Story Of The Week

UDAN FOR INTERNATIONAL FLIGHTS

“Until you spread your wings, you have no idea how far you’ll fly.”

-Napoleon

Untitled

Source: Bloomberg Quint

What is UDAN?

UDAN (Ude Desh ka Aam Nagrik) is the “Regional Airport Development” and “Regional Connectivity Scheme” of India whose motto is “Let the common citizen of the country fly”.

It’s objective is to make air travel cheaper and more widespread. Through this initiative the nation can drive national economic development, create jobs, and can lead to the development of air transport infrastructure across all regions and states in India. This scheme plays a major role in our Prime Minister Narendra Modi’s National Civil Aviation Policy (NCAP) that was released by the Ministry of Civil Aviation (India) on June 15, 2016. The scheme is proposed to run for 10 years and may be extended there after. The scheme is planned to be jointly funded by the central and state governments. Several states are already on board and have signed the MOU with the Union government. The government seeks to encourage the market of aviation, with respect to UDAN through various schemes. The parliament proposed to grant concessions from the Central government including VGF (Value Gap Funding) to subsidize airfare, concessions on service tax on tickets and also concessions from the state government including reduction of VAT (GST after it came into effect) to 1% or less for 10 years. The policy seeks support of oil companies to create fuel infrastructure on airports for smooth execution of UDAN.

This scheme has been implemented successfully and as the result, the government of India is now thinking of encouraging tourism through international air routes using the same model.

The Centre came out with a draft scheme on 22nd of August, 2018 for expanding the air travel programme UDAN to international routes where state governments will identify the routes for operations. The draft for International Air Connectivity scheme targets approximately 20 crore tickets by the year 2027.

 

Untitled1

Source: Financial Express

The Implementation Process of Going International:

There are two ways to implement the plan. The first is when the international routes will be identified by the state governments as to where they need subsidies. Airports Authority of India (AAI) will be choosing the subsidy amount for the same.

And, the second part shifts to the airline carriers where the bid on the percentage of flight capacity will be done by domestic airlines for which they need subsidy support from the government for those specific routes.

The airline whose quotes are the most attractive for the specified route, will get the subsidy support for that route.

The financial subsidy will be given only as per the number of seats that are remain unsold, irrespective of how much the subsidy amount may be.

Although the AAI will be the prime agency for implementing the scheme, the subsidies appropriation will be done through an International Air Connectivity Fund (IACF) which will be raised through the contributions from various state governments.

Developing regional routes can help to feed major routes that can bring growth to the aviation sector in the long run. Some states like Assam and Andhra Pradesh have already come up with proposals of eight routes for UDAN international scheme, with Assam having announced Rs 100 crore as viability gap funding to promote international travel from the state.

“The subsidy support shall be provided to selected airlines only for the passenger seats, which remain unsold at the time of IAC flight operation, from the total number of passenger seats for which subsidy has been requested by the selected airline as part of its proposal,” the draft said.

The subsidy support cannot be extended to more than three years. The Airport Authority of India will implement the scheme.

Untitled2

Source: The Economic Times

PROS AND CONS:

The target, when the original UDAN scheme was rolled out, was to encourage airlines to operate out of the 398 ‘unserved’ airports in the country. These were the airports that did not host any commercial flights.

The main aim of the subsidy was to provide airlines with the incentives as they didn’t find it profitable to operate out of small cities. Hence, even by the medium of UDAN international, tourism in these cities can receive an impetus through faster air connectivity. That, in turn, can attract better infrastructure and better investment.

Subsidised airline tickets would also allow smaller regional airlines to compete on a level playing field against bigger airline carriers.

The issue lies in the fact that, at the end of the day, subsidies are a burden on the government. Coupled with the fact that global oil prices will probably increase due to the strain on the global supply of crude oil as a result of the Iran sanctions, the burden starts to get especially heavy. Not to mention that Iran is one of India’s biggest suppliers of crude oil.

Second, one of the externalities, which had a negative impact, of the RCS (Regional Connectivity Scheme) was that with the increase in traffic, there’s a need for tighter security. The boom in demand may be good for business, but if your own security forces threatens to abandon you on the account of non-payment, it’s a problem.

Future Expectation:

The UDAN international scheme, if performs at par with the expectations, can help India in achieving the ambition of becoming the third largest aviation market of the world by 2020.

But we cannot overlook the fact that the subsidy burden may be too high with crude oil prices tending to increase in the near future because of the US sanction on Iran.

To conclude, UDAN is a great idea. The scheme has a distinct, set agenda. The think tanks have formulated a scheme that can achieve multifaceted objectives. This scheme has the potential to thicken the air way traffic within and via India. UDAN can create jobs, bring about infrastructural advancement and make India a tourist friendly country. The state governments involvement turbospeed by Centre’s subsidy can take UDAN to greater heights.

It’s the same boom in demand that will support India in attaining its goal of becoming the world’s third largest aviation market by 2020.

 

References:

  1. https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/government-unveils-draft-udan-scheme-for-international-routes/articleshow/65493551.cms
  2. https://timesofindia.indiatimes.com/business/india-business/government-unveils-draft-udan-scheme-for-international-routes/articleshow/65492579.cms
  3. https://www.financialexpress.com/infrastructure/airlines-aviation/flight-plan-after-taking-off-domestically-udan-to-spread-wings-internationally/1284389/
  4. https://www.bloombergquint.com/politics/2018/08/21/government-unveils-draft-udan-scheme-for-international-routes
Advertisements

Categories: Story Of The Week