The Indian government has approved a ten per cent increase in aeronautical charges at 84 airports across India operated by the state owned Airports Authority of India (AAI).

This at a time when airports across Asia and in many parts of the world, are reducing airport and passenger charges to stimulate air travel.

These charges include landing, parking and terminal area navigation fees that airlines pay for using airports. Naturally, one should expect the airlines will pass on the costs to us passengers, in the form of higher fares, but at a time when airlines globally are in meltdown, will they be able to ? Conveniently, the ministry expect airlines to absorb the increases. They are already bleeding so what difference will a little more make.

Since the start of this year, the Civil Aviation ministry headed by Mr. Praful Patel, has approved increases in aeronautical charges at the now privately operated brownfield airports at Mumbai and Delhi, which account for close to 60 per cent of India's total air traffic.

The three privately operated greenfield airports at Bangalore, Kochi, and Hyderabad can also be expected to increase their charges, since they are allowed, by contract, to charge what AAI charges.

The government is also expected to clear AAI's proposal for charging development fees from departing passengers at places like Thiruchirapalli, Trivandrum, Goa, Amritsar and Ahmedabad. Reflecting a warped thinking at the ministry, as demonstrated by the exorbitant fee differential between domestic and international passengers, we can be certain that airports with higher international traffic will have their development fee proposal cleared cleared first.

Airport developers claim a resource crunch in implementing their development plans during the current economic slowdown. The sharp fall in passengers and freight have affected revenue and business plans. Thanks to its lopsided planning, the government has created monopolies and cartels out of airports. Let us not forget, this is the same government which screamed "cartelisation", just two weeks ago, when private airlines raised their fares.

Risks are inherent in any business, and in a competitive scenario economic downturns are great drivers of efficiency maximisation, leaner organisations and cost effective operations.

Indian passengers have no problem paying for facilities -- once they are built; but asking us to pay for them in advance and cover the business risks of these monopoly airport operators is not acceptable. Instead of protecting passengers, the government is only aiding this huge cartel of monopolies called airport operators.

The Government has approved the levy of Development Fee (DF) by the Delhi International Airport Limited (DIAL) @ Rs.1300/- per departing international passenger and @ Rs.200/- per departing domestic passenger with effect from 1 March, 2009. The DF which is being levied purely on an adhoc basis, is inclusive of all applicable taxes and is for a period of 36 months only.

This approval shall be reviewed specifically upon the following milestones:

• DIAL will submit final project cost estimates within 6 months of the commencement of the levy of DF, i.e. latest by 31 August, 2009. The project cost so submitted, including amount of contingencies, and their utilization shall be audited by an independent technical auditor to be appointed by Airport Authority of India (AAI) or as the Regulator / Government may decide.
• DIAL will undertake a review of the bidding process in respect of the hospitality district. They may approach the Government with the outcome of the review within 6 months of the commencement of the levy, i.e. latest by 31 August, 2009.

The approval is subject to the following conditions:-

• The final determination of levy may be made by the Government/Regulator upon compliance of the above two milestones.
• Following procedure monitoring mechanism shall be followed:
1. DF receipts would be deposited in a separate Escrow Account. Modalities of the Escrow Account may be decided by DIAL, with the approval of the AAI, atleast one week before the commencement of levy.
2. AAI and the Central Government would have supervening powers in respect of Escrow Account to ensure that all receipts are properly accounted for and are utilized only for permitted purposes. These powers may include stoppage of withdrawal by DIAL.
3. Presently, other capital receipts like equity and debt funds are channelized through another Escrow Account of DIAL as per OMDA requirements. The Independent Auditor appointed by AAI, presently verifies only the revenue as defined in Article 1.1. of OMDA and not the receipts of capital nature and utilization thereof. As a condition of this approval, DIAL would be required to subject such capital receipts and expenditure also to AAI supervision.
4. All accounting and auditing practices, as would have been applicable to AAI, will be applicable to DF receipts and expenditure by DIAL. The modalities in this respect should be worked out between AAI and DIAL, atleast one week before the commencement of levy.
5. The compliance in respect of the above issues will be furnished by AAI and DIAL to the Central Government on event basis as well as on a periodical monthly basis.

• It will be ensured that DF is utilized for the development of such “Aeronautical Assets” only, which are “Transfer Assets” in terms of OMDA.
• DIAL should report the collection and usage of DF on a monthly basis to Central Government / Regulator through AAI.
• The levy will be reviewed 6 months after commencement by the Regulator/Central Government and thereafter at such intervals as the Regulator/Central Government may decide.
• At the stage of final determination, Regulator/Central Government will ensure adequate consultation with the users.
• The amount collected through DF would not in any case exceed the ceiling of Rs.1827/- crores (NPV as on 1.3.2009). The ceiling amount would be exclusive of taxes, if any.
• The balance amount of Rs.1250 crores received as shareholders advance (i.e., Rs.1750 crores net of Rs.500 crores to be appropriated towards equity) would be retained by DIAL. Any escalations of cost would be met from the amount so retained. In case the cost escalation is less than the retained amount, the ceiling amount of Rs.1827 crores would be reduced by an amount which is equal to the difference between the retained amount of Rs.1250 crores and the amount representing project cost escalation beyond Rs.8975 crores.
• Rate and tenure of levy are premised upon the traffic projections and other estimates. In case due to actual figures being different than those estimated, the collections during levy period exceed the amount of Rs.1827 crores (NPV as on 1.3.2009) or any other amount which the Regulator/Central Government may determine, the excess amount so collected shall not be utilized, for any purpose whatsoever, without the prior approval of the Regulator/Central Government.

The Delhi International Airport Private Limited (DIAL) are undertaking modernization, development and upgradation of IGI Airport, New Delhi as per the approved Master Plan. DIAL had estimated that the Master Plan will be implemented at an estimated cost of Rs. 8975 crores. Requisite funds were to be raised through Rupee Term Loan, External Commercial Borrowings (ECB), Base Equity, Internal Accruals and Refundable Security Deposits (RSD) from Hospitality District (commercial property development). However, it has now been brought to the notice of the Central Government that DIAL are unable to raise Refundable Security Deposits to the extent anticipated and a substantial short fall is expected. It has also been stated that the lenders have not agreed to extend any further debt as the existing debt arrangement takes into account all possible revenue streams and have suggested that levy in the nature of capital receipts to leverage any additional debt. The shareholders have brought in shareholders’ advances to the extent of Rs. 1250 crores and are not in a position to take additional equity exposure beyond Rs. 1200 crores. Further, the present declining air traffic scenario has adversely impacted the revenue streams of DIAL and the Debt Service Coverage Ratio (DSCR). Accordingly, DIAL have proposed a levy of DF under Section 22A of the AAI Act, 1994 @ Rs. 350/- per departing domestic passenger and @ Rs. 1000 per departing international passenger for a period of 39 months.

The proposal of DIAL was examined by the Ministry of Civil Aviation in consultation with the Ministry of Law and Airports Authority of India. The Government also engaged M/s KPMG Advisory Services Pvt. Ltd. to undertake diligence and verification of the proposal submitted by DIAL. Government has been advised that DIAL can levy DF under Section 22A read with Section 12A of the AAI Act for the purposes mentioned in clause (a) of Section 22A. Further, the completion of project by March 2010, i.e., in time for Common Wealth Games 2010 was of utmost importance. Keeping in view the position that all other funding options appeared to have been exhausted, there was no option but to levy a pre-funding charge as contemplated under Section 22A so as to ensure timely completion of the project. Such pre-funding charges are accepted by ICAO subject to compliance with laid down guidelines/principles.

The Central Government have, accordingly, approved the levy of DF by DIAL @ Rs. 1300 per departing international passenger and @ Rs. 200 per departing domestic passenger w.e.f. 1.03.2009 for a period of 36 months, inclusive of all applicable taxes, purely on an ad-hoc basis, to fund an estimated short fall of Rs. 1827 crores. This approval is subject to review after 6 months when DIAL is expected to furnish the final project cost, which will be audited by an Independent Technical Auditor. DIAL have also been advised to review the bidding process of the Hospitality District to explore the possibility of raising further resources therefrom. A detailed accounting/monitoring mechanism is required to be put in place, inter-alia, including deposit of all DF receipts in a separate Escrow Account where AAI and the Central Government will have supervening powers; the account will be maintained as per accounting and audit procedures followed by AAI etc. AAI will play a critical role in the monitoring of levy and usage of DF and keep the Ministry apprised. The DF receipts shall be utilized only for construction of such “aeronautical assets” as are required to be “transferred” to AAI by DIAL upon expiry of the lease of IGI airport. The shareholders advances amounting to Rs. 1250 crores shall be retained in the project to fund expected increase in project costs.

Source : Press Information Bureau, Government of India

Bengaluru International Airport Ltd. (BIAL), the operator of the Bengaluru International Airport (BIA), has decided to levy the long pending User Development Fee (UDF) of Rs 260 on all outbound domestic passengers, from January 16, 2009.

According to an official release by BIAL yesterday, the Ministry of Civil Aviation (MoCA) has given nod for levy of UDF.

Albert Brunner, CEO, BIAL said

"UDF is a crucial revenue stream for us although we have not been allowed to charge the amount we requested for. This is a beginning. The presently approved UDF is an ad-hoc. The final UDF will be decided by the ministry after further reviews or by the regulatory body appointed by the Government,”

With the crash in domestic traffic, monthly losses have zoomed in excess of Rs. 200 million per month, BIAL desperately needed the UDF. All development at the airport has been stopped by BIAL, with a lack of UDF being cited as the main reason.

Based on the September 2008 traffic, BIAL stands to earn about Rs. 66~70 million a month, which will not fully cover their shortfall. Their existing UDF request of Rs. 675 will allow them to fully cover their shortfall, but with the Ministry approving only Rs. 375 as UDF for Rajiv Gandhi International Airport (RGIA) at Hyderabad, an airport which is larger both in size and investment than BIA, I see no way for the Government to approve BIAL's request and justify their decision. Added to this a figure of Rs. 675 is considered too exorbitant by everyone.

In my opinion, a UDF of Rs. 375 would be an acceptable compromise between the needs of BIAL and the cost on passengers. Keeping in mind the total crash in regional air traffic, a segment where costs are critical, it might behoove BIAL to keep the UDF at the presently approved Rs. 260 for regional flights.

In the mean time, to make ends meet, BIAL will have to critically analyse, and reduce their expenditure. BIAL should also put the aero-city and other real-estate projects on top priority for additional income.

The Deccan Herald reports that the Bengaluru International Airport Limited (BIAL) consortium has filed a default notice about 10 days ago against the Union civil aviation ministry asking it to make good losses of Rs 23 crore. BIAL claims it had incurred the losses and indirectly held the ministry responsible for it — its complaint was the failure to clear the user development fee (UDF), to be charged by the operator on departing domestic passengers, resulted in the losses.

BIAL, which has been asking the ministry to approve the UDF for a couple of months now, wants the approval for Rs 675 UDF and civil aviation minister Praful Patel may go into this issue next week.

Official sources claim that it was not a loss which would affect the functioning of the airport. According to them, it was only supposed to bridge the revenue deficit which in any case can be carried forward to the next financial year.

It is unclear whether the notice is just a pressure tactic on the part of BIAL to push forward their long pending UDF request. For a few months, there have been persistent rumours that the cash flow at BIAL was precarious. I can infer from these developments that Siemens, the dominant private partner, has choked off funds to BIAL, leading to desperate times.

The ministry has directed the 105,300-square metre, Rs 2,500 crore RGIA to charge Rs 375 from outgoing domestic passengers from August. The 71,000-sq m Rs 2,470 crore BIA has sought permission for Rs 675 UDF.

The civil aviation ministry had appointed a consultant to look into to the UDF request and verify BIAL's capital expenditure claims. Under pressure from various quarters ,the ministry wanted to know whether a smaller airport with lesser facilities can cost as much as a bigger airport with better facilities and in this case, it was BIAL vis-à-vis the bigger GMR promoted Rajiv Gandhi International Airport (RGIA).

The ministry was to take a call on the UDF issue some time after the BIAL filed the audit report on the project cost in August-September. As per Deccan Herald sources, the consultant has submitted the report on financial verification and this should enable the ministry to finalise the UDF soon.

The Mint reports that Delhi International Airport Pvt. Ltd (DIAL), the operator running New Delhi’s Indira Gandhi International Airport (IGIA) has sought relaxations on taxes from the Union government and permission to levy a new airport development fee (also called User Development Fee or UDF) on passengers that will together amount to a potential benefit of around Rs. 2,000 crore.

If the request receives government approval, it will help the GMR Infrastructure Ltd., led consortium to meet a gap it is facing in its capital expenditure plans for the airport.

DIAL is readying the Delhi airport at an estimated cost of Rs. 8,890 crore ahead of the Commonwealth Games in 2010 with the construction of a new passenger terminal, a new runway and hotels at the airport site, complemented by a metro rail link connecting the airport with Connaught Place, a central business district in the Capital, to be developed by Delhi Metro Railways Corp. Ltd (DMRC).

According to an estimate in 2006, when the airport was privatized, the development of the Delhi airport was to cost Rs7,961 crore. This however, has increased now by around Rs1,000 crore or nearly equal to the cost of creating three new airports such as the ones commissioned at Bangalore and Hyderabad this year.

DIAL also wants the government to pitch in funds for construction of the metro link to the airport, according to a senior government official familiar with the process, who did not want to be named.

It wants to levy Rs300 as a so-called airport development fee on each outbound domestic passenger from the Capital besides Rs1,000 each on those flying international routes for a period starting January 2009 until December 2011. Such a passenger fee alone will likely result in revenues of over Rs1,400 crore for the operator.

DIAL, which had earlier agreed to pay partly for the metro link from the city as long as the payment was taken as part of the capital expenditure of the airport project, now wants the government to pay Rs350 crore to DMRC for constructing the 22.7km link. DMRC earlier this year had awarded the contract to Reliance-Anil Dhirubhai Ambani Group’s Reliance Energy Ltd that had bid for the project in collaboration with Spain’s CAF to construct the link.

Among other waivers requested by DIAL are a Rs100 crore in value added tax or VAT exemption and Rs200 crore in customs duty exemption taking the total to Rs2,050 crore.

The government official quoted earlier said the airport operator also wants changes in the land use norms at the 5,000-acre airport site but did not specify details.

A civil aviation ministry official, who too declined to be identified, said the ministry cannot allow for measures that conflict with those in the operations management and development agreement signed between DIAL and state-run Airports Authority of India, or AAI.

“We cannot allow anything that affects the bidding parameters,” this official said. “Within the agreement, we can look into what can be done.”

The impact of slowdown in air passenger traffic is showing up at airports in India as well—nearly 1,200 weekly flights have been cut from March bringing the number down to 10,922 in November, the aviation ministry said recently.

“New airports and airport modernization (has been) severely affected,” the ministry said in its presentation, a copy of which was reviewed by Mint, to the cabinet secretary K.M. Chandrasekhar earlier this month adding that there was a “30% shortfall against projected passenger traffic at Delhi and 32% in Mumbai airports.”

An analyst said the government should look for broader solutions. “There are two things to it—the airlines are seeing a downturn and are primary sufferers, while all airports are also looking at a downturn and are secondary sufferers,” said Robey Lal, former country head of industry grouping International Air Transport Association (IATA) in India and an ex-AAI board member.

In such circumstances, Lal suggested the government increase an existing passenger service fee of Rs. 225 on each ticket countrywide, which is used to fund security as also development of airports. This way, he argued, all airports in the country would benefit and not just DIAL or another private operator. About Rs. 130 from this Rs. 225 fee is used to pay for security, Rs. 25 is service tax, and the rest is used for operations and development of airports by the airport operator.

The Deccan Chronicle reports that the ministry of civil aviation (MoCA) is ready to roll out the User Development Fee (UDF) for Bengaluru International Airport Limited which is likely to cheer air passengers but leave the promoters red faced. While the UDF for domestic passengers will be Rs 375, international travellers will have to fork out Rs 1,000 every time they fly out of BIA. The decision comes as a blow to the private operator as they have said that non-approval of the proposed UDF has caused huge losses to it.

Highly placed sources in MoCA say the long pending decision was taken after scrutinising the capital cost of the airport which was put at Rs 2,470 crore by BIA. “The Hyderabad international airport was considered as the benchmark as it is bigger and better than BIA in many ways and was also being built simultaneously. While GMR Group, the lead consortium for Hyderabad airport pegged their expenditure at Rs 2,370 crore, BIA was on little higher side. So after deliberations we have decided to fix the UDF on par with Hyderabad airport,” sources said.

“The procedure for arriving at the UDF was based on the cost incurred on the project. In this connection, the private operator had earlier sent the internal audit report but we sought an independent engineer’s report and it was carried out by international firm Scot Wilson as the evaluation of expenditure should be done from an arm’s distance. The same firm which gave the completion certificate for BIA,” sources said.

BIAL had sought approval for Rs 675 as UDF for domestic passengers and Rs 1,075 from international travellers. The proposal was pending before the MoCA for the last five months as it was considered high. “After carefully assessing the costs and public sentiments, the officials and representatives of AAI, felt that the charges should be on par with Hyderabad airport,” he said.

“It was felt that it was unfair to further burden passengers who already feel that BIA is inferior to Hyderabad airport. The BIAL hasn’t collected UDF for the last five months and we have to factor in this to make up for the losses incurred. A final decision will be taken after we work out all these modalities,” the officials said. The decision comes at a crucial time when BIAL is rethinking about its expansion plans due to the global meltdown.

In what is sure to be a shock, to both the BIAL and HIAL consortia, the Deccan Chronicale reports, the parliamentary standing committee on transport, tourism and culture, on Thursday October 23, recommended immediate withdrawal of user development fees (UDF) being charged by Hyderabad and Bengaluru airports.

It said the private operators had invested only Rs 330 crore and Rs 240 crore at Hyderabad and Bangalore respectively to develop the airports. The rest of the amount came from the AAI, state governments and through debt from financial institutions.

Observing that the government’s policy was to make air travel more affordable, the committee said the UDF imposed on passengers “may be withdrawn immediately and no more UDF may be imposed on passengers in any of the airports.”

The committee has also recommended that the HAL airport in Bangalore, and the Begumpet airport in Hyderabad be used for short-haul domestic flights.

The committee, headed by the CPI(M) leader, Mr Sitaram Yechury, said any future greenfield or brownfield airports should be developed with the Airports Authority of India (AAI) having a majority stake in a joint venture.

What impact this recommendation will have on the pending UDF requests of the consortia at Delhi and Mumbai is also to be considered.

Madhumathi D.S. of the Hindu Business Line reports that the 5 month young Bengaluru International Airport, which was expected to have a dream take-off on the back of phenomenal traffic growth during 2005-08, now seems to be going slow on its expansion plan in the face of a traffic decline.

“There has been a dramatic fall in monthly traffic for all airports in India since June 2008. We are currently conducting a study on the current trend and based on the results, which will be out in two-three months, we will take a decision on our next expansion plan,” the operator, BIAL, said in response to queries from Business Line.

Until a couple of months ago, BIAL CEO, Mr Albert Brunner, was hoping to take up a mezzanine expansion now and a larger Rs 3,500-crore phase 2 in early 2009 with a second terminal, pending the board’s clearance.

Bangalore's traffic numbers, reflect the overall slowdown across the country. BIAL said, “The overall annual growth of passenger volume [at Bengaluru International Airport] has dropped to 3 per cent since June 2008” compared to an anticipated 8 per cent growth rate.

The Southern sector has been especially dented. “There has been a drop of approximately 15 per cent in the flights operating in the Southern sector (Kochi, Coimbatore, Hyderabad, Chennai) from Bangalore since May 2008. The Mumbai, Kochi, Coimbatore, Delhi, Goa, Hyderabad, Chennai and Pune routes have collectively seen a 12 per cent reduction in the number of flights,” as per BIAL sources.

The dip could also not have come at a worse time than now for BIAL, which is awaiting the Civil Aviation Ministry’s clearance to start collecting a user fee (UDF) from domestic fliers leaving the city. The UDF is one of the main revenue sources for its ambitious expansion plan.

BIAL started collecting a user fee of Rs 1,070 each from its outbound international passengers from the first day of its operations.

The May, June, July period is lean all over India, but traffic has continued declining instead of picking-up in late August and September as it does every year. Clearly the "FUD Factor" (Fear, Uncertainty, Doubt) of the global economic melt-down is having its effect on the psyche of India Inc.

Bangalore’s air traffic, the third highest in the country, was until a few months ago the envy of some other larger cities. BIA opened in May 24, taking over 10.1 million annual passenger traffic from the HAL airport. In fact, the traffic growth was so large and unforeseen – from 4 million in 2005 to over 10.1 million in FY 2007 – that BIAL had to insert two unscheduled expansions into first phase of the project in 2006-07, a move that pushed the project cost from the original Rs 1,400 crore to Rs 2,500 crore.

That happily poised graph has changed its course downwards. Even as BIA completed 100 days in late August, the writing was on the wall. Peak hour traffic did not grow to match the capacity, though BIA handled 2.42 million passengers, on the wing of 30 per cent rise in international airlines and air freight carriers into the city.

From 170 flights per day and 340 air traffic movements (ATMs) when it launched, BIA will now end the Summer ‘08 season with 162 flights (324 ATMs) per day. Winter ‘08 flights would see a small 1.5 per cent gain with 165 flights (or 330 ATMs). According to the operator, “Although the domestic air traffic reflects a [fall] of 1.5 per cent, the overall positive growth is due to the increased international flight operations from Bangalore.”

This is in spite of adding six new international carriers since it began services - Dragon Air, Tiger Airways, Oman Air, Air Mauritius and most recently Kingfisher Airlines and Jet Airways. International flights, BIA said, have increased over 230 per cent year on year for the Winter season.

BIAL said the domestic UDF, once cleared, will be part of the airline ticket cost; the airlines will collect it while issuing tickets, as directed by the Directorate General of Civil Aviation. BIAL plans to set up counters to collect the fee by cash or credit card from those who have booked their tickets in advance but will be flying from the levy date.

UDF has become a double-edged sword for BIAL. They are facing the "Devil's Alternative". Imposition of UDF will have its impact on an already weak aviation scenario, and not imposing UDF, will have disastrous consequences on the finances of BIAL. I do not envy Mr. Brunner's seat at this moment, he has some very delicate balancing to do, and hard choices to make.

All I can offer is my support during these tough times.

The deepening economic crises are forcing the hands of the private airlines in India.

Manisha Singhal of the Business Standard reports that airlines have sought a bailout of almost $1 billion (Rs. 4,700 Crore) amidst losses expected to reach $2 billion this year. Take a cue from the recent $440 million (Rs. 2,000 Crore) bailout of NACIL, the national airline, airline chiefs recently made a presentation to the Prime Minister’s Office to this effect and government sources said some of their demands may be accepted.

What airlines want

• Interest-free loan with a “bullet” (one-time) repayment after three years
• ATF be put under ‘declared goods’ for uniform sales tax
• Reduction or withdrawal of duty on spare parts for aircraft maintenance
• Scrapping customs and central excise on ATF
• 50% reduction in airport landing, route and terminal navigation charges for 24 months
• Freeze on further increases in airport service charges

The concessions requested include an interest-free loan with a “bullet” (one-time) repayment after three years, putting aviation turbine fuel (ATF) in the “declared goods” category for sales tax relief and scrapping customs (5.15 per cent) and central excise (8.54 per cent) on the fuel.

The industry has also asked for a reduction or withdrawal of duty on spare parts for aircraft maintenance. Airlines have also asked for a 50 per cent reduction in airport landing, route and terminal navigation charges for 24 months for domestic operations and a freeze on increase in airport service charges, sources close to the development said.

While the civil aviation ministry hopes that its finance counterpart will soon accept the demand to bracket ATF in the declared goods category, to ensure uniformity and help the airlines save on fuel costs, it is unlikely demands to reduce airport charges, and route and navigation charges will be considered.

Airline companies have been unable to garner investor interest or raise money from institutions to fund their losses and expansion plans.

Private carriers like Naresh Goyal-promoted Jet Airways have commenced "re-organisation" of international operations. Today it annouced, effective January 13, 2009, it will discontinue its Mumbai - Shanghai - San Francisco route, and serve its SFO bound passengers on codeshares with United via London.

No sympathy
While, the airlines are hoping for some positive response from the government soon, they do not have much sympathy from either industry experts or the general public.

Many aviation experts say airlines are themselves to be blamed for the financial crisis. “Could they not see the writing on the wall that crude, as a commodity, will go up? They made their biggest mistake when they started competing with the Indian Railways,” said an aviation analyst who did not wish to be identified.

Just last week, the airlines appeared to be willing to add special fees in the ticket price to cover travel agents' commissions costs, earning them the ire of the travelling populace.

Impact on airports
Delhi International Airport Limited (DIAL), has joined the ranks of other airports in India, Bengaluru International Airport (BIAL), and GMR Hyderabad International Airport (GHIAL), to demand imposition of User Development Fees on passengers. Aviation experts are cautioning about the exaggerated negative impact of these fees, on the Indian aviation industry especially in these tough times. Airports are stuck between a rock and hard place, with no easy options available.

Related articles :

Fuel Populism killing Indian aviation

Air passengers to pay yet another fee

Is our fixation with user development fee (UDF) as the funding workhorse for our airports causing us to overlook other more efficient and social benefit-maximizing funding options?

V Ranganathan, Indranil Guha, Manuj Sethi & Reema Mahajan

Indian airports are in the throes of modernization. With work complete or nearing completion in four major ones — Delhi, Mumbai, Hyderabad and Bangalore — and tier II city airports queued up already, India’s airports liberalization process has progressed briskly. But is there more to it than what meets the eyes? Replacing our creaky airports with glitzy glass and mortar structures is one thing; transforming them into thriving international aviation hubs is quite another.

For that to happen, robust governance is a fundamental pre-requisite — an area that is the Achilles heel of our bureaucracy and political establishment. For example, before the airports privatization got underway, there seems to have been very little deliberation in our policy circles with respect to regulation of user charges to be charged by these new airports. No wonder, this issue has become one of the stickiest bones of contention since the opening of the new Bangalore and Hyderabad airports.

Under the proposed user development fee (UDF) regime, Bangalore International Airport Ltd (BIAL) has proposed a user charge of Rs 675 for domestic passengers and Rs 1,070 for international passengers. So how likely is it that such a UDF regime, which is slated to become the funding workhorse of most of India’s major greenfield and brownfield airports, would in fact end up becoming a major drag on the growth potential of India’s civil aviation sector?

The success of most of the leading airports around the world has been largely due to their ability to diversify their revenue streams and draw a larger share of their income from nonaeronautical revenues (that is, commercial activities like retail revenues and office rentals) vis-a-vis aeronautical revenues.

Singapore’s Changi International Airport earns 60% of total revenue from non-aeronautical charges, up from 40% in 1981. Non-aeronautical revenues help Changi cross subsidize its user charges and landing fee, which in turn helps the airport attract an ever increasing base of carriers and passengers from around the world to fly to Changi. The increased footfall thus generated drives retail spending at Changi’s many retail outlets and hotels, thereby covering for under-realization of user charges. To support this strategy, Changi has a conscious policy of investing in capacity well ahead of demand. Changi today has the capacity to handle 70 million passengers per annum (mppa) against an actual demand of 37 mppa (2007 figure). So successful has this strategy been that the tiny city state with a population of just 4.5 million manages to attract nearly eight times as many travelers to its airport.

Just like Changi, a CRISIL study has shown that the British Airport Authority earns 72% of total revenue from non-aviation activities; Toronto earns 62%; while Indian airports earn no more than 10-30%.

For Changi’s model to be successfully replicated in India, it’s imperative that Indian airports attract more passengers by rapidly adding capacity, lowering landing fee and eliminating UDF. Currently, our leading airports serve no more than one-sixth to one-fourth the passenger numbers served by the likes of Changi and Heathrow. For a city with a GDP half the size of Singapore’s, Bangalore’s airport for example, serves a paltry 10 mppa (against 37 in case of Changi).

Such measly scale of operation means that there is hardly any cost efficiencies associated with scale. Furthermore cost of capital for airport financing typically tends to be on the higher side, because of the plethora of operational, financial and political risks they entail. Besides, India’s upcoming airports have to contend with high operating expenses, owing to very high debt service obligation. Therefore, they seem to have little choice but to charge rather steep user charges to bridge the gap between revenue realization and debt obligations, more so during the initial years when the optimal revenue potential of the airport has not yet been realized.

So is there an alternative funding model that can help Indian airports lower their user charges? This is where some financial ingenuity and smart leveraging of funding opportunities provided by multilateral agencies like International Bank for Reconstruction and Development (IBRD) and Multilateral Investment Guarantee Agency (MIGA) can do the trick. Both IBRD and MIGA are part of the World Bank Group and help promote investments in developing countries by providing insurance cover against political and other non-commercial risks for projects in the developing world.

Now this is how it works: An airport first secures IBRD/MIGA’s backing which enables it to raise debts, whose repayment is structured such that repayment obligation during say, the first 10 years of operation is negligible. At the end of 10 years, the entire original debt is retired through a lump-sum ‘bullet’ payment, which in turn is refinanced through a new loan. The benefits of this model are two fold. Firstly, the cost of capital at the time of refinancing is much lower, given that the airport would have been in operation for 10 years by then and that most of the risks would have been mitigated over this period. Secondly, the ingenuity of the debt structuring ensures that interest payment obligation in the first 10 years is very low, thereby eliminating the need to charge high user fee to fund debt service obligation.

This model can be a very effective alternative to the UDF-based funding structure for India’s upcoming airports.

For the next Changi to emerge out of India, what we need is not just brand new terminal buildings replacing the old ones, but a change in mindset and a concerted strategy — both at the level of individual airports as well as at policy formulation level. It’s going to take some doing and out-of-the-box thinking to bring about a shift in the centre of gravity of Asian civil aviation from the Asia Pacific region to the subcontinent.

(Prof V Ranganathan is the RBI Chair Professor at Indian Institute of Management, Bangalore. The others are second year MBA students at the institute)

Source : The Times of India

The civil aviation ministry has directed the Hyderabad airport to levy a user development fee (UDF) of Rs 375 on each domestic passenger, more than 38 per cent lower than what GMR Hyderabad International Airport Ltd (GHIAL), the developer of the airport, had asked for.

The airport had asked for a UDF of at least Rs 600 from domestic passengers travelling out of Andhra Pradesh. For passengers travelling within the state, it had demanded a user fee of Rs 350.

UDF is the fee levied at the airport on departing passengers to enable the airport developer bridge the gap between expenditure and admissible revenue as stipulated by the ministry guidelines.

The Hyderabad airport already charges Rs 1,000 as user fees from international passengers.

“What has been allowed to us is much lower than what we had asked for. This will definitely mean losses for the airport. We have to take a call on how to fill the widening gap between our revenues and costs,” said A Vishwanath, chief commercial officer, GHIAL.

In its accounts submitted to the civil aviation ministry last month, GHIAL had estimated that due to the recent slowdown in traffic, the gap between revenues and costs would widen by another 15 per cent which would make a case for UDF which was more than Rs 600.

“However, we had said that even with the rising costs, we were fine with a levy of Rs 600 but could not go lower than that,” he said.

The ministry today also came up with guidelines on the basis of which UDF is to be charged at airports which will be finalised after discussions with various stakeholders. According to the guidelines, the project cost is to be estimated on the basis of aviation-related costs and have to be in line with the targetted capacity creation. The guidelines mandate the consideration of whether the contract was awarded after competitive bidding.

Apart from the aeronautical costs, cost of capital employed, depreciation, operation and maintenance, and taxes would also be admissible as a pass through into the tariff.

For estimating the cost of the capital employed, cost of debt on actual basis and 14 per cent return on equity is to be considered. Since expenditure items like personnel costs, operations and maintenance and pre-operative expenditure have not been verified, a cap was proposed for these items.

The guidelines have stipulated that to estimate revenue of the company, the sum of the total aeronautical revenue and a portion of non-aeronautical revenue has been considered.

Source : The Business Standard