DIAL may reduce minimum annual guarantee by duty-free operator

Delhi International Airport Ltd (DIAL) might agree to a reduction in the minimum annual guarantee (MAG) paid by duty-free operator, Alpha Future, a joint venture between international company Alpha and Kishore Biyani promoted Future Group.

In 2006, Alpha Future had undertaken a 39-month contract with DIAL for a minimum annual guarantee of $93 million (Rs 372 crore) in Delhi airport. Around August last year, the company had asked for a revision of the MAG to $54 million (Rs 216 crore).

Also, on the basis of Alpha's downward revision of its projected sales from $381 million in November 2006 to $209 million in 2007, the concession fee was asked to be reduced from $132 million to $68 million.

If agreed to, this would mean DIAL's revenues from duty-free operations would go down by $39 million (Rs 156 crore). Earlier, DIAL had refused to agree for a reduction and there were talks of them terminating the contract and go for rebidding.

But yesterday, top DIAL executives said that negotiations are on and there is no question of terminating the contract. Instead, they might look at reducing the MAG.

"Due to constant construction and renovation work, Alpha lost out on 30 per cent of the 8,000 sq ft that had been promised to them at the contract. Also, terminating the contract at this stage would be very unwise, considering that we would lose out on revenues for the remaining period of the contract. We might look at reducing the MAG, though not to the extent that Alpha has asked for," said a DIAL executive.

At the time of the contract Alpha had been promised 8,000 sq ft which would be later extended to 15,000 square feet by the beginning of this year.

The contract also says that after the other operator Flemingo's contract with DIAL expires in February 2008, Alpha would be the sole duty-free operator at the Delhi airport.

"However, renovation work in that area is already behind schedule. So how much extended area we will actually get is doubtful," said a duty-free shop owner.

A similar situation that arose at the Mumbai airport last year, had contrary results when MIAL cancelled ITDC-Aldeasa's contract when it asked that its minimum annual guarantee be halved.

The contract was awarded in February 2007 after a competitive bidding process and duty-free operations were slated to start by June.

However, the joint venture company had not been even formally floated by then. After termination of the contract with ITDC/ Aldeasa, it was given to DFS, which had been the second highest bidder when the contract for duty-free shopping was put up for bids.

Duty free operations in India generates a revenue of below $2 per passenger, while in countries like Singapore, the revenue per passenger would come to around $20.