UDAN delayed: Stressed health of airline operators to impact existing route operations, future bidding

The government’s UDAN (Ude Desh Ka Aam Naagrik) scheme aimed at enhancing regional air connectivity through fiscal support and infrastructure development, seems to have hit an air pocket.

As of May 31, 2021, only 47 per cent of the total routes and 39 per cent of the airports (unserved and underserved) have been operationalised under UDAN. The number of new RCS routes which started operations increased at a healthy pace and stood at 102 and 120 routes in FY2019 and FY2020 respectively, have declined to 77 new routes in FY2021 due to the Covid-19 pandemic.

During FY2018 – FY2021, a total of Rs 3,350 crores have been incurred by the Central Government towards the UDAN scheme and the budgeted outlay for FY2022 is Rs 1,130 crores.

Giving more insights, Shubham Jain, SVP & Group Head, Corporate Ratings, ICRA, said that the slow progress of UDAN implementation is attributable to delayed upgradation of infrastructure and readiness of airports, due to lack of adequate right of way (including insufficient runway lengths) at some of the RCS airports and delays in securing necessary regulatory approvals.

“Low demand on few routes awarded, adverse and unpredictable weather conditions leads to inconsistent operations and have also resulted in closure of operations by some airlines in a few cases. The second wave of the pandemic, which started from mid of March 2021 would further impact the UDAN scheme going forward with aviation being one of the worst-hit infrastructure sectors,” he said.

The Civil Aviation Ministry has set a target of operationalising as many as 100 unserved and underserved airports and starting at least 1,000 RCS routes by 2024 (of this, 52 unserved and underserved airports and 357 routes are operationalised as on May 31, 2021). To improvise the RCS network and achieve its target of developing 100 RCS airports by 2024, the AAI has launched UDAN 4.1 as a special bidding round under UDAN 4.0 in March 2021 to award 392 routes.

“The award and implementation of UDAN 4.1 may get delayed significantly due to the second wave of the pandemic in India and its effect on the Indian aviation industry. ICRA expects the target of operationalising 100 airports under UDAN by 2026, with a delay of two years from revised schedule (of 2024 from earlier 2019). The weak credit profile of domestic airlines is expected to have an impact on the existing routes under UDAN scheme, particularly for smaller airlines given the stretched liquidity position, low utilisation in some of the routes and will also impact future bidding of routes under the scheme,” Jain added.

There has been a significant impact on the financial health of airline operators due to the Covid-19 pandemic. According to estimates by the ratings agency, Indian airlines will report a significant net loss of Rs 21,000 crore in FY21 and an estimated net loss of Rs 12,700 crore in FY22, with the industry debt level increasing to around Rs 50,000 crore in FY22.

While some airlines have sufficient liquidity and/or financial support from a strong parentage, which will help them sustain over the near term, there are other airlines which are already in financial stress. Furthermore, even for the former, credit metrics and liquidity profile have deteriorated. Until the cash inflows improve, the airlines will require funding support to meet their expenses.