Right time for private participation in airport infrastructure

Government to encourage PPP model of airport development

With the recent examples of Tata and Adani investing in airport infrastructure in the country, industry experts feel it to be the right time for the private players to put their money in the country's airport and aviation infrastructure. As the aviation economy is down, the private players will be able to bid at decent valuation.

Recently, the Tata group along with international investors GIC Pvt. Ltd of Singapore and SSG Capital Management Ltd of Hong Kong commited an investment of Rs 8,000 crore for a stake in GMR Group's airport business. The Tata investment is expected to give GMR fresh capital and the werewithal to aggressively bid for more global and domestic airports. Tatas also has investmnts in two domestic airlines, Air Asia India and Vistara.

The Adani group recently emerged as the winner in bidding for six airports - Jaipur, Lucknow Ahmedabad and Guwahati, Thiruvanthapuram and Mangaluru. These airports are expected to see domestic passenger growth of 15-25% a year. The Adani group would control 11% of the domestic passenger market and 10% of international passengers.

This April, GVK Group also have signed a term sheet and exclusivity agreement with Abu Dhabi Investment Authority (ADIA) and the National Investment & Infrastructure Fund (NIIF) for an investment in new shares in GVKAHL equating to a 49% stake. GVK recently sold Bengaluru airport to investors led by Fairfax to overcome a cash crisis. GVK has a got a 20% share of international passenger and 14% of domestic traffic from Mumbai. It recently negated a bid by the Adani group to buy share of its erstwhile partners in Mumbai airport led by Aiports Company South Africa, by invoking the first right of refusal and increasing its stake to 74% from 50.5% earlier. GVK also won the concessionaire bid for the Navi Mumbai airport, which will have a capacity to handle over 60 million passengers a year.

The government will be mainly adopting the Public Private Partnership model (PPP) in developing its airports. While these PPP experiments have led to the creation of world class airports, it has also helped AAI (Airports Authority of India) in enhancing its revenues and focusing on developing airports and air navigation infrastructure in the rest of the country, the Civil Aviation Ministry said in a recent statement. The statement added that PPP in infrastructure projects brings efficiency in service delivery, expertise, enterprise and professionalism apart from harnessing the needed investments in the public sector.

Currently, the airports being managed under the PPP model include Delhi, Mumbai, Bangalore, Hyderabad and Cochin.

Analysts feel allotment of projects to new players help in breaking the dominance of traditional ones such as GMR & GVK. They feel there has to be a cap on the number of projects a new player could be allotted.

Today, more private players are showing an interest in investment in airport infrastructure as there is a better predictability on revenue. Earlier, tariffs were based on a cost-plus methodology, which capped upsides from revenues streams such as gains from real estate monetization. The new rules incentivize the concessionaire (operator), as it can retain upsides from higher non-aeronautical revenue such as real estate monetization and operational efficiencies that come from higher passenger footfalls.

Now, a new base access charge (BAC) regime is in place, which provides much more visibility on revenue accretion. Under the new model, revenues simply rise with an increase in volumes or the amount of air traffic handled. The investment by the Tata group-led consortium involves a higher payout if some conditions are met, one of which is the continuation of the BAC regime.

Indian airport infrastructure is coping under pressure with the rising passenger population. Indian airports handled 265 million domestic passengers in 2016, and the figure is projected to have crossed 300 million in 2018, according to the Centre for Asia Pacific Aviation (CAPA). The entire airport network of India is equipped to handle only 317 million passengers. The report had indicated India's airports would “exceed structural capacity by 2022.”

“There's an urgent need for capacity building in major Indian airports as they are bursting at the seams and close to saturation,” Binit Somaia, South Asia director, CAPA, said in an AFP report.

Indian Civil Aviation Minister Suresh Prabhu said the government will spend $60 billion to build 100 new airports over the next 15 years. A cargo policy is also on the offing that is expected to boost the country's logistics capacity.

Recently, the Minister of State for Civil Aviation Jayant Sinha said the airport infrastructure in metros will see a committed investment of $ 14 to $ 15 billion over the next few years. The Airports Authority of India (AAI) looking at a capex of around Rs 25000 crore in the next few years. He said the government will ensure the metro cities will have 2 or 3 airports in them. While the private sector will be involved at airports at the metros while AAI will look at creating heliport and seaports among others, said Mr Sinha at the recently held India Aviation Summit. Delhi is adding a fourth runway, a fourth passenger terminal and another passenger terminal. Hindon airport, on Delhi outskirts, will be ready to receive flights by March. Similarly the government is working hard to complete Navi Mumbai airport by 2021-22, said Minister Sinha. The Bengaluru airport will be having a secnd runway and terminal while a new terminal will be constructed in Chennai.

An International Air Transport Association (IATA) report had called the government to address the infrastructure woes and amend the policies that pose “excessive costs” on airlines. IATA had indicated the air passenger to treble to 500 million people fly to, from or within India. The IATA report had called upon the government to develop a strategic Master Plan for the country's airports, open the Navi Mumbai airport at the earliest and make use of the military airspace to expand airspace capacity.

The report said fuel cost for Indian airlines make 34% of operating costs as against the global average of 24%. According to Alexandre de Juniac, IATA CEO, the lack of competition in fuel and lack of true open-access to on-airport fuel infrastructure is strangling the lifeblood from the airlines. “If we can comprehensively fix jet fuel and infrastructure issues, India will be primed to take a giant step forward in the world of aviation,” he said.

India is currently considered the third largest domestic civil aviation market in the world. India's passenger traffic grew at 16.52 per cent year on year to reach a whopping 308.75 million in FY18.. With the IATA predicting a 6.1% growth rate post 2019 for the next 20 years, Indian aviation could witness 527 million journeys per year by 2037.

Indian airlines, which operate around 500 aircraft, have ordered an additional 1,000 planes, according to an estimate by HSBC in December.

The Indian carrier Jet shut its operations recently, while SpiceJet and Indigo are not showing good numbers. Air India has piled a debt of around $8.5 billion. The government has infused Rs 2100 crore in Air India as part of guaranteed borrowing.

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