Building runways to next growth phase

Investment needed to fund India's airport capacity expansion is about $35-40 bn over next 5-7 years

Passenger traffic at Indian airports has had a phenomenal run, growing over 10 per cent, and outpacing GDP growth over the last decade. Resurgent economic growth and a rapidly growing middle class has ensured that more Indians are traveling by air, more frequently, than ever before. Macro-economic indicators support the case for this to continue. 

Airlines have anticipated this and are ordering more planes. McKinsey studies indicate that footfalls at Indian airports will likely reach 600 million in the next 10 years (by 2026-27), up from 223 million currently. Passenger numbers at each of two top airports — Delhi and Mumbai — will likely exceed 100 million, catapulting them into the global big-league. Atlanta’s Hartsfield-Jackson airport, currently the world’s largest airport sees 104 million passengers every year. 

While the numbers may seem rosy, part two of the aero-story has the potential to bring us down a few thousand feet. Consider this: 19 of India’s top 20 airports are now dealing with traffic above design-capacity (15 are crunched for terminal capacity, while seven are restricted by the runways). Airport infrastructure is lagging demand at most Indian airports, and needs to be expanded. Our assessment suggests that nine terminal expansions need to begin in cities, including Hyderabad and Chennai. Also 10 greenfield airports are required, including at Ahmedabad and Kochi. Considering the long gestation periods, land acquisition for these needs to begin immediately. 

Total investment needed to fund India’s airport capacity expansion is estimated to be about $35-40 billion over the next five to seven years, or $20 billion, excluding land cost. Stretched balance sheets of the existing set of private airport developers may not be able to support this, and foreign capital has been unwilling to step into this asset class so far. 

Flying high with AAI 

As India’s biggest airport operator with over 100 airports in its portfolio, the Airport Authority of India (AAI) has an opportunity to play a central role in airport infrastructure development over the next decade. Apart from the experience of running airports, it has a far healthier balance sheet compared to the private players. The AAI ended 2015-16 with a profit of about Rs 3,700 crore, cash reserves of Rs 4,500 crore and long-term borrowings of only Rs 500 crore, making it well-suited to take the lead. The nodal agency of the Ministry of Road Transport and Highways, the National Highways Authority of India, has tapped non-traditional sources of funding such as the Employees’ Provident Fund Organisation and Life Insurance Corporation bonds to fund roads. These and other new pools of finance can be used to fund airport infrastructure. For better and faster project-execution to keep pace with demand, the AAI could move from its traditional item-based contracting to turnkey engineering, procurement and construction models. 

The AAI could also bring in private professional agencies to run terminal operations at its airports. This model has worked well at Singapore Changi and other airports, helping de-bottleneck operations and maximise commercial potential. The AAI has begun the process of outsourcing the operation and maintenance of Jaipur and Ahmedabad airports to private players, which could be extended to more cities. 

Attracting private investments to build or expand the next tier of Indian airports is likely to be tougher than the last time, when the biggest-five airports by traffic (Delhi, Mumbai, Bengaluru, Hyderabad and Kochi), were privatised. FIIs have been concerned by the lack of a predictable, long-term tariff mechanism. India needs a simplified airport regulatory regime, and a fair and transparent tariff-policy, to draw the world’s attention to the traffic growth and potential for investment. 

Private Indian companies have been steering clear of airport projects despite the growth in passenger numbers. The proposed amendment of the Airport Authority of India (AAI) Act to remove restrictions around land usage, could change this. Budget 2017 has proposed that airport companies be allowed to monetise land to raise funds for upgrading infrastructure — if implemented, this would allow both private operators and the AAI to raise fresh capital for projects. It will also make the sector more attractive to potential entrants. 

It is not only the scale, but also different types of funding that need to be considered. Recycling capital, by allowing existing developers to exit projects is an effective method to generate liquidity. Development capital eventually needs to be replaced by patient capital. The GVK group’s stake sale to Fairfax, and their resulting exit from the Bengaluru airport project is one recent example of such recycling. 

Innovative mechanisms for broader participation will be required to bring in more private developers and longer-term investors into the sector. 

Building for the next 100 

Improved air-connections are needed to make India’s businesses and trade more efficient.The public-private partnership model has shown the way to improve user experience at the airports. With passenger traffic at the airports doubling in the last six years, this could be the time to start thinking about the privatisation of Chennai, Kolkata and non-metro airports. Bundling small and medium airports to bid them out together, could help attract bidders. The Greek government was able to sign its first privatisation deal for small regional airports in 2015, by bundling 14 airports, and offering them on a 40-year lease. 

As longer term measures take shape, optimising air navigation services could result in a step-change towards de-bottlenecking air-traffic. Improved CNS (communication, navigation and surveillance) operating models help reduce congestion. 

Airport bottlenecks and funding are complex problems, and progress can take decades. India’s air-infrastructure build-up will need to be on the fast track, to be able to cater to the growth projected for the next decade.  

Rajat Gupta is a senior partner, Vikram Kapur is a partner and Shankar Chandrasekaran is an Associate partner of McKinsey & Company