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Regional Connectivity Scheme transforming Indian skies

By: Ramesh Vaidyanathan and Mansi Singh

Introduction

India is one of the fastest-growing aviation markets in the world and currently the ninth-largest. It is projected to become the third-largest aviation market by 2020. In June 2016, the Ministry of Civil Aviation in India unveiled the National Civil Aviation Policy (NCAP). The major focus of the NCAP was on the Regional Connectivity Scheme (RCS), also known as UDAN (short form for ‘Ude Desh Ka Aam Nagrik’, which translates as ‘country’s common man gets to fly’), and aims to make flying affordable for the masses, promote tourism, increase employment opportunities and promote balanced regional economic growth.

The RCS aims to connect under-served or un-served airports to key airports through inexpensive flights. Under the RCS, the fare for a one-hour journey of approximately 500 kilometers on a fixed-wing aircraft or for a 30-minute journey on a helicopter is capped at INR 2,500 (approx US$35). The government will provide subsidies to the airlines in order to offer these fares.

Supporting mechanism

Under the RCS, the airline operators will be supported through: (i) concessions by the central government, state governments and airport operators to reduce the cost of airline operations on regional routes; and (ii) financial support (Viability Gap Funding – VGF) to meet the gap, if any, between the cost of operations and expected revenues on such routes.

Bidding process

The government-owned Airports Authority of India (AAI) is implementing the RCS through a market mechanism where airline operators assess demand on routes and submit proposals to AAI for providing connectivity on such routes while committing to certain minimum operating conditions. AAI invites interested bidders to submit their initial proposals under the provisions of the RCS and subsequently invites counter proposals against the initial proposals. The routes and networks are awarded to bidders who submit valid proposals and quote the lowest VGF from the government for such routes and networks.

Status of implementation

First round of bidding

AAI aims to operationalise hundreds of routes through several rounds of bidding. The government has awarded 128 routes connecting 43 un-served and under-served airports to five selected airlines for commencing operations under the RCS in the first round of bidding.[1] The airports chosen in the first round of bidding cover more than 20 states and Union Territories of India.

Second round of bidding

The government has eased several norms in the second round of bidding for the RCS to attract more airlines and helicopter operators to participate in it. These relaxations include dilution of the exclusivity clause that mandated that only one airline fly on one route in the first three years. Now, the selected airline operator of a particular route may issue a no-objection certificate to other airlines that want to operate on the selected RCS route. The Ministry has also diluted norms that restricted two airports in close proximity to one another from participating in the bidding.

The second round of bidding involved 502 routes to connect 126 airports, including helipads. These include 49 un-served and 15 under-served airports, as well as 24 helipads. While proposals for the second round have been submitted by the bidders, the results are yet to be declared. As per media reports, as many as 141 initial proposals have been submitted by 17 players under the second round of bidding.

Challenges to implementation

While the efforts of the government in expediting operations under the RCS are laudable, there remain certain implementation hurdles to overcome for ensuring seamless operations. Due to the congested air traffic and inadequate infrastructure in India, airports are finding it difficult to allocate slots for regional operations. Also, the success of the RCS depends largely on the cooperation of states. The state governments are required to provide tax subsidies for regional operations, as well as security and fire services free of charge, besides providing electricity, water and other utility services at concessional rates. While the RCS is a novel idea to promote regional connectivity, its success will depend entirely on buy-in from various stakeholders including governments, local bodies and airport operators.

Investment opportunities

The RCS offers attractive business opportunities to international aviation companies and investors. As per media reports, airlines have ordered as many as 100 aircrafts for deployment under the RCS. The RCS has also generated huge demand for helicopters and small aircrafts for operations in hilly regions and other parts of the country. Indigo Airlines has announced its plans to buy 50 ATR planes worth US$1.3bn, while Spicejet Airlines has also signed a letter of intent to buy 50 Bombardier Q400 planes. Needless to say, these developments could create tremendous opportunities for airline and leasing companies all over the world.

AAI envisages providing connectivity to un-served and under-served airports of the country by reviving existing air-strips and airports. AAI plans to spend US$3bn on non-metro projects between 2016 and 2020, focusing on the modernisation and upgradation of airports.[2] One hundred and sixty airports in the country are being revived and operationalised in an attempt to boost regional and remote air connectivity.[3]

In an attempt to aid the modernisation of existing airports, the Indian government has permitted 100 per cent foreign direct investment in greenfield and brownfield airport projects. It has also increased foreign investment allowances in scheduled air transport service (air transport service undertaken between the same two or more places and operated according to a published timetable), domestic scheduled passenger airlines and regional air transport services.

The RCS, alongside the relaxed foreign direct investment policy, has opened multiple avenues for foreign investment.

Conclusion

India’s aviation carries huge growth potential due to the large and expanding middle-class population, rapid economic growth and higher disposable incomes. The RCS could well prove to be a game-changing move. Thirty-one un-served airports have been added for scheduled flights in the last year, as compared to the 75 airports operational during the last 70 years. Increased connectivity will lead to the development of remote areas, enhance trade and commerce, and expand tourism. The RCS is benefitting not just airline operators but also original equipment manufacturers. The RCS will not only let the ‘common man’ fly at affordable prices, but will also boost the regional economy and lead to job creation. Indian skies today are truly more vibrant than they have ever been.

Notes

[1] See Press Information Bureau Government of India, ‘Status of implementation of UDAN’ available at http://pib.nic.in/newsite/mbErel.aspx?relid=169146 accessed 22 January 2018.

[2] See Make in India, ‘Aviation’ at www.makeinindia.com/sector/aviation accessed 22 January 2018.

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