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If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.[/bsu_quote] Reagan’s critique on government’s view of the economy can be applied to Indian aviation and the remote connectivity policy or route dispersal guidelines (often referred to as RDGs) implemented by the Ministry of Civil Aviation.
Route Dispersal Guidelines (RDGs): a brief overview
Formulated in 1994, the route dispersal guidelines are a part of a policy aimed at providing better connectivity to remote regions like the North East, Jammu & Kashmir, Andaman & Nicobar islands and Lakshadweep. In a relic of long-held beliefs of the government being all powerful, the policy was formulated to force airlines to deploy capacity to these regions rather than taking a modern approach and incentivising them to do so. In a classic example of the blunt tool called “government intelligence”, the connectivity intent of the RDGs has been lost, instead rendered the airlines’ networks unviable, and affecting overall profitability. Naturally, the worst affected of all Indian carriers is the play-toy of the government — Air India.
Key elements
The RDG policy classifies routes as Category (Cat) I, II, IIA or III. Category I initially comprised of 12 major routes between large metro cities which has now been expanded to a massive 30 routes!!; Cat II are routes to airports in remote regions; Cat IIA are routes within these regions (intra-regional); and Cat III are routes other than those in category I and Cat II and IIA.
To comply with the RDG policy airlines are mandated (read: forced) to deploy a pre-determined amount of capacity on certain routes. For instance, till recently 10% of total capacity on Cat I routes was to be deployed on Cat II routes. Thus if an airline flew Delhi-Mumbai five times a day with ~1.02mn ASKs (available seat kilometres), it would have to deploy ~102,000 ASKs on a Delhi–NorthEast or a Delhi–Jammu & Kashmir or Bangalore–Lakshwadeep or Chennai–Port Blair route. Similarly, one percent of capacity was to be deployed on Cat IIA thus another 10,200 ASKs would be deployed on routes like intra-north-east. The new policy has a list of 87 destinations called incentive destinations. These comprise of towns and cities ranging from Bilaspur to Belgaum and Shillong to Sholapur and the policy mandates that airlines fly six percent of capacity on trunk routes to these incentive destinations.
Network planning and RDGs
The route dispersal guidelines force airline network planners when evaluating and forecasting profitability on city pairs like Delhi–Bangalore, to simultaneously build two more cities into the network structure just to comply with this guideline. Interestingly, if one looks at a popular route of Delhi–Guwahati–Imphal it is an ideal one to meet compliance and indeed Indigo started with this route. However, looking at the current network structure of Air Asia, they have started out with a non-RDG route structure but how long will their honeymoon with the ministry last, before they too are forced to comply? Headed by bureaucrats, Air India is forced to listen to the government and fly several of these unviable routes and we tax-payers are forced to fund the national airline’s losses.
India has seen airlines largely adopt the one-airplane type fleet model which is in line with global practices and helps keep the overall cost base low. It makes very little financial sense to fly a narrow-body Code-C jet such as a Boeing 737 or an Airbus A320 on a route such as Guwahati–Dimapur or a Delhi–Pantnagar given the complete lack of demand. The other alternative is to induct smaller airplanes with lower capacity but that will then affect the airline’s business model.
While airline planners and strategists should be looking at yields, costs and network profitability, they find themselves crunching numbers just to ensure compliance with the RDG targets. In a desperate move, for a brief period, certain airlines resorted to purchasing ASKs to compliance with norms, but ministry pressures put a stop to this practice.
Remote connectivity
The intent of the RDGs was to increase connectivity to remote and/or under-served regions. Indeed given the multiplier effect aviation can have on economies, and the need to connect city pairs where road and rail infrastructure is inadequate or terrain makes it unviable, the policy intent is noble. Yet, as this is done in isolation, the demand for air services lags far behind the capacity deployed, essentially forcing airlines to fly unprofitable routes.
Due to the central nature of all aviation infrastructure in India, state and city agencies have no stake, no involvement and therefore no incentive in helping routes become feasible. A classic example is Mysore, which despite being a leading tourist destination in Karnataka, a major industrial and educational centre, well connected with Bangalore via hundreds of daily bus services from slow shuttles to ultra-luxury Volvos, multitudes of trains, and innumerable cars and taxis, still has an un-utilised airport which has cost the Indian tax-payer, not the citizens of Mysore, over Rs 1,500 crore. The minister of state for civil aviation who happens to be from Karnataka had to “persuade” SpiceJet to continue its thrice a week service to the city.
Why are airlines reluctant to fly to Mysore? First, the runway is too short to accommodate Code-C jets and this effectively limits the airport to Jet Airways and SpiceJet, the only two airlines flying turbo-props in India. Second, while there is a gleaming terminal, there is no instrument landing system so operations are limited to the daytime and in good weather. Third, there is no re-fuelling facility at the airport!!!!
Current revisions being considered in the policy include incentives in form of exemption from landing and parking charges, route navigation charges (RNFC), fuel throughput charges, and any other charges levied by AAI, allowing airlines to self handle ground operations at certain airports, computing actual deployment of capacity as a multiple (ranging from 1.5X to 4X) and other concessions and benefits. However, this is largely cosmetic. As one stakeholder recently commented, “the policy is like asking a company like Apple to produce 1000 iPhones for a city where the demand is at most for 20 iPhones and then saying that we would give you free electricity to produce these phones and count each phone sold equal to four.” Either way, it is a loss for the airlines.
Outlook
RDGs are a huge topic of debate and discussion in the airline community. Several argue that the policy is flawed and that the guidelines hamper the growth of the entire aviation industry. While revisions are being considered, a draft policy has been floated and comments have been invited after the fact. If the past is any indication, any sensible changes suggested will be overruled by the ministry claiming that they violate the intent of the policy. As such the RDGs are here to stay much to the detriment of Indian aviation.
Good analysis. Indian govt policy is rarely well thought out, even if sometimes it stems from a good idea.