The government aims to create a level playing field for airlines and airports through eliminating the 5/20 rule and setting tariffs through a 30% hybrid till method, with the objective of increasing non-aeronautical revenue. Although the benefits of the policy may accrue over a period of time to all stakeholders, the policy creates the right investment climate for investors. Ind-Ra expects the pax volumes to reach 260 million in FY17, powered by the aspirations of the middle class to travel in flights and reduction in price differentials between air travel and rail journey including the recent increased cancellation fees for train tickets.
Capping tariffs for short-haul flights (covering 600km or one hour of travel) at INR2,500 would make air travel affordable for the larger sections of the middle class. However, these flight charges will apply only for airports that come under the ambit of regional connectivity scheme (RCS). Though the tariff cap will be indexed to inflation in ensuing years, Ind-Ra believes that the rates will meaningfully accommodate escalations in the operational costs of airlines. RCS will provide a slew of other exemptions to airlines such as reduced service tax, no airport charges, reduced fuel cost and viability gap funding to facilitate them break even in a short time. Implementing an efficient mechanism for the timely release of viability gap funding will go a long way for airlines, absence of which could jeopardise their financial stability leading to mounting receivables for airports.
RCS has the potential to attract new sections of the population to undertake air travel thereby fuelling pax volumes in airports. These airports could also become feeder airports to the large/international gateway airports such as Delhi, Mumbai and other metro airports.
Although the draft policy released in 2015, mentioned hybrid till only for future airports, the government has now delineated that user tariffs at all future airports will be determined on 30% hybrid till basis. It may increase the user charges in some airports however hybrid till in long term will be beneficial to all the stake holders. Hybrid till also incentivizes the airport developer to augment the non-aero revenues in the coming years. The earlier uncertainty surrounding the till mechanism for the existing airports impaired the debt service metrics of the airports. The ad-hoc tariffs then although aided the airports to accumulate cash however the final tariff orders annulled the collections which played spoilsport on the finances. Ind-Ra believes that the hybrid till is a mid-path as opposed to the single and double till and would mutually benefit the passengers and developers.
The policy's impetus to model future airports under public-private partnership augurs well for the sector. Airport Economic Regulatory Authority's order to allow project cost with a ceiling of INR65,000/sq.m. for a terminal building and INR4,700/sq.m. for a runaway excluding earthwork up to subgrade level underlines the cost efficient structure the regulator expects from new developers. Any increased costs will have to be examined by a duly constituted committee of experts. Although Ind-Ra believes that user development fees on these new airports will be low, determination of user charges need to be timely to avoid cash flow mismatches, an issue being faced by the airports running under public-private partnerships.
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On the other hand, Airport Authority of India (AAI) shall build new airports considering a non-zero internal rate of return excluding no-frills airports. No-frills airports will be built under RCS with a cost of INR0.5bn-INR1bn with state governments' backing in cases where financial viability is in question. A new airport may be built within 150km of an existing airport, with a suitable compensation to AAI, even if the existing airport's capacity is not saturated. The ministry had earlier this month said that it may partner with state governments to develop some airports for regional connectivity.
The government's increased focus on cargo services and maintenance, repair and overhaul (MRO) services - according to infrastructure status and section 80IA benefits, provided the facility is located along with the airport, augurs well for the sector. The growing share of freight cargo income for private airports underscores this point. The historical pattern suggests that freight is an important forward indicator of passenger traffic. Since MRO activities hold huge business potential for Indian airports, the ministry will urge state governments to exempt MRO activities from VAT. The government also proposes to frame a single window with prompt clearances at cargo terminals.
The policy also emphasises on the concerted efforts of various agencies such as Airport Economic Regulatory Authority, AAI along with airport developers, airlines, MRO and state governments to reduce airport charges and cargo charges. Despite the huge potential available for the sector, implementation hurdles could delay the benefits to the stakeholders. Zeroing down on the right places for new airports, refurbishing existing airports and judiciously employing funds, while the existing capacity stays idle, are some of the crucial issues that need to be resolved.
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