Hinterland turns lucrative for domestic airlines

With the near-saturation on the metro routes, domestic airlines have started looking at expanding on the regional sector to propel growth and profits, along with complying with the government's route dispersal guidelines (RDG) and earn credits under the proposed domestic flying credit (DFC) rule for flying abroad.

A senior airline executive, who did not want to be named, said the economics of flying on regional destinations has started to make sense with the revenues earned on them easily covering the operational costs.

"Many of the airports in some of these remote places are offering better rates and even the jet fuel taxes are lower. Most airlines operating on these routes use smaller aircraft that weigh under 40 tonne and so taxes on aviation turbine fuel (ATF) are lower at 4%. All these incentives keep the cost low and so they have to earn lower revenues to make profit," he said.

Take for instance, on the Delhi-Bagdogra route, which is slotted as category II, airlines pay zero tax on jet fuel at the Bagdogra airport. This is a huge saving for them and, therefore, they are easily able to recover their costs even at an average load factor of 65%-75%.

State-owned Air India's (AI) April 2014-January 2015 data shows that it was cash surplus by around 47% over variable cost on the Delhi-Bagdogra route. Variable cost includes airport charges, crew and jet fuel expenses made by an airline when it operates a flight.

AI operates two daily flights from Delhi to Bagdogra. The only domestic airline that has consistently been in the green – IndiGo – has 28 weekly flights to this Northeastern town from Bangalore, Mumbai, Delhi, Kolkata and Guwhati. The recently launched full-service airline Vistara is also tapping this sector even before metro sectors like Bangalore, Chennai and Hyderabad.

On Thursday, the Tata-Singapore airline announced daily flights on Delhi-Guwhati-Bagdogra route.

Ashwin Thomas, director of Air Pegasus – regional airline based in Bangalore – says the operational cost work in favour of flying to small airports.

According to him, due to the tonnage of the aircraft Air Pegasus operates – the ATR-72-500 that weigh less than 40 tonne – the airline does not pay landing and parking charges at the Bangalore airport, which is its hub.

Air Pegasus will start flying to Thiruvananthapuram and Hubli from April 12 for which it will begin booking from today.

"In South, there is only 4% connectivity to regional airports. There is a huge potential that can be tapped on the Tier 2 and 3 cities," he said.

Thomas said his airline would look to scale up its daily four flights to 16 flights in a month to add cities like Calicut, Madurai and others on the two ATR-72-500s that it will operate.

Before Air Pegasus, there have been other regional carriers like the Chennai-based Paramount Air and New Delhi's MDLR that could not sustain their business due to high cost and low demand on the regional sector.

However, an aviation analyst said the current environment was more favourable for regional market because of lower ATF prices and robust growth in the air travel demand.

"Since June last year, the air passenger traffic has been growing over 10% month after month. Even the jet fuel prices have been ruling low and with incentives like lower airport charges for low tonnage aircraft, it would not be difficult for airlines to tap these regional market despite the current low base of air travellers," he said.

According to him, the current route dispersal guideline that makes it mandatory for airlines flying on metro routes to operate flights to remote airports is also pushing growth.

The proposed norms for international flying, which mandates logging 300 domestic flying credits (DFCs) to start operating foreign flights to destinations of over six hours, will also see traffic to regional airports swell.

Vistara, for example, would earn a credit of three times of its revenue passenger kilometre (RPKM) for operating flight on Delhi-Guwhati-Bagdogra route once the proposed DFC norm replaces the current 5/20 rule that allows only airlines with five-year experience and 20 aircraft to fly abroad.