Regional airlines look to capitalise on emerging demand

New Delhi: A new carrier, FLY91, will launch a flight between Bengaluru and Goa this month, as a couple of regional airlines seek to capitalise on the emerging trend of Indians flying to short-haul destinations that were earlier covered by road or rail.

These travel segments, connected by smaller ATR, Bombardier Q400s and Embraer aircraft, are not catered to by established carriers such as IndiGo and the Air India group despite increasing demand. IndiGo, India’s largest carrier by market share, operates a fleet of around 45 ATRs and the Air India group does not have any regional aircraft in its fleet. SpiceJet offers regional flights with around 34 Bombardier aircraft. These airlines have clearly left the segment for regional carriers, who are now starting to move in.

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FLY91 has started operations with a fleet of two ATR aircraft and plans to induct 30 more aircraft in the next five years. The space is underserved, with capacity in this space accounting for a meagre 3% of the total seat capacity and regional aircraft fleet of less than 10% of the total domestic fleet.

The entry of regional airlines with a sustainable and viable business model could give wings to this segment, industry experts said.

“Regional air transport in India has been quite neglected in the sense that no dedicated focused player ever really existed since Vayudoot in the 1980s or possibly Indian Airlines up until 1995,” said Mark D Martin of Martin Consulting.

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Currently IndiGo, and Kingfisher and Jet Airways in the past, provided more of a feeder service than being focussed on regional connectivity along with their national network, Martin added. “With that in context, the launch of FLY91 and the expansion of Kolhapur-based Sanjay Ghodawat group’s regional aviation venture Star Air are good signals for the regional segment,” he said.

With major airlines in India going through challenging times as there have been supply chain issues, regional connectivity would have never been on their growth plan and the entry of these carriers will help the segment grow, experts said.

The central government, in its 2016 policy, introduced a new category of airlines — scheduled commuter airlines — with a low capitalisation threshold.The scheme also allowed airlines operating on regional routes under its Udey Desh Ka Aam Nagrik (UDAN) scheme to avail viability gap funding. Besides, it also allowed code sharing with carriers operating on major routes to make regional airlines somewhat viable.

As of now, only about 54% routes are operating under the scheme, according to a response to a Right to Information application filed by HT. But the concept of code share of regional airlines seems to have not worked as they are not seen to be happening in domestic routes. Even the government-owned regional airline Alliance Air has been struggling, posting losses of over ₹500 crore annually.

However, Martin appreciated the strategies of both the newly launched FLY 91 and Star Air. “It’s good to see that both FLY 91 and Star Air clearly seem to come with fundamentals in revenue models, which don’t need viability dependence on the UDAN scheme,” he said.

Speaking on the scope for regional airlines, travel industry veteran Manoj Chako, who is managing director and CEO of FLY 91, said there is huge scope for regional aviation as the middle class is constantly growing in India.

“India is the fastest growing market in the world. We are on the cusp of exponential growth in aviation and obviously regional aviation becomes a very critical element in it,” Chako said. “If we want to compare with other markets’ population, number of airports, density and propensity to spend, we are only scratching the tip of the iceberg.”

Pointing out inadequate capital to fund operations in the long-term as one of the reasons for more regional carriers not being launched, a former official of the Directorate General of Civil Aviation said the promoters must be ready to step in to capitalise the airlines during crises.

““Fuel cost accounts for 30-40% of the total cost of the airlines. While this cost on a per kilo litre basis is the same across airlines, considering the target audience for the regional airlines, the airfares have to be kept much lower so as to attract more number of passengers for maintaining adequate passenger load factors,” the former official of the aviation watchdog said on condition of anonymity.

“There are significant opportunities in the regional space and FLY 91 is well-funded and professionally managed. Star Air has done well too. However, regional airlines’ viability should be beyond UDAN,” said Kapil Kaul, CEO and director of CAPA India, an aviation advisory.

Aviation is all about cost leadership and it is about correct financial structure, the way you set up your lease agreement, maintenance contract, the way you manage your financials, capital and engineering, Chako said. There are only two things in aviation — capital structure that can support the growth and high-value assets that need to be managed well, he added.

The strategy was to start strong. “We studied 24 failed airlines and we learnt that the reason for their shutting down eventually boiled down to these two reasons, where you either did not know how to manage the assets and second, you did not have the right capital structure to support the growth,” Chako said. “One of the reasons for the airlines to fail is also when one thinks aviation as a vanity project. If the airlines have the right approach and capital, I don’t see a reason why they would fail.”

Chako has raised $25 million from private equity and A-listers to begin with. “We are the best capitalised regional airline to start anywhere in the world. We aim to open a new base and every base every year would have six to seven new aircraft,” he said. “By the end of five years, we will open five bases and will have a fleet of 35 aircraft.”