From 59 million passengers in 2005 to more than 335 million in 2019, Indian airports have seen exponential growth in passenger throughput. This growth has been made possible by a growing middle-class which is forecast to hit 300 million plus, economic growth that averaged 7 percent per annum until recently, expanding urbanisation, improving infrastructure and favourable demographics. Indeed, consensus forecasts estimate that India will be the third largest aviation market by 2030.
While the growth story is phenomenal, often overlooked is that at its core the Indian market is very different. Whether it is the consumer behaviour, or the metro cities that account for 60 percent of the domestic traffic demand and 70 percent of international demand, or the price-sensitive nature of demand that have led to low-cost carriers grabbing 80 percent marketshare, the Indian aviation sector is different, which calls for airport development models that are fit for the country.
But it seems the country’s policymakers are not taking this into account.
The privatisation push
The government continues its drive towards privatisation of airports. The beginning of the year saw about 48 percent of domestic capacity under PPP airports. This has now gone up to 60 percent after the successful bids by Adani Airports for six airports. Another six airports may be soon bid out bringing the total airport capacity under PPP model to 65 percent.
Since the airports are guaranteed a monopoly status, coupled with long-term concession period, this essentially translates to low competition, stable cash-flows and a captive consumer base. Further, there has been no focus on
development of multi-airport systems. This gives existing airports immense market power and brings forth the absolute need for mitigation measure via economic regulation of airports.
The goal of economic regulation of airports is to replicate outcomes of competition. For this, the regulatory model was set up in 2008 with the first tariff order dated 2012. Since then there have been multiple orders, revisions and an amendment to the airport development model itself.
The current airport development and regulatory model
The current airport development model is based on western models that were adapted after the first major airport privatisation of the British Airports Authority in 1986. At that time, the UK established an ex-ante system of regulation based on balancing interests of consumers and investors alike. The goal was to develop infrastructure while also
addressing market dominance and abuse. Various adaptations of this model were followed the world over.
For India, the first wave of PPPs started in 1999 with the Cochin International Airport Limited. This was followed by Hyderabad in 2002 and Bengaluru in 2004. The largest airports in the country, Delhi and Mumbai, were privatised in 2006. Ironically at that time there was no airport regulator and a regulatory body had to be set up by an act of parliament in 2008.
The current airport development model is based on per passengers revenue payments, limited equity ownership of the Airports Authority of India, a ‘hybrid-till’ structure where only 30 percent of the non-aeronautical revenues are taken into account while determining airport charges, long concession periods and a removal of the restriction regarding the number of airports that may be awarded to a bidder. For investors, as long as the bids are put within a margin of safety, the airport investments will guarantee a good return.
The current economic regulatory model of Indian airports has the Airport Economic Regulatory Authority (AERA), which regulates airports that have traffic in excess of 3.5 million passengers a year. These airports have to submit to the regulator a schedule of charges and investments in their regulated asset base (RAB). The regulator then determines the charges based on a guaranteed return on the RAB factoring in the cost of capital, depreciation, operations and maintenance and taxes. The rate of return guarantee to the airport operator takes form in fees. These are borne by the travelling public.
Is the model fit for purpose?
Consider these numbers. Delhi airport 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. Given the recent expansion at Benglauru airport estimated to cost in excess of $1.7 billion and preliminary numbers being floated for Jewar and Navi Mumbai airports, a similar outcome may be assumed.
While investment in excess of $5.5 billion has gone into airports, 55-70 percent of total project costs for airport development spends have gone to terminal buildings. The design and utility of these buildings leave one wondering whether they are geared towards driving capex rather than driving aviation growth. Airports make the case that the terminal construction costs are capped and regulated but the argument is flawed on many counts.
Similarly, on the regulatory mechanism single-till structure would be ideal to limit charges, because this effectively considers all the revenues earned by an airport and determines charges accordingly. And for a price-sensitive market this is the till structure that works best. Yet, the country has chosen to go with a hybrid-till structure.
Finally, despite a majority of passengers gravitating to low-cost flying, the infrastructure includes amenities which only a small percentage of the passengers demand. Lounges, large floor areas, artwork, expensive parking and jetbridges are just a few of the examples where western models have been force-fit in the Indian context. The regulatory model has done little to alleviate this mismatch.
For India, whether the airport development model is fit for purpose remains a subject of much debate.
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