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  1. New Civil Aviation Policy: How flying may get more expensive

New Civil Aviation Policy: How flying may get more expensive

With the new civil aviation policy proposing to extend the so-called hybrid till model for determining airport charges to state-run (Airport Authority of India-operated) airports also, passengers will have to fork out more as user development fees (UDF).

By: | New Delhi | Updated: July 4, 2016 8:48 AM
Airport charges are universally determined under single till, double-till and hybrid-till mechanisms. In all cases, airport operator gets a predetermined internal rate of return (IRR) as per the concession agreement. (Reuters) Airport charges are universally determined under single till, double-till and hybrid-till mechanisms. In all cases, airport operator gets a predetermined internal rate of return (IRR) as per the concession agreement. (Reuters)

With the new civil aviation policy proposing to extend the so-called hybrid till model for determining airport charges to state-run (Airport Authority of India-operated) airports also, passengers will have to fork out more as user development fees (UDF). Besides, they could also suffer from airlines deciding to treat their share of the extra cost as a pass-through to the passengers, analysts said.

This runs contrary to the new policy’s objective of making air travel more affordable.

Airport charges are universally determined under single till, double-till and hybrid-till mechanisms. In all cases, airport operator gets a predetermined internal rate of return (IRR) as per the concession agreement. Under single-till mechanism, revenues from both aeronautical (landing, parking and ground handling) and non-aeronautical (duty-free shops, hotels, restaurants and airport infrastructure) segments are taken into account to determine the IRR.

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However, under the hybrid till method, which is currently being used by joint venture (public private partnership) airports, only 30% of non-aeronautical revenue is taken towards IRR, allowing the operator to pocket 70% of the non-aeronautical revenue. The idea is to encourage the operators to expand airport infrastructure. But the lower revenue base compared to single-till method practically prompts the operators to levy higher charges (UDF) on passengers and airlines.

For instance, the Airport Economic Regulatory Authority (AERA) in 2014 determined tariffs on the basis of single-till for the Hyderabad airport and ruled that the UDF be made zero, still allowing the airport operator to achieve the targetted annual revenue. The airport operator GMR was later allowed by the Andhra Pradesh High Court to collect charges as per hybrid-till method. This resulted in UDF of Rs 1,938 for international passengers and Rs 491 for domestic passengers, corresponding increase in airfares.

Some experts say that the new aviation policy has ignored the conclusions reached by the AERA and the ministry of finance after an extensive evaluation that single-till method is the most suitable for India. However, the aviation ministry defended its decision to extend the hybrid till model to AAI airports. “It (hybrid till) won’t lead to an increase in UDF; on the contrary, the method will attract private investments and boost commercial development at the airports,” RN Choubey, secretary at ministry of civil aviation said. He added the decision was based on the success of this model at international airports run by private operators in joint venture with AAI namely Delhi, Mumbai, Hyderabad and Bangalore airports.

“This change makes AERA a toothless entity. Passenger charges in India will increase, making air travel more expensive. And it contradicts one of the stated intentions of the civil aviation policy to make flying affordable,” Conard Clifford, regional vice president, Asia Pacific, IATA said. He added that the UDF charged at Hyderabad airport seems to have no correlation to what is the targeted annual revenue requirement for the airport and is a case example which establishes that single-till is in the best interest of the Indian passengers.

“There is no fixed mechanism to find out how the charges will increase under the hybrid-till method. Moreover, it will depend on AAI if it wishes to increase the UDF; it may choose to charge the airlines instead,” Amrit Pandurangi, senior director at Deloitte said.

The final civil aviation policy stipulates that under the hybrid-till mechanism if the tariff in one particular year or contractual period turns out to be excessive, the airport operator and regulator will explore ways to keep the tariff reasonable, and spread the excess amount over the future.

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