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Small town connect: Fares may hit air pocket

Incentivising airlines to fly to unconnected destinations will not only drastically cut travel time but also help bridge the fare gap with railways, thereby catalysing the masses to avail of air travel options.

Written by Sharmistha Mukherjee | Updated: November 4, 2015 6:03:38 am
air tickets, air ticket price, air fare, civil aviation, civil aviation ministry, regional connectivity scheme, RCS, indian express, business news The subsidy proposed on non-metro routes, in the mean time, could also imply an increase in price of flight tickets on trunk routes.

A downward push on prices of air tickets is likely on routes between non-metro destinations with the civil aviation ministry setting in motion the ball to subsidise the cost of air travel for the common man at about Rs 2,500 per flying hour under its newly conceived regional connectivity scheme (RCS). A study of air fares on non-metro routes done by The Indian Express shows incentivising airlines to fly to unconnected destinations will not only drastically cut travel time but also help bridge the fare gap with railways thereby catalysing the masses to avail of air travel options.

Sharat Dhall, president at travel portal yatra.com, said, “Rs 2,500 is a reasonable price point. There would be a lot of passenger willing to pay an additional Rs 1,200-1,300 over average second AC train fares to avail of the convenience of an one hour flight. There will be lots of people willing to upgrade from other modes of transport. This move will help catalyse growth in the air passengers market.”

A study of air fares available between non-metros on travel portal makemytrip show that a one-way flight ticket between Guwahati and Dibrugarh in Assam costs Rs 4,228. A second AC rail ticket on the same route on Brahmputra Mail is way cheaper at Rs 1,230. But while the aerial distance of 353 km is covered in 55 minutes, the rail distance of 564 km incurs travel time of approximately 14 hours.

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“Time is of essence today particularly if there are medical emergencies or urgent meetings. If the air fare is about Rs 2,500 more people can afford to take flights”, said Subhash Goel, President, Indian Association of Tour Operators (IATO) and Chairman STIC Travel Group.

Besides, providing for affordable air travel options to the middle-class consumer, the regional connectivity scheme is also expected to link up unconnected destinations. “In parts of Rajasthan, North-East India, Madhya Pradesh there are no options to travel by rail. In all such areas, the RCS will help provide affordable and time-effective air travel options to the masses”, added Goel. There are, for instance, no direct trains between Amritsar-Srinagar or between Bagdogra-Guwahati (nearest station New Jalpaiguri from where there are direct trains to Guwahati); there are no direct flights available between Bhopal-Raipur, Nagpur-Hyderabad on Dec 3, a day selected a month later for purpose of this study.

freThe push for air travel proposed under the regional connectivity scheme is expected to boost domestic air traffic to 300 million by 2022 from 70 million now. Domestic air ticketing is expected to go up further to 500 million by 2027.

Mittu Chandilya, chief executive officer and managing director, AirAsia India, concurred, “Regional connectivity, small town airports will help airlines to geographically increase the footprint. We see a massive opportunity for Tier 2 city airport expansions and enabling larger aircraft operating from these cities.”

Aviation advisory firm Centre for Asia Pacific Aviation (CAPA), however, cautioned. “Even with all the significant concessions that have been proposed, a target fare of Rs 2,500 for a one hour flight may not be feasible and needs to be reconsidered. It is not possible to expect that this fare level can be achieved right across all aircraft types carrying from say to 9 to 100 passengers. Aircraft in the 9-30 commuter category have quite different economics to 50-100 seater regional equipment. Airlines operating aircraft in the 50-100 seat category have significant capital requirements. CAPA estimates that a start-up venture would need to have Rs150-200 crores. For this level of risk promoters would not want to be limited to charging fares of Rs 2500 which would dampen investor interest”, said Kapil Kaul, chief executive officer, CAPA.

Another critical challenge, he informed, is that aircraft technology in the 9-30 seat category is outdated with no new aircraft programmes in the pipeline at the moment. Kaul said, “Building a strong commuter eco-system with outdated technology may not be realistic.”

The subsidy proposed on non-metro routes, in the mean time, could also imply an increase in price of flight tickets on trunk routes. The subsidy will be funded through a two per cent levy on air fares for both domestic flights on trunk routes and on international commercial flights and is expected to generate Rs 1,500 crore per annum. Dhall said the increase, however, is not likely to be substantial enough to adversely affect traffic. “A two per cent levy may roughly translate into an increase of Rs 80-100 on domestic flights. Air fares this year are already lower by over 20 per cent when compared with last year on account of low fuel prices. The levy is

unlikely to affect traffic on metro routes”, Dhall said.

IndiGo president Aditya Ghosh added that if the proposal to charge two per cent levy on air tickets is seen in isolation, then air fares would rise. “At the same time, if the money collected from cess is invested back in the airport infrastructure like air traffic management and ground handling, then we will definitely see fares coming down.”

“Besides, the taxes that they are planning to reduce on the MRO side will ultimately reduce the input costs of running an airline. Ultimately if it actually turns out to be right then there could be a lowering of fares,” informed Ghosh.

As per the RCS outlined in the revised draft national civil aviation policy, the government will provide viability gap funding (VGF) to airlines flying to underserved and unserved destinations to keep air fares low on regional routes. The VGF will be indexed to aviation turbine fuel (ATF) prices and to inflation.

While the Centre would provide 80 per cent of the resources to bridge losses incurred by airlines by flying to these routes, the remaining amount would have to be pitched in by the states. There will be no service tax on tickets on regional flights. The proposed subsidies for enhancing air connectivity would, however, be only offered in states which reduce VAT on ATF to one per cent or less at RCS airports.

“States are currently not collecting any tax at RCS airports because there are no flights to these destinations. If they reduce VAT on ATF at these airports, they would be earning to the extent connectivity improves to that location,” Civil Aviation Secretary R N Choubey said.

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