How can India establish a viable airport nework for a billion trips?

As India gets down to building a massive airport network, the interests of all stakeholders have to be balanced while keeping costs low, service standards high and ensuring smooth transitions

In the next few years, India will massively build out its airport network so that we can accommodate a billion trips. How should such airports be financed and regulated? Which regulatory regime should be established for different types of airports in our airport network? What role should state agencies play? These are some of the questions that will have to be resolved as we embark on this massive infrastructure build-out. Moreover, the interests of all stakeholders will have to be balanced while keeping costs low, service standards high and ensuring smooth transitions.

Balancing stakeholder interests

Various experts have estimated that building out the airport network to meet future demand will require between Rs 3-4 trillion. The government’s fiscal position limits public capital expenditure potential and hence, private sector participation will be necessary to build airport infrastructure. It is expected that the public sector will construct many non-viable airports as India goes from 95 operational airports to between 150 and 200 airports: such an expansion in smaller, long-tail airports could require around say Rs 1.5 trillion of investments. Private sector participation can be harnessed to drive the capex investments in global, metro, regional hub and cargo terminals and airports, which will require the bulk of the investments. 

An airport concessionaire can finance the construction, operation and maintenance of major airports from revenues that it receives from: (a) user fees, (b) landing and parking fees from airlines, (c) non-aeronautical revenue such as retail and parking, and (d) if the contract so provides, city-side development. There are two ways to keep costs low for passengers: (1) taxes can support airports such that passengers are shielded from user charges, or (2) to avoid unexpected and sudden changes in user fees, such fees may be stated upfront for the duration of the concession period (possibly indexed to inflation) prior to bidding.

Our government is committed to efficient, but light-touch regulations which limit discretionary powers with the government and regulators even as they achieve the end-objectives of (1) building capacity ahead of demand, (2) offering world-class facilities to citizens and passengers, and (3) developing healthy competition among airlines and between airports.

Evaluating multiple airport models

In order to expand airport capacity in an economically viable manner, multiple airport development models will need to be evaluated. Some cities will witness the creation of new terminals at existing airports (such as in Pune and Patna); in other cities, existing airports will continue to operate while new greenfield airports will come up to serve a larger catchment area (such as in Navi Mumbai and Goa); and finally, some states or regions may need to consider creating a group or bunch of airports with the dual objective of serving its currently underserved and unserved cities and to improve the economic viability of the overall cluster by bundling them with one or two larger, commercially-viable airport(s).

As multiple airports open up to serve large urban areas, airports and airlines will have to create coordination mechanisms to ensure that passengers are optimally served. Distribution of slots, terminals, arrival and destination cities, international terminal etc. will be important issues that the industry will need to deal with. Clear guidelines, with or without financial incentives, need to be crafted by the aviation ecosystem so that such transitions are smooth and rule-based. 

A policy regime for both brownfield and greenfield airports is necessary to attract global investors and offer Indian passengers an affordable travel

Understanding airport economics

Larger airports, those with more than 5 million passengers per year, are typically quite profitable simply on the basis of the aeronautical and the non-aero revenues that they earn. Traditionally in India, the value that the airport generates is shared with the local state government or the government airport operator as a revenue share. Large airports may even be commercially sustainable with low user fees or even without city-side development rights, if the revenue share is low.

Smaller airports tend to be unprofitable. There can be multiple approaches to making them viable on their own (allowing for more city-side development rights, capex and/or opexsupport from the local state, municipality or industry, etc.) or in a cluster (by bundling in a few smaller airports with one or two commercially viable airports). With the Ude Desh Ka Aam Naagrik (UDAN) Regional Connectivity Scheme taking off across the country, we are evaluating various approaches for operating smaller, unprofitable airports.

Tenure duration and the rights embedded in the option to renew can significantly create or take away value from the concessionaire. Global practice has varied from freehold (UK privatisation) to 99 years (Melbourne) to 20 years (Santiago), with median ranging around 30 years with an option to renew for another 30. Further extension of the concession period beyond 60 years may only marginally improve financial viability as the present value of projected cash-flows after 60 years not material.

Phasing out capital expenditure can help the operator improve project viability significantly even as government, passengers and airlines prefer front-loading. Setting stringent service level agreements for the airports with the other stakeholders can help guide the timing of capital investments by the concessionaire.

As India embarks on NextGen Airports for Bharat (NABH) Nirmaan, a large airport capex programme to quintuple airport capacity over the next 15 to 20 years, we are working to establish a stable and balanced approach to meet stakeholder needs. Such a policy regime for both brownfield and greenfield airports is necessary to attract global investors and offer Indian passengers an affordable and delightful travel experience.

(Concluded)

The author is Minister of State for Civil Aviation. He acknowledges the support of AkhileshTilotia, his OSD, in this series. Views are personal.