Why Delhi and Mumbai airport operators seek to charge passengers more

That quick bit of shopping you did at the international airport in Delhi or Mumbai could prove costly in the future. Here's why

Mass cancellation of flights may not be the only crisis facing flyers. The cost of any flight from Delhi and Mumbai could rise by up to ₹3,000 soon unless the airport regulator is able to reverse a court order. 

The operators of the international airports serving the two cities have secured a favourable verdict from the Telecom Dispute Settlement Appellate Tribunal (TDSAT), which has authority over airport disputes, allowing them to recover the costs of developing all sorts of infrastructure including hotels, shopping malls and other facilities at the airports from passengers. 

The airport regulator, Airport Economic Regulatory Authority (Aera), has contested the order issued by the TDSAT in July this year to raise what are called User Development Fees (UDF). Hearings in the case have now opened in the Supreme Court. 

At the heart of the dispute is the issue of regulatory assets — the infrastructure and services provided by the airport operators. Simply put, that means how much a company running an infrastructure service (the airport in this case) can charge consumers to recover its capital expenditure. 

Perturbed by the possibility of rising ticket prices eating into their revenue, several airlines, including Air France, KLM, Lufthansa and Oman Air have also joined the petition filed by Aera. 

But the issue is far bigger. Challenges around the calculation of regulatory assets have clouded several of India’s key projects. These are in power, oil & gas, roads and now airports. These disputes have often made the government wary of taking on public-private partnerships (PPPs). This is because the economic implications for the public are large in each dispute. 

For instance, in the airport case, redrawing the numbers will mean a passenger using Mumbai airport for domestic travel will pay ₹3,856, a massive rise from the current ₹175. For Delhi, this will be ₹1,261 instead of the current ₹25. This has the potential to cripple the growth in aviation — once allowed, there’s nothing to stop other private-sector developers of airports from levying similar charges. 

Already, fear of a public uproar has led to a redrawing of the scope of PPP projects to develop infrastructure, often almost from the scratch. As seen in the chart on the year-wise list of projects cleared by the PPP appraisal committee, the top decisionmaking body in the central government, the rate has flagged since the start of the Covid pandemic in 2020. 

 

In turn, this led to low private-sector capex in the economy. As interest in PPPs tapered off, the pace of investment by the private sector in major projects also took a hit. 

Tracing what the two airport operators, Delhi International Airport Ltd (DIAL) and Mumbai International Airport Ltd (MIAL), have asked for, reveals the extent of the problem.  Airport operators are entitled to recover costs for the aeronautical-related capital they invest in  projects. Aera has factored those in. For the period 2009-14, the total came to ₹966.03 crore for Mumbai airport. This included the aeronautical assets such as landing, parking, costs of building runways, apron, and ATC facilities; a hypothetical additional sum for the costs of operation and maintenance of the airports; tax payable; and the revenues the airports generated before privatisation. 

Both MIAL and DIAL had signed off on these calculations listed out in the State Support Agreement, a voluminous document when taking over the lease for them in 2006. None of these companies responded to mails sent by Business Standard. 

Both these companies however complained that the investments made by them in developing the non-aeronautical services like hotels, shopping areas and so on should also be factored in the hypothetical regulatory asset base that Aera relied on to pass its first set of orders for the  period 2009-14. (See chart: No. of projects) 

The difference in the interpretation is substantial. Instead of ₹966.03 crore, the sum for which MIAL would need to be compensated will be four times larger at ₹4,848 crore. 

Since the cost would be divided between the passengers using the airports and the airlines in a ratio of 70:30, the jump in UDF is easy to calculate. Airfares could shoot up close to ₹10,000 for even the smallest of journeys. 

The first appeal by DIAL and MIAL contesting Aera orders was filed in the TDSAT in 2012. The tribunal rejected their claim in 2018. The companies then approached the Supreme Court but it too accepted the TDSAT orders. 

The term regulatory assets popped into Indian legal lexicon with the power sector. Once the private sector picked up power distribution companies from the government, they asked for the true cost of power supplied to the consumers to be reflected in the tariffs. Wary of raising electricity prices for consumers, most state governments clubbed these losses as “regulatory assets” — to be made good later. The power sector has paid the price for these delays, as tariffs rarely kept pace with these arrears. 

“The aviation sector seems to have imported the concept from the power sector. But as there was never any difficulty in imposing the true cost of building the airports on the passengers, how does this fiction emerge?” said former Union finance and power secretary, Subhash Garg. 

The two companies have claimed in their support a letter of May, 2011 (reviewed by Business Standard) from the ministry of civil aviation to the then chairman of Aera. The brief letter notes that “the existing aeronautical charges will be set as the initial regulated aeronautical charges. Accordingly in this case, the proposed approach is to back solve the initial aeronautical asset base, given the aeronautical charges”. 

That much is clear. But then it adds this sentence: “There is no record of any mechanism for calculation of regulatory base.” 

It does not mention anywhere that non-aeronautical costs need to be accounted for in the calculation, but keeps a tiny window open for revisiting the formula. The letter was the reason for the Supreme Court to accept the revision petition by the companies in December 2023, and ask the TDSAT to examine whether the non-aeronautical expenses should also be clubbed with allowable costs. 

The letter was produced as evidence by DIAL and MIAL to the Supreme Court some 15 years after the privatisation of these airports. The tribunal accepted that all non-aeronautical costs are fit to be included in the calculation of the UDF. 

Would bringing in more regulatory assets or capital costs raise the effective returns for the current operators of these airports? Former power secretary Arun Kumar said, “Regulatory assets have been recognised in the power sector as the legitimacy of those has been approved by the regulator. Those are therefore part of the balance sheet of the companies. But in the aviation sector, the regulator has to first recognise those claims.” 

As Garg put it, airports are not a distress sector — unlike power — so it is not clear whether the Supreme Court will admit the plea for higher costs as those have been presented now. At stake is how the expansion of the aviation sector will pan out.