More than 98% of the Indians have never been inside an aircraft. The Narendra Modi government wants to change that. The new civil aviation policy released on Wednesday sets out the ambitious aim of increasing domestic air passengers four-fold over the next five years. And one of the main thrusts of this new approach is improving regional connectivity – by making the most common flights more expensive.
Formulated by the Ministry of Civil Aviation, the policy attempts to bring regional connectivity to Tier 2 and Tier 3 cities in the country where airstrips either don’t exist or airports have no scheduled flights. The government plans to cap fares – that is, fix an upper limit – for short duration flights in regional airports with less connectivity at Rs 2,500 for a journey duration of less than one hour.
In India, two-thirds of all flyers originate from just six metro airports – Delhi, Mumbai, Chennai, Bangalore, Hyderabad and Kolkata. More than 80 million travellers originate from these cities making up for 67% of the passenger traffic while the remaining 40 million travellers originate from the other 69 operational airports.
The government now wants to rejuvenate airports that are barely being used by offering incentives to airline operators to start flying on some of these routes. Over the past few years, the government has spent more Rs 600 crore on 25 airports which were technically operational but had no scheduled flights. These airports form a part of the 375 airports in the country which exist on paper but don’t cater to any commercial flyers.
The ministry of civil aviation is now hoping to connect lesser connected cities and regions by providing cheap air tickets to consumers – by offering subsidies and tax breaks to airlines. In the past, multiple air operators have complained that they are losing money on most of the routes already and that it makes no sense to ply on a route where the demand will be lukewarm.
“They (the government) need to realise it’s not a case of ‘build the airport and we will come’,” Sanjiv Kapoor, chief operating officer of SpiceJet Ltd told Bloomberg last year.
This is especially true for financially starved carriers like Air India and SpiceJet. In 2014, a response in the parliament revealed that the national carrier Air India was making profit only on nine routes out of 370 daily flights it is operating.
Making it possible
In order to subsidise those local flights, though, the government intends to make existing air travellers on major routes shell out more money for their air tickets. The ministry will soon notify a new levy on the most popular domestic routes, like the ones between the metros.
This levy will be used to put together cash for the government’s Viability Gap Funding scheme, which will cover the losses of airlines that choose to ply on lesser connected routes. The central government will contribute at least 80% of this corpus through the levy on the most common routes, while the rest will come from the state governments. The government is hoping to generate Rs 1,500 crore a year from this levy.
Explaining the rationale behind this scheme, Civil Aviation Minister Ashok Gajapathi Raju told the Economic Times in an interview that airports with no connectivity are like “non-performing assets”.
“We have built airports that are not functional and they are like non-performing assets,” he said. “Our focus will be providing regional connectivity equitably across all regions of the country. Even the growth in aviation today is not uniform across all states.”
While the final policy document states that the rate of levy will be decided at the time of its formal implementation, a report by the Mint in March said that it is likely to be 2% – and air carriers aren’t going to be too happy.
Distortion of the market
The levy is likely to add $350 million a year as additional costs for the operators, Tony Tyler, Director of the International Air Transport Association, an international airline lobby, told the Mint. The reason, Tyler said, is that the market is competitive and the actual price of flights will fluctuate to make legroom for the levy.
“It’s the airlines who are going to pay because of the competitive market – fares are set in the market, the amount the passenger pays is set in the market. So it’s going to be a real drain and a financial strain on the airlines in India,” Tyler added.
Meanwhile Rathin Roy, Director at the National Institute of Public Finance and Policy, said that introducing a levy on some sectors to subsidise others is an "inefficient" way of improving flight connectivity.
"There are already restrictions on flying too many flights on the profitable sectors and now if you are imposing a levy on each Bombay-Delhi ticket, for instance, you are asking travellers on this route to subsidise the cost of travelling for someone in, say, Vijaywada," he said.
Roy added that charging the levy might be a viable option but this is not how an evolved market operates.
"This is a clear distortion of the market because the consumer is involuntarily being forced to pay tax on his ticket as well as pay tax for someone else's travel. If some sectors need subsidy, make an allocation but what's the point of charging a levy on tickets?"
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