Traffic Boom: Capacity to grow in line with passenger volumes

Capacity to grow in line with passenger volumes

The airport sector has witnessed strong growth in the past few years. From 2014-15 to 2018-19, passenger traffic grew at a double-digit compound annual growth rate (CAGR) of 16 per cent while cargo traffic grew at a CAGR of 9 per cent. In the past decade especially, the sector has witnessed fast-paced growth in traffic volumes (almost three times the GDP) at optimum airfares. This is a sharp increase in contrast to the rather flat growth during 2009-13. In fact, leaving aside the top 30 airports, the remaining airports have been clocking traffic growth in the range of 30-35 per cent.

However, the country still serves a feeder destination and is yet to emerge as an aviation hub. The airport sector faces several challenges. While domestic traffic has grown at around 22 per cent in the past two to three years, international traffic has not exhibited strong growth. The country also needs to leapfrog into the digital era. There are tremendous opportunities in store for digitalisation at airports.

Airport privatisation has emerged as a key focus area of the government. In December 2018, the government had put up the Ahmedabad, Jaipur, Lucknow, Guwahati, Thiruvananthapuram and Mangaluru airports for privatisation. In July 2019, the cabinet approved the privatisation of the Ahmedabad, Lucknow and Mangaluru airports, giving them to the Adani Group on a per passenger fee basis. Industry experts believe that this move is also likely to end the market domination by a few players in the sector.

The Regional Connectivity Scheme (RCS), also known as UDAN, has successfully connected several underserved and unserved areas with the operationalisation of about 250 routes under the first three rounds, as of January 31, 2020. Over 40 unserved airports have been commissioned since the launch of the scheme. In addition, the recently launched UDAN 4.0 aims to enhance connectivity to the Northeast as well as to the hilly states.

On the policy front, a new national cargo policy was unveiled to tap the unexplored potential of the cargo segment. Meanwhile, the National Civil Aviation Policy, 2016, has laid the groundwork for sound airport infrastructure development.

Regulatory regime to be checked

The regulatory regime still has a long way to go in facilitating smooth tariff determination for the major airports. In a bid to streamline tariff determination, in August 2019, Parliament passed the Airports Economic Regulatory Authority (AERA) Amendment Bill, 2019. This is expected to allow the bidding out of private airport projects on the basis of predetermined tariffs. However, the provisions in the bill leave scope for uncertainties, disputes and issues pertaining to rate of return, cargo, ground handling, fuel farm services and property development activities.

Industry experts are of the view that the AERA (Amendment) Act, 2019, throws up more questions than provides answers to the existing issues. Questions pertaining to sectoral regulation, classification on the basis of tendering process and determination of tariffs for private/public-private partnership-based non-major airports still remain to be answered. AERA’s normative orders are also a cause for concern and the appeals filed against the orders are still pending.

Capacity issues loom large

Capacity constraints are likely to surface as a major issue in the future. Most of the major airports are already congested. Close to 25 of the 50 busiest airports operate at over 100 per cent capacity. Expansion plans at most of the airports are also running behind schedule. By 2040, Indian airports will need the capacity to handle a minimum of 1.1 billion passengers flying to, from and within the country. Moreover, opportunities with respect to the maintenance, repair and overhaul and aerospace industries have not been fully realised. The pace of technology adoption too remains slow. Enhanced customer experience through digital initiatives and analytics will play a vital role in driving the next wave of airport transformation.

In a bid to ease the strain on existing capacity, the government plans to operationalise 100 additional airports by 2023-24. The report of the Taskforce on National Infrastructure Pipeline 2020-2025 has identified airport projects worth Rs 1.43 trillion, highlighting plenty of investment opportunities.

Meanwhile, greenfield airport projects at Navi Mumbai, Jewar, Mopa, Purandar, Bhogapuram and Dholera have made significant headway. Besides, new capacity has been created with the commissioning of the Kannur, Durgapur, Shirdi, Pakyong and Kalaburagi airports.

Capacity utilisation is also being improved through automation and deployment of new technology-enabled solutions at airports. Digital processing of passengers at airports called Digi Yatra and upgraded versions of the AirSewa 2.0 web portal and mobile app are some of the noteworthy initiatives in this area.

Unlocking value

There are a number of ways in which the financing scenario in the sector can be improved. While commercial banks are best suited to assume construction risks, private players should be invited at the operations and maintenance stage. Lenders draw comfort from the fact that the sector is fairly regulated. It also assures regular returns. The sector is witnessing foreign institutional investment which has reinstilled some confidence. Some of the innovative funding mechanisms that can be explored include monetisation of land/real estate assets, infrastructure investment trusts (InvITs), and securitisation of non-aeronautical tariffs. A predetermined tariff structure provides comfort to lenders and ensures greater revenue visibility. However, there is no upside for investors in this model. There is a lot of potential for InvITs for the airport sector.

The coming years are expected to present significant opportunities. The airport sector is projected to witness healthy double-digit growth. This will also be aided by the robust demand for air travel in Tier II cities.

Future vision

Future-ready airports have emerged as the need of the hour. In the current scheme of things, Tier II airports will witness not only higher traffic but also improved passenger experience. The developers need to build capabilities and resilience to deal with bottlenecks. Policy uncertainty, inadequate legislative guidance in the AERA Act, clubbing of airport tribunals and non-appointment of members to tribunals are some of the key factors leading to increase in delays and disputes.

Going forward, greenfield airports should look for the much-needed certainty in terms of aero and non-aero cross-subsidisation, utilisation of land for real estate activities, treatment of cargo and an assured rate of return. Issues related to land acquisition, environmental clearances, a dispute resolution mechanism, etc. require immediate attention to attract investors.