Is a UDF levy for new airports justified?

With budget airlines threatening to boycott airports with high user development fees, the costing of UDF and apportioning of airport revenues become significant.

Siddhanta Sharma
Executive Chairman & CEO,
SpiceJet Ltd

'While fixing UDF, airports need to see what facilities an airline's passengers use and what revenues they contribute to the airport'

New greenfield airports have proposed to charge a UDF from all passengers departing through these airports. While some moderate amount of recovery may be required for the upgraded infrastructure, we need to debate its quantum and reasonableness. The quantum of investment in an airport infrastructure can be divided into (a) Airside infrastructure (Runway, Taxiway, Parking stands, ATC Tower, Instrumentation, Lighting, and so on); (b) Passenger Terminal Infrastructure; and (c) City-side development of ancillary infrastructure such as hotels, conference facilities, offices, and so on.

For providing basic infrastructure as in (a) above, airport operators would levy landing and parking charges at the same rate at which they are being recovered by all other airports in India. Investment covered under ancillary infrastructure as in (c) above, is a separate profit-centric activity and does not benefit the passengers directly. It is, therefore, correct to assume that UDF is primarily being levied for the terminal facilities created by airport operators.

The level of services provided within the terminal building differs for each category of airlines, and can be broadly divided into airlines operating to overseas destinations and domestic airlines. Domestic airlines can be further sub-divided into full-service carriers and low-cost carriers. It is evident that domestic carriers do not require various facilities such as dual aero-bridges, immigration, customs, duty-free infrastructure and large passenger-waiting areas. Similarly, within the domestic carriers, low-cost ones do not require aero-bridges, business lounges, VIP lounges, and so on. It is, therefore, important to ensure that one category of passengers does not bear the burden of facilities provided to another class.

By the same logic, the revenues earned by airport operators from facilities like restaurants, bars, and duty-free shops located within the terminal buildings should be counted as contribution by the passengers who directly pay for this revenue stream.

The new greenfield airports are considerably away from the cities they serve. Therefore, for a passenger it will appear to be a double whammy since he spends more money and time to get to the airport and on top of that, he would pay the UDF. The levy of UDF would further deter passengers, especially those who wish to take a flight of about an hour or less, because their total travel cost would be in multiples of the surface travel cost. Given the new airport distance from the cities, the time-saving for such passengers would be marginal.

It is, therefore, fair to conclude that the airport operators need to distinguish the needs of few broad categories of passengers, provide them with adequate facilities applicable to their category, take into account the additional cost of transportation to and from the airport, consider revenues contributed by these passengers through spending at various airport outlets, look at the existing passenger service fee, bear in mind the long lead time of recovery for infrastructure projects, and thereafter determine whether UDF should be levied at all.

Kuljit Singh
Partner,
Ernst & Young

'India, which requires $8 bn for upgrading its airports, may have little option but to increase airport charges so as to make such huge investments viable'

The issue of UDF has recently come into prominence in India on account of the proposal to levy such charges for the new Hyderabad and Bangalore airports. Of course, what has been overlooked is that such charges have already been levied in the case of the Cochin Airport. Further, the concept of development charges is also already in vogue in various other infrastructure sectors in India (for instance, the levy of tolls for highways and port charges for ports) as well as internationally.

The UDF is proposed to be charged from passengers using the newly constructed airport facilities and will effectively get added to the cost of the tickets being charged to passengers. The basic rationale for charging such a fee is that the cost of the airport cannot be recovered fully from the existing passenger traffic by applying the pre-existing airport charges and hence, a special UDF is levied on the passengers who are the basic beneficiaries of the newly constructed airport.

Given the serious infrastructure paucity faced by the Indian aviation sector coupled with one of the highest air-traffic growth rates in the world (32.5 per cent in 2007, and a compound annual growth rate of roughly 25 per cent in the last five years), India needs significant airport capacity augmentation. As per the Planning Commission estimates, India needs an investment of $8 billion in airports in the next five years. If such huge investments are to be made viable, there would be an obvious need for increasing the airport charges.

However, despite the obvious need for the UDF, there is still some anxiety in the minds of the general public and airlines, possibly due to a lack of clarity on how the UDF will be determined. As airports are regulated facilities, the charges of airports are regulated. However, till date there is little clarity on how the UDF will be regulated. For instance, it is not clear as to how a reasonable capital cost of the airport will be determined to serve as the base for determining the UDF. The rate of return which will be allowed to the airport is also not clear.

As is well known, airports make substantial revenues from non-aeronautical activities. However, there is lack of clarity on the treatment of such non-aeronautical revenues for determination of the UDF. For instance, it is not clear whether a hundred per cent of the non-aeronautical revenues will be ploughed back or only a part of such revenues will be ploughed back for determining the UDF.

It is this lack of clarity which is fuelling the present debate on the levy of UDF despite the clear benefits that new airports will bring to the passengers. However, the best way of addressing this debate is to make the entire process of levying the UDF more visible to the users rather than doing away with the concept altogether. What is needed is for the government to set up the airport regulator urgently so that there could be open public hearings on the determination of the UDF. A country such as India, which requires a huge $8 billion for upgrading its airports may have little option (other than bundling real estate with airports) but to increase its airport charges so as to make such huge investments viable.