UDAN to Make the Udan Costly, Flight Fares May Rise Airfares are set to climb with the government deciding to charge up to Rs 8,500 per flight on major routes to fund the regional air connectivity scheme. The imposed amount would be for an entire flight and the price of each ticket could take an upturn depending on the number of seats in that particular flight. Civil Aviation Secretary R N Choubey today said that the tax would be up to Rs 8,500 per flight based on the distance. The ambitious scheme, UDAN (Ude Desh ka Aam Naagrik), seeks to connect small cities by air as well as make flying more reasonable for the masses. To grant viability gap funding for the flights that run under the regional connectivity scheme, the Ministry would entail a levy on every departure on main air routes such as the national capital, Mumbai, Chennai, Hyderabad, Bengaluru and Kolkata. R N Choubey outlined the levy as- For 1,000 kilometre length of scheduled flight - Rs 7,500 per flight, For a 1,000 to 1,500 kilometre flight- Rs 8,000, and For flights above 1,500 kilometre - Rs 8,500 He also said that for UDAN, the government would be crafting the Regional Connectivity Fund (RCF). With the tariff, the government guesstimates to have Rs 400 crore for RCF. In addition to this, another 20 per cent funding will come from state governments. He said the amount is estimated to be approximately Rs 500 crore per year available in the kitty. The move would thrust airfares slightly higher as airlines are likely to pass on the burden to fliers. The funding is being granted since the fares of half of the seats operated in a specific flight under UDAN would be capped at Rs 2,500 for one-hour duration. This cap would be pertinent for distance of 476-500 kilometers. The limit of RCS airfare would differ from Rs 1,420 to Rs 3,500 for fixed-wing aircraft. For helicopters, half-an-hour ride under the scheme would cost Rs 2,500 and for over one- hour duration, the charge would be Rs 5,000. RCF is to be funded by the Centre and respective state government participating in UDAN. Upon the news, Indigo share price closed with the decline of almost 2%. Jet Airways share price tanked over 3%. UDAN: The regional aviation scheme Udan, which will be in maneuver for 10 years, aims at providing connectivity to unserved and underserved cities and towns by stimulating existing airstrips and airports. This would be attained by providing financial spur in the form of central and state government concessions, as well as viability gap funding for interested airlines to kick-off operations while making sure that passenger fares are kept affordable. The tariff for a one-hour journey of about 500km on a fixed wing aircraft or a 30-minute journey on a helicopter will be capped at Rs 2,500, with proportionate pricing for routes of different lengths and duration. To trim down the cost of operations, the centre will provide concessions in the form of reduced excise on VAT, service tax and litheness in code sharing at airports under the Regional Connectivity Scheme. State governments would have to reduce the VAT on ATF to 1% or less, besides providing security and fire services free of cost and electricity, water and other utilities at considerably concessional rates. Landing and parking charges and terminal navigation landing charges will not be imposed by the airport operator. An analyst said the regional aviation policy was very complex and may face rough weather as subsidy alone is not sufficient to keep small airlines flying. Steve Forte, New York-based analyst and former chief executive of Jet Airways said that why make it simple if it can be made complicated. It just does not add up. It seems the program, as outlined in the document, is full of good intentions but may have come out too short. Aircraft acquisition, pilots and cabin crew, training, maintenance, spare parts and import duties symbolizes a major burden for a potential operator, predominantly in view of the fact that subsidies will be removed after only three years as the government expects the new routes to become profitable after that period. Disclaimer The investment advice or guidance provided by way of recommendations, reports or other ways are solely the personal views of the research team. Users are advised to use the data for the purpose of information and rely on their own judgment while making investment decision. Dynamic Equities Pvt. Ltd - SEBI Investment Advisory Reg. No.: INA300002022 Disclosure Dynamic Equities Pvt. Ltd. is a member of NSE, BSE, MCX SX and a DP with NSDL & CDSL. It is also engaged in Investment Advisory Services and Portfolio Management Services. Dynamic Commodities Pvt. Ltd., associate company, is a member of MCX & NCDEX. We declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered. SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise letters or levied minor penalty on for certain operational deviations. Answers to the Best of our knowledge and belief of Dynamic/ its Associates/ Research Analyst: DYNAMIC/its Associates/ Research Analyst/ his Relative: Do not have any financial interest / any actual/beneficial ownership in the subject company. Do not have any other material conflict of interest at the time of publication of the research report Have not received any compensation from the subject company in the past twelve months Have not managed or co-managed public offering of securities for the subject company. Have not received any compensation for brokerage services or any products / services or any compensation or other benefits from the subject company, nor engaged in market making activity for the subject company Have not served as an officer, director or employee of the subject company Article Written by Tanaya Nath .