Improved Parameters: UDAN Round 2 attracts more bidders

UDAN Round 2 attracts more bidders

In an attempt to sweeten the deal and attract more airlines, the government changed the parameters in the second round of bidding for the Regional Connectivity Scheme (RCS), also known as UDAN (Ude Desh Ka Har Nagrik), which took place in October 2017. The strategy seems to have paid off. This time around, 18 airline companies and helicopter operators have submitted bids for 502 routes, higher than the 11 airlines that did so in the first round.

The key changes in the bidding parameters of UDAN, a scheme launched in October 2016 with the aim of connecting unserved and underserved airports with partially subsidised flights to keep the cost of flying low, include dividing routes into priority and non-priority sectors, reducing the stage length of flights to 150 km, and allowing helicopters to operate on priority sectors. Moreover, selected airline operators (SAOs) have been allowed to increase the number of flights on regional connectivity routes at any time and to any number. These changes have helped attract operators such as IndiGo and Jet Airways, that had abstained from bidding in Round 1. The results of the second bidding round are expected soon.

While five airlines were awarded 128 routes connecting 70 airports in the first round, this fell short of the aim of connecting the 406 unserved and 18 underserved airports. In order to make it lucrative for operators and encourage more of them to participate in UDAN, the Ministry of Civil Aviation (MoCA) held discussions with all the stakeholders and revised some parameters of the scheme.

The major concession that has been granted is allowing helicopter operations on specified priority routes, including those in the Northeast, Jammu & Kashmir, Uttarakhand, Himachal Pradesh, the Andaman & Nicobar Islands and Lakshadweep. All seats for helicopters, up to 13 passenger seats, will be considered as RCS seats and will be covered under the subsidy – viability gap funding (VGF) – provided by the government. The parameter for fixed-wing aircraft to qualify under the RCS remains the same – at least nine seats have to be priced at an all-inclusive fare of Rs 2,500.

An operator flying from a priority area will be allowed to operate 14 weekly departures from the same RCS airport and qualify for the subsidy. For other routes covered under the RCS, the limit remains seven weekly flights. While retaining the exclusivity clause, which allows only one operator to fly on a particular route for three years, the selected airline can now issue no-objection certificates to other airline operators willing to operate on its RCS route.

Another move, though not a part of the bid criteria, that is likely to see an increase in participation is the exemption of SAOs from the goods and services tax (GST) on disbursement of the government subsidy. According to an MoCA notification, disbursement of the subsidy will be exempt from GST for a period of one year after commencement of RCS operations to any of the 13 airports which have been connected since the scheme came into effect. These airports are Shimla, Bathinda, Nanded, Kadapa, Gwalior, Porbandar, Kandla, Puducherry, Ludhiana, Mysore, Vijayanagar, Bikaner and Jaisalmer.

Progress of bids in Round 2

A total of 141 initial and 55 counter proposals have been received by the MoCA in the second round. The initial proposals were for 502 routes connecting 126 airports and helipads. These include 49 unserved and 15 underserved airports as well as 24 helipads.

Airlines and helicopter operators bid for routes between airports through an online auction where the name of the bidder is not known. The financial bids are then made available to the bidders to invite counter bids. The routes are finally awarded to the operator that asks for the lowest financial support from the government, that is, the lowest VGF. According to media reports, 17 companies had originally submitted bids with 141 proposals. Against this, 55 counter proposals have been received from 10 applicants.

Status of routes awarded in Round 1

In the first round, the MoCA received 45 initial proposals from 11 bidders, covering more than 200 regional routes. Of these, 128 routes connecting 70 airports were awarded to five airlines – Alliance Air, SpiceJet, Turbo Megha Airways, Air Odisha and Air Deccan. Besides, MoUs were signed with almost all the state governments, including those of Bihar, Punjab, Tamil Nadu, Telangana, Maharashtra and Puducherry, to promote regional air connectivity.

After Alliance Air launched the first RCS flight on the Delhi-Shimla route on April 27, 2017, SpiceJet, Turbo Megha Airways (operating under the brand name TruJet) and Air Deccan have also launched operations, on about 25 routes, against the aim to connect 43 served and underserved airports in Tier II and Tier III cities.

Air Odisha, the only airline from Round 1 yet to launch operations, has reportedly sought time till mid-January to do so.

VGF to subsidise operations

Airlines which fulfil the RCS mandate of making flying affordable to the masses are given a subsidy by the government (in the form of VGF) if half the seats on the flight are sold at a fare of up to Rs 2,500 per seat per hour of flying. The VGF will be provided for the flights for a period of three years from the date of commencement of operations.

The cost of providing the VGF is shared between the centre and the states, with the MoCA contributing 80 per cent and the respective state governments giving the remaining 20 per cent. In the case of north-eastern states and union territories, the ratio of cost sharing is 90:10.

To help meet the cost of providing VGF to airlines, the Regional Connectivity Fund (RCF) has been created, under which the ministry levies Rs 5,000 per departure on all airlines operating flights on major routes. This is estimated to generate Rs 2 billion annually. The government has decided to revise airfares and the government subsidy to airlines under the RCS every three months. While airfares will be indexed to inflation, the VGF will be decided after taking into consideration inflation, the cost of aviation turbine fuel and the rupee-dollar exchange rate.

According to media reports, the ministry now feels that the amount collected for the RCF might not be sufficient once players start operating more routes under UDAN.

Airline readiness

Interestingly, many new airline and helicopter operators participated in the second round in addition to established players that bid for the first time. Airlines such as Interglobe Aviation (IndiGo’s parent company) and Jet Airways are the new entrants in the second round, while Thambi Aviation, AAA, Arya Airlines and Maritime Aviation are the new kids on the block.

To make the economics of short-haul routes work in their favour, airlines will need to induct smaller aircraft into their fleet. Taking this into consideration, IndiGo has placed an order for 50 ATR planes, of which seven are expected by March 2018. SpiceJet has also signed a contract to buy up to 50 Bombardier Q400 regional planes, adding to its existing set of 20 Q400 planes. Air India is in the process of receiving new ATR aircraft to ply on new and existing routes. Air Deccan, which launched operations on the 400 km Mumbai-Jalgaon route on December 27, 2017, deployed a 19-seater Beachcraft B-1900D (18 passengers and one crew member) on the flight.

Besides Embraer and ATR, operators now have the option of selecting Dornier 228 aircraft, manufactured by Hindustan Aeronautics Limited. The first civilian aircraft to be produced and certified in the country, this 19-seater non-pressurised aircraft can fly up to 700 km on full load, making it ideal for regional flights.

Airport readiness

Even as airlines shop for aircraft, the government is upgrading infrastructure at underserved and unserved airports to make them suitable for RCS flights. An unserved airport is one where scheduled commercial flights have not operated in the past two flight schedules approved by the Directorate General of Civil Aviation (DGCA). An underserved airport is one where departures of scheduled commercial flights have not exceeded 14 per week, as per the latest flight schedule published by the DGCA.

Flights on many routes that went under the hammer in Round 1 are yet to start because infrastructure at the airports is not ready. The upgradation of most of the 70 Round 1 airports is likely to take a few more months.

Further, the government has approved the revival of 50 airports within a two-year time frame, at a cost of Rs 45 billion. The Airports Authority of India (AAI), the implementing agency for the RCS, will not only upgrade AAI-owned airports but also coordinate with other airport operators such as state governments, public sector undertakings and private airport operators, for the upgradation of their airports. The authority has made interim arrangements for operationalising flights at Tier II and Tier III cities by making provisions such as pre-engineered buildings/ porta cabins (for terminal buildings) and mobile air traffic control towers at some of the airports to meet the stringent timelines.

Whether the government’s dream of regional air connectivity will become a reality or remains on paper as in the past depends on several factors including the speed of upgrading underserved and unserved airports, the sustainability of generating funds from one group of air travellers to fund regional connectivity of another group, and the ability of airlines to manage the economics of multi-aircraft fleets.