Earlier this week, an interesting aviation sector headline flashed on Indian media. In November 2018, the growth of the aviation sector slowed down to a 51-month low of 11%. In normal circumstances, a mature business will take 11% growth happily. For Indian aviation, it was a negative statistic – the growth had slowed down significantly.
Indian civil aviation market is slated to become the third largest market in the world behind that of the United States of America and China in another five years or so. Despite the individual airlines facing the heat of increased competition and high fuel prices, the market has been growing on the back of competitive airfares and increased demand.
In this backdrop, one of the demand drivers over the coming years in the civil aviation sector could be the Ude Desh Ka Aam Nagarik or UDAN program. Prime Minister (PM) Narendra Modi had spoken about the possibility of people wearing hawai chappals boarding hawai jahaj– how to make air travel affordable and possible for common citizens. For a country of India’s size, the air access has also been significantly limited. Many large towns do not even have an operational airport. Some which do aren’t served by regularly rostered flights.
This regional connectivity scheme was launched in 2016 where the government took the role of a market maker to broaden and deepen the aviation market. The idea was to bring on board some of the 425 odd Indian airports, which were unserved or underserved, with no regular scheduled flights. The government also planned to create a viability gap funding structure to promote flights from already connected cities and airports to the new regional locations.
When UDAN was planned, there was quite a lot of usual criticism around the lines of why the government should intervene. But unless there was a backstop, in this case, the central government, it would have been near impossible to develop new airports and attract airlines -after all, it was possible via a market mechanism, it would have already happened in all these years.
The government created the viability gap funding structure using a universal service type cross-subsidy model. A surcharge was levied on tickets on existing routes, which was then used to refund part of the ticket costs for the airlines flying on UDAN route. The participating airline would reserve a certain number of tickets on each flight at a low price – INR 2,500 for routes with flying time under one hour. The government would pay the airline a certain differential from the viability fund.