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To make India truly affordable for travellers, tackle airport monopolies

Mini

The airports argue that since airport development requires substantial investment and involves long gestation periods, a monopoly is the only way for airports to ensure a return on capital. Is it true?

To make India truly affordable for travellers, tackle airport monopolies
For Indian airlines, the current commercial fleet of 500+ aircraft is likely to double within the next seven to 10 years. And this fleet requires adequate airport capacity – for developing networks, for parking the aircraft and for flying the aircraft. As of the latest count, there are 137 operational airports across the country and more are being developed. And within these, metro airports continue to be key to aviation traffic with about 61 percent of the domestic traffic and about 73 percent of international traffic still originating from the six metro cities. All of these airports operate as monopolies – which has consequential impacts on affordability and access.
Current model ensures monopolies
The current model of airport development is based on ensuring airport monopolies. The airports argue that since airport development requires substantial investment and involves long gestation periods, a monopoly is the only way for airports to ensure a return on capital. Thus the rules such as “right of first refusal” which are in direct contravention of the stated policy goal of driving affordability and access.
In cities where airports should have complimented existing airports, operators insisted on water-tight contracts that effectively shut down or ban use of the older airports. Case in point: Bengaluru, Hyderabad and Cochin. A similar fight will likely play out in Goa once the Mopa airport comes into existence.
In all cases the disadvantage flows to the end user: the passenger.
Costs recovered from passengers
Airport funding mechanism has been such that the costs of capacity are borne by passengers via development fees. And airports spend significant time and effort to ensure that several areas are covered under the regulatory asset base – thereby enabling a levy of development fees. These fees are captive fees given that the airports are monopolies. The passenger simply has no other option if wishing to travel by air. The proposition is both unfair and unjust.
The numbers speak for themselves. For instance at Delhi airport, the final project cost was 3.8 times the initial estimate and in the case of Mumbai it was 1.7 times the initial estimate. The cost of these overruns was covered by the flying public. Both airports were allowed to levy development fees to the tune of nearly Rs 3,400 crore.  The contribution via fees levied on passengers being 1.2X–1.4X the equity contribution in the case of Delhi and 3.0X–3.2X in the case of Mumbai.
Policy intervention is limited
The government via its new policy of Next Generation Airports for Bharat Nirmaan (NABH), is attempting to address the costs of capacity. Interestingly the new policy does not apply to metro airports that were already given to developers. The argument there is that any retrospective policy will deter investors.
The new airports are bid on a yield per passenger basis essentially capping the amount of fees that can be charged. Yet, they exclude the non-aero revenues which ideally should also be included as a part of the overall regulated asset base. Which means that fees such as the access charges added to cab rides, the expensive food offerings and exorbitant parking charges are likely to be the norm.
Competition limits costs
One of the ways to limit costs without undue regulatory intervention is to encourage competition. The question is whether these airports can come up soon enough and whether the government will make a determined effort towards encouraging airport competition and restricting monopolies. Given the traffic volumes and growth projections, having more than one airport for metro-cities should be a core focus. Yet this is not the case.
The sad reality is that operating as a monopoly continues to be a core part of the airport business mode. Take for instance Bengaluru. The HAL airfield – an operational airport – is not open to commercial flying in spite of a capacity crunch at the Bengaluru International Airport (which eased after the grounding of Jet Airways). A similar case is seen with Hyderabad where the older airfield was closed off to commercial operations. Mumbai is an interesting example where there was a chance to foster competition but with the same airport developer developing Navi Mumbai – competition will not quite occur.
 Multiple-airport systems can help address costs
The United Nations estimates that by 2050 almost two thirds of the world’s population will live in urban areas. This trend has consequences that must be planned for starting today. For India the challenge is even greater as it will see the highest increase in urban population. It is estimated that by 2050 India will add more people to its cities than are currently residing in them. And this is already being witnessed in cities such as Delhi which have grown to include Gurugram and Noida as parts of the National Capital Region or cities like Mumbai that are expanding northwards to Malad and eastwards to Navi Mumbai. The expansion of these cities essentially is a dispersal of the population and requires new airport capacity to come up rather than further strengthening the monopoly position of existing operators.
Having cities served by multiple airports carries benefits for stakeholders and passengers alike. These include easing capacity woes, generating economic output not limited to one area of the city, easing traffic congestion, easing land acquisition complexity and ensuring affordability by having airport compete. Simply put: when airports compete passengers win.
Satyendra Pandey has held a variety of assignments in aviation. He is the former head of strategy at a fast growing airline. Previously he was with the Centre for Aviation (CAPA) where he led the advisory and research teams. Satyendra has been involved in restructuring, scaling and turnarounds. Has also provided policy inputs and suggestions.
Read Satyendra Pandey's columns here.

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