Modi govt wants private players in small Indian airports

Policy tweaked to ensure return on investment for private players and revenue for AAI

An executive with a leading soft drink giant was visibly upset when he had to catch a flight from Chaudhary Charan Singh International Airport, Lucknow, recently. “There is hardly any place to sit, washrooms are dirty, it’s not a happy experience,” he said. 

Although long queues at check-in counters are common across Indian airports now, air traffic from non-metro cities has multiplied exponentially over the last five years due to a booming middle class and cheap ticket prices. In fact, a study conducted by travel portal MakeMyTrip states about one-fourth of domestic air traffic in India comes from metros, while the remaining 75 per cent comes from smaller cities.

But infrastructure at these airports, mostly managed by state-owned Airports Authority of India (AAI), has not kept pace, which explains the overcrowded terminals and check-in counters as well as increasing flight delays.

With 10 of the 126 airports operated by AAI together handling 30 million passengers a year, the Narendra Modi government wants to attract private players in exploiting the commercial opportunity of terminals with such heavy footfalls.

First, terminal management will be bid out for a period of 15 years during which the bidder will pay a pre-fixed rent to AAI based on the revenue it can generate per passenger. Second, all capital investment in the terminal will be made by AAI. To put it simply, an operator while paying a pre-fixed rent to AAI now has, without investing capital, the scope to maximise its revenue from non-aeronautical activities like the food and beverages business, duty-free shops, leasing of terminal space, and running car rentals or parking.

The model, which is being used for the privatisation of terminals at the Ahmedabad and Jaipur airports, is a departure from the model used in the cases of the Delhi and Mumbai airports, where a bidder was selected based on the highest share of revenue offered to AAI from the gross revenue of the airport. This reduced the scope of return on investment for the developer, leading to increase in tariff for compensation. Over the past decade, GMR and GVK, operators of the two airports, have run up costs in excess of estimates as a clear process was not established for determining the appropriate level of capital expenditure. For instance, the cost of modernising Delhi and Mumbai airports more than doubled to $3 billion each.

The new model, according to government officials, has received good response from global majors with Flughafen Zürich AG, Egis Airport Operation and DAA International showing interest in the Ahmedabad and Jaipur projects. Minister of State for Civil Aviation Jayant Sinha calls the new model a win-win situation. “AAI will earn rent while the private player which will operate the terminal now has the opportunity to maximise income from the terminal by increasing the service quality of the terminal,” Sinha said. 

Indeed, AAI’s revenue has significantly improved since FY07 as the four private airports (Delhi, Mumbai, Hyderabad and Bangalore) have delivered a massive dividend as lease income. For FY 17, such income consisted of around 30 per cent of its total revenue. Increase in such revenue will help the operator as it needs more than Rs 3,000 crore to develop unserved airports, as well as to revamp air traffic control towers, runways and passenger terminals.

An infrastructure bottleneck is likely to be a hurdle in India’s booming aviation story as consultancy firm CAPA (Centre for Asia Pacific Aviation) estimates that the 40 largest airports in the country will exceed their capacity in the next 10 years, “AAI has strong capabilities in airport development and operations, however, its lack of commercial orientation is hurting the economies of key cities; lessons from the public-private partnership experience will need to be factored into future projects,” says a senior AAI official. 

Sinha, meanwhile, has drawn up an ambitious plan of doubling India’s airport capacity in the next 10 years, which will need an investment of around Rs 3 lakh crore, most of which will come from the private sector. “The regulations have made it difficult for developers to earn adequate returns from operating airports, we need to create an attractive policy framework for global airport developers in India,” Sinha said in an interview in December.