Flying high on shorter routes

Though the jury is still out on how many airlines will benefit from the Government’s Regional Air Connectivity Scheme (RCS), Alliance Air, the regional arm of Air India, is hoping to turnaround its fortunes through the program.

Alliance, one of the five carriers who were awarded routes under the RCS, is most likely to be the first to start operating flights under the scheme. Part of the Government’s UDAN initiative to link smaller cities, the Scheme aims to breathe life into unserved airports.

Alliance has some inherent advantages when compared to Air Odisha and Deccan, which too were awarded routes.

It already has a flight to Delhi to Bhatinda, which will now get subsidy under the RCS; and on the cards are flights linking Shimla and Ludhiana to Delhi. Under UDAN, services should begin within six months of being awarded the route.

The loss-making company at present has a fleet of 72-seater and 48-seater ATR aircraft that fly to 34 destinations. Under the RCS, Alliance has been awarded 15 routes.

CS Subbiah, Chief Executive Officer, Alliance Air, admits there are risks involved in flying into markets few want to go, but is quick to add that the RCS plan will help. “Viability Gap Funding (VGF) fits into our business plan as we are allowed to go to a place where the Government is willing to subsidise part of the risk.”

Under the RCS, the Government will provide VGF for fixed-wing aircraft covering 200-500km, provided at least 50 per cent of the seats are priced at an all-inclusive fare of ₹2,500. It’s most likely that 18-20 seater aircraft will operate in many of these routes. The Government will provide the operator a viability gap funding of ₹3,750 per seat sold under the RCS, up to a maximum of 40 seats per flight. The VGF has been capped at ₹4,170 for routes that span 776-800km.

To be eligible for the VGF, an airline will have to operate regular services to at least one airport, which at present does not have regular flights. “VGF will cover about 30 per cent of our costs. The costs associated with the risk of entry into a nascent market are partly covered by VGF ,” Subbiah says.

The CEO says that the funding will help Alliance keep the fares low to woo customers who would otherwise travel by Shatabdi and Rajdhani trains. For instance, the flight from Bhatinda, home to one of the biggest Army cantonments, will allow a soldier to reach his family in Chennai in six to seven hours. A train journey would take more than 50 hours.

At the same time, challenges remain. Says Subbiah, “The first four months are going to be crucial till we establish the product in the market and people start flying. First of all we need to create awareness.” In the past, non-availability of funding had forced the airline to withdraw from Chennai-Puducherry and Delhi-Durgapur-Kolkata routes.

Then there are logistical issues too. Alliance’s Shimla flight, for instance, could run into some financial trouble. Given the height at which Shimla is located the airline will not be able to take more than 30 passengers from Delhi, while fewer than that number will be able to fly back (with a baggage allowance of 10kg per passenger).

To make the Shimla flight financially viable the airline has also approached the Himachal Pradesh Government for financial assistance. While Subbiah declined to get into specifics, the airline is rumoured to have asked for over ₹50 crore annually.

However, Subbiah is keen to start the Shimla flight at the earliest as during the summer, people from Delhi will prefer to fly rather than spending hours by train or road to reach the hill station. He is hoping that the timing of the flight — in peak summer months — will save time on marketing the service.

“We are keen to capture the traffic in the summer months so that by the time winter comes the traffic becomes regulated. Besides a lot of Government employees come down to Chandigarh, and taking the flight will save them a lot of time,” he points out.

Depending on the success of the flight, Alliance could also look at increasing its frequency. This will also serve another purpose; as the aircraft flies more, the fixed costs get spread out. “Which means that the cost of operations is likely to come down. Affordability will increase so you can take more risks,” says Subbiah.

He is also betting on success for another reason — Air India has a wide network locally and internationally, and passengers travelling from the interiors will be able to connect to the Air India network. “We feel that ultimately the regional networks have to converge into the national networks. We expect that in six months, transfer passengers (from Alliance to Air India and vice-versa) should be contributing about 20 per cent to our revenues. That will be very good traffic if we get it. This is slightly on an optimistic note. A pessimistic note will be about 10 per cent,” Subbiah concedes.