In today’s Finshots, we explain why regional airlines in India have always had a tough gig.
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The Story
India has a new regional airline — Fly91.
And for its founder Manoj Chacko, it’s the start of a dream that has been almost a decade in the making.
Yup, for the past many years, Chacko had run from pillar to post trying to raise funds for his airline. He sent out over 400 pitch decks and met with over 200 investors. Yet, everyone gave him the cold shoulder.
Maybe it had something to do with Chacko being part of the Kingfisher Airlines’ founding team. So maybe no one wanted to fund a new venture run by a former top honcho of an airline that went bankrupt. Maybe it was partly because of the collapse of the storied Jet Airways brand. Or maybe it was simply because India has a graveyard filled with defunct carriers such as Air Sahara, Air Pegasus, Air Carnival, Air Costa, and even Go First.
So even though the country has seen a boom in air traffic with the number of domestic passengers doubling to over 15 crores in the past decade, Chacko struggled to raise the ₹200 crores he needed.
Until somehow things finally fell into place recently — after getting a ₹100 crore cheque from a PE firm called Convergent Finance a few years ago, Chacko finally managed to cobble together the rest from a bunch of around 40 investors. And got the green light from India’s aviation regulator.
On Monday, it operated its first flight from Goa to Bengaluru.
Not a bad first route to fly, eh?
But the question now is — can Fly91 succeed where others couldn’t?
Well, let’s try and break down a few reasons why other attempts have been unsuccessful and what might have potentially changed in the industry now.
For starters, despite attempts to increase the number of airports across the country, the growth drivers have been the big cities of Delhi, Mumbai, Bengaluru, Hyderabad, Kolkata, and Chennai. Around 60% of the domestic traffic originates from these cities. And that number hasn’t changed in over a decade.
This also means that when an airline attempts to fly routes between regional city pairs, it doesn’t turn out to be lucrative. It’s a loss-making proposition. That’s why, even despite special subsidies being provided by the government, 46% of the flights under the Regional Connectivity Scheme (RCS) have stopped.
Even the government-owned regional airline Alliance Air has been struggling. It is racking up losses of over ₹500 crores annually. And even the government subsidy isn’t making much of a difference. In fact, the government is having to pump more money into it.
So, why will Fly91 succeed here?
We don’t know. But one idea they seem to have is to operate on a code-sharing agreement. Tell the bigger airlines that Fly91 isn’t looking to compete but to collaborate — by tying up with Fly91, the bigger carriers can provide last-mile connectivity to smaller towns on a single ticket. It could be quite convenient for a flyer.
The other factor that could be a tailwind for Fly91 is the Aviation Turbine Fuel (ATF).
The fuel accounts for around 45% of an airline’s operating cost. And since this is linked to global oil prices, it can be quite volatile. But the problem is that regional airlines typically operate on routes where the disposable income of customers might be a bit lower than the metros. They may not be willing to pay big money on airfare and they’re more price sensitive. So airlines can’t pass along a higher ATF cost easily either.
Apart from that, Indian states also taxed ATF quite heavily. Just like how your everyday petrol and diesel aren’t subsumed under GST and it’s left to the states, ATF is treated in the same way. The states get to choose how much value-added tax (VAT) to add.
And for many years, the VAT on ATF hovered around the 30% mark.
But in the past couple of years, there seems to be some hope. The government has tried to nudge states into cutting back on ATF taxes with the argument that if taxes were low, more airlines would fly to their state for refuelling. And that higher demand could potentially offset any fall in taxes. For instance, Srinagar witnessed a rise of 30% in earnings and Kerala and Andhra Pradesh improved connectivity by 15–20%.
And currently, the government says that 31 states and union territories have since slashed the VAT to even as low as 1–5%.
That means these lower rates could be a big boost for a regional airline that is looking to make a mark now.
But things could get even better.
Remember how the government has mandated blending ethanol into our petrol? Yeah, since we get ethanol by processing sugarcane and even rotten potatoes, we’ve got plenty of it at home. And if we can mix 20% ethanol with 80% petrol, we can reduce our import costs, save money, and pass along the savings to customers.
Anyway, the government has been looking to include 1% of sustainable fuel in ATF as well. One that can be made from domestically available feedstock. And if that happens soon, it could help deal with the price vagaries a little bit too. And make things a tad bit cheaper for the airline companies.
But is all this going to be enough for Fly91?
We’ll have to wait and see.
Until then…
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