Revamping UDAN: Five-Year Subsidy Extension for Airlines

The UDAN scheme sees a major shift with five-year subsidies and a six-fold funding increase to revitalize underused routes.

Gopi

•March 26, 2026•6 mins read

Revamped UDAN: Expanded funding, longer subsidies, stronger regional connectivity

Introduction

Air connectivity is no longer a luxury — it is an infrastructure imperative for equitable regional development. India, with the world's third-largest aviation market, still has vast Tier-2 and Tier-3 cities underserved by air travel. Launched in 2017, the UDAN (Ude Desh ka Aam Naagrik) scheme aimed to democratise aviation — yet a CAG report found only 7–10% of routes remained viable beyond the subsidy period, and 327 of 663 routes launched have since been discontinued. The Union Cabinet's approval of a ₹28,840 crore revamped UDAN scheme — a nearly six-fold increase — marks a significant policy correction, shifting from infrastructure-first to a sustained operations-and-connectivity model.

Indicator	Value
Original UDAN outlay (2017)	₹4,500 crore
Revised outlay (2026)	₹28,840 crore
Routes launched since 2017	663
Routes discontinued	327 (49%)
Airports revived under UDAN	95
Airports fallen into disuse	15
Route viability beyond subsidy (CAG)	Only 7–10%
Subsidy period extended	3 years → 5 years

Background & Context

What is UDAN? UDAN — Ude Desh ka Aam Naagrik (Let the common citizen fly) — is India's Regional Connectivity Scheme (RCS) launched in 2017 under the National Civil Aviation Policy. Its core objectives:

Revive underserved and unserved airports
Make air travel affordable on regional routes
Stimulate economic activity in Tier-2 and Tier-3 cities

The Bidding Mechanism Airlines compete for routes connecting smaller cities. The winning airline receives Viability Gap Funding (VGF) — a subsidy equivalent to 50% of seating capacity. In return, airlines must sell 50% of seats at a flat rate of ₹2,500 per flight hour — making regional air travel affordable.

The Subsidy Funding Shift Previously, subsidies were funded through a Regional Connectivity Scheme (RCS) levy embedded in airfares on non-UDAN routes — effectively taxing passengers on profitable routes to subsidise unprofitable ones. The revised scheme shifts this to direct exchequer funding — a more transparent and sustainable model.

Key Changes in Revamped UDAN (2026)

Parameter	Original UDAN	Revamped UDAN 2026
Total outlay	₹4,500 crore	₹28,840 crore
Subsidy period	3 years	5 years
Subsidy source	RCS levy on airfares	Direct exchequer funding
Airport focus	Revive unused airports	Redevelopment + O&M support
Airports targeted	95 revived	100 new redevelopments
Helipads proposed	—	200 helipads (₹15 cr each)
Scope	Infrastructure only	Infrastructure + Operations + Maintenance

Fund Allocation Breakdown

Component	Outlay
Airline route subsidies (10 years)	₹10,043 crore
Airport redevelopment (100 airports, 8 years)	₹12,159 crore
Airport operations & maintenance (441 aerodromes)	₹2,577 crore
Helipad development (200 helipads)	₹3,661 crore
Aircraft procurement (HAL Dhruv, Dornier)	Remaining allocation

Why the Original UDAN Underperformed

1. Route Viability Problem Only 7–10% of routes remained commercially viable after the subsidy window ended. Airlines exited routes the moment subsidies lapsed — revealing that demand on many routes was insufficient to sustain commercial operations independently.

2. Scale of Discontinuation

327 of 663 routes (49%) discontinued
15 of 95 airports revived fell back into disuse
This represents significant sunk infrastructure costs with limited sustained economic benefit

3. Structural Design Flaws

Three-year subsidy window was too short for route maturation and demand development
RCS levy funding was opaque and regressive — burdening passengers on profitable routes
No sustained support for airport operations and maintenance post-revival
Insufficient last-mile connectivity to airports in remote areas

4. Demand-Side Gaps Regional air travel demand is constrained by:

Low per-capita income in Tier-2/3 cities
Poor surface connectivity to airports
Lack of awareness and digital ticketing penetration

Policy Significance of Key Changes

1. Extended Subsidy Period (3 → 5 years) Gives routes longer runway for demand to mature organically before commercial viability is tested — addressing the primary cause of mass route discontinuation.

2. Exchequer Funding over RCS Levy

More transparent fiscal accounting
Removes regressive cross-subsidisation from air passengers
Subjects UDAN spending to parliamentary scrutiny — improving accountability

3. Operations & Maintenance Support Capped at ₹3.06 crore per airport — addresses the post-revival collapse of low-traffic airports by funding ongoing operational costs, not just one-time infrastructure.

4. Helipad Development (200 helipads) Critical for last-mile connectivity in:

North-East India
Himalayan states (Uttarakhand, Himachal, J&K)
Island territories (Andaman, Lakshadweep)
Remote tribal areas

5. HAL Aircraft Procurement Procuring HAL Dhruv helicopters for Pawan Hans and HAL Dornier aircraft for Alliance Air supports domestic aerospace manufacturing — aligning UDAN with Aatmanirbhar Bharat and the defence-civil aviation convergence agenda.

Broader Implications

Economic Development

Regional airports stimulate local tourism, trade, and investment
Reduced travel time connects producers in smaller cities to larger markets
Supports India's target of 220 operational airports by 2025 under the National Civil Aviation Policy

Equity & Inclusion

Democratises air travel beyond metro cities
Enables faster medical evacuation and disaster response in remote areas
Connects tribal and border areas — with security and development co-benefits

Federal Dimension States share the financial burden of UDAN — state governments contribute to VGF and provide land, waived taxes, and reduced VAT on aviation turbine fuel. The Karnataka Minister's concern about Tier-2 airport viability post-UDAN reflects the federal fiscal stress when central subsidies lapse.

Challenges Ahead

Demand sustainability: Extended subsidies delay but do not resolve the fundamental demand viability question on thin routes
Airline capacity: Indian carriers face aircraft shortage and high operating costs — limiting willingness to operate marginal routes
Airport O&M: ₹3.06 crore cap per airport may be insufficient for larger regional airports with higher maintenance costs
Last-mile connectivity: Without surface transport to airports, air connectivity remains inaccessible to target populations
Fiscal burden: ₹28,840 crore over 10 years is significant — requires robust monitoring to prevent fund diversion or underutilisation

Way Forward

Demand-side interventions: Promote regional tourism packages, corporate travel incentives, and digital ticketing awareness
Surface connectivity: Integrate UDAN airports with highway and rail networks under PM Gati Shakti
Route rationalisation: CAG-informed analysis to identify genuinely viable routes versus permanently unviable ones — avoid subsidising the latter indefinitely
State partnership: Stronger state-level accountability for airport upkeep and local demand generation
Private sector: Encourage PPP models for airport O&M at commercially marginal airports
Monitoring framework: Real-time route performance dashboard — discontinue non-performing routes early and redeploy subsidies

Conclusion

The revamped UDAN scheme represents an honest policy reckoning — acknowledging that infrastructure alone cannot sustain regional aviation without continuous operational support and longer demand incubation periods. The six-fold funding increase and shift to exchequer-based subsidies reflect fiscal seriousness, but the deeper challenge remains: creating genuine, self-sustaining air travel demand in India's smaller cities. UDAN's true measure of success is not the number of routes launched or airports revived — it is the percentage that remain operational five years after subsidies end. Until that metric improves dramatically from the current 7–10%, UDAN will remain a connectivity aspiration rather than a connectivity achievement.

Quick Q&A

Everything you need to know

The UDAN scheme is a flagship regional connectivity initiative launched in 2017 to make air travel affordable and accessible, especially for people in Tier-2 and Tier-3 cities. It aims to enhance regional connectivity by reviving unserved and underserved airports and providing subsidised air travel.

Key features of the revamped UDAN scheme (2026):

Increased outlay: Expanded to ₹28,840 crore, nearly six times the original allocation
Extended subsidy period: Increased from 3 years to 5 years for selected routes
Shift in funding: Subsidies now funded directly from the exchequer instead of airfare levies
Infrastructure push: Development of 100 airports, 200 helipads, and support for aerodromes
Operational support: Financial aid for maintenance and operations of low-traffic airports

The scheme continues its bidding mechanism, where airlines compete for routes and receive viability gap funding (VGF) while offering affordable fares capped at ₹2,500 per hour.

Significance: The revamped scheme reflects a shift from mere infrastructure creation to ensuring sustainability and operational viability. It aims to address earlier shortcomings by supporting airlines and airports over a longer duration, thereby strengthening India's regional aviation ecosystem.

The need to revamp the UDAN scheme arose due to significant challenges in ensuring the long-term viability of regional air routes. While the scheme successfully expanded connectivity, it struggled with sustainability issues.

Key reasons for revamp:

Low route viability: Only 7%–10% of routes remained operational after subsidy withdrawal, as per CAG findings
High discontinuation rate: 327 out of 663 routes were discontinued by 2026
Underutilised infrastructure: 15 out of 95 revived airports fell into disuse
Short subsidy duration: The 3-year cap was insufficient for routes to become self-sustaining

For example, many routes connecting remote regions faced low passenger demand, making them commercially unviable without continued support.

Policy implications: The earlier model relied heavily on market forces after initial support, which proved unrealistic in low-demand regions. The shift to longer subsidies and direct funding indicates recognition of the need for state intervention in public infrastructure sectors.

Conclusion: The revamp is a corrective measure aimed at addressing structural weaknesses, ensuring sustained connectivity, and preventing wastage of public investment in infrastructure.

The viability gap funding (VGF) mechanism is central to the UDAN scheme, designed to make regional air routes financially viable for airlines while keeping fares affordable for passengers.

Working mechanism:

Airlines bid for specific regional routes under a competitive process
The government provides subsidies (VGF) to selected airlines to cover operational losses
In return, airlines must cap fares at ₹2,500 per hour of flight for 50% of seats
The remaining seats can be sold at market rates

Initially, VGF was funded through a Regional Connectivity Scheme (RCS) levy on passengers flying non-UDAN routes. The revamped scheme shifts this burden to direct government funding.

Example: A flight connecting a remote town to a metro city may not attract enough passengers to be profitable. VGF compensates airlines for this gap, ensuring continued operations.

Impact: The mechanism has enabled connectivity to remote and underserved areas, fostering regional development. However, its effectiveness depends on demand generation and cost management.

Conclusion: VGF is a crucial policy tool that balances affordability and commercial viability, though it requires continuous monitoring to avoid inefficiencies and fiscal strain.

The low sustainability of UDAN routes is primarily due to structural and market-related challenges inherent in regional aviation. Despite subsidies, many routes fail to achieve long-term viability.

Key reasons:

Low passenger demand: Smaller cities often lack sufficient traffic
High operational costs: Fuel, maintenance, and logistics costs remain high
Limited infrastructure: Many airports lack modern facilities
Short subsidy duration: Airlines could not stabilize operations within 3 years

For instance, routes connecting remote or economically weaker regions may not generate enough revenue even with subsidised fares.

Broader challenges:

Seasonal demand fluctuations
Poor last-mile connectivity to airports
Competition from rail and road transport

Implications: These challenges highlight the difficulty of applying a purely market-driven model to public infrastructure. Regional aviation often requires sustained policy support.

Conclusion: Addressing these issues requires a holistic approach, including infrastructure development, demand stimulation, and integrated transport planning, beyond just financial subsidies.

The revamped UDAN scheme emphasizes improving last-mile connectivity, particularly in remote and geographically challenging regions such as the Northeast, हिमालयी states, and island territories.

Key initiatives:

Development of 200 helipads at a cost of ₹3,661 crore
Support for heliports and water aerodromes
Procurement of helicopters like HAL Dhruv for regional operations

For example, in hilly regions like Arunachal Pradesh, where road connectivity is limited, helicopters can provide quick and reliable transport for passengers, medical emergencies, and essential goods.

Case study: In the Northeast, UDAN flights and helicopter services have already reduced travel time significantly, improving access to healthcare, education, and markets.

Impact: Enhanced connectivity can boost tourism, trade, and local economies while integrating remote regions with the national mainstream.

Conclusion: By focusing on multimodal connectivity, the revamped scheme addresses geographical barriers and ensures inclusive development, making air travel a viable option even in inaccessible areas.

The shift from an airfare-based levy to direct government funding represents a significant policy change in the UDAN scheme. Earlier, subsidies were funded through a levy on passengers flying non-UDAN routes, distributing the cost across users.

Advantages of direct funding:

Transparency: Clear allocation from the budget improves accountability
Reduced burden on passengers: Lowers ticket prices on non-UDAN routes
Stability: Ensures consistent funding irrespective of passenger traffic

Limitations:

Fiscal burden: Increased pressure on government finances
Risk of inefficiency: Subsidy dependence may discourage cost optimization
Opportunity cost: Funds could be used for other sectors

For example, the ₹10,043 crore allocated for subsidies reflects a significant commitment of public resources.

Evaluation: While direct funding improves equity and predictability, it requires strong monitoring mechanisms to ensure effective utilization.

Conclusion: The shift is a pragmatic step to sustain the scheme, but long-term success depends on balancing fiscal responsibility with developmental objectives.

The UDAN scheme serves as an important case study of government intervention in infrastructure development aimed at promoting inclusive growth. It highlights both the potential and challenges of state-led initiatives.

Achievements:

Expansion of regional connectivity to underserved areas
Revival of unused airports
Increased accessibility of air travel for common citizens

However, the scheme also faced significant challenges, such as low route viability and infrastructure underutilization.

Policy lessons:

Need for long-term support: Infrastructure projects require sustained funding
Importance of demand assessment: Projects must align with market realities
Integrated planning: Coordination with other transport modes is essential

Example: The discontinuation of nearly half the routes highlights gaps in initial planning and execution.

Conclusion: UDAN demonstrates that while public policy can bridge market gaps, its success depends on adaptive design, continuous evaluation, and alignment with broader economic and social goals.