Flying beyond the margins

You can either call them bravehearts or foolish. The three regional airlines in the country – Air Costa, Air Pegasus and TruJet – have been in the industry for up to two years and are fighting an uneven battle in an environment, where chances of survival are wafer thin.

The Vijayawada-based Air Costa is struggling to get its aircraft fleet right, but plans to start pan-India operations. While Air Pegasus, headquartered in Bengaluru, is bogged down by high costs, TruJet, backed by movie star Ram Charan and based in Hyderabad, is trying to make the best of its early days. They will hope that the new National Civil Aviation Policy (NCAP 2016), expected to be announced by the end of January, fuels their growth in the coming years.

These commuter airlines have fleets of small aircraft, connecting the country’s hinterland. These are places that do not generate enough traffic for the bigger players such as IndiGo and Air India. The new policy’s draft, which was announced in November, asks airports and governments to give concessions to the regional airlines.

But a recent report by the Centre for Asia Pacific Aviation (CAPA) paints a dismal picture of this industry segment. Despite a healthy load factor, the report says, these airlines are losing money and key personnel; and while debt is piling up, salaries are being paid in instalments.

Entrepreneurs though remain optimistic. “In the coming years, regional airlines will play a larger role. National carriers will be forced to tie-up with us and our cumulative revenues will be as big as theirs,” says Shyson Thomas, Managing Director and CEO of Air Pegasus, which started its operations last year.

The present civil aviation policy for regional airlines, which was announced in 2007, makes it easier for an entrepreneur to set up a regional airline. The paid up capital for regional airlines is ₹30 crore, compared with ₹50 crore for national carriers for employing five aircraft.

For every additional aircraft, regional airlines have to invest ₹10 crore, half of what their bigger peers need to cough up. In terms of fleet size, while an Air Costa needs to have a minimum of three aircraft within two years of receiving the operator’s permit, its bigger peer such as IndiGo must have at least five in one year.

But have these low entry barriers helped? Analysts are not sure, and fault the same policy for the ‘not-so-serious operators’ entering the industry. And some airlines such as Air Carnival and FlyEasy are yet to start operations.

Kapil Kaul, CEO (South Asia), CAPA, also faults the strategy of these companies. According to him, most of the airlines are under capitalised; and some of them have selected aircraft models that are inappropriate. “There is lack of management depth and there are challenges concerning their business models,” points out Kaul.

Air Costa, for instance, was losing ₹3 crore per month by the third quarter of the current financial year, owing to a poor choice of aircraft. It is now in the process of returning both its 78-seater, Embraer E170s, and has included the 112-seater E190s, which are more fuel-efficient.

These airlines also have to contend with their bigger peers on the regional routes. SpiceJet and Jet Airways too cater to ‘short and thin’ regional routes. “But we are still a bus and train nation, with only the elite and time-sensitive businessmen preferring air travel. I am sure this is going to change in the next 10 years,” said Air Costa’s CEO Captain K N Babu in an earlier interaction with BusinessLine.

For that to happen, a lot will depend on the cost of flying.

Air Pegasus’ Thomas says that the current policy needs to do more. “It should allow carriers to have their own ground handling service and parking charges should be lowered,” he says. The entrepreneur also wants Bengaluru’s HAL airport to be re-opened as a hub for regional carriers, who now pay a steep fee to Bangalore International Airport Ltd, which operates the only airport in the city. Amber Dubey, partner and head, aerospace and defence at consultancy firm KPMG, agrees.

“India’s interiors will never be connected unless there are substantial tax breaks and cash subsidies to make the routes viable. The NCAP 2016 proposes to do that,” he points out.

Dubey adds that airlines need high traffic volumes to spread out the fixed cost and make air fares affordable. “That’s the reason nearly 72 per cent of India’s air traffic is restricted to just the top 10 airports,” he adds.

Therefore, says CAPA’s Kaul, even though a large market for regional airlines exist, the key to their success lies in putting together a well-structured, fully-funded business plan with professional management teams.

“However, we are yet to see such a start-up in India,” points out Kaul. Will NCAP 2016 provide the incentives for the regional airlines to flourish? Air Pegasus and its peers are eagerly waiting.