UDAN international: Does the cost justify the returns with India’s new draft scheme?

  • The Indian government has proposed a draft scheme called ‘UDAN international’ to encourage international air travel.
  • The UDAN international scheme, if implemented properly, with serve towards India’s ambition of becoming the world’s third largest aviation market by 2020.
  • That being said, the subsidy burden may be excessive with crude oil prices set to increase in the near future due to the US sanction on Iran.
After the success of the Regional Connectivity Scheme (RCS), or UDAN, encouraging air travel in India, the government is now mulling over encouraging tourism through international air routes using the same model. The draft scheme document for ‘UDAN international’ highlights how state governments can offer subsidies to domestic airline carriers over a period of three years.

The scheme’s metric for measurement is the goal of reaching 20 crore in international ticketing by 2027. Stakeholders and feedback on the draft is open till September 4.

Pros and cons of implementing UDAAN international

When the original UDAN scheme rolled out, the aim was was to encourage airlines to operate out of the 398 ‘unserved’ airports in the country. These were airports that hosted no commercial flights whatsoever.

The goal of the subsidy was to incentivise airlines that didn’t find it lucrative to operate out of small cities. Hence, even through UDAN international, the tourism sector in these cities could receive an impetus through faster air connectivity. That, in turn, would attract more infrastructure and investment.

Subsidised airline tickets would also allow smaller regional airlines to compete on a level playing field against bigger airline carriers.

The issue lies in the fact that, at the end of the day, subsidies are a burden on the government. Coupled with the fact that global oil prices will probably increase due to the strain on the global supply of crude oil as a result of the Iran sanctions, the burden starts to get especially heavy. Not to mention that Iran is one of India’s biggest suppliers of crude oil.

Second, one of the negative externalities of the RCS was that when there’s more traffic, there’s a need for more security. The boom in demand may be good for business, but if your own security force threatens to leave because they haven’t been paid, it’s a problem.

That being said, it’s the same boom in demand that will help India attain its goal of becoming the world’s third largest aviation market by 2020.

How does it work?

There are two parts to the process. The first part is where each state will identity the international routes that they need subsided, for which the Airports Authority of India (AAI) will determine the subsidy amount.

And, the second part shifts the airline carriers where domestic airlines will bid on the percentage of flight capacity for which they need subsidies from the government for each route.

At the end of the day, the airline that has the lowest quotes for a particular route, will get the subsidy for that passage.

The financial subsidy will only be given out as per the number of seats left unsold, whatever the overall subsidy amount may be.

While the AAI will be the nodal agency implementing the scheme, the subsidies will be distributed through an International Air Connectivity Fund (IACF) which will be set up using the contributions from different state governments.

Developing these regional routes, in the long-term, feeds into major routes that brings growth to the aviation sector. The states of Assam and Andhra Pradesh have already proposed eight routes for the UDAN international scheme, with the former having announced Rs 100 crore as viability gap funding to promote international travel from the state.

The key difference between RCS and UDAN international scheme is that there’s no capping of prices. That basically means that consumer benefits where subsidised prices increase the pool of demand to include the budget-sensitive middle class citizens, won’t come into the picture.

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