Will hike in regional route levy make air ticket fares costly?

The Civil Aviation Ministry recently announced an upward revision of the levy charged on domestic carriers that was funding its flagship UDAN, the regional connectivity scheme(RCS). It comes into effect in two phases – from January 1, 2023, the levy will be ₹10,000 per departure; and then again, it is further increased to ₹15,000 from April 1 till April 30, 2027.

Right now, the levy to be paid by an aircraft is only ₹5,000, which was introduced in June 2017.

“The revision was due for some time. But plans were put on hold because of Covid and a slowdown in the sector. Now with new regional routes being planned, the levy is being reworked,” a Ministry official said.

Costlier tickets?

The move will, in effect, lead to an increase in ticket cost for users, said those in the know. Earlier, a ₹50 charge was included in the ticket costs, but if some officials of airlines are to be believed, then, this could now be ₹100 per ticket.

According to Satyendra Pandey, Managing Partner, Aviation Advisory, AT-TV, this addition coupled with other increases like airport charges, will price out a segment of the market. Large structural changes such as the cost of capital, constrained credit and ATF(Aviation Turbine Fuel) pricing, however, remain unresolved.

“The levy should not be looked at on a stand-alone basis. Rather, the funding of the scheme and the intent versus impact of the scheme requires a revisit,” he told businessline adding that, “While there are now post-facto rationalisations on why the levy was increased, the mechanism of increasing levies remains one-sided.”

Pandey said that airlines will now incorporate this into the cost of doing business – which effectively means the end consumer will get a higher price (pay more for tickets).

Arun Lohiya, Chief Operating Officer, CAD Ventures, thinks that this is a good step and the increase per ticket would be much lower as compared to a sharp revision in ticket prices that happens when private players increase charges like user development fees and so on.

“As the routes grow, the revenue should also increase to further increase the reach of the RCS scheme,” he said, adding that issues like fuel pricing and multiple levels of taxation have a far higher impact on airlines and the ticket price.

Self-funding scheme

The levy is towards the viability gap fund (VGF) for the participating carriers under the RCS. The RCS or UDAN is a self financing scheme and the VGF is shared between the Centre and the States concerned. Currently, 425 routes are operational and 575 routes are ‘on-track for implementation’ within the next five years.

Under the UDAN scheme, airlines will bid for identified air routes. The bidder seeking the lowest subsidy is allowed to operate flights on the selected route. The airline provides half the seats on each flight (minimum nine and maximum 40 seats) at the subsidised rate of ₹2,500, the remainder is compensated by the government (through VGF).

Viability of routes

Interestingly, the question over the viability of these routes continues. While most airlines — including the country’s largest player IndiGo — continue to be in losses, a report presented before the Parliamentary Standing Committee earlier this year said, only one out of four routes under the low-cost flying scheme has survived after completing the government’s subsidy period of three years.

Of the 94 RCS-UDAN routes that have completed the three-year tenure till 30.11.2021, only 22 routes are in operation, the report by the Ministry said.

Meanwhile, AT-TV’s Pandey said, whether or not the increase in levy will benefit regional operators remains debatable.

“UDAN is a supply driven scheme and does not address the core challenge of stable demand on regional routes. The narrative continues to shift while the core issue of viability remains,” he added.

Leave a Reply