The financial headwinds in the airline industry have caused turbulence in the Centre’s flagship regional connectivity scheme UDAN, in which the third version of the bidding saw interest for only one network with zero viability gap funding (VGF) sought from the government. Compared to this, in UDAN 2.0, there were bids for 48 routes, from India’s two largest budget carriers IndiGo and SpiceJet, with nil funding sought to operate on the routes. This, a senior civil aviation ministry official pointed out, indicated a slack in competitiveness from the airlines for whom cash flow has become a concern.
Notably, while there were 111 bids from 15 airlines for the third version of UDAN, there were 107 unique bids, indicating lack of competition on most routes.
“Airlines are not doing very well and there is a lot of turbulence in the industry. The airlines only want to take up comfortable routes now, don’t want to venture into various other routes and don’t want to bid zero (VGF). Earlier, the feeling was very buoyant and we saw competition among major players including IndiGo and SpiceJet who bid with zero VGF because they thought that they will manage with only exclusivity and some tax concessions. Now, cash flow has become very important (for airlines). Everyone is saying that if cash flow is not available from (a particular flight), it is not viable,” the official said.
Under the UDAN scheme, the government aims to connect unserved and under-served airports. On the routes selected under the scheme, a fixed number of seats are sold at fares, for which a cap is decided by the government. Airlines bid for routes with VGF they require to meet the costs and this funding is contributed by the civil aviation ministry and respective state governments. Upon technical qualification, the airline with the lowest VGF bid is selected to operate on the route with a three-year exclusivity.
For UDAN 3.0, the government received 111 proposals from 15 airlines including existing bidders such as Air India-subsidiary Alliance Air, IndiGo, SpiceJet, Jet Airways, Turbo Megha Airways and new airlines such as Andaman Airways, Aarya Airlines among others.
In the country’s domestic market, airlines have been grappling with financial pressure on account of an uptick in the fuel prices over the last few quarters and a depreciating rupee, both factors that have subsided only recently. During April-November 2018 period, the average jet fuel prices witnessed a increase of around 35 per cent year on year, while the average rupee depreciated by 7.8 per cent against the US dollar during this period. However, intense competition in the sector prevented airlines from passing on the increase in costs to their customers that caused them to bleed.
Ratings agency ICRA had said in a November report that airlines in India are estimated to require a massive capital infusion of around Rs 35,000 crore over the next three to four years to bring down the high debt-levels in the industry. For the July-September quarter, all three listed airlines – IndiGo, SpiceJet and Jet Airways reported net losses. ICRA said that during the first half of 2018-19, the three listed airlines together lost about Rs 20 crore per day.