India's Connectivity Boost and Manufacturing Goals
The Indian government has approved ₹28,840 crore over the next decade to upgrade its regional air connectivity scheme, Udan. The plan aims to improve access to smaller towns by building 100 new airports and 200 helipads, supporting economic growth in tier-II and tier-III cities. Civil Aviation Minister Ram Mohan Naidu said the government will encourage major aerospace firms like Embraer and Leonardo to set up manufacturing lines in India. This initiative contrasts sharply with past efforts, where nearly half of the 649 routes launched under earlier Udan phases were eventually discontinued.
In market reactions, Embraer (ERJ) shares traded near $59.03 with a TTM P/E of 36.7x, suggesting investors anticipate future growth. Leonardo SpA (LDO) shares were around €58.04, with a TTM P/E of 29.69x. Embraer has a $31.6 billion order backlog, and Leonardo reported €23.8 billion in orders for 2025, offering a base for potential Indian manufacturing projects.
Local Production Hinges on Orders, Global Supply
A key part of the Udan scheme is boosting local manufacturing of regional aircraft. Embraer, with the Adani Group, is considering an assembly line for E175 regional jets in India, which would be the country's first commercial aircraft facility of its kind. However, Embraer's potential investment hinges on securing orders for at least 200 aircraft, directly tying India's manufacturing goals to future airline buying decisions. This is also affected by global aerospace supply chain issues, which have slowed production and increased delivery backlogs.
The regional aircraft market is expected to grow from $13.8 billion in 2025 to $21.2 billion by 2034. Embraer leads in regional jets, while ATR is strong in turboprops. Embraer's local assembly plans depend on securing these major orders in India. Competitors like ATR remain strong, and the regional jet market has seen more aircraft grounded due to pilot shortages and engine issues. Leonardo's involvement in helicopter production complements this, supported by its large order book.
Past Failures and Financial Weaknesses
Despite new government support, the Udan scheme faces inherited problems. A Comptroller and Auditor General report found only 7% to 10% of routes remained financially viable after subsidies ended. By February 2026, over 327 of 663 launched routes had been discontinued, and 15 of 95 revived airports stopped operating. The subsidy period has been extended from three to five years to help airlines reach profitability. However, switching funding from airfare levies to direct government spending increases the cost to taxpayers.
The Indian aviation sector also faces significant financial strain. Airlines reported net losses of ₹5,289.73 crore in FY2024-25, with further losses expected in FY2026. The sector is susceptible to rising fuel prices and currency drops, worsened by geopolitical tensions. While analysts expect reduced losses by FY2026-27, smaller airlines in this scheme still face considerable risks given the history of unproven long-term viability.
Outlook: Optimism Tempered by Risks
Analysts generally view Embraer and Leonardo positively. Wall Street rates Embraer (EMBJ) 'Bullish' with a $80.93 price target, and Leonardo SpA (LDO) has a consensus 'Buy' rating with a €67.10 target. The global regional aircraft market is expected to grow, driven by developing economies and the need for efficient transport. India's significant Udan investment and manufacturing aims depend on integrating these aircraft into the expanded air network. The longer subsidy period and direct government funding aim to lower airline risk. However, overall success relies on steady demand, airline financial stability, and Embraer securing major aircraft orders – elements that have historically shown volatility in the aviation sector.