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India’s Regional Airlines And Their Short-lifespans

For India, the challenge of regional airlines remains. As of this writing, five more regional airlines are in the pre-planning and launch stages.

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The Covid-19 pandemic has triggered a wave of changes. Major cities are witnessing de-densification, migration towards smaller towns is slowly but surely happening and there is a significant shift in travel behaviour. Given these changes, one would assume that regional airlines would start to see light at the end of the tunnel. Yet this is simply not the case. India’s regional airlines with an average life-span of 2-3 years continue to regularly head to the mortuary. And new ones continue to spring up and follow the same path. While rhetoric is high, traffic levels are low. Viability is suspect. And investors frequently burn their hands. Why is this the case?

The curse of low traffic volumes

Regional airlines are those that connect smaller city pairs. True to its name a regional has a specific geographic focus. Yet the challenge with regional flying is that certain airports sometimes see footfalls of as little as 7,000 passengers. And the nature of this volume does not bode well for profitability.

With current business models, traffic is the lifeblood of revenue generation. Thus these miniscule traffic volumes effectively mean that regional airlines are challenged on cash-flow. Add to this woefully inadequate capitalization, challenges with planning and operational hurdles. Together these make for an extremely turbulent ride and inadequate returns on capital.

Strategic avenues geared at developing traffic, tourist footfalls and connectivity remain unexplored. Rather airlines have relied on subsidies and waivers – which once taken away lead to disaster.

Unaligned aircraft lifecycles and business-models 
India’s regional airlines are also challenged with the choice of aircraft and lifecycles. That is, a suitable aircraft that matches the mission profile, network to be flown and operational conditions. Almost always the choice is erroneously based on standalone metrics rather than a comprehensive set. Furthermore, in several cases a regional aircraft business case is made used because the current market demand is not sufficient for larger aircraft. As the demand matures and more flyers take to the skies this changes. Failing to do so means that a larger (pan-India) airline swoops in for the kill and grabs the route. A cash-accretive route overnight starts bleeding and the regional airline is left with few options. Yet repeatedly, this reality has not been planned for.

While choosing a regional aircraft, operators have the option to choose between a jet or turboprop. Often they rely on advice from conflicted parties or even worse from manufacturers who are keen to enter the market. An overall strategic, operational and financial review of the assets is found wanting. Add to that a short-term focus and this leads to a complete mismatch between the aircraft type and model.

Aping the west and force-fitting models
The skill of regional airline planning is one that has to integrate an understanding of the Indian consumer and the travel trends. Plans have to be based on ground realities and not a topical understanding of the market gleamed sitting on desktops. The market reality is one where, of a population of 1.3 billion, eighty-four per cent survive on a per-capita income of less than $1200. And within the remaining segment that flies, eighty per cent of the traffic is extremely price sensitive. Yet this does not mean that they demand any less in terms of service or quality. Add to that socio-political realities and it is a complexity challenge that has to be addressed wholly and not on a piecemeal basis.

Ironically, regional airlines require more comprehensive business plans than national airlines and plans that cater for far more contingencies. Yet, India’s regional airline market is challenged in that it has witnessed a force-fitting of western models. This then has led to poor planning decisions the burden of which is borne by the investors, passengers and communities. With a track record of patchy service, stakeholders are reluctant to engage with these airlines and ask for credit guarantees and/or collateral impacting overall liquidity.

Doing the same thing over and over again…
In the last decade, over twenty regional airlines have come and gone. Some after launching operations, some even failed to start. Yet, in terms of lessons learnt or documentation of these failures, there has not been any discipline. The script remains the same and each time a few new folks come to produce the movie. The regulatory and market mechanisms continue to not be conducive.

And across the ecosystem players are aware of this fact. It is no wonder that distributors often demand that regional airlines pay them upfront; travel agencies often will not sell tickets on regional airlines beyond 15 days; airports refuse to grant slots; banks have higher collateral requirements; talent continues to leave at the first instance of something better; and on items like spare provisioning and turnaround suppliers continue to treat regional airlines as second fidle.

The trends each time are very similar. One hopes against hope that the outcomes are not.

Can regional airlines generate a positive return on capital?
Together these factors contribute towards regional airlines failing to provide a return of capital let alone a return on capital. Thus the most attractive proposition becomes their loss carry-forwards which can be used for cash-rich business houses; alternatively these become investments for those that are just taken in by the glamor or owning an airline.

That said, regional airlines cannot be overlooked as they provide an important connectivity link. India continues to have many unserved and underserved destinations and without the ability to do a day trip via air, there are demonstrable impacts on investment and interest. Connectivity drives commerce and an air-route is still the fastest and in many cases such the only way to link city pairs. While the government attempted to address this in part via the regional connectivity scheme (referred to as the UDAN scheme), this only propped up failed business models by waivers and subsidies. The scheme makes for good messaging and good politics, but not good economics. And ironically, the scheme is likely to run out of funding which will most likely lead to the failure of airlines that have used the scheme to build entire route networks.

For India, the challenge of regional airlines remains. As of this writing, five more regional airlines are in the pre-planning and launch stages. But the jury is out on whether they will be cleared to takeoff and if so whether they will remain airborne. The curse of India’s regional airlines and their short-lifespans continues.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Satyendra Pandey

The author is an aviation professional. His positions include working as the Head of Strategy at GoAir and with CAPA (Centre for Aviation) where he led the Advisory and Research teams.

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