Whalesbook
India's modified UDAN 2.0 scheme has been approved, committing Rs 28,840 crore to expand regional air connectivity and boost domestic aircraft manufacturing. The program aims to develop new airports and helipads, support airline operations, and build on the foundational goals of its predecessor. This infrastructure push, alongside a strategic focus on indigenous aircraft procurement, is designed to stimulate economic activity in Tier-2 and Tier-3 cities and improve access to remote areas. However, the initiative faces economic complexities and execution challenges that have marked the history of regional air transport in India.
Infrastructure and Manufacturing Goals
The UDAN 2.0 scheme allocates Rs 12,159 crore for the development of 100 new airports via a challenge mode, alongside Rs 3,661 crore for constructing 200 modern helipads, targeting hilly, North-Eastern, island, and aspirational regions. This infrastructure expansion is complemented by Rs 400 crore designated for the acquisition of domestically manufactured aircraft, aligning with the 'Atmanirbhar Bharat' initiative and specific plans for HAL Dhruv helicopters and HAL Dornier aircraft. A dedicated Special Purpose Vehicle (SPV) is also being established to bolster the domestic aviation manufacturing ecosystem, signaling a strategic push beyond service provision into production capabilities, involving entities like Hindustan Aeronautics Limited (HAL). The government anticipates this will strengthen India's aviation ecosystem and contribute to the Viksit Bharat 2047 vision.
Funding and Viability Challenges
Despite the significant capital infusion and infrastructure development plans, the long-term financial viability of regional air routes remains a critical concern. To sustain operations, the Centre will provide 80-90% Viability Gap Funding (VGF) over five years, with Rs 10,043 crore budgeted for this purpose. Additionally, Rs 2,577 crore is allocated for three years of Operations and Maintenance (O&M) support for RCS airports. However, historical data from the Comptroller and Auditor General (CAG) reveals significant challenges. Only 52% of awarded UDAN routes commenced operations under earlier phases, and just 7% sustained operations beyond the initial three-year concession period. Thin demand, often averaging only 30-50 daily passengers on tier-II and tier-III routes, coupled with high operational costs, has led many regional carriers to struggle or cease operations. Alliance Air, for instance, reported a substantial loss of Rs 691.12 crore in FY25.
Market Dominance and Execution Issues
The Indian aviation sector, while experiencing robust growth in passenger numbers, remains a challenging market for profitability, particularly for regional players. IndiGo stands as an anomaly, consistently profitable while the rest of the industry, including major carriers like Air India, incurred significant losses in FY25, totaling over Rs 5,289 crore collectively. Regional airlines face intense competition from dominant carriers like IndiGo and the Air India group, which control over 90% of the domestic market share, leaving little room for smaller operators. Furthermore, the reliance on subsidies through VGF raises questions about long-term sustainability, as routes often become unviable once concessions expire. The previous iteration of UDAN saw delays in airport upgrades and VGF disbursal. While UDAN 2.0 aims to extend VGF and potentially increase agreement periods, the historical pattern suggests that the scheme may continue to provide 'subsidised symbolism' rather than durable market development. Infrastructure development, while crucial, has also been slower than planned, with land acquisition and state clearances posing significant hurdles for heliport rollout.
Future Outlook
As India solidifies its position as the world's third-largest domestic aviation market, the success of UDAN 2.0 will depend on its ability to overcome these persistent structural issues. While the scheme aims to boost domestic aircraft manufacturing, including the Saras Mk2 and potential collaborations with companies like Embraer, the economics of regional air travel—marked by volatile demand and high operating costs—require careful planning and sustainable support. Analysts project that the overall aviation industry's net losses could shrink by FY27. However, the path for regional carriers remains difficult, highlighting the need for improved regulatory efficiency and financial support beyond government subsidies to ensure lasting connectivity.