Why an airport model where passenger foots bill for largesse not fit for purpose

Published: February 21, 2020 5:00:08 AM

An airport development model, where in the end the passenger foots the bill for largesse and runaway spending, is not fit for purpose

aviation sector, aviation industryThe economic regulatory model also leads to perverse incentives for airports, towards spending more.

By Satyendra Pandey

In the beginning of the year, the government passed an order discontinuing the fuel throughput charge at airports. This is a charge that was levied by airport operators per litre of jet fuel and borne by airlines. The move has been much appreciated by aviation industry stakeholders because it impacts margins for airlines. Cleverly worded, the order, after discontinuing the charges, states, “AERA/Ministry of Civil Aviation… should take into account the amount in this revenue stream and duly compensate the Airport Operator/AAI by suitably recalibrating other tariffs …” Put simply, the airport operators will be allowed to recoup the loss of revenue via updated charges. In the end, it is the passenger that will pay.

Why the consumer will eventually pay the charge can be traced to the current economic regulatory model of Indian airports. Currently, PPP airports are guaranteed a return on equity of 16%. This is made possible by means of charges borne by the flying public. The process involves the airports submitting traffic projections along with operating expenses, taxes, the cost of capital, any subsidies received, and capex plans to the regulator. A target revenue figure is calculated, and the gap between the target revenue and actual revenue is recovered via the levy of user development fees (UDF), charged to the passengers. That is not all, in cases where the airport is unable to secure adequate financing for capex, the funding gap between the financing secured and financing required is again borne by the passengers via airport development fees (ADF).

Needless to say, this model is flawed. Because the burden falls on the consumer. Consider these numbers: The Delhi airport’s final project cost was 3.8 times the initial estimate, and in the case of Mumbai, it was 1.7 times the initial estimate. The cost of these overruns was covered by the flying public. Both airports were allowed to levy development fees to the tune of nearly `3,400 crore. The contribution via fees levied on passengers was 1.2X–1.4X the equity contribution in the case of Delhi, and 3.0X–3.2X in the case of Mumbai. Given the recent expansion at Benglauru airport, estimated to cost in excess of Rs 10,340 crore, and preliminary numbers being floated for Jewar and Navi Mumbai airports, a similar outcome may be assumed.

The economic regulatory model also leads to perverse incentives for airports, towards spending more. And, thus, airports continue to build. We are witnessing the construction of luxury terminals with amenities to cater to the few, but paid for by all. Economy-class passengers pay for the lounges they do not use. Terminals and terminal areas are refurbished, demolished and relocated. Commercial vehicles are charged for accessing the airport because they use a short strip of road that now comes under the airport premises while private vehicles are charged exorbitant amounts for parking. The international traveller pays for improving infrastructure at the domestic terminal. Construction continues unabated. And for all of this, the passenger is forced to pay more.

Sadly, in spite of spending gone awry, airports continue to want for airside capacity. That is the ability to land and take-off aircrafts, and the ability to park them. Due to a disproportionate focus on terminal capacity (large buildings), the country has seen only two new runways since Independence on a net basis. As traffic has grown, and as the number of aircraft flying has increased exponentially, a comprehensive capacity gap looms. We are always one thunderstorm or rainstorm away from complete disruption in the skies, and this scenario plays out every year. Construction of runways requires land and given the challenges with land acquisition, airports simply take the easy way out and build fancier terminals. This is highlighted by the fact that while investment in excess of $5.5 billion has gone into airports, 55-70% of total project costs for airport development spends have gone to terminal buildings. The design and utility of these buildings clearly demonstrate that they are geared towards driving capex rather than driving aviation growth. Airports make the case that the terminal construction costs are capped and regulated, but the argument is flawed on many counts.

Finally, airport development also ignores the market reality where 80% of the traffic is now on low-cost airlines. These passengers demand efficient airports that are low-cost, but high quality, and enable folks to fly in and out while minimising time. Instead, we have five-star shopping malls with jetbridges attached. Lounges, large floor areas, artwork, expensive parking and the `150 cup of tea are items simply not aligned to the market demand. Rather, these epitomise a mindset where Western models have been force-fit in the Indian context. A mindset that completely ignores the price sensitivity of the Indian passenger. And a mindset that glosses over the passenger who neither expects nor wants to pay for these features and facilities, but is left with no choice.

India’s airport development model needs revisiting. We cannot continue to blindly force-fit Western solutions where the demand profile is very different. An airport development model, where in the end the passenger foots the bill for largesse and runaway spending, is not fit for purpose.

The writer is former head of strategy, GoAir. Views are personal

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