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Corporate Feb 13, 2013

Aviation min proposes Rs 400 cr subsidy for regional routes

By Sindhu Bhattacharya

New Delhi: The Civil Aviation Ministry has drawn up a plan to offer all domestic airlines a subsidy so that they connect tier III and smaller towns and bring them on the aviation map.

This novel idea, which will put some amount of financial burden on the state governments as well as air passengers who fly on metro routes, will mean at least 40 smaller towns which currently have no air connectivity could get connected by air with their respective state capitals.

The cost? The ministry is readying a proposal to offer as much as Rs 350-400 crore subsidy in all to this project and airlines will have to bid for subsidy on each route. The subsidy would be initially available for three years.

Reuters

But what happens if airlines do not want to fly unviable routes despite the subsidy? Reuters

Among these 40 towns which could soon join the aviation map are Meerut, Jhansi, Bareilly, Hubli, Belgam, Shimoga, Mysore, Rajamundri, Bhavnagar and Kutch. All of them are towns which have dense population and enough demand but whose residents at present need to travel to respective state capitals of Lucknow, Gandhinagar (or Ahmedabad) and Bangalore to be able to take a domestic flight.

A detailed proposal in this regard is ready with consulting firm Deloitte Touche Tohamatsu and is scheduled for submission to the Ministry of Civil Aviation this Friday. The consultancy firm was roped in to conduct a detailed study on which towns need to be connected and how this could be done.

A highly placed official source told Firstpost that bidding for subsidy is a novel idea and this subsidy would be generated from :
a) The ministry's own resources through an Essential Area Service Fund which has already been activated with a token amount of Rs 10 lakh
b) Asking state governments to underwrite at least 10% seats on such flights
c) Imposing a cess on metro passengers.

This source clarified that metro passengers of domestic airlines will not have to pay more since airlines are already charging them more for cross subsidizing operations in unviable areas like the North East.

If the ambitious subsidy proposal does get cleared, it will mean domestic airlines no longer have to meet requirements under the current route dispersal guidelines which mandate operations to the North East and some other unviable routes where the Government offers no subsidy.

The source quoted earlier said airlines would be encouraged to bring small aircraft which are already allowed several concessions. For example, ATR aircraft (which seat up to 72 people) are already exempt from airport charges, get Aviation Turbine Fuel at 4% VAT against 25-30% for other aircraft. In addition to these concessions, the Airports Authority of India (AAI) will not charge any navigation charges from aircraft which fly on regional routes.

Besides, state Governments have been asked to underwrite 10% seats on such aircraft and provide security at designated airports under BCAS supervision. Such airports will also need to be provided water, power and tax holidays by the state Government.

This source said Deloitte has identified 80 such small towns and cities where connectivity should be provided but in 40 of these, it is possible to get airlines to fly immediately because adequate facilities for airport etc are already present. The subsidy amount of Rs 350-400 crore is valid for these 40 cities as of now.

He said the policy will be now put up for a public debate, then taken to the Cabinet and if approved, should be in place by April.

So far, so good. But what happens if airlines do not want to fly unviable routes despite the subsidy?

The Ministry has already been in the airlines' cross hairs since it has not permitted established ones like IndiGo to import required aircraft for scheduled flights recently, arguing that the emphasis should now be on regional connectivity. It has also indicated its intention to control air capacity in the country.

The proposal to increase regional connectivity is welcome, but should not be done by arm twisting airlines which are already bearing a high cost burden due to irrational taxes on jet fuel.

by Sindhu Bhattacharya

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