How a crowd-funded airline can be the key to transforming regional connectivity

Fly91, the country’s newest regional airline, has an interesting history. One of its co-founders tried at least 200 investors before he ran into some luck after a PE Fund, Convergent Finance, wrote him a cheque for Rs 100 crore.

Once that fell into place, the co-founder, Manoj Chacko, who earlier worked as senior vice president with the now-defunct airline Kingfisher Airlines, raised another Rs 100 crore from about 40 investors.

What does the future hold?

But what does the future hold for the airline? Rather, what does the future hold for regional airlines in a country where the number of grounded airlines is far higher than the active ones?

While this is also the first time a domestic airline has been crowd-funded, which is quite laudable, how long will the Rs 200 crore funding last for Fly91? In an interview with a news agency soon after launching the airline, Chacko, who along with the former Fairfax India head, Harsh Raghavan, founded the airline, said the Government’s Viability Gap Funding (VGF) for the sectors that it operates in would get them around Rs 200 crore on an annualised basis.

The airline has received approval for Agatti, Jalgaon, and Sindhudurg from its base in Goa under the Government’s regional connectivity scheme for which it will receive viability gap funding (or subsidy) in exchange for which it has to offer half of its seating capacity at a discounted fare of Rs 2,500 per hour of flight. Fly91 has won 20 sectors under RCS, but Chacko pointed out that the airline’s business plan is robust enough to do well on its own.

VGF

Viability Gap Funding (VGF) is a grant provided to infrastructure projects that are economically justified but fall short of financial viability due to factors like long gestation periods and insufficient revenue streams. The VGF scheme aims to make such projects financially viable by offering a capital subsidy to attract private sector participation in Public-Private Partnership (PPP) projects that would otherwise be unfeasible.

Under the VGF scheme, the amount of VGF is determined as a capital grant at the project construction stage, equivalent to the lowest bid for a capital subsidy, capped at a maximum of 20 percent of the total project cost. This grant is disbursed to the private sector developer after they have contributed the required equity for the project.

The VGF scheme, administered by the Ministry of Finance, is designed to mobilise private investment in infrastructure by providing financial support to projects with social or commercial importance but facing financing challenges. The maximum Viability Gap Funding (VGF) that can be provided to a project is 30 percent of the Total Project Cost (TPC).

Policy needed

While regional airlines struggle to sustain themselves, IndiGo, the country’s largest pan-India airline with an overwhelming 62 percent market share, has decided to open another frontier to develop its regional network. It recently announced that it plans to order 100 smaller aircraft to develop its regional network. This is a huge boost for the airline industry and regional air connectivity, and at the same time, it highlights the fact that the government needs to put together a policy, especially for the regional airlines, where all the players have a level playing field.

The government can encourage national airlines to fly metro and tier 2 routers and tie up with smaller regional airlines as a feeder service to boost regional connectivity for seamless travel for passengers.

Apart from this, the government should roll out more incentives than what it does through its UDAAN scheme. At present, the scheme offers UDAAN (Ude Desh ka Aam Naagrik), launched by the Government of India, which aims to make air travel affordable and widespread, particularly in tier-2 and tier-3 cities. By capping airfares at Rs 2,500 for a one-hour flight, it enhances regional connectivity to underserved and unserved airports.

The scheme provides financial incentives to airlines, such as viability gap funding, and encourages infrastructure development with state support, including reduced VAT on aviation turbine fuel. UDAAN seeks to boost tourism, create jobs, and stimulate economic growth by bridging the urban-rural divide and making air travel more inclusive.

But more needs to be done to grow the number of players in the regional airline sector. These could include -

Concessions on Landing and Parking Charges, Terminal Navigation Landing Charges (TNLC), and Route Navigation and Facilitation Charges (RNFC): Discounted rates for these charges can significantly reduce operational costs for regional airlines.

Reduced Excise Duty on Aviation Turbine Fuel (ATF): A lower excise duty rate, such as the 2 percent rate proposed for the first three years, can help reduce fuel costs, which are a significant expense for airlines.

Lower VAT on ATF: State Governments can lower VAT to 1 percent or less on ATF at UDAN airports within their jurisdiction for a decade, further reducing fuel costs.

Viability Gap Funding (VGF): The Central Government, State Governments, and airport operators can contribute to the VGF to meet the gap between the cost of operations and expected revenues on regional routes.

Right to Self-Handle Ground Operations: Allowing regional airlines to self-handle ground operations can reduce costs associated with outsourcing these services.

Code-Sharing Arrangements: Permitting regional airlines to enter code-sharing arrangements with domestic and international airlines can increase their passenger base and revenue.

Land Allocation and Infrastructure Support: Providing land free of cost for airport development and supplying security and fire services can reduce the financial burden on regional airlines.

Discounted Utilities: Offering utilities at heavily discounted rates can further reduce operational costs for regional airlines.

As Fly91 and other regional airlines navigate these turbulent skies, the combined efforts of government support and innovative business strategies will be key to their survival and growth in an increasingly competitive sector.