Since the second phase of airline deregulation commenced in 2003-04, airport infrastructure has been struggling to catch up, with demand frequently exceeding supply. The challenge of inadequate infrastructure during the past 16 years was compounded by its technical and operational efficiency. Further, the Covid-19 pandemic has had a devastating impact on the industry for almost two years, and the uncertainty continues to prevail. This has provided a historic opportunity for reset.
Capacity expansion
The existing airport operators are expected to incur a capex of around $10 million for expansion over the next five years. Of this, public-private partnership (PPP) airports are likely to account for 66 per cent while the AAI will account for the remaining 34 per cent. In addition, a capex of about $8 billion is required for proposed greenfield airports in Noida, Navi Mumbai, New Pune, Mopa, Bhogapuram, New Rajkot, Itanagar, Dhamra, etc.
There has been over 90 per cent capacity addition through brownfield expansion at various airports. A combination of brownfield and greenfield expansion has enhanced the maximum capacity of Indian airports to over 850 million annual passengers. After 25 more AAI airports are privatised, their capacity enhancement could take the total system capacity beyond 1 billion passengers per year.
Funding strategies
The Noida International Airport is a remarkable case study of a 100 per cent foreign direct investment (FDI)-funded airport, which has brought in a new set of promoters and investors. The success of the project thus far, right from the bidding stage, proves to foreign investors that the 100 per cent FDI route works. Further, the best practices adopted by foreign players, during the development as well as maintenance phase, have the potential to lower the overall cost of building and running airports. Besides, there is immense potential for investment in commercial development, hospitality, warehousing, cargo, logistics, etc.
Indian PPP airports are well placed to raise funding through multiple options, ranging from fresh equity issues to monetisation of real estate assets. These airports have largely relied on rupee-denominated debt, except GMR Airports Limited, which raised foreign currency debt.
The well-developed Indian public equity as well as the relatively nascent infrastructure investment trust (InvIT) markets offer good potential for airport projects/operators to raise long-term funds. There have been two corporate-level stock listings of groups engaged in infrastructure businesses such as airports. Neither has been able to generate returns that could attract investor interest. InvITs are a source of steady long-term regular income – aligned to the core nature of the airport business. Hence, these have the potential to attract marquee investors. In India, while the equity market is almost as large as the economy, the bond market is relatively smaller. Within this, the corporate bond market is even smaller at around 0.2x of the GDP. This reflects the potential for the growth of the bond market.
Next steps
As per CAPA, at a system level, there is no capacity issue till 2023-24. While Pune airport is already operating above its design capacity, Chennai and Kolkata airports are at the earliest risk of saturation and will need second greenfield airports in the next 10 years. These new projects must be taken up on priority. The planning and provision for additional airports need to be done almost a decade in advance to manage various aspects including the contentious land acquisition activity. A centralised planning system is required that has the appropriate expertise and is not hampered by bureaucracy.
The current airport business model encourages neither capex and cost optimisation, nor efficiency and productivity to the extent required. A well-thought-out plan needs to consider airport capacity requirements not just until 2040, but well beyond. The new model should support increased profits for airport operators, while simultaneously lowering costs for consumers and the industry. It must also formally measure quality and competitiveness.
Based on a webinar on “Reassessing India’s Long-term Airport Capacity Post Covid-19” organised by CAPA India