A sustainable revenue stream is the cornerstone of the viability of an airport, given the stiff regulatory environment and volatility in tariffs. Over the years, emphasis has been laid on the timely creation of quality infrastructure. This transition has taken place with the privatisation of Delhi airport. The development of world-class infrastructure at the airport became vital and with passengers being regarded as consumers, there was a major focus on the provision of diverse services. The Airports Authority of India too followed a similar approach.
With these positive changes, the momentum of airport privatisation continued and received a significant impetus in the past two to three years when the government offered the development of six airports on a public-private partnership (PPP) basis. All the six airports attracted a good response from the bidders including new entrants in the market. However, the bidders followed an aggressive bidding approach (offering higher per passenger fees) to clinch the deal, thereby putting the viability of the projects in question.
That said, in order to ensure the viability of an airport and reach break-even point, airport developers have to focus on a combination of aeronautical and non-aeronautical revenue sources. Till now, based on past trends, revenues have varied across airports. Aeronautical revenues themselves have been highly volatile because of regulatory uncertainties, while non-aeronautical revenues have remained at 25-30 per cent of total revenues. Globally, this potential is more than 50 per cent. Therefore, non-aeronautical revenue streams that are highly under penetrated in the country need to be leveraged to run the airport business successfully.
Trends in non-aero revenues
Based on trends in the past two years, income earned per passenger from non-aeronautical sources at Delhi airport has increased from Rs 235 in 2017-18 to Rs 299 in 2018-19. At Mumbai airport, it has increased from Rs 215 to Rs 240. In contrast, at Bengaluru airport, the rate per passenger has remained stable at Rs 151 during fiscal years 2017-18 and 2018-19 and has dropped at Hyderabad airport from Rs 148 to Rs 135 in 2018-19. This fall in non-aeronautical revenues is because of ongoing expansion works at both the airports that restricts their ability to grow. Also, the growth at Indian airports is mainly driven by domestic passengers. This makes it difficult for the operators to equalise the marginal spends on domestic passengers with the actual spend.
Bidding experience
The privatisation of the six airports witnessed aggressive bidding. Adani Enterprises Limited, the concessionaire for the six airports, offered per passenger fees of Rs 160 to Rs 177 for domestic passengers and double the amount for international passengers. These will be effective once the airports commence operations.
Similarly, for Bhogapuram airport, GMR Infrastructure offered a per passenger fee of Rs 303, which will be effective from the eleventh year of the commercial operation date (if discounted at a 5 per cent rate it is Rs 155 per passenger). For Jewar airport, Zurich Airports International AG has offered a per passenger fee of Rs 400 for both domestic and international passengers which will be effective from the sixth year of operations (if discounted at a 5 per cent rate it is Rs 235 per passenger). Considering the high per passenger fees offered by airport developers, greater stress needs to be laid on developing non-aero services.
Income matrix
Based on non-aeronautical income trends and the bidding numbers, for an airport operator to break even, non-aeronautical revenue from a single passenger has to be 1.55 times that of the bidding fee after taking into account 30 per cent shared till and the basic cost of providing non-aero services.
If no interventions are made with respect to generating non-aeronautical revenues despite keeping the per passenger fee (to be paid to the government) high, it might lead to a decline in income per passenger.
Gauging commercial potential
In order to take up commercial development at airports, several aspects such as digitalisation, knowing your customer, differentiating between discretionary and necessary commercialisation, segmenting brands, segment categorisation, and potential of meeters and greeters and integrated advertising need to be taken into account. The right mix of these aspects will ensure passenger satisfaction, which is a key value driver for generating non-aeronautical revenues. To decide which aspects are essential for passenger satisfaction, the three factors of comfort, ease and speed cannot be overlooked. Comfort with respect to cleanliness, seating, information and addressing complaints besides entertainment is essential. Apart from this, facilities such as ground transportation, and easy check-in and security clearance processes are required. At the same time, efficiency in processes, maintaining the right flow path, and reducing processing time and queues enhance passenger experience.
That said, all three factors can be integrated into the terminal design as it helps generate commercial interest from customers. The terminal needs to be designed in such a way that it offers ease of transition, good ambience and comfort, flow, brand segregation and easy parking and captures all possible avenues of passenger comfort. Further, interventions such as understanding passenger habits and requirements with respect to food habits, reasons for travelling, age segmentation and demographics also help in providing customised services to passengers.
Airport real estate development is another key source of non-aeronautical revenues for an airport operator. This can be through commercial development, construction of a convention centre, and development of cargo, warehousing, education, hospitality, medical, retail and entertainment facilities.
At the same time, non-traditional revenue sources such as checked-in baggage handling, telecom infrastructure, food delivery at gates, consulting services, event management, exclusivity, conveniences, premium services, entertainment, branding, theme-based promotions, home pickup and drop services, and utilising vacant land for non-airport use can be leveraged.
Role of technology
In order to streamline non-aeronautical services, technologies like biometrics, robotics, artificial intelligence (AI) and blockchain play a key role. With the help of AI, operators can analyse facial expressions of passengers for a more refined understanding of a potential customer. Smart phones can be put to use to enable self-service facilities without the need for any interface with the retail store or food outlet. At duty-free shops, price variations due to dollar-rupee fluctuations can be addressed using advanced technologies.
Future landscape
The Indian market offers huge scope for leveraging the revenue potential of non-aeronautical services as the segment is highly underpenetrated. Two major consumption segments – travel and retail – will be the key value drivers going forward. Domestic travel spending per capita in the country has already doubled in the past five years. This is because the disposable income per capita has increased by 22 per cent. As a result, travel and tourism has emerged as a large expenditure segment with about 11 per cent of disposable income spent on travel and tourism in comparison to developed economies.
In addition, retail consumption expenditure has increased at a compound annual growth rate of 22 per cent due to changing lifestyles and choices and growth of millennials. Therefore, retail shopping has emerged as another major consumption segment. Going forward, the spending on retail is expected to increase from Rs 21 billion in 2018 to Rs 31 billion in 2021 as 48 per cent of the population is below 50 years of age and saves less.
Apart from this, the airport village (developing the airport as a destination), despite being a new concept, is expected to be a game changer as the operator is not required to pay a revenue share per passenger on this facility. Airports globally (like Zurich airport) have already developed the concept. In India, the Bengaluru and Hyderabad airports are also taking steps in this regard.
Besides the introduction of these facilities, their promotion is also important to make them better known to customers. For this, an innovative concept of retaining brand funding from the user development fee can be adopted. Under this, some percentage of the concession revenue is retained by the operator and is spent on development and marketing. Delhi airport has already adopted a similar concept.