme as they have to offer 20 percent of the VGF share besides a whole gamut of incentives to attract airlines to their respective airports.

You and me, the flyers who use large metro airports, will also have to pay to ensure connectivity to India's hinterland. Either a cess on each air ticket on metro routes or a lumpsum charge for each flight from these airports is coming - either way, flying for the comparatively better off is all set to get expensive. Choubey said the levy and its quantum is yet to be decided but that in either case it will be nominal.

The scheme is up for public consultations for three weeks and should take about a month to get notified. The VGF will be provided through a Rs 500 crore annual fund, which will be built through the levy on each metro airport ticket and also from the proceeds of auctioning of bilateral rights.

Here are eight highlights of the draft RCS:

1. The regional connectivity scheme will be applicable on flights which cover between 200 km to 800 km with no lower limit set for hilly, remote, island and security sensitive regions. Under the scheme, such flights must connect at least one RCS airport (a list of underserved and unserved airports specifies which airports qualify under the scheme). Aircraft with up to 80 seats are allowed under this scheme.

2. The RCS caps fares and also offers a ceiling for the VGF available for each route. This means airlines cannot charge beyond the caps specified from passengers and then will be allowed to do reverse bidding for availing the VGF. For the shortest route under the scheme, which is between 200-225 km or less than an hour of flying, fare has been capped at Rs 1,770. For the longest route, the cap is Rs 4,070.

3. In addition to VGF, the Centre will also provide concessions such as 2 percent excise on Value Added Tax (VAT) and service tax at 1/10th the rate and liberal code sharing with domestic as well as international airlines for RCS airports.

4. State governments will have to provide free security and fire service, utilities at concessional rates and reduce VAT on ATF to 1 percent. No landing charges, parking charges and Terminal Navigation Landing Charges will be imposed for RCS flights.

5. A Regional Connectivity Fund (RCF) will be created to fund the scheme via a levy on certain flights. States are expected to contribute 20 percent to the fund which will have a corpus of Rs 500 crore each year. For balanced regional growth, allocations will be spread equitably across 5 regions - North, West, South, East and North East with a cap of 25 percent.

6. A minimum of 3 and a maximum 7 regional connectivity scheme flights per week per route with minimum 9 and maximum 40 seats per flight will be allowed. This means if an operator of, say, an 80 seater aircraft is part of this scheme, it can avail VGF for only 50 percent of seats on any flight. Since the remaining 50 percent are not bound by RCS conditions, the operator is free to price tickets for these seats.

7. The regional connectivity scheme will be in operation for 10 years with individual route contracts for a 3-year span. Limited period exclusive route rights will be allotted to selected operators. There is a well defined exit clause too in the scheme in case operators want t exit within one year or after completion of an year. In the first case, the Rs 50 lakh bank guarantee will not be returned.

8. Market-based reverse bidding mechanism to determine least VGF to select the airline operator with the right to match to the initial proposer. The VGF component will be reduced if passenger load factor remains high and will be discontinued after 3 years when route becomes self sustainable.

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Updated Date: Jul 02, 2016 11:48:42 IST

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